Semester Paper

For the course of:

“Corporate Social Responsibility”

As part of the Master of International Management

Facilitated by Prof. José Antonio Puppim de Oliveira

Submitted by:
Catharina Jarck
Luciano Riquet

Rio de Janeiro, 12th December 2006

 Stakeholder Engagement:
The importance and benefits of a two-way dialogue with stakeholders.
An exploratory study examining past research into the subject and exemplification thereof based
on British American Tobacco’s Brazilian Business Unit SOUZA CRUZ

I. Introduction

Today’s competitive business environment does not only put strain on companies to perform well
in the financial sense, i.e. focusing on the bottom line, but also to display good corporate
citizenship. As our awareness on social and environmental issues rise, so do our expectations that
companies fulfil their role in today’s society. Although not empirically proven, there is a
noticeable trend for companies to embrace sustainable development and contribute more than
what is legally required of them with regards to the softer sides of business. Pressure also is
mounting from a more educated workforce, especially in Europe and North America, who are
more conscious of the behaviour of their employing company.
For the past 20 years there has been academic research going on in the area of the “stakeholder
theory”. This school of thought maintains that a company is not only responsible to it
shareholders and only for making profits, as Milton Friedman famously said in 1970, but is
accountable to a broader set of people and companies – namely the stakeholders. Hence the
question for any organisation today arises of “who (or what) are my stakeholders” and “what
should we do to maintain a healthy relationship with them”? This does not only apply to the
overall business, but in particular specifically to the area of Corporate Social Responsibility
(CSR). Given that critics often claim CSR and all its implications such as social and
environmental reporting are only to pay lip-service to the latest management trends, it is
becoming increasingly important to know who the stakeholders are and to have a strategy in
place that links all CSR activities into the core business of the organisation – giving it legitimacy.

By: Luciano Riquet & Catharina Jarck -2- MIM 2006

 II. Research Questions
Given the current emphasis for companies to act environmentally and socially responsible, and
mounting pressure by society for companies to invest more of their ever-growing profits into
good causes, the questions arise how companies can determine who their main stakeholders are.
In addition, even the cash-richest companies will not have a limitless budget to spend on social
and environmental projects. It is therefore important to understand how companies allocate their
CSR budgets, i.e. which stakeholder gets how much for what? Lastly, we would like to explore
what the implications of the CSR activities have had on the company. Are they of any explicit
benefit to the company? Are those benefits measurable?

III. Framework
When a company like Coca-Cola is feeling the pressure by society to “clean up its act”, and it is
actually starting to tarnish its core asset; its brand, then you know times are definitely changing.
(“Coke joins the battle for the brand”, Financial Times, 21 Nov 06). Until a few years ago, Coca-
Cola was seen as something of a miracle in the business circles. No matter what crisis hit the
company (scandals regarding fungi in bottles in Belgium, abuse of common resources in India,
incidents at shareholder meetings), it had so far not affected its most valuable tribute; the brand
itself (Tom Pirko, Bevmark consultancy). In the most recent years however, the tide has been
changing. Coca-Cola’s “force of good” image was getting scratched through continuous media
coverage of things going wrong. With the arrival of its new CEA, Neville Isdell, corporate social
responsibility has been put into the limelight. Two years ago, the company revised its strategic
priorities to sustain long-term growth. Included into the new five goals is now to “make Coke the
recognised global leader in corporate social responsibility”. Although social responsibility has
been something as part of the company’s history and present, it was not deemed sufficiently
prominent, without sufficient urgency, to maintain the standards required of multi-nationals in
today’s more demanding and transparent world. Therefore, CSR efforts have been incorporated
into the company strategy, and the internal and external processes overhauled (according to Mr.
Isdell during an FT interview).

By: Luciano Riquet & Catharina Jarck -3- MIM 2006

 Only companies which include their efforts in the areas of CSR into the actual day-to-day
operations and strategic outlook will actually be able to achieve to contribute meaningfully to its
stakeholders. Or would the “for the English to see” approach do good too?

