Indonesian Mining Conference and Exhibition, November 2007                    CORPORATE SOCIAL RESPONSIBILITY             ...
Indonesian Mining Conference and Exhibition, November 2007perspective to maintain their social legitimacy.                ...
Indonesian Mining Conference and Exhibition, November 2007          To maintain a stable working environment              ...
Indonesian Mining Conference and Exhibition, November 2007         budgeted and included under company         expenses an...
Upcoming SlideShare
Loading in …5

CSR and the Indonesian mining industry


Published on

Published in: Business, Economy & Finance
1 Comment
  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

CSR and the Indonesian mining industry

  1. 1. Indonesian Mining Conference and Exhibition, November 2007 CORPORATE SOCIAL RESPONSIBILITY AND THE INDONESIAN MINING INDUSTRY NOKE KIROYAN Managing Partner, Kiroyan Kuhon Partners AbstractCorporate Social Responsibility as a concept in business ethics emerged after World War II, but only after the EarthSummit in Rio de Janeiro in 1992 has it become inextricably linked to sustainable development, in fact CSR isnowadays understood as the contribution of business toward sustainable development. John Elkington introduced theTriple Bottom Line as shorthand for sustainable development, and now all three are inter-related and have joined themainstream. Because of the nature of the business itself that brings it in close contact with the communities and thechange it causes to the earth’s topography, mining is particularly called upon to be engaged in CSR. The extent of thesusceptibility of the industry to external pressures and the drivers of CSR need to be thoroughly understood as well formining companies to formulate strategic policies for their own sustainability and that of the surrounding communities.A Brief History of CSR fundamental ethical assumption that it is morally wrong to use resources in ways that may jeopardize During the last decade the term Corporate the legitimate interest of future generations.Social Responsibility or its abbreviation “CSR” has Sustainability comprises three components:become the rage among companies and development environmental, economic and social (Matten, 2006:agencies, and correspondingly the number of books, 25-7). In a similar vein John Elkington coined the termarticles and scientific discourses on the subject has ‘Triple Bottom Line’ to describe the three componentsproliferated. Although it only recently gained currency, of sustainability, the interrelationship of which hetheories on CSR actually have been around for a few described as follows: ”Society depends on thedecades already, having emerged as a coherent economy – and the economy depends on the globalposition shortly after World War II in the work of ecosystem, whose health represents the ultimateHoward R. Bowen, an economics professor at bottom line. The three bottom lines are not stable; theyWilliams College in Massachusetts. According to him, are in a constant flux, due to social political, economicin order to survive in the free enterprise system and environmental pressures, cycles and conflicts. Sobusinesses must produce social goods such as higher the sustainability challenge is tougher than any of thestandards of living, widespread economic progress and other challenges in isolation.” He clearly views thesecurity, order, justice and freedom and development triple bottom line from a dynamic perspective,of individual persons (May et al, 2007: 5). William C. likening the interplay between the three componentsFrederick also holds the view that although the seed of as continental plates that move independently fromwhat would eventually become known as CSR have each other and occasionally causing “shear zones” thatbeen planted earlier, it is only after World War II that produce the social, economic and ecologicalthe concept blossomed, and he credited Frank Abrams, equivalents of tremors and earthquakes (Elkington,then chairman of the board of directors of Standard 1998: 70-4).Oil of Jersey (now ExxonMobil) with advocating the The mainstream concept of CSRidea in an article in the Harvard Business Review in encompassing current thoughts on sustainable1951. In Abrams’ view, because firms are man-made development and stakeholder engagement isinstruments of society, management should be good succinctly described in a definition formulated by thecitizens who act in “socially responsible ways.” He World Bank as quoted below:goes on to say that “business managers can moreeffectively contribute to the solution of the many “Corporate responsibility is the commitmentcomplex social problem of our time. There is no of businesses to behave ethically and tohigher responsibility, there is no higher duty of contribute to sustainable economicprofessional management.” (Frederick, 2006: 7-8). development by working with all relevant A convergence of the many individual stakeholders to improve their lives in waysthoughts about the role of business in society, a few that are good for business, the sustainableexamples mentioned above, began to emerge in the development agenda, and society at large.”early nineties. After the Earth Summit at Rio de (World Bank, 2007)Janeiro in 1992, sustainability, or more specificallysustainable development as defined by the World A very astute observation on the disparity inCommission on Environment and Development interpreting CSR in different parts of the world was(Brundtland Commission) in 1987 is seen as providing made by William B. Werther, Jr. and David Chandler.the framework for CSR. The concept is based on the They maintained that companies require a CSR Page 1 of 4
