The Conference Board of Canada recently released a study on corporate social responsibility (CSR), which it considers a growing trend in the marketplace. The group believes that the movement toward greater social responsibility in corporations is in fact more than a trend, and that it is reaching ever higher, beyond management and into the ranks of company directors. According to the report, The Role of the Board of Directors in Corporate Social Responsibility, corporations who fail to join the CSR movement do so at their own peril, and will eventually fall prey to market forces or internal mismanagement. The board cites the Enron, WorldCom and sub-prime mortgage crises as examples of what can go wrong in the absence of defined CSR principles. Specifically, the study examines the current status of social responsibility in the corporate world and the factors of success and failure that must be accepted and avoided in order to integrate CSR into a company. In addition, the report includes a “CSR Governance Road Map” for companies at various stages of development.
The case for social responsibility
The Conference Board claims that “the role of the firm in society is coming under greater scrutiny” and “the trajectory of corporate governance and corporate social responsibility (CSR) trends are meeting head-on.” However, few companies are actively incorporating CSR governance into their corporate strategies; rather they are looking to other sources, particularly governments, legislation and standards organizations, for CSR guidelines to follow.
The report notes that “In 2007, fewer than 10 Canadian firms reported having CSR or sustainability explicitly in their governance mandates.” Still, according to the report, company boards of directors increasingly look at CSR issues, which is an important step toward directly incorporating CSR measures into their overall corporate strategy. This seems to be an indication that companies and their boards have begun to hear the message of the value of CSR. The push to integrate social responsibility comes from a number of sources, including governments, shareholders and other stakeholders, such as employees, customers and community groups.
There are also signs that CSR advocates are communicating the business case and that their message is reaching open ears. The report states: “It has been clearly established that companies that consider their social and environmental performance are more successful over the long term.” Consequently, since boards and directors are responsible for maintaining and developing their companies' and the investors' value, they have a real duty to take into account non-financial issues in their oversight. In the United States and Europe, many companies have proactively established CSR committees to examine social, environmental and sustainability issues. This is a clear indication that the corporate world in these areas considers CSR issues to be priorities.
In 2002, in the wake of the various corporate scandals, the Canadian Council of Chief Executives (CCCE) issued a call to incorporate social responsibility into business strategy, titled Governance, Values and Competitiveness: A Commitment to Leadership. The notice says unequivocally that when companies conduct business with “strong moral values and good corporate citizenship”, they enhance their reputation and shareholder value, and increase confidence in the market generally. In other words, the CCCE believes it is simply good business to be a good corporate citizen.
Specifically, many stakeholder groups are increasingly demanding of boards and directors that their companies consider CSR. Activist investors want better social practices and greater transparency; the financial community wants to see better returns on strategic investments; the media, non-governmental organizations (NGOs) and CSR watchdog groups are all exposing companies' ethical and environmental behaviour; and the board of directors has to deal with these things. One of the first ways that boards choose to deal with these issues is to create a CSR committee. Despite, or perhaps because of the fact that “Canada already is recognized as a country with high standards of ethics and corporate governance”, the CSR-committee approach hasn't caught a strong hold in this country in the same way it has in the U.S. and the United Kingdom.
The report outlines four areas where CSR can offer a distinct advantage in the marketplace:
-
Stakeholder views: Boards can learn much from conversations with stakeholders, either within or outside of the company. Stakeholders can offer new ideas and information that a board might never consider, which can lead to improved strategy and returns.
-
Risk and opportunity management: It seems obvious that carefully considering risks and finding ways to avoid them will enhance business practices and returns, and this is a major part of socially responsible governance. Moreover, anticipating issues and planning for them well in advance can increase innovation and beef up strategies.
-
Competitive advantage: Consumers are looking for companies that are different and that care about important issues, and firms that consider their social responsibilities can use that fact to their advantage in the market. In addition, such firms can better “capitalize on opportunities; attract, motivate, and retain talent; develop new products or technologies to generate cost savings; and establish new markets.”
-
Long-term orientation: The preceding factors naturally lend themselves to long-term strategic thinking. And if a company avoids such long-term strategy, particularly alongside increasing acceptance of social responsibility, it is quite possible that it will fail due to legal or market-based oversight.
Of course, it is also important that companies focus first on those CSR governance issues that affect them closest, and ask themselves, “Of the social and environmental issues a company confronts on a day-to-day basis, which are most likely to affect the firm's bottom line?”
A closer look at CSR
There exist also numerous obstacles to instituting CSR within a company. These include an unarticulated or badly communicated business case, contrary or conservative groupthink among directors and chief executives, the appearance of financial disincentives and even simply the chairperson's mindset. There can be no doubt that it is difficult to convince executives that immediate expense in exchange for long-term environmental gain (and perhaps enhanced reputation) is better than short-term savings for lower environmental standards.