Legitimacy
The following section looks at the legitimisation, or reasoning, companies might be pursuing
CSR related activities.
Based on the paper by Unerman & Lewis (1999), they have established that there are basically
four drivers for companies to adopt a CSR approach, or change their behaviour towards their
stakeholders.
Table 1:

Stakeholders Company Behaviour Communication

Strategy 1 Pressure on Company to Behaviour changes Communication of changes to appease the
change stakeholders and send a positive message about
company
Strategy 2 Pressure on Company to Behaviour does not change Communication that it did change, creating a false
change reality
Strategy 3 Pressure on Company to Behaviour does not change Communicates about other areas to re-direct
change attention to positive aspects of company behaviour
Strategy 4 Pressure on Company to Behaviour does not change Communication is biased towards re-directing
change Puts pressure (influence) on stakeholder expectation and trying to match that
stakeholders to change their
expectations of company’s
behaviour

Based on L. Lewis & J. Unerman (1999).

According to Lewis and Unerman, the reason for companies to engage in CSR activities varies,
ranging from managers seeking to comply and fulfil their social and environmental obligations
which they deem imposed on by the stakeholders, to ignoring them and attempting to change the
stakeholders’ perspective on what is good or bad behaviour. In order to accomplish either one of
the approaches (or justifications) of CSR activities firstly requires the company (manager) to
define what is deemed “good” or “bad” behaviour – both from the company’s perspective but
also from the stakeholders’ expectation and point of view. The authors therefore argue that CSR
is based on the principle of ethics and morals, as without an understanding what would be
considered right/wrong and good/bad behaviour, CSR activities lack purpose and direction.

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Given that principles of ethics and moral are very much bound to the culture and time, one can
further argue that the CSR definitions and priorities for companies can change over the years and
depending on the country it is applied to (i.e. the company operates it). This is particularly
pertinent for multinational corporations with subsidiaries and suppliers in different parts of the
world. Although certainly there are certain values which are universal, regardless of culture and
that have not changed over the course of history, emphasis shifted in terms of importance of
focus. Nike and Coca-Cola are a good case, as their licence to operate in developing countries
was questioned, shedding light to the activities of their suppliers and partners and their business
practices. What was once deemed acceptable corporate behaviour shocked the public years later.
Though in both cases one could also argue that only through the increased visibility of the
working and environmental conditions did the consumers in the developed world cry foul.

Exploring this aspect however goes beyond the scope of this paper. Instead, this section is
concerning itself with the concept of linking CSR to the moral values by means of legitimising
the company’s activities. Other authors have examined this concept, one of them being Lindblom
(1994) who defined organisational legitimacy as “a condition or status which exists when an
entity’s value system is congruent with the value system of the larger social system of which the
entity is a part. When a disparity, actual or potential, exists between the two value systems, there
is a threat to the entity’s legitimacy”.
The four strategies outlined in Table 1 are often what companies adopt, either one or the other, or
combinations thereof. The author argues that managers will therefore in one way or another
attempt to legitimise the actions/activities of their company, either because they really want to
behave socially responsible or because they have to – thus perhaps influencing their stakeholders’
expectations to bring those more into line with what the company is willing and/or able to do.
Resulting either way in the addressing of expectations of stakeholders, be it through meaningful
actions or changing perceptions.

Defining Stakeholders
This leads to the next question of who a company’s stakeholders actually are. According to
Freeman (1984; 46) the definition of the stakeholder is “any group or individual who can affect
or is affected by the achievement of the organisation’s objectives”. Only from about the 1970’s

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 and 80’s has the emphasis on the concept of the stakeholder really taken off. Prior to that,
companies often failed to appreciate that other than employees, shareholders and customers there
are further parties involved and impacted by the actions of an organisation. The conventional
input- output model prevailed for a long time, basically until the realisation dawned that
companies were tending to operate more within networks as boarders opened, communication
and infrastructure improved. The need arose to re-dress the model, loosely based (according to
Donaldson & Preston, 1995) on Adam Smith’s models of equilibrium in the competitive market.
Instead, a more complex two-way framework was established, acknowledging the interests and
legitimate claims by all groups or individuals impacted by the firms actions. Table 2 below
highlights the changed perspective.

Table 2:

Source: Donaldson, T. & Preston, L.E. (1995)

In order to understand better who the stakeholders are, with whom the company is supposed to
enter this two-way relationship, the theory has been taken further by others, including Mitchel, et
al (1997), who add attributes to the stakeholders which are important in defining their role or
impact on the organisation. In their work the stakeholders possess one, two or all of the following
characteristics:
1. their power to influence the firm
2. the legitimacy of their relationship with the firm and the claims the make
3. the exigency of their claims on the firm
For companies this is a crucial focus, as it allows them to prioritise competing stakeholder claims,
according to what will have the biggest impact on their company, negative or positive.

