Integrating IBM

IBM takes on the challenge of weaving corporate social responsibility efforts into its core business practices.

By Abby Schultz

After creating supplier conduct principles in June 2004, IBM developed a tutorial to train more than 4,000 procurement officers to look at the labor and environmental practices of potential suppliers at the same time as questions of cost, quality and delivery of products and services.

“It’s important your workforce is aware of the program, so they are able to be the ambassadors on a day-to-day basis,” says John Gabriel, IBM’s Manager of Supply Chain Social Responsibility.

By creating the principles, and training its global procurement workforce, IBM is achieving the Holy Grail of corporate social responsibility (CSR) efforts today: integration. That is, IBM is weaving social and environmental concerns into its core business practices. As many of its executives like to say, corporate social responsibility is “part and parcel” of how IBM does business.

“A lot of companies are really working on this, struggling to make sure [CSR] is integrated,” says Rev. David Schilling, Director of the Global Corporate Accountability Program for the Interfaith Center on Corporate Responsibility, a group of 275 faith-based institutional investors. “We’ve worked with many, many companies in the supply chain—in the apparel, footwear, toy and automotive industries—and you can tell pretty quickly whether the CSR function and the supply chain labor standards are ancillary or core to the business approach,” he continues. “I think IBM is really trying to align those two, which is critical.”

A lot of attention is being paid today to the topic of integrating social and environmental concerns into core business practices. In a 2006 report titled “From Challenge to Opportunity: The Role of Business in Tomorrow’s Society,” executives from the World Business Council for Sustainable Development say businesses will make their biggest contribution to society through core business operations—“through technologies and products that enable the world to address its environmental and social challenges.” Real societal change, the report asserts, will not come from philanthropic efforts.

Many companies are wrestling with what this all means. For some companies, of course, corporate responsibility evolved as a way to stay out of trouble. But that outlook is changing.

“More progressive companies are starting to see that by outperforming their peers on sustainability, and having a keen awareness of the way sustainability is shaping their industry, they can create value and exploit new markets for products and services,” says Matt Loose, advisor at SustainAbility, a think tank and consulting firm in London.

Not all of IBM’s stakeholders would agree that IBM has a perfect record when it comes to integrating corporate responsibility into core business practices. Many non-governmental organizations (NGOs) and socially responsible investors are watching closely to see if conditions at factories that supply parts for IBM and others show real improvement, and they remain concerned with manufacturing operations in China, where workers are limited to joining a single government-run trade union.

Stakeholders also remain concerned with some of IBM’s business practices. The SEC is currently conducting formal investigations into how IBM disclosed earnings and equity compensation in the first quarter of fiscal year 2005, and into potential accounting irregularities involving a customer, Dollar General, according to KLD Research & Analytics, an investment research firm.

In 2004, IBM was notified that the SEC is considering recommending a civil action against IBM for possible accounting irregularities related to an $11 million transaction in fiscal year 2000 with Dollar General, a customer of IBM’s Retail Stores Solutions unit, according to IBM’s 2006 annual report. The SEC is also conducting a formal investigation into IBM’s disclosures of earnings and expensing of equity compensation in the first quarter of 2005, the report said.

Keeping With Tradition

IBM argues corporate social responsibility has always been part of how it conducts business. The social responsibility material on IBM’s website tells readers IBM is “based on a set of fundamental values,” and from its inception in the early 1900s, the company “staked out a territory few corporations were willing to approach in that time, the idea of the corporation as partner, citizen, neighbor and participant in the world's affairs.”

Stanley Litow, IBM’s Vice President of Corporate Community Relations, points out that IBM has been issuing environmental reports since 1935, has integrated corporate philanthropy since World War II, and has encouraged employees to volunteer in their communities since the days of Thomas J. Watson, Sr., IBM’s first president, through the first half of the 20th century. Today, IBM is a recognized leader in community relations.

“A lot of things that are corporate citizenship are part of the company’s DNA,” Litow says.

IBM, however, no longer operates in separate silos, with the operations chief in Tokyo working independently from the operations chief in the United States. The company is integrated from top to bottom, and the function of corporate citizenship is integrated in the same way marketing or research is integrated. Four years ago, IBM set up a Corporate Citizenship Council, with Litow as its head, and division heads of environmental affairs and product safety, government programs, workforce relations, investor relations and integrated supply chain, among others, as members. The group meets every other month, and communicates electronically in the time between to collaborate, problem solve and conduct strategic planning on CSR issues and to communicate corporate social responsibility priorities throughout IBM’s business operations.

“For example, the environment—it’s about how you manufacture goods, but it’s also about how you incentivize employees to be environmentally aware and conscious,” Litow says. “If you haven’t set up a management structure, you end up spending resources in an inefficient fashion.”
Encouraging Industry Collaboration

About the same time IBM was establishing the Corporate Citizenship Council, Bradley K. Googins, Executive Director of the Boston College Center for Corporate Citizenship, got a call from Litow. IBM was exploring the idea of working collaboratively with other companies on strategic planning issues related to corporate citizenship. A subsequent gathering of executives revealed companies were spending time on how they should report social and environmental performance, but, unlike financial reporting, they weren’t using the data they gathered to manage their business, Googins says. “By the time a company is reporting out, it’s honestly much more of a communication vehicle than a management tool,” Googins says. Litow bristles at the emphasis given to social and environmental reporting, saying, “the real benefit or value to a company is less in terms of what happened in the past, and more in terms of going into the future—strategic planning for the company, it’s vital.”

