Executive summary
Corporate Responsibility (CR) has emerged as a significant theme in the global business community and is gradually becoming a mainstream activity, according to a new survey by the Economist Intelligence Unit, in cooperation with Oracle Corporation. The growing emphasis on corporate responsibility is affecting the relationship between companies and their various stakeholders, such as investors, customers, vendors, suppliers, employees, communities and governments.
In October 2004 we conducted an online survey of corporate executives around the world and a separate online survey of institutional investors, asking them to assess the importance of corporate responsibility. In all, 136 executives and 65 investors responded. The main findings of the survey include:
● Eighty-five percent of executives and investors surveyed said CR was now a “central” or “important” consideration in investment decisions. This figure is almost double the 44% who said CR was “central” or “important” five years ago, demonstrating the growth in CR’s significance.
● The three most important aspects of CR for executives surveyed were: ethical behaviour of staff (67%); good corporate governance (58%); and transparency of corporate dealings (51%).
● For institutional investors, transparency of corporate dealings was even more important. Sixty eight percent said it was one of the three most important aspects of CR, followed by high standards of corporate governance (62%) and ethical behaviour of staff (46%).
● Eighty-four percent of executives and investors surveyed felt CR practices could help a company’s bottom line.
● Brand enhancement (61%) and better staff morale (67%) were picked by both groups as the most important business benefits of CR.
● But both groups also cited cost implications (42%) and unproven benefits (40%) as the two biggest obstacles to implementing CR programs.
There are several definitions of CR, but for the purpose of this paper, the term is defined as “the integration of stakeholders’ social, environmental and other concerns into a company’s business operations.” “CR is really about ensuring that the company can grow on a sustainable basis, while ensuring fairness to all stakeholders,” says N R Murthy, the chairman of an Indian IT firm, Infosys.
This definition implies an emphasis on a company’s external relationships. But our survey shows that executives are much more focused on the internal aspects of CR, in particular ethical behaviour, corporate governance and transparency. By contrast, external aspects received much less emphasis: philanthropic giving and ethical investments were ranked as priorities by 6% and 4% respectively of those surveyed. Another sign of this internal focus was that the most important stakeholders for executives, after customers (65%), were employees (61%) and shareholders (46%). And they said that this focus would not change much in the next five years. Stakeholders such as non-governmental organizations and local communities were given a low priority at the present time (1% and 5% respectively) and a slightly higher priority in five years (2% and 9%). Over time, some argue, the internal and external aspects of CR will merge as companies build strong internal governance structures and are able to turn their attention outwards.
Until recently, board members often regarded CR as a piece of rhetoric intended to placate environmentalists and human rights campaigners. But now, companies are beginning to regard CR as a normal facet of business and are thinking about ways to develop internal structures and processes that will emphasise it more heavily. In the not-too-distant future, companies that are not focusing on CR may come to be seen as outliers. As companies focus on non-financial performance, an important yardstick of CR, the measurement of intangibles, such as customer satisfaction and employee morale, are likely to become less vague and more credible.
The CR trend is being driven by a variety of factors, such as the erosion of trust in large corporations, the globalization of business, the corporate-governance movement, the rise in importance of socially responsible funds and sheer competitive pressures. This last factor, however, does not necessarily imply that firms emphasising CR will beat the competition. It may produce such intangible benefits as brand enhancement, stronger employee morale and greater investor confidence. But, on the tangible side, it is harder to prove that CR leads to higher profits. Indeed, it is easier to quantify the costs of emphasising CR than the benefits. A full-fledged CR programme at a large multinational can cost tens of millions of dollars, or as much as 2% of total revenue.
The worldwide development of CR, then, is neither linear nor uniform. At this stage, CR seems like the proverbial elephant being felt by different blind men— it is interpreted in many ways, but, nonetheless, is a large, single body and one that is on the move. If CR is to progress to the next stage of its development, a major challenge is to establish more widely accepted ways to measure CR. At the moment, there are many competing standards of measurement. CR also remains a controversial subject, rejected by many corporate boards as an unwelcome and unnecessary intrusion into company affairs. The arguments, if anything, prove that CR is very much a “live” topic and one that has to be addressed by the global business community.
Introduction
Corporate Responsibility (CR) is not an academic topic to A.J. Devanesan, the president of one of the world’s largest pulp and paper companies, Asia Pacific Resources International Ltd (APRIL), based in Indonesia. In September 2004 an angry crowd of 250 illegal loggers ambushed APRIL’s staff on a remote logging road deep in the rainforests of Sumatra. They were upset that APRIL had prevented them from illegally harvesting APRIL’s forests. The mob started hurling stones and firebombs, setting one of the APRIL workers ablaze (he escaped uninjured).