By: Luciano Riquet & Catharina Jarck -6- MIM 2006

As this paper aims to demonstrate in the findings of our primary research, having an effective
mechanism to define the stakeholder and their claim, can positively benefit the organisation.

Benefits of CSR
The big question amongst academics and more so in the business world is always whether the
efforts put into CSR related activities pay off, and how so. There have been several attempts in
the past to try and quantify the benefits, most notable are the efforts of AccountAbility which in
the 1990’s coined the term “Triple Bottom Line”, which was later (in 1997) also used by John
Elkington. The notion being that social and environmental performance should be measured, in
the same way financial performance is. However, the concept of the “3BL” as it is shortened to
has many critics, arguing that it is almost impossible to be able to objectively judge the social and
environmental impact and performance of companies, more so in a way that is comparable with
others.
Nonetheless, the drive towards greater concern for social and environmental responsibility
continues, as awareness and exposure increases, and competition gets tougher. It seems that just
like a few decades back the chocolate on the pillow in your hotel room at turn-down was a unique
feature, it has actually been turned into a threshold factor over time, as everyone is doing it. With
CSR it is similar. Our research on the internet has shown there are indeed hardly any companies
without some reference to their social, environmental, and stakeholder concerns.

According to Burke & Logsdon (2004), the question is “under what conditions does a firm jointly
serve its won strategic business interests and the social interests of its stakeholders?” This
approach makes perfect sense, as the company needs to understand the strategic benefits it will
gain from, in order to implement CSR activities in such a manner that they contribute to the long-
term sustainability of the business. Looking at it in this way, and taking into consideration the
arguments made at the beginning of this paper, one can conduce that CSR has two dimensions
concerning strategy. Firstly, it needs to be embedded in the strategy of the company in order to be
fully implemented, and secondly, CSR activities themselves need to be strategically aligned in
order to contribute to the core business activities. Going back to Burke and Logsdon’s findings,
they have conceptualised six criteria which CSR activities ideally should embrace.

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Table 3:

Feature Meaning Implication

Centrality Closeness of fit btw CSR activities and firm’s Provides direction & feedback re
objectives whether actions are in line with
company objectives/mission
Specificity Ability to internalise benefits of CSR programme Benefits are specific – thus of value
– to the company
Pro-activity Behaviour that is planned, by scanning environment Company can take advantage of
for future threats and opportunities arising situations by being “first-
mover” or having implemented
changes necessary
Voluntarism Absence of, or exceeding of imposed compliance Same as with “pro-activity”
requirements
Visibility CSR activities/programmes are observable to Ability to draw positive recognition
stakeholders from stakeholders
Value Creation Measurable benefits to the company Potential capitalisation of benefits
Based on Burke & Logsdon, 2004

IV. Findings of the Case “Souza Cruz”

Having conducted an interview with the Corporate Affairs Planning Manager, we would like to
shed light to Souza Cruz’ view on CSR, how it approaches the concept of stakeholder
engagements and the issue of benefits to the organisation.

Background
The company chosen to be studied with regards to its efforts and activities in the stakeholder
engagement is British American Tobacco’s Brazilian subsidiary “Souza Cruz”. Souza Cruz was
founded in 1903 by a Brazilian – Albino Souza Cruz, who sold almost 75% of the company to
British American Tobacco (BAT) in 1914.
Up until the late 1990’s BAT and Souza Cruz had a very different approach to CSR than they
have today. Even though they recognised there were stakeholders - other than its shareholders,
most CSR initiatives were often unfocused and not coordinated, resulting in a “hit or miss”
situation when it came to their CSR programmes. This lead to some satisfied stakeholders, and
others who were not, and uncontrolled negative press surrounding the tobacco industry.
In 2001 British American Tobacco re-visited its mission and vision statements, and adopted the
“Four Pillars to Our Strategy”, for the first time including “responsibility” into the core business
objectives. This new approach filtered through to all BAT subsidiaries, including of course Souza
Cruz in Brazil. As the company acknowledges itself, it is operating within a disputed industry and
therefore has as one of its aims to “be seen as a responsible company in an industry viewed as

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controversial”. In order to do so, and to ensure its long-term sustainability and growth, all its CSR
activities are centred around two pillars; namely regulation and reputation.