The obstacles continue even after a company decides to join the movement: there is debate among CSR advocates regarding whether CSR should be fully “embedded” into all company concerns, or be a separate “focused” activity. The study offers several necessary conditions to successfully institute CSR into company governance: “it is essential to develop the firm's CSR business case [and communicate it well both in and outside of the company], establish a values framework for the firm, and build director knowledge of CSR trends, risks, and opportunities.” Also important are “building CSR into risk management and business strategy, providing oversight on CSR performance and progress toward targets, and reporting on CSR performance.” As for the embedded or focused approach, the report offers that, at this time, neither is better than the other, and both may in fact lead to the same point.
The report outlines three ways that boards look at CSR:
- A stakeholder model, in which boards, via CSR committees, focus primarily on stakeholder concerns
- An integrated approach, in which boards speak to integrating social and environmental factors throughout the firm
- A systemic approach, in which CSR is perceived as a key driver of firm innovation and performance, wherein firm purpose is informed by a strategic social change agenda
There is a visible progression from one mode to the next. The first is often the beginning step on the road to integrating corporate social responsibility into a company's strategy. The motivation for this step comes from the general realization that social and environmental issues have important effects on business performance, and that a company's directors have a duty to consider interests beyond simply the fiscal “bottom line.” These interests certainly include shareholders but extend also to “employees, suppliers, creditors, local communities, governments and the physical environment.”
The “integrated” second mode involves enhancing directors' understanding of socio-political issues and incorporating them into “core decision-making processes.” Directors must also make sure that any CSR governance framework and management systems in place operate properly. Studies suggest that directors increasingly recognize the strategic importance of social, environmental and ethical issues, but overcoming the obstacles mentioned above can slow progress toward the “systemic” third mode. And certainly, as with the embedded and focused approaches, there is currently no consensus on whether one mode is actually better than the others.
Many people-“Analysts, thought leaders and board directors”-sense a broad, if slow, movement toward incorporating social responsibility into company strategy, regardless of the reason-whether it's a desire to do good, to enhance the company's reputation or simply to improve the financial bottom line. According to some, over the next 10 years, the business case for CSR integration will be made absolutely clear and CSR governance will be a mainstream practice. That is, the corporate world will recognize that they can no longer do business without strategically considering non-financial issues: society, the environment and ethical behaviour. Along this line of thought, this change will happen naturally as the “CSR-oriented risks and opportunities” become clear to directors, and also as people with more diverse backgrounds, such as NGO experience or international business résumés, join boards of directors.
At the same time, some feel that CSR integration will mostly occur in industries with a heavy social or environmental footprint, such as oil, gas, chemicals, forestry and mining.
The role of the board of directors
Company directors can advocate for CSR issues within their firms and push for greater acceptance and integration of social responsibility mandates. Commonly, they do this by creating CSR committees. Among the firms the report studied, common roles of the committee were:
- Advising on the scope and philosophy of principles and standards
- Designing, updating and monitoring implementation of CSR policies
- Reviewing scorecards and monitoring progress against CSR targets
- Discussing CSR strategy
- Identifying and managing issues
- Ensuring support for CSR from top management
- Ensuring that there is sufficient budget to implement CSR commitments
- Including CSR in capital planning
- Monitoring compliance
These functions are more procedural than strategic, and few firms explicitly claimed that their CSR committees worked at looking for “monitoring and providing recommendations on CSR trends and developments that could impact corporate performance.” Moreover, subject boards had little input on CSR reporting.
In other words, despite increasing acceptance that companies should be socially responsible, and much operational work in that direction, there seems to be a gap between leading the pack and merely following the herd. Directors' role as advocates of CSR has yet to make the confident leap beyond the committee and into corporate strategy.
The future of corporate social responsibility
The report supports the idea that “good corporate governance will be redefined over this decade to include ways in which a board provides oversight and strategic direction on the firm's social and environmental performance.”
This means three things:
-
In the future, the basic principles of “good corporate governance” will be reformulated to include CSR
-
Boards will approach CSR in either an “embedded” or a “focused” way
-
Boards will integrate CSR into their strategy sessions
As a result, companies and their directors would do well to begin the process of looking at their greater role in society now, as this could provide the advantage they need to reach the forefront of their markets in the future; rather than simply accepting CSR regulations as they come and risking falling behind and possibly failing entirely as a new paradigm of business arises.
To read the full Conference Board of Canada report, visit www.conferenceboard.ca/documents.asp?rnext=2657. (You must register for the board's e-Library.)
For the Canada Council of Chief Executives statement, Governance, Values and Competitiveness: A Commitment to Leadership, follow the link from www.ceocouncil.ca/en/corporate/corp_gov.php.