  2. 2. Indonesian Mining Conference and Exhibition, November 2007perspective to maintain their social legitimacy. In an earlier work on the relationshipBecause societies differ, so do their norms on what is between mining and CSR, Professor Alyson Warhurstconsidered acceptable, and two dimensions of the International Centre for the Environment,consistently influence the role of CSR in any society: Mining and Environment Research Network that isdemocracy and economics. Wealthy societies have part of the School of Management of the University ofaccess to greater resources and they tend to have more Bath, argues that multinational mining companiesdemanding expectations as wealth opens up more must undergo a paradigm shift from a self-centeredoptions. On the other hand, in poor democracies the preoccupation with their ‘legal rights’ to a broadersense of general social well-being is associated with sense of ‘social responsibility’ particularly inthe basic necessities, such as food, shelter, developing countries where disparities in power andtransportation, education, medicine, social order and information exist. The crucial issue is whether thejobs. The dynamics generated by economic profit-making nature and rights protected by nationaldevelopment cause a constant redefinition and and international law frees MNCs moral obligationevolution of societal expectations and the CSR and social responsibility. Corporate Socialresponse on the part of the companies evolve in line Responsibility implies compliance plus the activewith these developments (Werther & Chandler, 2006: development and implementation of mainstream13). The emphasis on basic necessities in developing business strategy, supported by technological andcountries like Indonesia explains why Corporate organizational innovation to prevent negative socialSocial Responsibility programs are focused on impacts and optimize social benefits from the development, so much so that Community Part of the implementation of CSR in developingDevelopment is sometimes regarded as synonymous countries by large state mining enterprises and MNCswith CSR, because indeed most CSR programs are provide social welfare for the surroundinggeared toward poverty reduction of communities, communities in the form of providing education,which is actually only one of the three bottom lines. healthcare, leisure facilities and subsidized basic foods. (Warhurst, 1998: 4-5). These items are currentlyMining and CSR understood as constituting part of community development as commonly practiced by mining The practice of CSR appears to be prevalent the extractive industries, mining companies in Currently, much of what Prof. Warhurstparticular. In her book “Corporate Social advocated in her paper almost a decade ago hasResponsibility for Mining Companies” Natalia become part of standard practice among most miningYakovleva explains that “CSR is particularly relevant companies in Indonesia. To name a few examples, in ato the mining industries, because they cause study conducted in Indonesia by the non-governmentalsignificant effects upon economic, social and organization PIRAC, the example of the miningenvironmental dimensions, and are particularly viewed company Rio Tinto that operated in East Kalimantanamongst the most damaging and dangerous industrial was included as representing the mining sector amongsectors.” She described the following reasons why the the four case studies conducted in 2004-2005. Themining industry must consider CSR as an important three areas the company concentrated on through thebusiness issue: Rio Tinto Foundation were agriculture, healthcare and preservation of local culture (Ibrahim, 2005: 91-4). On Generally negative public opinion of the the island of Sumbawa, the copper-and-gold mine mining sector, mostly due to environmental Newmont Nusa Tenggara concentrates on four areas: and social concerns infrastructure, community health, agriculture and Environmental, community and indigenous education. Similar activities can be observed at any pressure groups that have consistently major mining operation in Indonesia these days targeted the mining sector at local and because of the need for a ‘local license to operate’ international levels, with large international without which operations will not be sustainable NGOs specifically targeting the mining despite the mining company being in possession of all industry the official permits and licenses required by the laws The constant challenge of maintaining ‘the of the country. social license to operate’ in the face of A more recent study by Heledd Jenkins and resistance from many social organizations Louise Obara of the ESRC Centre for Business based on accusations of lack of community Relationships, Accountability, Sustainability and engagement, impact on agricultural land use, Society (BRASS), Cardiff University cites a number pollution and related health impact and of business reasons aside from external pressure for migration of labor from other areas mining companies to invest in communities through Mining companies often operate in remote CSR programs as follows: areas that are economically underdeveloped and lack social welfare services (Yakovleva, To gain competitive advantage because 2005: 19-20) companies that are perceived to be socially responsible are more favored in getting concessions Page 2 of 4