The Role of CSR at Souza Cruz

Given the controversy surrounding the tobacco industry, the links between smoking and some
diseases, Souza Cruz – in line with BAT – decided at the beginning of the decade to visibly
position itself as a leader in the area of “responsibility”. Smoking became all about “responsible
choices made by informed adults”. Gone were the days in which the risks involved with excess
smoking were ignored. On the contrary, the company involved itself with restructuring its
strategy and incorporating its CSR activities, in particular stakeholder engagement, firmly into it.
The reason for its increased efforts were founded on the need of visibly and pro-actively being
involved in both regulatory affairs and its reputation. Tobacco companies the world over realised
that in order to have a sustainable and legitimate business, they would need to seek to become
more transparent and more engaged with the stakeholders and the communities they were
operating in. The benefit of this engaging, two-way process with the stakeholders is the ability to
be able to define stakeholder interests, and find overlapping areas with the company itself. This
more focused and coordinated approach also allows for more progress on the company’s own
agenda with regards to regulation and reputation, whilst simultaneously reducing the amount of
negative press about the company and the industry as a whole.
Souza Cruz consequently became the first Brazilian listed company to adopt the AA1000
standards of corporate social and environmental reporting fully, and remains the only listed
company to date to do so in Brazil. In addition, its Social Report is audited by Bureau Veritas for
validity and accuracy in reporting.
In accordance with the AA1000 standards, which asserts the following three statements, namely
1) stakeholder engagement is the key to the process of accountability;
2) companies must respond to questions raised by stakeholders and take actions on proposals
submitted and;
3) that capacity to respond to legitimate expectations requires the company to learn and
innovate through the stakeholder engagement,

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Souza Cruz established its own Stakeholder Engagement approach; the “Dialogo” sessions.
However, in order to do so, it had to firstly define who the stakeholders are which need to be
involved and communicated with.

The Stakeholder
In line with the current view that stakeholders are either companies or individuals who either
have an impact on the organisation, or are themselves impacted by the actions of the organisation,
Souza Cruz acknowledges various different bodies to be its stakeholders. They include
government bodies, the media, its consumers, suppliers, distributors, NGOs, competitors,
shareholders and the scientific community amongst others. (For diagram of stakeholders,
provided by Souza Cruz, please see annexe, I).

Stakeholder Mapping
Since 2001, Souza Cruz’ department of Corporate and Regulatory Affairs (CORA for short)
initiates a process every two years in which all the stakeholders of the company are defined and
classified. The process is internally referred to as “SMC”, standing for “Stakeholder Mapping and
Classification”. It is executed with the involvement of all departments, which independently
define their stakeholders, i.e. the organisations, individuals, bodies that matter in their line of
work. All department heads submit a list of whom they believe are their respective stakeholders
and together with the CORA team they are classified and grouped, depending on their impact on
the business, their importance to the business and their willingness to enter into a dialogue with
the company. The stakeholders are therefore grouped into either a) “neutral”, b) sympathetic or c)
hostile. The process of stakeholder identification takes about six months and is repeated every
two years due to changes in the behaviour of stakeholders, their attitudes towards the company or
to capture new organisations/individuals who have become important in Souza Cruz’ operations.
Although there are roughly a couple hundred thousand stakeholders to Souza Cruz, taking into
consideration leaf growers, employees, suppliers, retailers and other related organisations, it has
on average, about 600 active stakeholder groups it is in regular contact with at any given time.
These groups include Environmental NGOs, scientific & medical communities, universities,
government authorities, workers’ trade unions, growers associations, politicians, municipalities

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representatives, agricultural research representatives, advertising agencies, investors entities and
restaurant, bars & hotels associations.

CSR Activities Defined

Souza Cruz is active in a number of different areas with regards to the broader field of CSR.
Specifically, according to Brazilian law, the company complies with the “Rouanet Bill”, allowing
companies to make donations supporting culture and the arts, resulting in tax benefits. All
activities in this area are not publicised by Souza Cruz, thus not resulting in any advertisements.
Looking at the broader areas in which the company is active, one can summarise them into
education, environment, regulation, combating elicit trade, amongst others. For more details see
Table 1 in the annexe II, which contains a condensed summary of most of the areas the company
is active in.

