The Impact of NGO Activism

Introduction

Corporations often draw criticism and face demands from non-governmental organizations (NGOs); some typical examples of controversial issues raised by NGOs include climate change, pollution, fracking, GMOs in food, animal welfare, supply-chain issues, and labour standards. The most pressing concern for the majority of corporations is profit maximization; NGOs, however, traditionally only concern themselves with issues related to people, the environment, and society. As such, it is difficult for NGOs and corporations to find common ground in solving problems. In tandem with the increasing demand for firms to look beyond profit and to behave more responsibly and sustainably, the interactions between corporations and NGOs have increased in breadth, intensity, and complexity. For instance, NGOs are now forming partnerships with corporations to address environmental and social concerns. This emerging trend raises some intriguing questions. Why is it important for companies to maintain a mutually beneficial and healthy relationship with NGOs? How can NGOs conduct themselves in such a way as to achieve mutually beneficial outcomes? What are the benefits and drawbacks of these aligned interests for both parties?

This chapter analyses the relationship between NGOs and corporations through the lens of the Economics of Mutuality. In particular, we discuss whether the relationship between the NGO and the corporation itself can be considered as a mutual partnership aimed at achieving long-term goals and objectives through effective implementation based on mutual understanding, common interests, and shared values. With the support of examples and cases, we discuss the strategies that NGOs use to change business practices and the direct and indirect impact of NGO advocacy activities on firms’ conduct and operations.

The Interactions of NGOs and Mutuality

In essence, mutuality refers to a situation in which businesses achieve long-term reciprocal benefits with regards to sustainable economic, social, and environmental development. NGOs are the most prominent actors advocating for social and environmental issues. Issues such as climate change are so complex that governments as well as businesses have realized the importance of NGO involvement. Consumer and social pressure as reflected in NGO campaigns is an important vehicle by which the interests of customers, communities, and societies are communicated to companies. Since NGOs are not motivated by a desire for profit (although they do face pressures to fund their staff), they are seen by the public as being more trustworthy than other organizations, and they have become increasingly important as they have grown in number and variety. According to the Union of International Associations, approximately twenty thousand international NGOs were registered in 1985; by July 2018, this number had increased to over sixty-seven thousand.1

Historically, NGOs have often been regarded as being antagonistic towards companies. More recently, however, there is an increasing appreciation of the fact that NGOs can be very useful to companies in garnering the support of both local communities and specific social groups. NGOs and corporations can form collaborative relationships to address social and environmental issues. As both NGOs and corporations face public scrutiny (e.g. NGOs themselves are monitored by Charity Navigator), collaboration between NGOs and businesses is more likely to produce ‘win–win’ results:2 companies can enhance their legitimacy and improve their business practice while NGOs increase their revenue and influence. However, in some rare cases, NGOs also suffer from their partnership with businesses. If NGOs do not choose sponsorship carefully, they end up drawing public criticism just as companies do. For instance, BP and Shell’s sponsorship deals with British cultural institutions has drawn criticism from other NGOs and anti-fossil-fuel activists. The ensuing pressure caused BP and Shell to withdraw their annual contributions to these institutions. In other words, NGOs can run the risk of being accused of doing corporate PR work in return for revenue.

In addition, although corporate governance issues are more likely to be influenced by investors, NGOs have also been recognized as important influences on the conduct of firms. NGOs such as ShareAction, which focuses on investment systems and environmental protection, adopt a shareholder-activist campaigning model to participate in corporate governance issues (Ivanova 2016). When collaborating with companies, however, NGOs have to be careful to avoid financial dependencies which can lead to mission drift. Only NGOs that remain sufficiently financially independent of companies can apply the necessary scrutiny to ensure that companies are genuinely attempting to have a positive impact and are not just engaged in greenwashing.

The trade-off between companies’ engagement with external pressures and their need to change their policies fits the pattern of maintaining a mutually beneficial and healthy relationship with NGOs. When facing pressure, boycotts, and campaigns from NGOs, companies have to judge how they should respond to and engage with them. From the valuation perspective, how much do changes such as shutting down a pollution unit or investing in new technologies cost companies? By how much does the value of a company increase as a result of gaining consumer confidence, such as when food companies decide to use sustainably sourced ingredients? How much value do companies gain in terms of long-term benefits? Companies must choose how to respond to outbursts of criticism wisely in order to maintain profits and impact positively on society and the environment.