Out of this meeting, IBM, with the assistance of the Center for Corporate Citizenship, and AccountAbility, a non-profit think tank based in London, founded the Global Leadership Network, which Litow chairs. The idea of the network is to help companies integrate corporate social responsibility within core business practices. An initial group of 10 companies, including 3M, General Electric, FedEx and Omron, has grown to 25, with this year’s addition of Home Depot, Wells Fargo and Dow Chemical. The network allows companies to exchange best practices and have access to an interactive toolkit where they benchmark their practices against others. A company that believes IBM’s supplier conduct principles can be applied to their business can look at how their ideas stack up against IBM’s, Litow explains.

“What the Global Leadership Network allows you to do is to plan across the various departments within your company and to contrast that externally against what other companies are doing and to provide yourself with a roadmap toward getting better,” Litow says.

IBM’s supply chain practices are a good illustration of how CSR becomes part of day-to-day business decisions. IBM has a huge global supply chain: The company buys $36 billion a year in goods and services from 30,000 suppliers in approximately 80 countries. The company created a department to address supply-chain corporate social responsibility in 2004 and placed it within the Global Procurement area instead of Compliance or Communications because “that’s where the point of influence exists with who we do business with,” says John Gabriel, the Manager of Supply Chain Social Responsibility.

A major effort of this department was to work with HP and Dell, as well as electronics manufacturing companies like Flextronics, Jabil and Sanmina-SCI, to write a uniform set of supplier principles around labor and environmental practices. The principles, called the Electronic Industry Code of Conduct (EICC), was created in October 2004 and has now been signed by 25 members.

Last year, members of the EICC Group sat down with two NGOs, the Centro de Reflexión y Accíon Laboral (CEREAL) and the Catholic Agency for Overseas Development (CAFOD). The purpose of the two-day session was to discuss CEREAL’s concerns with labor practices at factories in and around Guadalajara, Mexico—practices CAFOD had drawn attention to two years earlier in a report titled, “Clean Up Your Computer.”

“We were able to discuss issues in more detail and to get to the root cause of the situation and then to understand what we can do to make improvements,” says Gabriel. Among areas needing attention: letting workers know their rights and how to voice concerns they might have with hours, safety, or daily workforce practices.

This effort by IBM and other EICC companies wins praise from Schilling at the Interfaith Center on Corporate Responsibility. “I’m sure there’s some tension, but they really, in my estimation, have taken seriously the charges of specific labor rights abuses in factories where they are sourcing,” Schilling says.

Focusing on Green

Environmental concerns touch every aspect of IBM’s business. “The environment matters in research, in product design, in manufacturing, throughout procurement, in the way we distribute and ship our products and materials around the world, through our services business interest, and of course, environmental concerns directly intersect with the work we do with governments, in terms of communications, and real estate and the like,” says Wayne Balta, IBM’s Senior Vice President of Environmental Affairs and Product Safety.

IBM developed its product stewardship program in 1991. The effort, part of its global environmental management system, encourages the company to use environmentally preferable materials, including as much recycled and recyclable materials as possible, and to design for disassembly for when a product reaches the end of its useful life, Balta says.

Over the years, IBM, among other computer companies, has faced pressure from NGOs and socially responsible investors to recover and recycle electronic equipment, particularly personal computers. The take-back of old IBM PCs now falls into the hands of Lenovo Group Ltd. of China, which bought IBM’s PC business in 2005. In its 2006 CSR report, IBM details how materials are recovered in its “product end-of-life management operations.” In 2005, 1.6 percent of a total 53,670 metric tons of products and waste collected ended up in landfills, 16.26 percent less than the previous year. Nearly half of the material was recycled, and some 37 percent was resold.

The environmental section of IBM’s corporate responsibility report lays out the business case for IBM’s environmental efforts in dollars and cents. IBM estimates savings and cost avoidance from its environmental initiatives was $255.5 million in 2005, compared to that year’s expenses of $105.6 million.

Tying Responsibility to the Bottom Line

IBM’s corporate responsibility efforts sometimes look like straightforward philanthropy, but its business interests often are in the picture. Several years ago, the research labs at IBM were working on grid technology—software that joins idle desktop computers into massive supercomputers. In 2003, the technology enabled scientists to find 44 potential smallpox treatments. Today, the World Community Grid (as it is now called) joins 500,000 computers worldwide for scientific, humanitarian research. At the same time, several IBM customers are considering whether the technology can be used to harness idle computer time to solve problems within business and governments, IBM’s Litow says.

Projects such as the grid are proof to Litow as well as stakeholders that corporate responsibility brings value to the bottom line.

“I think IBM has been quite ahead of the curve on this for some time,” says Googins at the Center for Corporate Citizenship. “They inherently understand this as a business issue. I think they were one of the leaders at understanding philanthropy is misguided. It’s not about the money; it’s about how a company makes the money. Now, they are clearly one of the leaders at how to integrate this into the business.”