UK fund managers are being pressed by investors to incorporate the corporate social responsibility (CSR) related performance of companies into their investment decision-making. CSR is becoming a crucial and strategic non-financial indicator of a company's future potential, especially as the socially responsible investment (SRI) market is rapidly reaching critical mass. As a result, CSR is becoming a strategic business risk issue to the extent that laggards may suffer hostile external scrutiny, and be downgraded or screened out of investment funds.
On the other hand, for the leading-edge companies that embrace the challenge of embedding good environmental, social and ethical performance throughout their operations, the benefits are likely to be considerable. Companies with the leadership and vision to address CSR strategically can gain the real credibility and the opportunities associated with being a 'good' corporation. Such best in class status can enable them to become a preferred business partner, supplier or opportunity for investment, as well as helping to create true added value. For companies in operationally sensitive sectors, CSR performance can underscore their very 'licence to operate', which in today's climate of corporate citizenship can be absolutely crucial.
At the strategic level, CSR underpins corporate commitment and values and demonstrates board-level leadership, governance and responsibility. It facilitates credible disclosure of operational performance to key stakeholder groups to provide transparency and accountability. It goes beyond minimum regulatory compliance and enables strong management of environmental and social impacts to be demonstrated, along with associated risk reduction and mitigation.
CSR means that staff are treated fairly, so ensuring their loyalty and commitment. It embraces social and community issues such as sponsorship of charitable or environmental initiatives, or product safety, and thereby underpins brand value and assists in attracting new customers. Ultimately, CSR can support the company's business strategy.
Nevertheless, a significant proportion of publicly-quoted companies remain in denial and, quite simply according to one SRI fund manager, 'still do not get it'. According to a survey, Directions in Environmental and Corporate Social Responsibility (Salterbaxter Jan 2002), some 80 FTSE-200 companies have no intention of disclosing any substantive environmental or CSR-related performance information. Indeed some remain implacably hostile to the entire CSR concept, even though the practical benefits of embracing it are gaining increased credibility. Furthermore, companies who do find themselves in the cross-hairs of external scrutiny over their environmental or social performance can suffer considerable pain if the way they are addressing their CSR-related responsibilities exposes them to accusations of management under-performance.
Companies in denial
Managing CSR should be like any other aspect of managing a business. However, some boards do not yet see the business case for it, especially if the company concerned considers itself to be in a relatively benign sector with a small environmental and social footprint. They question why they should commit time and resources to addressing their CSR-related performance when the rewards appear so vague and unproven. Some will argue that addressing CSR-related performance beyond the legal minimum required of them conflicts with their responsibility to maximise their return on investment and puts their profitability at risk.
At first sight, such an attitude towards a company's limits of responsibility appears to carry some justification. A proven synergy between CSR and financial performance is still lacking. Criticism is levelled at the apparent lack of transparency of the rating agencies and indexing methodologies' perspectives for assessing a company's CSR performance. CSR reporting is often slammed for ignoring operational decision-making and actual financial performance. 'Stakeholder engagement' is slated for blithely including all conceivable stakeholders, however marginal or spurious, when the company's key stakeholder groups should clearly be their customers, employees and shareholders.
Generating value
On the other hand, funds under SRI screening in the UK are growing apace. More listed companies than ever are reporting on their environmental and increasingly on their social/sustainability, performance, as the recent ACCA UK Awards for Sustainability Reporting 2001 testified. Participation in the BiE Index of Corporate Environmental Engagement by FTSE-350 companies continues to increase. The numbers are up by 12% on last year to 206, of which 83 are FTSE 100 members. A CSR Index will follow this year. In addition, over two-thirds (68%) of CEOs in Pricewaterhouse Cooper's (PwC) recently published 5th annual Global CEO Survey of some 1160 CEOs worldwide, stated that CSR is vital to the profitability of any company.
So why is CSR a strategic business risk issue? CSR can create, protect and enhance shareholder value. True value creation is driven not just by financial performance but is augmented, according to PwC's ValueReporting Forecast 2002, by information on a company's 'marketplace, corporate strategy and the intangible assets and non-financial measures [such as CSR] that are leading indicators of future financial performance'.
Let us reiterate: CSR provides companies with a powerful opportunity to create value for their shareholders. It facilitates the adoption of joined up business decision-making, better allocation of capital and associated risk management, the effective realisation of strategic goals and generation of competitive opportunity. All this leads to added reputational, brand, or shareholder value. Such a corporate climate is strongly indicative of a well-managed company, one that is managing its liabilities, is on top of its risks and fully exploiting its opportunities.
By the same token, a company's reputational capital or value can easily be destroyed by an incoming CSR-related missile beneath the board's shareholder-fixated radar screen, which will expose its shortcomings in governance, probity and accountability. The market's reaction to such shortcomings may be to sell, thereby pushing down share prices, which can erode confidence in a company and destroy shareholder value.
Strategic implications
It is crucial that companies are able to separate out strategic CSR performance issues from operational ones, and the essential from the superfluous. Boards should certainly engage and report on their key performance indicators (KPIs), but being coerced into implementing superfluous CSR-related performance elements merely generates cynicism and indifference.
WWF-UK's report, To Whose Profit? on building a business case for sustainability, which was launched in late 2001 in conjunction with Cable & Wireless, provides a useful checklist when deciding whether an issue is likely to have strategic implications. Paraphrased, it can be equally useful in assessing which CSR issues have strategic implications, through answering the following questions:
Equally, separating out the essentials from the superfluous is necessary to gain business acceptance. When companies with a small corporate environmental footprint, are down-rated for not implementing an environmental management system (EMS), or are slated for not actively measuring and controlling their energy usage, when they operate from serviced offices with little or no control over their utility bills, it does little to generate proactive CSR engagement.
