By Professor Obayashi, KEIO Business School
One of the activities that show a sense of corporate social responsibility in Japan is disaster preparedness. Readers may remember the catastrophic earthquake which attacked the eastern part of Japan in 2011. People suffered and economic activities shuttered; however, many business parties responded to the emergency and supported the sufferers by offering help and by continuing business. Without their efforts and preparedness, suffering due to the earthquake would have been even greater.
Disaster preparedness has an economic externality, that is, the benefit not rewarded by market price. For comparative examples, an earthquake-resistant building supplies safety for its tenants which can be rewarded by a premium in the rent that tenants pay for safety. At the same time, the resistant building supplies safety for its neighbors as well because it might not collapse on neighboring buildings or block streets. The latter safety benefit is not rewarded through market rent, and thus, is economic externality. In general, economic externality implies undersupply of goods causing the externality if parties rely on market mechanism only. Therefore, it suggests a need for systems more than traditional market systems in order to promote supply of the goods; in this case, the goods are resistant buildings. Other examples of disaster preparation include firm’s investment to enhance its ability of continuing business in case of emergency.
Economic externality, and consequent under-supply of beneficial activities, is a characteristic for environmental problems as well; common cause may imply common policy. As we introduce tax and subsidy incentives to control CO2 emission, we may introduce regulation to promote disaster countermeasures. However, besides commonality, there is difference between CO2 emission control and disaster preparation. CO2 control has an equal effect while disaster preparation has an unequal effect. That is to say one unit of CO2 reduction will have the same benefit to the environment no matter who does it. On the other hand, externality of an earthquake-resistant building is none if it has no neighboring buildings, or is very large or if it is built in a crowded area. Thus, the amount of disaster preparation externality depends on factors like who is next to you and what you are supplying to whom. As the cost of disaster preparation is often high, uniform regulation is not efficient.
Nonetheless, disaster preparation is prevailing more and more in firms in Japan. The main motives are sense of social responsibility and public support for the firm which prepares itself, rather than regulation. If the public support takes the form of additional sales for the firm even in regular time, it works as incentives to the firm anyway.
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