Definitions of corporate responsibility
Despite the growing importance of CR, there is little agreement as to what the phrase means and there are several different names for the same or similar practices, such as Corporate Social Responsibility (CSR), Corporate Citizenship, Global Citizenship and Corporate Accountability.
While some may argue over the distinctions among these terms, at the core they all point towards the same fundamental principle: that a company is responsible for providing more benefits than just profits for shareholders. It has a role to play in treating its employees well, preserving the environment, developing a sound corporate governance, supporting philanthropy, fostering human rights, respecting cultural differences and helping to promote fair trade, among others. All are meant to have a positive impact on the communities, cultures, societies and environments in which companies operate.
These efforts should also benefit a company’s various stakeholders, who comprise all or some of the following: customers, employees, executives, nonexecutive board members, investors, lenders, vendors, suppliers, governments, NGOs, local communities, environmentalists, charities, indigenous people, foundations, religious groups and cultural organizations. “CR is still an emerging term,” says Melissa Brown, executive director at Association for Sustainable and Responsible Investment in Asia (Asria). “I have met many people with strong feelings about the terms, but I’m an agnostic. The underlying issues are fundamental—environment, human rights, governance, corruption and so on.”
As for the executives in the survey, in their opinion the two most important stakeholders are customers and employees, followed by shareholders and board directors. The survey results indicate that executives may embrace CR in their companies, but they still do not give high importance to a broad range of stakeholders. When asked their priorities in five years’ time, the executives surveyed see little change in the ranking.
There is a wide regional difference in the importance of the various stakeholders. In the United Kingdom, there is a high sensitivity to companies’ use of animals in medical tests. Scandinavia is one of the most progressive regions in the world on virtually all CR issues, with the exception of whaling, which is practised by Norway. Singapore places much emphasis on CR, but at the same time permits companies to do business in Myanmar, contrary to the practice of many other developed countries.
It is not surprising then that there is a wide variation in approaches to CR. At one extreme is a legalistic approach, in which a company “goes by the book” on CR, following a set of specific guidelines or measurements.
Many Japanese firms follow this method. “More than 600 Japanese companies produce environmental reports,” says Ms Brown. “And environmental reports require good statistical and monitoring ability.” A Japanese retailer, Lawson, for example, takes a factual attitude to CR.
Japan is not the only country where companies go by the book. In the survey, both executives and investors were asked how to judge CR from the viewpoint of this rules-based approach. On average half of both groups said “compliance with laws and regulations” was the key measurement by which to judge a company’s CR, far ahead of other yardsticks, such as philanthropic activities.
At the other end of the spectrum is a fuzzier version of CR that emphasises the spirit, as well as the letter, of the law. It is the application of CR that goes beyond building a school in rural Africa or making sure the firm is complying with the US Sarbanes-Oxley Act. Some say that this form of CR even requires a fundamental and permanent modification of capitalism.
Stephen Davis is one of the world’s foremost authorities on corporate governance. Mr Davis, who has studied governance for 15 years as head of Davis Global Advisors, based in Boston, Massachusetts, sees evidence that the world is moving towards a “civil economy,” where the principles of a civil society are applied to the global economy. He believes that the priorities of internal stakeholders will become more closely aligned with external ones. New corporate rules, such as those enshrined in the Sarbanes-Oxley Act, focus on improving internal governance. Once those become strong, the focus is likely to shift onto external stakeholders.
“You have people who think of corporate governance in the old fashioned ways and then there are the CR folks who are thinking about structural issues,” agrees Gavin Anderson, the founder of Governance Metrics International, based in New York
(Mr Davis is one of the co-founders of the group). One example is in Singapore. David Gerald, the head of Asia’s largest shareholder group, the Securities Investors Association of Singapore (SIAS), is pushing to get rid of a government rule that blocks individuals from voting on shares they bought with their government-held retirement investment accounts. Even though individuals own the money in the accounts, the government considers that the accounts are owned by it, and that the government has the right to vote, not the individual But, recently, the government relaxed the rule, saying investors could attend annual meetings of companies they held through these retirement funds, even if they were still not allowed to vote.