On the other hand, for some companies an EMS externally certified to the international EMS standard ISO 14001, is a bidding necessity. In counterpoint, there are examples of companies with poor social performance records, facing allegations of sweat-shop labour practices, low employee pay scales, supporting unsavoury regimes and the like, which have been screened out as a business partner or supplier. Such mud sticks and can be extremely difficult to dislodge.
Practical engagement
So how should companies address CSR as a strategic business issue? Crucially, CSR can help a board bridge the value gap between its statement of strategic goals or business objectives and its current performance. Such goals or objectives could include, creating added shareholder value, becoming lead performer in the sector, and so on.
Conducting a mapping exercise or gap audit between a company's strategic business objectives and its current position will show where specific improvements in CSR performance can help a board achieve its strategic business objectives.
Marrying a company's strategic business objectives to its current operational performance, through conducting a high-level gap audit between where your company is now and where it wants to go, is both a crucial first step and a cultural shift. A prioritised strategic CSR action programme should then follow, whereby a structured sequence of CSR-related objectives and targets are identified and implemented, over a specified timescale, to help achieve a set of strategic goals. These must have follow through actions connected to them that create added reputational, brand, or shareholder value. From a CSR perspective, examples could include:
These examples of CSR in practice demonstrate its strategic business implications: companies that ignore the warning signs do so at their peril. At the same time, companies with the vision to address their CSR performance as an opportunity rather than a threat and a cost-burden stand to generate actual financial benefits – including lower cost of capital, lower insurance costs, improved investor confidence and greater management credibility.
In conclusion, boards should recognise that their strategic business objectives and the expectations of their key stakeholders – customers, employees, shareholders – will together create the greatest value if they're pulling in the same direction. CSR provides the matrix whereby good corporate practice maximises the opportunities for adding reputational, brand, or shareholder value. Positive CSR engagement must be built into business decision-making, since today's world of corporate citizenship is increasingly unforgiving.
The broadsheets warn that: 'a summer of discontent is looming for British business as shareholder groups prepare a series of ambushes on issues ranging from executive pay and the 'old boys network' to the independence of auditors and environmental policy' (The Observer, Sunday 14 April 2002). Boards should take note: your company's CSR-related performance is becoming a strategic indicator of your company's health and its likely future financial performance - whether you like it or not.
Andreas King is principal consultant and Hayden Morgan is senior consultant, CSR Unit, RPS Consultants, Tel: 020 7647 3228, E-mail: kingan@rpsplc.co.uk
WORKING GROUP
An independent think tank, The Federal Trust, has set up a working group on Corporate Responsibility to European Society, with support from the European Commission. The group's aim is to demonstrate ways in which companies can reconcile their traditional business goals with wider social responsibilities, including environmental and consumer concerns. The group is chaired by Sir Brian Unwin, former president of the European Investment Bank (EIB) and the Rapporteur is Dr Malcolm McIntosh, visiting professor of corporate social responsibility at the University of Bath.
GREEN PAPER FOR EUROPE
European Commissioners Anna Diamantopoulou (Employment and Social Affairs) and Erkki Liikanen (Enterprise and Information Society) presented a Green Paper on promoting a European framework for Corporate Social Responsibility last year.The paper, intended as a launch pad for debate, took up the 'triple bottom line' concept, whereby companies voluntarily take on board social and environmental concerns alongside their economic ones. In line with the Commission's proposal for a Sustainable Development Strategy for Europe, the paper argues that all three elements can dovetail to create more productive and profitable business.
The strategy's message is that long-term economic growth, social cohesion and environmental protection must go hand in hand. This has numerous implications for companies' relations with their employees. Socially responsible human resource management is a key area highlighted in the Green Paper. It involves a commitment to lifelong learning, health and safety, a better balance between work, family and leisure, greater workforce diversity, gender-blind pay and career prospects, profit-sharing and share ownership schemes. These practices, say the authors, can have a direct impact on profits through increased productivity, flexibility and innovation, with lower staff turnover, and more reliable output.
The paper says that a successful commitment to CSR means instilling it fully in business culture - and being seen to do so. Although many multinational companies already publish CSR reports on environmental or health and safety issues, less attention is paid to areas such as human resource management, staff consultation, child labour and human rights. The paper therefore advocates greater consensus on the type of information companies should be ready to disclose and for more comprehensive coverage in social accounting, reporting and auditing. This is in line with the invitation by the Commission in its Communication on a sustainable development strategy.
The paper mentions ethical labelling as another all-round development whose effectiveness needs to be exploited. As a response to rising consumer demand for CSR, a growing number of these labels have originated from either individual manufacturers or industries, NGOs and governments, with guarantees relating to sourcing, or labour standards. In order to extend their use beyond niche products, it is necessary to make them more effective, the paper says, with mechanisms to verify their ethical claims.
Likewise, socially responsible investing (SRI), in which funds are directed to firms which comply with specific social criteria and away from others which do not, has seen a strong surge in popularity and is potentially a powerful tool for promoting CSR. If it is to prove more useful, however, investors would need to have the clearer picture which greater standardisation in social reporting would bring, and the paper calls for greater harmonisation of evaluation tools for SRI.