The Influencing Strategies of NGOs on the Mutual Behaviour of Firms

NGOs’ engagement with the behaviour of firms can be diverse and complex. There are four types of engagement strategy: direct compromise, direct coercion, indirect compromise, and indirect coercion. Examples of indirect strategies include research reports and policy briefings, while examples of direct strategies include protests, boycotts, disruption, picketing, and occupations (Frooman and Murrell 2005). In this chapter, we narrow our focus to strategies that NGOs can use to form mutually beneficial relationships with corporations in order to emphasize the positive impact of NGO activism on corporations’ value-creation and greater levels of environmental and social responsibility. As can be seen in Table 19.1, the strategies used by NGOs are categorized into three forms: 1) advising and consulting; 2) collaboration; 3) shareholder activism.3

Advising and Consulting

To engage with companies on certain issues, NGOs often seek out specialized communities, networks, and knowledge. When companies start to interact with NGOs, it marks the beginning of the learning process through which new strategies are formed for achieving economic benefits as well as benefits to society and the environment. Examples of this include the Environmental Defense Fund (EDF), providing knowledge and expertise on energy issues; the Clean Water network, sharing its extensive knowledge on water quality; the WWF, providing help on the sourcing of materials; and Conservation International (CI), providing expertise in food and agriculture. NGOs can serve as consultants and advisors helping companies to become more responsible and sustainable. These characteristics can have positive impacts on companies’ business operations, management practices, supply chains, and their reputation in society.

The interaction between companies and NGOs provides a learning and knowledge-exchange opportunity for firms that lack expertise in certain innovations and new practices and regulations, or that are not aware of the potential impacts of uncertainties. NGOs often have analytical and technical skills that can help corporations to set standards, generate new ideas, address new issues, and respond to other stakeholders. For instance, the World Resources Institute (WRI) produces and curates datasets as part of their commitment to turning information into action. One of the datasets enables users to explore, compare, and assess the greenhouse-gas mitigation plans in each country’s Intended Nationally Determined Contribution (INDC).4 Another example is the International Union for Conservation of Nature (IUCN). One of the IUCN’s key objectives is to share the knowledge gathered by its unique global community of more than ten thousand scientists.5

However, there are also concerns regarding NGOs’ accountability in their roles as advisors and consultants to multiple stakeholders. Some scandals have been reported in the NGO sector, such as misuse of funding, misconduct, and a lack of transparency in their financial systems. For example, the Red Cross, the world’s best-known humanitarian organization, reported in 2017 that more than $5m (£3.8m) of aid money was lost to fraud and corruption during the Ebola epidemic in West Africa. In 2018, Oxfam admitted that some of its members had engaged in sexual misconduct in Haiti. This had severe consequences including loss of credibility in the eyes of the public, reduced funding support, and Haiti’s banning Oxfam from operating in the country.

NGOs are at the frontline of the battle to obtain transparency from companies. However, NGOs themselves should not be exempt from transparency requirements. Organizations such as Charity Navigator have now been set up to rate how effectively NGOs manage themselves. NGOs are assessed based on financial efficiency and capacity, and on how they manage accountability and transparency.

Collaboration

NGOs and companies tend to begin the engagement process with different needs and views. Communication helps both parties to balance their needs and expectations so that they can achieve common goals. NGOs and companies can develop mutual forms of collaboration based on their aligned interests and complementary resources. Hoepner, de Aguiar, and Majithia (2013) studied managerial compliance with the International Code of Marketing of Breast-Milk Substitutes over a twenty-year period; their findings suggest that corporations that adhere responsibly to NGOs’ international standards are less likely to provoke consumer boycotts and have better reputation risk management while not encountering any shareholder value reduction as result of their responsible behaviour. In addition, NGOs can help with organizational change and increase transparency within global supply chains (e.g. more disclosure on social and environmental information) (Reid and Toffel 2009; Mcdonnell and King 2013). However, any violation of the rights of key stakeholders, such as consumers, employees, suppliers, and governments could have significantly negative impacts on the supply chain, potentially causing business failure.

For NGOs, collaborative relationships offer them the power to steer companies’ policies and operations, and therefore to achieve their own goals. However, there are factors that can potentially moderate the influence of NGOs. In contrast to having an antagonistic relationship with the same company, a collaborative relationship may influence the independent standing of NGOs. Doh and Guay (2006) argue that different institutional structures and political legacies can explain the influence of NGOs in the policymaking process. Also, given that NGOs work across borders, their impact is constrained by national and regional contexts.

