CSR and the Indonesian mining industry

Indonesian Mining Conference and Exhibition, November 2007

CORPORATE SOCIAL RESPONSIBILITY AND THE INDONESIAN MINING INDUSTRY

NOKE KIROYAN

Managing Partner, Kiroyan Kuhon Partners

Abstract

Corporate Social Responsibility as a concept in business ethics emerged after World War II, but only after the Earth Summit in Rio de Janeiro in 1992 has it become inextricably linked to sustainable development, in fact CSR is nowadays understood as the contribution of business toward sustainable development. John Elkington introduced the Triple Bottom Line as shorthand for sustainable development, and now all three are inter-related and have joined the mainstream. Because of the nature of the business itself that brings it in close contact with the communities and the change it causes to the earth’s topography, mining is particularly called upon to be engaged in CSR. The extent of the susceptibility of the industry to external pressures and the drivers of CSR need to be thoroughly understood as well for mining companies to formulate strategic policies for their own sustainability and that of the surrounding communities.

A Brief History of CSR During the last decade the term Corporate Social Responsibility or its abbreviation “CSR” has become the rage among companies and development agencies, and correspondingly the number of books, articles and scientific discourses on the subject has proliferated. Although it only recently gained currency, theories on CSR actually have been around for a few decades already, having emerged as a coherent position shortly after World War II in the work of Howard R. Bowen, an economics professor at Williams College in Massachusetts. According to him, in order to survive in the free enterprise system businesses must produce social goods such as higher standards of living, widespread economic progress and security, order, justice and freedom and development of individual persons (May et al, 2007: 5). William C. Frederick also holds the view that although the seed of what would eventually become known as CSR have been planted earlier, it is only after World War II that the concept blossomed, and he credited Frank Abrams, then chairman of the board of directors of Standard Oil of Jersey (now ExxonMobil) with advocating the idea in an article in the Harvard Business Review in 1951. In Abrams’ view, because firms are man-made instruments of society, management should be good citizens who act in “socially responsible ways.” He goes on to say that “business managers can more effectively contribute to the solution of the many complex social problem of our time. There is no higher responsibility, there is no higher duty of professional management.” (Frederick, 2006: 7-8). A convergence of the many individual thoughts about the role of business in society, a few examples mentioned above, began to emerge in the early nineties. After the Earth Summit at Rio de Janeiro in 1992, sustainability, or more specifically sustainable development as defined by the World Commission on Environment and Development (Brundtland Commission) in 1987 is seen as providing the framework for CSR. The concept is based on the

fundamental ethical assumption that it is morally wrong to use resources in ways that may jeopardize the legitimate interest of future generations. Sustainability comprises three components: environmental, economic and social (Matten, 2006: 25-7). In a similar vein John Elkington coined the term ‘Triple Bottom Line’ to describe the three components of sustainability, the interrelationship of which he described as follows: ”Society depends on the economy – and the economy depends on the global ecosystem, whose health represents the ultimate bottom line. The three bottom lines are not stable; they are in a constant flux, due to social political, economic and environmental pressures, cycles and conflicts. So the sustainability challenge is tougher than any of the other challenges in isolation.” He clearly views the triple bottom line from a dynamic perspective, likening the interplay between the three components as continental plates that move independently from each other and occasionally causing “shear zones” that produce the social, economic and ecological equivalents of tremors and earthquakes (Elkington, 1998: 70-4). The mainstream concept of CSR encompassing current thoughts on sustainable development and stakeholder engagement is succinctly described in a definition formulated by the World Bank as quoted below:

“Corporate responsibility is the commitment of businesses to behave ethically and to contribute to sustainable economic development by working with all relevant stakeholders to improve their lives in ways that are good for business, the sustainable development agenda, and society at large.” (World Bank, 2007) A very astute observation on the disparity in

interpreting CSR in different parts of the world was made by William B. Werther, Jr. and David Chandler. They maintained that companies require a CSR

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perspective to maintain their social legitimacy. Because societies differ, so do their norms on what is considered acceptable, and two dimensions consistently influence the role of CSR in any society: democracy and economics. Wealthy societies have access to greater resources and they tend to have more demanding expectations as wealth opens up more options. On the other hand, in poor democracies the sense of general social well-being is associated with the basic necessities, such as food, shelter, transportation, education, medicine, social order and jobs. The dynamics generated by economic development cause a constant redefinition and evolution of societal expectations and the CSR response on the part of the companies evolve in line with these developments (Werther & Chandler, 2006: 13). The emphasis on basic necessities in developing countries like Indonesia explains why Corporate Social Responsibility programs are focused on community development, so much so that Community Development is sometimes regarded as synonymous with CSR, because indeed most CSR programs are geared toward poverty reduction of communities, which is actually only one of the three bottom lines.