Tools of Engagement
The objective of stakeholder engagement is – according to the company - to “keep the
stakeholders informed about the company and to respond to its reasonable expectations raised in
the dialogue process”. The means to do so can be summarized by the following activities and
programmes initiated by Souza Cruz:
• “Diálogo” is a bimonthly newsletter published by Souza Cruz and sent to 3’000 people
with information about the company, its activities and the market. It was launched in June
2003.
• “Comunique-se” which is a web press room sponsored by Souza Cruz specifically for
journalists. It generates an average of 2’300 monthly views to its pages since its started in
April 2002.
• “Politics for politicians” is a daily electronic summary sent to 800 stakeholders, mainly
congressmen, highlighting key news about Brazilian politics. This initiative too was
launched in early 2002.
In addition to these specific tools of communication, Souza Cruz of course publishes its annual
Social Report. Interestingly, for the sake of the environment, it does not print tens of thousands of
copies as other companies do (e.g. Shell in Brazil), therefore saving on paper and mailing.
Instead, it utilizes the ubiquity of the internet and the full past reports, and partial current ones

By: Luciano Riquet & Catharina Jarck - 11 - MIM 2006

can be downloaded by those interested. Its targeted efforts to communicate the necessary
information to those who need and want it results in a better use of fiscal resources,
environmental concern and yielding more focused results.
The core element of Souza Cruz’ stakeholder engagement is however the bi-annual dialogue
sessions it holds with 100 of its defined stakeholders. A representative mix is chosen to balance
the meetings, verified by Bureau Veritas for objectivity, in which issues are openly discussed
over a full day. The learning from these dialogues have provided valuable insight for the
company, opening up new channels and opportunities for collaboration it had previously not
envisaged. Naturally, all findings and suggestions from one session to another are recorded and
progress reports are sent to the stakeholders, keeping them abreast with the latest developments.

Allocation of Resources
As stated in the Social Report of Souza Cruz, roughly 15% of its gross sales revenues were
allocated to social spending. In 2004, this resulted in an amount of R$ 1.1bn, of the majority is
spent on Souza Cruz wages, salaries and related social costs/benefits. Roughly R$ 190mn of this
spending went to the actual CSR projects, and another R$ 600’000 were allocated for the
administration of the social reporting cycle.
The fact that in the introduction of the Social Report it is stated that total social spending
amounted to R$1.1bn is slightly misleading. For it implies to the reader that Souza Cruz spends
almost 15% of its total gross sales revenues on social causes. However, as this sum includes the
entire wage and salary related expense of all of Souza Cruz’ employees, it constitutes the
majority of the spending. As a matter of fact, the actual amount benefiting CSR related
programmes amounts only to 2,5% of gross revenues.

Legitimacy of Stakeholder & Requests

One of the main questions arising in the endeavour of stakeholder engagement is to define who
and what has/have legitimate requests and issues regarding the product and operations of a
company. Souza Cruz is very clear in its stance, referring to legitimate expectation as being those
which are in line with the company’s overall core objectives and its license to operate. Requests
made that are beyond their scope of operation will not be considered. An example of that was the
request by an NGO to Souza Cruz to fund all private health stations in the state of Rio de Janeiro,

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including staff, equipment and ambulances. Given that Souza Cruz’ area of business is the
responsible production and sale of cigarettes, it does not consider itself liable for the provision of
health facilities. In its view, that would clearly be the role of the local government.

V. Analysis of Case
Having explored Souza Cruz’ approach to stakeholder engagement, its mapping, classifying and
tools of collaboration, the next section will concern itself with analysing the findings and their
implications.

The emphasis Souza Cruz has placed on its stakeholders and the resulting social and
environmental activities since 2001 has resulted in a more focused approach to CSR and a “fit” to
the company’s objectives. Through the process of stakeholder mapping, then open dialogue
channels, Souza Cruz has been able to find more areas of consideration for CSR related
programmes. Thus resulting in more focus and prioritisation of activities, more coordination and
greater cooperation with the stakeholders.