Shareholder Activism

Although NGOs do not normally invest in shares, in recent years, activist NGOs have begun either to buy shares as their own (in order to participate in proxy meetings and other resolutions) or to find allies among firms’ other shareholders in order to address their concerns and pressurize companies to change. Institutional owners often find themselves called upon by NGOs to vote as proxies on a wide range of environmental and social issues—such as those dealing with diversity, climate change, pollution, waste, animal welfare, and others. NGOs can either pressurize investors to invest capital in certain companies or attempt to influence company directors by interacting with them directly and intervening in the annual general meetings (AGMs). The Interfaith Centre on Corporate Responsibility (ICCR) pioneered the use of shareholder advocacy to urge companies to act on environmental, social, and governance (ESG) issues (Goodman et al. 2014; Hebb et al. 2018). For instance, ICCR member initiatives include calling for increased diligence to eliminate forced labour risks in global supply chains, curbing GHG emissions to align with the 2 warming scenario established by the Paris Climate Agreement, and pressing for more sustainable food systems.6

Another example is ShareAction’s ‘Tar Sands—Counting the Cost’ campaign aimed to stop BP and Shell extracting oil from tar sands, which incurred severe environmental, social, and financial risks. ShareAction persuaded 100 shareholders to table a resolution at the AGMs of BP and Royal Dutch Shell in 2010, which resulted in Shell’s AGM 11 per cent of voting and BP’s AGM 15 per cent of voting. While such shareholder activism is unlikely to win majority support, it can increase public awareness and may lead to self-reflection among corporate executives, as shareholder meetings and results are often covered by the media. For future events, NGOs may need to weigh this publicity against the long-term commitment and dedication required for effective shareholder engagement.

The Impact of NGOs on the Mutual Conduct of Firms

As NGOs address the interests of customers, employees, and society, they are considered to be one of the main motivating factors in driving change in corporate conduct. NGO campaigns can be successful in altering corporate conduct and policies by shifting to more socially and environmentally focused managerial practices that also have a positive effect on financial value. For example, companies can save costs by improving energy efficiency and can improve business operations by improving employee well-being. NGOs foster communications and interactions with business which can generate social capital and in return benefit business overall. In addition, NGOs are helpful in embedding values of responsibility and sustainability in the for-profit corporate culture.

NGOs are essential players in helping companies to expand and shape sophisticated networks. NGOs collaborate with other stakeholders of the firm (e.g. customers, suppliers, investors, governments, regulatory bodies, and other NGOs) to shape the norms of corporate policies, culture, and beliefs. There are value potentials for businesses interacting with NGOs with regard to accessing their latent knowledge and networks. With help from NGOs, companies have the potential to discover and expand into new markets. Endorsement from reputable NGOs can help companies to attract more customers.

When companies commit to change, the actions often impact positively on their corporate reputation and public perception. Companies also maintain a level of legitimacy that helps them to gain the trust and acceptance of multiple stakeholders including government, media, employees, customers, suppliers, and investors. In contrast, companies that are unwilling to change may find themselves facing additional pressure and monitoring from activists and the public, or even increased regulatory attention. As a result of activist campaigns, companies make changes to policy, products, and business operations. Companies are requested to disclose more information on social and environmental performance. With more transparency, consumers become more informed about products and the company’s performance. As NGOs can motivate corporations to change management practice and increase transparency within global supply chains (Reid and Toffel 2009; Mcdonnell and King 2013), there is great risk-reduction potential for businesses interacting with NGOs in diminishing supply-chain risks.

NGOs can play an important role in promoting sustainable development and embedding societal issues through serving as early warning mechanisms and providing help in monitoring and implementing international agreements. For example, Volkswagen might have spared itself the pain of the 2015 emissions scandal had it paid attention to a 2013 report by the International Council on Clean Transportation (ICCT).

‘From Laboratory to Road’ showed that the gap between official CO2 and real CO2 values was continuing to increase, even using the VW Passat as an example—showing that the gap was more than 30 per cent in 2011.7

Collaboration between NGOs and corporations can help to pre-empt conflict and to reduce the amount of criticism drawn from environmental activists and the public. In areas where regulation is increasing, companies that have already made changes in response to NGO activism are well prepared for legislative shocks. This preparedness can serve as a competitive advantage in many industries. For NGOs, cultivating relationships with corporations can help improve the environment while increasing their own publicity and visibility. Building these relationships also helps NGOs to gain additional funding from business and individual donors, thus increasing long-term financial security and stability.