In an earlier work on the relationship between mining and CSR, Professor Alyson Warhurst of the International Centre for the Environment, Mining and Environment Research Network that is part of the School of Management of the University of Bath, argues that multinational mining companies must undergo a paradigm shift from a self-centered preoccupation with their ‘legal rights’ to a broader sense of ‘social responsibility’ particularly in developing countries where disparities in power and information exist. The crucial issue is whether the profit-making nature and rights protected by national and international law frees MNCs moral obligation and social responsibility. Corporate Social Responsibility implies compliance plus the active development and implementation of mainstream business strategy, supported by technological and organizational innovation to prevent negative social impacts and optimize social benefits from the outset. Part of the implementation of CSR in developing countries by large state mining enterprises and MNCs provide social welfare for the surrounding communities in the form of providing education, healthcare, leisure facilities and subsidized basic foods. (Warhurst, 1998: 4-5). These items are currently understood as constituting part of community development as commonly practiced by mining companies.

Mining and CSR The practice of CSR appears to be prevalent in the extractive industries, mining companies in particular. In her book “Corporate Social Responsibility for Mining Companies” Natalia Yakovleva explains that “CSR is particularly relevant to the mining industries, because they cause significant effects upon economic, social and environmental dimensions, and are particularly viewed amongst the most damaging and dangerous industrial sectors.” She described the following reasons why the mining industry must consider CSR as an important business issue:

Currently, much of what Prof. Warhurst advocated in her paper almost a decade ago has become part of standard practice among most mining companies in Indonesia. To name a few examples, in a study conducted in Indonesia by the non-governmental organization PIRAC, the example of the mining company Rio Tinto that operated in East Kalimantan was included as representing the mining sector among the four case studies conducted in 2004-2005. The three areas the company concentrated on through the Rio Tinto Foundation were agriculture, healthcare and preservation of local culture (Ibrahim, 2005: 91-4). On the island of Sumbawa, the copper-and-gold mine Newmont Nusa Tenggara concentrates on four areas: infrastructure, community health, agriculture and education. Similar activities can be observed at any major mining operation in Indonesia these days because of the need for a ‘local license to operate’ without which operations will not be sustainable despite the mining company being in possession of all the official permits and licenses required by the laws of the country.

Generally negative public opinion of the mining sector, mostly due to environmental and social concerns Environmental, community and indigenous pressure groups that have consistently targeted the mining sector at local and international levels, with large international NGOs specifically targeting the mining industry The constant challenge of maintaining ‘the social license to operate’ in the face of resistance from many social organizations based on accusations of lack of community engagement, impact on agricultural land use, pollution and related health impact and migration of labor from other areas

A more recent study by Heledd Jenkins and Louise Obara of the ESRC Centre for Business Relationships, Accountability, Sustainability and Society (BRASS), Cardiff University cites a number of business reasons aside from external pressure for mining companies to invest in communities through CSR programs as follows: Mining companies often operate in remote

areas that are economically underdeveloped and lack social welfare services (Yakovleva, 2005: 19-20)

To gain competitive advantage because companies that are perceived to be socially responsible are more favored in getting concessions

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To maintain a stable working environment because of acceptance by the communities To manage external perceptions and maintain a good reputation (CSR used for PR purposes)

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To keep employees happy because the staff feel more positive about the company and effective CSR measures can help in retaining and recruiting the best people However, Jenkins and Obara also warn that

CSR programs may create a ‘dependency mentality’ whereby communities look to companies to compensate them for social and environmental damage, and the company would then be seen as responsible for anything that goes wrong. The community development programs are not even regarded as charity but as compensation for the use of the environment and the resources, and instead of creating good relations with the community, a situation like this harbors potential volatility and the more damaging aspect that it is not readily apparent is, that communities concentrate on extracting compensation instead of developing longer term capabilities during the lifetime of the mine. CSR programs that are not well-designed and poorly executed may fail to address the needs of communities and therefore be unsustainable or even worse, exacerbate the problem of dependency. The following factors may contribute to failure of CSR programs:

Country/context specific issues like corruption, conflict and bureaucracy, for example conflict between large-scale mining companies and illegal miners that may impact the company’s perception of the community and how they develop their community involvement initiatives Failure to involve the beneficiaries in the community development projects, the communities become recipients of top-down gifts from the company Lack of human resources who have the appropriate skills – most mining company employees have a technical or engineering background that does not prepare them to deal with complex social issues Mining companies often have a micro-level perspective whereas a macro-level view is needed to integrate CSR initiatives into a larger sustainable development plan Consultation with communities are usually superficial and inadequate, being confined to the most influential community members only (Jenkins & Obara, 2006: 1-9) Not many studies have been undertaken and

published specifically about community development programs conducted by mining companies in Indonesia. In an attempt to evaluate the effectiveness of its community development programs, KPC commissioned Management of Social Transformation

of the Indonesian Institute for Science (MOST-LIPI) to conduct a comprehensive review in 2003. Each program was analyzed and recommendations submitted as to its improvement, but among its most important findings is that large-scale economic activities tend to attract people from other areas, so that the indigenous people become marginalized. The Kutai region was one of the target areas of extensive logging activities in the early seventies, followed by KPC in the late eighties. By the beginning of the 21st century indigenous communities (Dayaks and Kutainese) comprise 40% of the whole population of the East Kutai Regency (Kabupaten Kutai Timur), and in the areas directly bordering the mine site, the sub-districts of Sangatta and Bengalon they make up only 14% of total population (MOST-LIPI, 2003: 12-5). Similar conditions can be assumed to prevail around other large-scale mining activities, and the potential for social conflict needs to be addressed in the community development programs.

The former Director General of Mines, Surna T. Djajadiningrat pointed out that many Environmental Impact Assessment (AMDAL) studies draw the conclusion that community development programs are not required because there are no communities in the area that will be impacted. He said that these studies seem to imply that ‘communities’ are social units that may provide services to the industry to be established, be it in the form of accommodation, provision of goods and labor. Economically less-developed human settlements are not included in this definition (Rudito et al, 2003: 28-30). As the example of KPC has shown, scattered human settlements totaling around 2,000 people can develop into a major town of 60,000 within a decade.

CSR in Indonesian Law

With the passing of Law No. 40/2007 on August 16, 2007 Indonesia became the first country in the world to include the obligation to conduct CSR in Corporation Law. A salient feature of this new piece of legislation is that companies in the extractive industries are specifically mentioned as those required by law to conduct this obligation on pain of sanctions, although Chapter I Article 1 Paragraph 3) of the law is more general in nature, as it explains that “Social and environmental responsibility is the commitment of corporations to participate in sustainable economic development to improve quality of life and the environment in ways that are good for the corporation, the local communities as well as society at large.” However, Chapter V Article 74 on Social and Environmental Responsibility stipulates the following:

1) Limited liability companies in the sector of

natural resources and/or related thereto are required to implement Social and Environmental Responsibility.

2) Social and Environmental Responsibility as stipulated under Paragraph 1) above is an obligation of the corporation that is

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budgeted and included under company expenses and its implementation will be subject to the principles of appropriateness and reasonableness.

3) Corporations that are in breach of the requirement as stipulated under Paragraph 1) will be sanctioned under prevailing legislation.

4) Further stipulations on Social and Environmental Responsibility will be formulated in Government Regulations.

Currently the Department of Justice and

Human Rights representing the Indonesian government is collecting input from all stakeholders, including representatives of business associations and NGOs prior to issuing the Government Regulations to implement Article 74 of Law No. 40/2007. Concluding Remarks

1) Corporate Social Responsibility has evolved from a concept predominantly in the realm of business ethics into norms companies are expected to live by in order to obtain a ‘local license to operate’.

2) The mining industry is under close scrutiny of the communities and non-governmental organizations and this ‘local license to operate’ often determines whether the operation is viable or not, irrespective of the legal status protected under the laws of the country.

3) It is therefore incumbent upon mining companies to develop the expertise in various aspects of CSR, including community development, to decrease the risk of doing business. Many have done so already on a voluntary basis, precisely because the strategic importance of CSR is properly understood.

4) Indonesia has introduced a trail-blazing stipulation in its newly enforced Law No. 40/2007 on Corporations that require companies in the extractive industries to conduct CSR programs. The implementing regulations have not been issued yet, and until then this stipulation remains inoperable.

5) Most major mining companies operating in Indonesia have developed a high-level of competency in CSR and have therefore nothing to fear from Law No. 40/2007.

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CSR and the Indonesian mining industry

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