Welcome to the brave new world of CR. As it becomes more generally accepted, it is also moving further afield, even into the remote rainforest. Indonesian timber companies are not often upheld as paragons of CR but APRIL is an exception. After being criticized for years by rainforest groups for its logging policies, APRIL is seeking to become a good corporate citizen. “We want to be known as a world-class company, one which does the right thing,” says Mr. Devanesan. APRIL is not only trying to stop illegal logging, but has also set aside around 20% of its total 330,000 hectares of forest for conservation purposes
In some cases, firms such as APRIL take it upon themselves to improve their CR. In others, there is a ripple effect, as one company practising CR requires all its vendors and suppliers to uphold the same standards. A US fruit company, Chiquita, requires all its fruit suppliers to adhere to its CR standards in order to continue to do business with the firm, a decision that affects fruit growers across Latin America.
The Singapore-based Olam, the world’s secondlargest trader of cocoa and robusta coffee, imposes its own CR standards on all the farms supplying it with raw products, affecting cocoa farmers in Ghana, Ivory Coast and other African nations. “As we sell to many confectioners, they are very concerned that we are not buying from farms that use child labour,” says Olam CEO, Sunny Verghese. Among Olam’s clients are Nestle and Cadbury.The CR activities of APRIL and Olam are far from isolated cases. There are many straws in the wind, among them:
● More than 1,500 companies have signed the United Nation’s Global Compact since it was launched in 2000. The Global Compact asks companies to uphold 10 principles relating to human rights, the environment and clean business practices.
● Almost a quarter of all Global Fortune 500 companies now produce some kind of report that provides an account of their environmental, social or sustainability efforts. Among them are General Electric, ExxonMobil and Intel.
● The New York-based Governance Metrics International (GMI), which covers corporate governance and CR, now produces in-depth rating reports on 2000 companies around the world and has a growing client base including TIAA-CREF, State Street Bank and ABP, the largest pension fund in Europe.
● Officials in Canada, Norway, Japan, Denmark, Sweden, South Africa, France, the Netherlands, Taiwan, the UK and Australia have either adopted or are considering adopting some form of CR reporting, either for the governments themselves or for companies that are reporting to the government.
● More than 10,000 individuals and 3,000 listed companies have helped to develop the standards of the Global Reporting Initiative (GRI), an organization based in Amsterdam, trying to create a single global measure for CR performance. Among its corporate clients implementing GRI standards are Bayer, Canon, Deutsche Bank, General Motors, Heineken and Shell.
● A group of five major European institutional investors, including the second-largest pension fund in the UK and the largest pension fund in the Netherlands, jointly stated in October 2004 that they would allocate 5% of their budgets for the purchase of non-financial research analysis of such topics as corporate governance, labour management and environmental practices.
● One in every nine investment dollars under professional management in the US is now invested in socially responsible funds. This amounts to US$2 trillion (trn) out of a total of US$19trn in investible funds, according to the 2003 report on socially responsible investing (SRI) produced by the Social Investment Forum, the national trade body for the SRI industry.
The results of our survey show a similar growth in the importance of CR. A total of 88% of executives said that CR is a “central” or “important” consideration in decision-making. This compares with 54% of executives who said it was a “central” or “important” consideration five years ago. The biggest percentage change between now and five years ago was among European executives. A total of 46% said CR was “central” or “important” five years ago compared with 84% at the present time. In Asia, the proportion rose from 49% to 82% and in North America from 66% to 88%.
The survey of professional investors reveals a sharper trend. Eighty-one percent of those surveyed said CR was currently a “central” or “important” consideration in their investment decisions, compared with 34% who said it was “central” or “important” five years ago. In fact, 14% of them said CR was not a consideration at all five years ago. Now, not a single investor said it was not a consideration.
Once companies have begun to pay more attention to CR, it is hard to reverse the direction. Investors and other stakeholders come to expect the company to emphasise CR more and more. “Sure, there are companies that go backward—but that is a path to disaster,” says the chief executive of Chiquita, Fernando Aguirre. “It would be very difficult [for Chiquita] to go backwards now.”
In Asia, recent corporate scandals, greater media focus and greater regulatory pressure were all ranked by executives as the factors that led to the growing importance of CR (with around one-third of them reporting these three as the highest pressures). In comparison, executives in Europe and the US said these factors were less significant. The difference can most probably be explained by factors such as the financial crisis in Asia in 1998 that highlighted CR issues in the region. In Europe, executives say that an emphasis on CR gives them a competitive advantage, a view held by about one-third of all European executives surveyed, against only 18% of Americans and just 16% of Asians.
