First published in BritCham Indonesia magazine Up.Date – February 2012 edition
Corporate responsibility for small businesses in Indonesia – At a tipping point?
Malcolm Gladwell in his book, “The Tipping Point” describes how sometimes little things can make a significant difference and lead to sparks in trends and monumental shifts in mindsets.
In the same way, the themes of corporate social responsibility (CSR) and sustainability for small and medium sized businesses (SMEs) in Indonesia stand on the verge of a paradigm shift and will likely change the way these businesses operate and function. CSR and sustainability can be defined as a company’s commitment towards the integration of economic growth, environmental management and social equity in a way that meets the needs of its stakeholders, now and for the future.
SMEs are an important part of Indonesia’s economy. They comprise 99% of all establishments and employ almost 90% of the workforce. Indonesia is home to many dynamic and vibrant SMEs contributing to more than half of Indonesia’s gross domestic product (GDP).Accordingly, the success in promoting SMEs is widely recognized as critical to long-term sustainable economic growth. As a result of this aggregate influence, SMEs have an immense environmental and societal impact and will increasingly play an influential role in the sustainability agenda.
Internationally, innovation in many countries is taking place in garage workshops and factories of SMEs. It would be overly presumptuous therefore to assume that all expertise and good CSR practices are solely the domain of the larger multinational firms. Indeed, despite resource constraints and a highly competitive market place, SMEs around the world are achieving commercial success by incorporating elements of good environmental and societal practices within their businesses.
The factors leading to the tipping point
Increasingly SMEs are showing greater commitment to environmental, social and community responsibility. There are a number of reasons why there has been a shift in the mindsets of SMEs leading to a tipping point in favour of greater sustainability.
The personal values and passion of the founders and owners of SMEs play a huge role in driving CSR for their businesses. SMEs that have the benefit of founders whose personal convictions, values and ethical core philosophy shape the business strategy and operations will inevitably have sound CSR practices implemented within.
Another key factor driving SMEs towards sustainability is that the implementation of CSR initiatives within a firm has a compelling business case. It helps minimise risks and maximise opportunities for SMEs. The introduction of social and environmental supply chain requirements has led to SMEs implementing a CSR framework within their organisations. Larger multinationals are now looking to increase the level of transparency and clarity within their supply chains. They demand greater accountability from their suppliers as part of their due diligence. Therefore, SMEs that display greater transparency and clarity about their sustainability and CSR practices are better positioned to effectively compete in the larger global supply chain of multinationals and in the process improve their overall revenue and profitability.
A good CSR and sustainability framework for SMEs will also become crucial as they seek to attract, retain and develop motivated employees and increase their sense of identity and belonging to the company. As the knowledge-based economy puts a greater premium on human capital; attracting and retaining capable individuals will become a critical factor for SMEs to effectively compete and survive a highly-competitive market. The younger generation of employees are looking towards job fulfilment, good working conditions, responsible employers and a good work-life balance. SMEs that can demonstrate their commitment to corporate responsibility and are transparent about their sustainability practices will attract the talented staff they require.
Sustainability is about being efficient, delivering a better product or service using as few resources as possible, and incorporating sound and responsible practices within the entire business operation to become more competitive. This encourages a culture of innovation and creativity within SMEs which will in turn give the SMEs a competitive advantage in a resource-constrained world. Furthermore, there will be product, market and process innovation which will be instrumental in differentiating an SME from its competitors. It may also be integral to driving down costs and attracting new customers, leading to improved overall profitability. The impacts CSR has on the bottom line have been essential in the growing role of CSR amongst SMEs.
An SME’s commitment to good CSR practices has also been vital in mitigating the effects of rising costs. For instance, an SME that is committed to reducing its carbon footprint and greater environmental stewardship will look to implementing energy efficient measures within its workplace, reduce wastage and effectively address production inefficiencies. This will have the effect of controlling the cost profile which is especially essential for an SME looking to properly manage its finances.
Another key driver responsible for the take-up of CSR and sustainability practices amongst SMEs is the growing importance of trust and reputation in a closely networked economy. There is a great deal of currency placed on relationships in a highly inter-connected world and good CSR practices will be essential for an SME seeking to interface effectively with all its different stakeholders. Stakeholders; both internal (including employees, customers and suppliers) and external (including the community, government, regulators and the general public); increasingly demand from businesses responsible practices that focus not only on the financial gains but also proper management of the businesses’ impacts on the environment and the wider society in which it operates.
Commercial success will increasingly be redefined not merely in terms of profitability but in terms of a positive impact on the environment as well as society. This is why SMEs must focus on how they can implement sustainability issues within their businesses to ensure lasting success.