Single Agenda vs. Multiple Agenda

Given the vast number of stakeholders Souza Cruz has, one of the difficulties it faces is to
address the varying agendas of the respective stakeholders. More often than not, stakeholders
have a single agenda. Examples to elaborate this would be the unions looking after the interest of
employees; health-focused NGOs want smoking to become illegal; environmental agencies
emphasis the raw materials or the issue of “butt littering”; shareholders want a higher return on
their investment, etc. Whereas the stakeholder groups focus on one area of the business of Souza
Cruz, the company itself needs to address the multiple agendas brought forward by the different
organisations and individuals.
This presents one of the greatest challenges for any company attempting to enter into an effective
stakeholder dialogue. The concept of “Stakeholder Mapping & Classification” used by Souza
Cruz is probably the most efficient tool to address this issue. The approach is very similar to that
of Mitchell, et.al. (1997), in which the authors seek to provide a framework that maps the most
important stakeholders with regards to the company. The “Stakeholder Typology” by Mitchell, et

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al, looks at the dimensions of “power”, “legitimacy” and “urgency”. Souza Cruz in turn defines
them according to their impact on the business, their influence and their willingness to engage.
This tool clearly highlights for the company the individual interests and concerns of their
stakeholders, and due to the classification allows the company to priorities its efforts according to
urgency and level of impact.

Stakeholder Involvement
As can be deducted from the findings of Lewis & Unerman (1999), legitimacy is the all-
important element of stakeholder engagement. This pronouncement is very much aligned with
Souza Cruz’ actual objectives - with regards to its CSR efforts - namely the stakeholder
engagement’s impact on regulation and reputation. Especially the latter “pillar” is concerned
with the legitimisation of the company in the eyes of the stakeholder. It was made clear during
the interview that in order for Souza Cruz to guarantee long-term sustainability in the industry, it
needs to focus on communication, transparency and involving its valid stakeholders and their
justifiable requests/concerns.
One additional benefit the company has achieved from this two-way process and its openness to
engage with all stakeholders (whether sympathetic or hostile), is Souza Cruz’ new ability to
leverage negative press from stakeholders which refuse to enter into a constructive dialogue with
the company. Previously, hostile organisations would simply attack the company through the
press, causing much “noise”, and leaving the company to defend its position equally publicly.
However, with the open invitation to join in a meaningful dialogue, hostile organisations have
two options. On the one hand, they can enter into the dialogue, hoping that their message will be
heard and putting the onus onto Souza Cruz to take actions. If the claims they have made, as
longs as they are legitimate, are not met – then the stakeholder can rightly accuse the company in
public. On the other hand though, should the hostile stakeholder not be willing to enter into a
dialogue, then Souza Cruz can disassociate itself from this organisation, emphasising the fact that
it wanted to engage with the stakeholder but was rebuked for its efforts of dialogue, putting the
responsibility firmly back into the court of the stakeholder.

Let us see two examples to stress this very important aspect of stakeholder engagement and
dialogue:

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Hostile → No Dialogue → Hostile:
The case in point of an NGO confronting BAT through the media, and accusing it of unfair
treatment of its tobacco growers in Kenya and Brazil is that of Christian Aid in 2004 (“Behind
the Mask: the real face of Corporate Social Responsibility”). The report published by the NGO
sheds light to tobacco farmers being subjected to chemicals used for tobacco leaf cultivation.
BAT has continuously since been trying to enter into a dialogue with the organisation, in order to
address the issues raised. However, the organisation has to date refused to engage with the
tobacco company it accused. This reluctance to engage has resulted in accusations through the
media, followed by press releases by BAT with its point of view and invitations to dialogue. It
becomes a circle of public accusations and rebuttals, without any concrete actions to rectify
situations or to clarify misunderstandings. Until Christian Aid agrees to engage, BAT can play
the card in this public dispute of trying to talk with the NGO, but is being refused. The question
thus arises of who is acting responsibly? The company that is attempting to engage to better the
situation with its stakeholders, or the organisation that is refusing to discuss constructively.