  3. 3. Indonesian Mining Conference and Exhibition, November 2007 To maintain a stable working environment of the Indonesian Institute for Science (MOST-LIPI) because of acceptance by the communities to conduct a comprehensive review in 2003. Each To manage external perceptions and program was analyzed and recommendations maintain a good reputation (CSR used for submitted as to its improvement, but among its most PR purposes) important findings is that large-scale economic To keep employees happy because the staff activities tend to attract people from other areas, so feel more positive about the company and that the indigenous people become marginalized. The effective CSR measures can help in Kutai region was one of the target areas of extensive retaining and recruiting the best people logging activities in the early seventies, followed by KPC in the late eighties. By the beginning of the 21st However, Jenkins and Obara also warn that century indigenous communities (Dayaks andCSR programs may create a ‘dependency mentality’ Kutainese) comprise 40% of the whole population ofwhereby communities look to companies to the East Kutai Regency (Kabupaten Kutai Timur), andcompensate them for social and environmental in the areas directly bordering the mine site, the sub-damage, and the company would then be seen as districts of Sangatta and Bengalon they make up onlyresponsible for anything that goes wrong. The 14% of total population (MOST-LIPI, 2003: 12-5).community development programs are not even Similar conditions can be assumed to prevail aroundregarded as charity but as compensation for the use of other large-scale mining activities, and the potentialthe environment and the resources, and instead of for social conflict needs to be addressed in thecreating good relations with the community, a community development programs.situation like this harbors potential volatility and the The former Director General of Mines,more damaging aspect that it is not readily apparent is, Surna T. Djajadiningrat pointed out that manythat communities concentrate on extracting Environmental Impact Assessment (AMDAL) studiescompensation instead of developing longer term draw the conclusion that community developmentcapabilities during the lifetime of the mine. CSR programs are not required because there are noprograms that are not well-designed and poorly communities in the area that will be impacted. He saidexecuted may fail to address the needs of communities that these studies seem to imply that ‘communities’and therefore be unsustainable or even worse, are social units that may provide services to theexacerbate the problem of dependency. The following industry to be established, be it in the form offactors may contribute to failure of CSR programs: accommodation, provision of goods and labor. Economically less-developed human settlements are • Country/context specific issues like not included in this definition (Rudito et al, 2003: 28- corruption, conflict and bureaucracy, for 30). As the example of KPC has shown, scattered example conflict between large-scale mining human settlements totaling around 2,000 people can companies and illegal miners that may develop into a major town of 60,000 within a decade. impact the company’s perception of the community and how they develop their CSR in Indonesian Law community involvement initiatives • Failure to involve the beneficiaries in the With the passing of Law No. 40/2007 on community development projects, the August 16, 2007 Indonesia became the first country in communities become recipients of top-down the world to include the obligation to conduct CSR in gifts from the company Corporation Law. A salient feature of this new piece • Lack of human resources who have the of legislation is that companies in the extractive appropriate skills – most mining company industries are specifically mentioned as those required employees have a technical or engineering by law to conduct this obligation on pain of sanctions, background that does not prepare them to although Chapter I Article 1 Paragraph 3) of the law is deal with complex social issues more general in nature, as it explains that “Social and • Mining companies often have a micro-level environmental responsibility is the commitment of perspective whereas a macro-level view is corporations to participate in sustainable economic needed to integrate CSR initiatives into a development to improve quality of life and the larger sustainable development plan environment in ways that are good for the corporation, • Consultation