More than corporate philanthropy

In the past, corporate responsibility has often been interpreted as corporate philanthropy, which has distracted attention from its core importance to business. But in the context of the wider challenges of sustainability, with an ever increasing global population and finite resources, corporate responsibility is now under more scrutiny and is increasingly recognised as being critical to long term business success.

Increased global awareness of sustainability issues, supported by scientific evidence and accompanied by new regulation and corporate accountability, is demanding an evolving and expanding response. Businesses are responding, with increasing numbers of high profile multinational companies making the headlines with commitments to reduce their carbon footprint and overall environmental impact.

Regulation and the investor community

The essence of corporate responsibility is now enshrined in the new Companies Act which more fully codifies directors' duties – not only do directors need to act in the way most likely to promote the success of the company for the benefit of its members, but they also need to have regard to various other stakeholders including the environment, the community, customers and suppliers, and employees.

Corporate responsibility indices such as the Dow Jones Sustainability Index, the Social Responsible Index and FTSE4Good have been around for a while and continue to grow. But mainstream investors are increasingly going beyond questions of financial governance and controls to consider non-financial governance and performance as measures of long term value.

Company boards are increasingly required to communicate the wider aspects of their business performance, beyond the purely financial, to a range of stakeholders – whether investors, customers, regulators, employees or business partners – and are expected to be able to make substantiated claims about the measures that they use in order to do so. This is being reinforced by a number of external factors. Chief among them is the Business Review, which encourages companies to link strategic aims with appropriate, detailed key performance indicators.

A wide range of stakeholders are demanding more on corporate responsibility. If the issue is left unaddressed or inconsistently managed, it could have serious repercussions for reputation and future sustainability.

Challenge and response

The way businesses respond to these new challenges is key, but will vary from business to business. Historically, businesses have focused on managing the downside risks to ensure regulatory compliance and licence to operate. But increasingly corporate responsibility is moving beyond compliance and providing upside strategic benefits through reputation enhancement and product and service differentiation.

As these risks increase, has the ability to tackle them and the associated processes and controls to manage them kept pace? Do organisations have the vision, the capacity in terms of resources and knowledge or the infrastructure in terms of systems and information to manage these risks?

In PricewaterhouseCoopers' view, companies need improved analysis of the strategic relevance of corporate responsibility and greater connections between vision statements and strategy. Measures of success need to be defined and key performance indicators developed to manage and measure performance. Governance, accountability and reward arrangements need greater alignment; corporate responsibility needs to be driven from the executive level of the organisation and there needs to be closer connection between corporate responsibility performance and remuneration. Risk management processes need to evolve; corporate responsibility needs to be fully embedded into risk analysis, and there needs to be clear linkage between the risks and the mitigating process and controls. Finally assurance mechanisms need to be enhanced to ensure that measures of performance are robust, reliable and credible.

Into the mainstream

Corporate responsibility is moving into the mainstream in terms of the way businesses are being managed, measured and assessed. But with this come new and different risks which should be carefully considered. Companies are advised to take a business-led approach focusing on the issues that will affect their strategy in order to maximise long term performance.

Jon Hauck is a director in the risk assurance services practice at PricewaterhouseCoopers LLP

Checklist

To address this new and evolving agenda companies should to consider the following key questions:

• Are corporate responsibility issues integrated into mainstream strategy?

• How are stakeholder needs understood and responded to?

• What executive and board accountability structures are in place?

• To what extent do risk processes incorporate robust analysis of corporate responsibility issues?

• How are key performance indicators selected and what analysis is performed?

• What assurance mechanisms are in place to ensure effective controls and reliable management information?