Hostile → Dialogue → Mutually Beneficial Partnership:

Souza Cruz had been criticized by “S.O.S. Mata Atlântica” and “Conservation International”
because of its use of native wood by the tobacco growers. In the Social Report’s first cycle the
NGO refused to participate. However, after three years of invitations, they finally agreed to enter
into dialogue with Souza Cruz. A meeting between the Souza Cruz Board, S.O.S. Mata Atlântica
and Conservation International took place, at which they presented criticism. Souza Cruz invited
S.O.S. Mata Atlântica to visit its Leaf Department, Souza Cruz farms and some leaf growers, as
well as organizing meetings with tobacco growers’ associations and Souza Cruz’ tobacco
managers. Thereafter the NGO participated in the 2nd Social Report dialogue sessions and
recommended that Souza Cruz should invest in the preservation of the Atlantic Rainforest.
Following the recommendation made by S.O.S Mata Atlântica to create a Private Natural
Heritage Reserve (PNHR), Souza Cruz acquired a tract of land (300 hectares) and donated it to
the Santa Cruz University (UNISC) with the objective of mapping its flora and fauna as well as
studying its biodiversity. Last March, the biggest PNHR in the Atlantic Rainforest in Rio Grande
do Sul state was created, managed by UNISC and supervised by S.O.S. Mata Atlântica. This

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example clearly underlines the point of this paper; which is the importance of a two-way view on
stakeholder engagement from both sides, in order to achieve shared legitimate goals.

The Stakeholders of the Stakeholder

One further point to diverge into is the consideration and understanding of the stakeholders’
stakeholders. As mentioned earlier, it is important to realise the different agendas both the
company and its stakeholders have. Linking this approach into the legitimisation of one’s actions
and behaviours, provides greater appreciation of the activities and attitudes of Souza Cruz’
stakeholders, who themselves are accountable in their actions to their own stakeholders in turn.
For example, for NGOs calling for the total abolition of tobacco companies, entering into a
dialogue is a futile exercise, and would undermine their raison d’etre. With this particular goal,
matters are black and white, and there can be no middle ground to come to any agreement or
compromise. Given that their call is not in the interest of any tobacco company, these
stakeholders will always be, due to their very nature and objectives, a hostile stakeholder with
whom engagement will not yield any meaningful outcome.
Understanding the varying agendas of the different stakeholders and their own interests and
licenses to operate, helps companies to determine and focus their efforts of CSR activities to
areas in which progress can be achieved in both stakeholders’ and own agendas; the underlying
efforts towards regulation and reputation.

VI. Conclusion
In concluding, this paper has hopefully provided some insight into the methods and merits of
applying a collaborative stakeholder approach. As highlighted by the case of Souza Cruz in
Brazil, CSR activities have become a vital tool of communication with stakeholders when applied
thoughtfully and aligned with the company’s core business objectives. It also shows that taking
CSR seriously requires resources in terms of man-power for the organisational aspects and
financial to run the programmes selected. Therefore, it is paramount to ensure that CSR and the
stakeholders are well-defined, focused and coordinated, which in turn yields a positive outcome
for the organisation.

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Yet arguably, these benefits cannot be measured in such a way that the outcomes become
quantifiable and comparable to other organisations. As seen in the case of Souza Cruz’ Social
Report, it advertises the fact that it spends 14.6% of total gross sales revenues on social spending.
On closer look, we find it is actually 2.5% of gross sales revenues. Given that the tobacco
industry in particular has high gross margins, yet profitability is around 30%, this figure as a
percentage might seem low compared to other industries. Taken in a net perspective however, it
is a huge sliver off the net income. Due to the differences in margins, taxation, excise, costs, etc
that firms incur, even trying to compare one company’s efforts to another’s on a financial basis is
rendered impossible, as also argued by McWilliams, et al (2005), let alone trying to compare
along the outcomes. Cultural differences, varying needs prioritisations, are only two components
that differ greatly across different countries and regions. Concepts such as the “Triple Bottom
Line” (Elkington, 1997), can therefore not work objectively. Instead, as in the case of Souza
Cruz, stakeholder engagement and the related CSR activities are seen to be the link between the
business and its social and environmental community (and their expectations), working towards
legitimisation of the product and its license to operate. Through its stakeholder engagement
Souza Cruz has certain influence on the two pillars of its operation; regulation and reputation, a
vital component for any company today.
Given the financial resources attributed to CSR initiatives, and the relatively intangible outcome,
one might argue that CSR and stakeholder engagement is all part of a big marketing campaign.
And rightly so, as the initiatives and programmes swallow a large chunk of resources which
could be spent otherwise towards the core business operations. However, the business community
has moved on from the 1950’s in which shareholders’ interest was the only aspect which
mattered. Times have moved on, the general population has become more informed, more
educated, more aware and choosier. Especially for those companies operating in areas which are
deemed in the slightest controversial (affecting either health related issues, or environmental
ones), CSR has been a tool to gain reputation by highlighting responsible actions. It is through
the stakeholder engagement that companies like BAT and Souza Cruz can acknowledge they are
operating in a controversial industry, but are doing so responsibly, thus legitimising their actions
in the eyes of (most of) their stakeholders.