with communities are usually the local communities as well as society at large.” superficial and inadequate, being confined to However, Chapter V Article 74 on Social and the most influential community members Environmental Responsibility stipulates the following: only (Jenkins & Obara, 2006: 1-9) 1) Limited liability companies in the sector of Not many studies have been undertaken and natural resources and/or related thereto arepublished specifically about community development required to implement Social andprograms conducted by mining companies in Environmental Responsibility.Indonesia. In an attempt to evaluate the effectiveness 2) Social and Environmental Responsibility asof its community development programs, KPC stipulated under Paragraph 1) above is ancommissioned Management of Social Transformation obligation of the corporation that is Page 3 of 4
  4. 4. Indonesian Mining Conference and Exhibition, November 2007 budgeted and included under company expenses and its implementation will be Environment Division. 2000. Investing in people: subject to the principles of appropriateness sustaining Communities through Improved and reasonableness. Business Practice. A Community Development 3) Corporations that are in breach of the Resource Guide for Companies. Washington, requirement as stipulated under Paragraph 1) DC: International Finance Corporation. will be sanctioned under prevailing legislation. Frederik, William C. 2006. Corporation, be good: The 4) Further stipulations on Social and story of corporate social responsibility. Environmental Responsibility will be Indianapolis: Dogear Publishing. formulated in Government Regulations. Hennigfeld, Judith et al (Eds.) 2006. The ICCA Currently the Department of Justice and handbook on corporate social responsibility.Human Rights representing the Indonesian Chichester: John Wiley & Sons, Ltd.government is collecting input from all stakeholders,including representatives of business associations and Ibrahim, Rustam. 2005. Bukan sekadar berbisnis:NGOs prior to issuing the Government Regulations to keterlibatan perusahaan dalam pemberdayaanimplement Article 74 of Law No. 40/2007. masyarakat. Studi kasus Bogasari Flour Mills, Coca Cola Indonesia, Riau Andalan Pulp andConcluding Remarks Paper dan Rio Tinto. Jakarta: Piramedia. 1) Corporate Social Responsibility has evolved Jenkins, Heledd & Louise Obara. 2006. Corporate from a concept predominantly in the realm Social Responsibility (CSR) in the mining of business ethics into norms companies are industry – the risk of community dependency. expected to live by in order to obtain a ‘local Cardiff University license to operate’. Malhotra, Deepak (Ed.) 2001. Politics of mining: 2) The mining industry is under close scrutiny What they don’t teach you in school. Littleton: of the communities and non-governmental Society for Mining, Metallurgy, and organizations and this ‘local license to Exploration, Inc. operate’ often determines whether the operation is viable or not, irrespective of the McMahon, Gary & Felix Remy (Eds.) 2001. Large legal status protected under the laws of the mines and the community: Socioeconomic and country. environmental effects in Latin America, 3) It is therefore incumbent upon mining Canada and Spain. Otawa: International companies to develop the expertise in Development Research Centre and New York: various aspects of CSR, including The World Bank. community development, to decrease the risk of doing business. Many have done so May, Steve et al. (Eds.) 2007. The Debate over already on a voluntary basis, precisely Corporate Social Responsibility. New York: because the strategic importance of CSR is Oxford University Press. properly understood. 4) Indonesia has introduced a trail-blazing Prabowo (coord.) 2003. Kajian program community stipulation in its newly enforced Law No. development di kawasan pengusahaan PT 40/2007 on Corporations that require Kaltim Prima Coal Kabupaten Kutai Timur, companies in the extractive industries to Provinsi Kalimantan Timur. MOST-LIPI. conduct CSR programs. The implementing regulations have not been issued yet, and Rudito, Bambang et al (Eds.) 2003. Akses peran serta until then this stipulation remains inoperable. masyarakat: Lebih jauh memahami community 5) Most major mining companies operating in development. Jakarta: Pustaka Sinar Harapan. Indonesia have developed a high-level of competency in CSR and have therefore Warhurst, Alyson. 1998. Corporate social nothing to fear from Law No. 40/2007. responsibility and the mining industry: Presentation to Euromines. University of Bath.Reference Werther, William B., Jr. & David Chandler. 2006.Brereton, David. 2002. The role of self-regulation in Strategic corporate social responsibility: improving Corporate Social Performance: The Stakeholders in a global environment. case of the mining industry. Melbourne: Thousand Oaks: Sage Publications, Inc. Australian Institute of Criminology. Yakovleva, Natalia. 2005. Corporate socialElkington, John. 1998. Cannibals with forks: The responsibility in the mining industries. triple bottom line of 21st century business. Hampshire: Ashgate Publishing Limited. Gabriola Island: New Society Publishers. Page 4 of 4