Forces for change
The survey confirms that shareholders constitute one of the drivers behind the growing emphasis on CR. Executives around the world chose three main factors that are causing firms to pay more attention to CR: greater focus on CR by shareholders, recent corporate scandals and greater pressure from governments and regulators.
According to the survey, executives said that the strongest drivers of the increase in importance of CR were shareholders, recent corporate scandals and greater pressure from regulators (all 29%).
There are several other motives for companies to adopt CR measures, including:
Erosion of trust: Public trust in corporate management has declined, following a spate of financial scandals, such as those that enveloped Enron in the US and Parmalat in Italy.
Globalisation: Anti-globalisation groups, such as Earth First, have demanded greater accountability from governments and companies alike. Companies are increasingly adopting CR as a form of insurance policy to circumvent or mollify outside pressure groups.
Competitive pressure: As more companies in an industry adopt CR practices, the laggards come under increasing pressure to follow suit. A typical example is the oil industry, where almost all companies now engage in some form of CR programme.
Competitive advantage: Many companies regard the intangible benefits of a CR programme, such as a better brand image, as a way of gaining the upper hand over their rivals.
A rules-based approach to CR may have its advantages, but few would disagree that CR ultimately depends on the personal integrity of the people who work in a company. “You can’t have two standards, one for society and one for companies. Both must promote good morals and ethics,” says Mr Gerald. If the individuals themselves can conduct their businesses in an ethical and sustainable manner, the argument goes, then the company will inevitably conform to any external CR standard. “I use the golden rule in every transaction: do unto others as you would have them do unto you,” says N R Murthy, chairman of an Indian IT firm, Infosys. An example of this idea is an annual survey of “trust”, conducted by a US public-relations firm, Edelman, scoring consumer confidence in the integrity of companies, government and other institutions. The results of the Economist Intelligence Unit survey support the view that executives and investors place a high value on integrity. The three most important aspects of CR for executives surveyed were: ethical behavior of staff (67%), good corporate governance (58%) and transparency (51%). Labour practices and employee rights also received a high score (44%).
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%). Labour practices received a much lower score (23%) among investors than among executives (44%).
This emphasis on qualities that are hard to measure means that CR remains a poorly defined concept. Companies, consultants, lawyers, non-governmental organizations (NGOs) and other interest groups all have their own definition. Those who are most interested in environmental issues tend to put forward an environmental definition that gives short shrift to other factors. Those who support philanthropy emphasize the charitable component of CR. Those who uphold human rights see CR as largely a labour issue.
Now there is a growing number of people who are urging the need for a single, universally accepted method of measuring CR, so that firms can be compared across borders and across industries. “We need to have one homogenized global standard that can be applied around the world—the same standard everywhere,” says Jim Thompson, who runs Hong Kong-based Crown Relocation, one of the world’s largest moving companies.
But which standard should apply and how should it be administered? One idea is to establish a central organization that sets the standard for CR, rather like the International Accounting Standards Board for the accounting profession. The central body would certify accountants who, in turn, would audit firms for their CR practices. This model is the one being pursued by the Global Reporting Initiative (GRI). “Just as there are global standards for financial reporting, we want to establish one global standard for non-financial reporting,” says Alyson Slater, Associate Director of the Amsterdam-based body. “The world is too cluttered with standards, codes of conduct and guidelines for CR.”GRI is a non-profit organization that is trying to work out how to “monetize” its GRI standard. They are thinking of issuing “accreditation” to consultants, accounting firms and others who, in turn, can charge companies to certify their CR programs by the GRI standard.
A similar, rival model for certifying CR programmes is being promoted by the New York-based Social Accountability International (SAI). For fees ranging from US$5,000 to many thousands of dollars, third party auditors will certify that a company conforms with the SAI’s SA8000 standard that focuses mostly on labour practices. SAI, in turn, regulates these third party auditors to ensure they are qualified to issue SA8000 certifications. Among the companies using SA8000 is Chiquita, to prove that the company has no child labour, forced labour or discrimination.