The obstacles that may arise in an SME’s journey towards sustainability
Despite the powerful arguments in favour of CSR for SMEs, they may still face some obstacles that may prevent them from incorporating CSR initiatives. Firstly, SMES operate in a highly competitive environment and are therefore forced to prioritise day-to-day operations and short-term cash flow issues over long-term sustainability.
They may face staff resource constraints and hence may not have enough staff to deal with and implement CSR initiatives within their businesses. Also, they may not have the necessary finances, resources or time to focus on environmental and social issues. A perception also arises that implementing CSR and sustainability initiatives within an SME may be too costly. They may also incorrectly assume that CSR and sustainability are matters that belong exclusively in the domain of big businesses and may not fully realise that their collective impacts on the environment and society can be significant.
Another obstacle that is faced is that SMEs may lack awareness of the business benefits arising through CSR practices. This failure to fully understand the significant capacity and value that good CSR practices will imbue an SME with, will severely hinder its development of good sustainability initiatives within the business.
One other issue that SMEs normally encounter is the lack of technical know-how and knowledge as to how they can implement good responsible practices within their companies and an information gap arises. SMEs may not be able to find external sources of assistance which can act as enablers for their sustainability practices. SMEs may not necessarily correctly relate CSR as a mainstream business issue and make the appropriate business case for it. This will be yet another stumbling block in their efforts to incorporate good CSR practices into their businesses.
Critical factors that lead to success
Corporate responsibility can be a very effective catalyst for SMEs to reap significant benefits. It must be noted though that there are a number of critical success factors which SMEs should consider to effectively embed and inculcate CSR within their business strategies.
Firstly, there must be a commitment by the owners of SMEs to run their business on the principles of sustainability. They should aim to integrate CSR initiatives within their management and operational practice.
They must also convince their key stakeholders, especially their employees, that actively engaging in CSR will be in the best interest of the company. Getting buy-in from their stakeholders will support SMEs as they embark on the path towards sustainability.
SMEs should also network more with other like-minded organisations and industry leaders in the field of CSR and sustainability. This will allow them to learn from their peers and implement best practices within their organisations.
Sustainability reporting, or the practice of analysing, measuring, disclosing and subsequently reporting the environmental, economic and social impacts a business has on the market in which it operates, will also support an SME as it seeks to develop its CSR credentials. The reporting process can help them with their internal management and give SMEs an opportunity to innovate their businesses from within. External communication of their CSR practices will also give greater assurance to stakeholders on the sustainability of the business.
It must be stressed that SMEs should adopt a staged approach when building a CSR and sustainability framework for their organisations. They should avoid being overwhelmed by the huge number of CSR initiatives they could implement and instead approach it in an incremental fashion. This will ensure that their road to sustainability does not become too daunting or onerous. They should look at the areas in which they could easily implement CSR initiatives and look to ‘build’ this over time as they build capacity and incorporate shorter-term benefits into the vision of long-term sustainability.
There is however a real danger that CSR initiatives and sustainability may be seen as a panacea for poorly managed companies. Mere focus on CSR initiatives will not support a business that is economically unfeasible and commercially unsustainable. Rather, sustainability initiatives should be viewed a catalyst to enhance an SME’s value proposition and allow it to position itself robustly to its various stakeholders.
Small should not just be sexy, but sustainable too
That many SMEs are committed to environmental, economic and social responsibility is certainly clear. A large proportion of SMEs are already incorporating sustainability practices within their organisations though they may not be aware of it and may actually be practicing “silent” CSR. For instance, they may have started using recycled paper for their organisation, installed energy efficient light bulbs resulting in lower electricity costs and a lower carbon footprint, implemented a work-life balance policy for its employees, maintain a non-discriminatory hiring policy, encourage staff volunteerism and encourage recycling within the organisation. Many successful SMEs also regularly provide excellent products and services and put something tangible back into their local communities.
All of these fall under the umbrella of sustainability practices though the SME may not view it as such. Therefore, it is important that SMEs closely examine the policies and activities within their organisation and understand how these activities and policies may align with sustainability and subsequently report on it. Thereafter, SMEs can look into increasing the scope and scale of their sustainability practices, and contribute as socially responsible corporate citizens in their country’s economic landscape.
In conclusion, SMEs, much unlike their larger counterparts and multinational corporations, cannot simply pack up and transplant their operations elsewhere should the factor conditions in the locations in which they operate in become unfavourable. SMEs are very much entrenched in their communities in which they operate. As local residents, the issues of their community’s environment, society and economic welfare are close to their hearts. They care about proper corporate stewardship of the environment and society as it is where their children, friends, family and roots are. The commitment to CSR is therefore more personal to SMEs and will remain a guiding force for them as they embrace sustainability.
“The price of greatness is responsibility,” declared Sir Winston Churchill. Ultimately, SMEs that aspire to greatness must infuse the values of social responsibility within themselves for this will surely pave the way forward for a truly sustainable future.