By: Luciano Riquet & Catharina Jarck - 17 - MIM 2006

References of Literature:

Articles:
Burke, L. & Logsdon, J.M. (1996). How Corporate Social Responsibility Pays Off. Long Range
Planning. Vol. 29, 4, pp. 495-502.

Clarkson, M.B.E. (1995). A Stakeholder Framework for Analysing and Evaluating Corporate
Social Performance. The Academy of Management Review. Vol. 20, 1, pp. 92-117

Donaldson, T. & Preston, L.E. (1995). The Stakeholder Theory of the Corporation: Concepts,
Evidence and Implications. The Academy of Management Review. Vol. 20, 1, pp. 65-91

Jones, T.M. & Wicks, A.C (1999). Convergent Stakeholder Theory. The Academy of
Management Review. Vol. 24, 2, pp. 206-221

Lewis, L. & Unerman, J. (1999). Ethical Relativism: A reason for differences in corporate
social reporting? Critical Perspectives on Accounting. Vol. 10, pp. 521-547

McWilliams, A., Siegel, D.S. & Wright, P. M. (2005). Corporate Social Responsibility:
Strategic Implications. Rensselaer. Working Papers in Economics. The workshop was
jointly sponsored by the College of Business Administration at the University
of Illinois at Chicago and the International Centre for Corporate Social
Responsibility (ICCSR) at the University of Nottingham in the United Kingdom.

Mitchell, R.K. & Angle, B.R, & Wood, D.J. (1997). Toward a Theory of Stakeholder
Identification and Salience: Defining the Principle of Who and What Really Counts. The
Academy of Management Review. Vol. 22, 4, pp. 853-886

Internet Sites:

www.globalreporting.org
www.bat.com & www.souzacruz.com.br , www.institutosouzacruz.com.br
www.djsi.com
www.globalcompact.org
www.economist.com

Articles:
“Coke joins the battle for the brand”. Financial Times, 21 November 2006.

Interview:

José Roberto Cosmo, Corporate Affairs Planning Manager, Souza Cruz

Paul Bal, Regional Manager, Latin American & Caribbean, British American Tobacco

By: Luciano Riquet & Catharina Jarck - 18 - MIM 2006

Annexe:
I. Diagram of Souza Cruz’ stakeholder groups

Media Public
Consumers Attorneys

Shareholders Judiciary
(6,000)

Legislative

Suppliers
Souza Cruz’
Stakeholders Executive

Retailers
(200,000) Scientific
Community

Leaf NGOs
Growers
(45,000)
Competitor Employees
s (6,000)

II. Areas of CSR Activities:

Table 1:
Area of Activity Specifically
Education Book sponsorships
Youth Conventions & Workshops promoting environmental awareness and
entrepreneurship
Youth Smoking Prevention programmes
Tobacco Regulation Cooperation with lawmakers & federation of industry, providing information on smoking
Involvement in regulation formulation
Consumer Newsletters
Information University Dialogue programme
Quit-Line telephone service
Warning consumers about risks of excess smoking
Seminars
Illicit Trade Support for ETCO
Campaigns to tackle illicit trade
Consumer research
Responsible Participation in UN’s Global Conduct
Corporate Conduct Promulgation of UN Millennium Goals
Implementation of Cuide programme
Own programmes to eliminate child labour and further educational programmes
Environment Creation of environmental park in Santa Cruz
Creation of ecological park in Cachoerinha
Donation of 300 ha plot to UNISC
Sponsorship of Souza Cruz Institute
Programme of second harvest for farmers with alternative crops

By: Luciano Riquet & Catharina Jarck - 19 - MIM 2006

By: Luciano Riquet & Catharina Jarck - 20 - MIM 2006