Conclusion

In spite of the increasing interactions between NGOs and corporations on social and environmental issues, there are many dynamics and challenges that should be addressed from the perspective of the Economics of Mutuality. If more companies formed mutually beneficial relationships with the NGO community, the interaction between the two would grow in importance and significance over time. The impact of NGOs’ activism on the mutual conduct of firms is dynamic and complex. The effect may differ across different areas of concern, companies, industries, and market environments. Some companies proactively engage with NGOs, while others try their best to avoid any involvement with them; some companies use NGOs to greenwash their damaged reputation, while others are genuinely concerned about environmental and social issues and are fully committed to changing. Corporations and NGOs both evaluate their own situations based on value and return: corporations are more likely to change if there are multiple benefits foreseeable in the near future; meanwhile, NGOs are more likely to select companies as targets if they believe that the impact of doing so will be more significant.

Corporations and NGOs need to formulate better methods to align their mutual interests and achieve common goals. NGOs need to work on improving their communication, strategies, and action. Corporations need to change their perception of their relationships with NGOs and behave more responsively and responsibly. Although NGOs have become prominent stakeholders, corporations must still engage with a wide variety of other stakeholders (e.g. customers, suppliers, investors, governments, and regulatory bodies). How can businesses best manage these complex and dynamic relationships with stakeholders? Do larger companies in consumer-facing industries benefit more from collaborative relationships with NGOs? Are companies that exist in a weaker institutional environment more likely to be targeted by NGOs? Will all mutual interactions and collaborations benefit both NGOs and business or are NGOs at risk of selling their values? Further empirical evidence is needed to answer these questions.

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Notes

1. Source: https://uia.org/ybio. ‘The Yearbook of International Organizations includes detailed information on over 37,500 active and approximately 38,000 dormant international organisations from 300 countries and territories––including intergovernmental (IGOs) and international non-governmental organisations (INGOs). Approximately 1,200 new organisations are added each year.’

2. Additional details of Charity Navigator: https://www.charitynavigator.org/.

3. As advocating has been considered the main role of NGOs, we only focus on the more specific strategies that NGOs can use to benefit the corporations and

   themselves.

4. ‘Under the U.N. Framework Convention on Climate Change (UNFCCC), countries committed to create a new international climate agreement by the conclusion of the Paris climate summit in December 2015. In order to help facilitate that goal, countries agreed to release public outlines of actions they intend to take. These commitments are known as INDCs’ (World Resource Institute). Data sets provided by World Resources Institute can be accessed at: http://datasets.wri.org/ dataset. The CAIT Paris Contributions Data can be accessed at: http://datasets. wri.org/dataset/85940e80-d6dd-4978-a2e6-82ca743b0884.

5. Resource provided by International Union for Conservation of Nature (IUCN) can be accessed at: https://www.iucn.org/.

6. More details can be found at: https://www.iccr.org/about-iccr. Each year, ICCR members typically file close to two hundred resolutions and ICCR publishes the full list online. The full list of resolutions can be found at: https://www.iccr. org/iccrs-shareholder-resolutions.

7. More details can be found at: https://www.theicct.org/blogs/staff/trend-that-cant-continue-europes-car-co2-emissions-gap.

Andreas G. F. Hoepner is a financial data scientist working towards the vision of a conflict-free capitalism. While the vision is unlikely to be fully achievable, Andreas’s view is that anyone can strive to make a regular contribution to reducing abusive conflicts of interests and thereby enhancing the fairness of our society and its financial system. Formally, Andreas is full professor of operational risk, banking, and finance at the Michael Smurfit Graduate Business School of University College Dublin (UCD). Since June 2018, Andreas has served on the European Union’s Technical Expert Group on Sustainable Finance.

Qian Li is a lecturer in sustainable business operations and public value engagement fellow at Cardiff Business School, Cardiff University. She previously worked as a postdoctoral researcher on the Mutuality in Business project at Saïd Business School, University of Oxford. Qian’s current work focuses on the empirical links between ESG risks and shareholder value, the impact of NGO activism, and the drivers of human capital. Interdisciplinary in nature, her work spans corporate finance, strategic management, environmental economics and business ethics. Qian holds a PhD in business ethics and asset management from ICMA Centre, University of Reading.

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