Managing corporate responsibility
Another approach is for companies to issue CR reports and to assign someone to manage their corporate CR programme, either in a full-time or a part-time capacity. Again, the models vary widely. In some companies, CR officials are full-time high-level executives and the company issues detailed annual CR reports separate from annual reports. “Our report allows us to capture in one concise package where we are and where we are going with CR,” says Jim Walter, senior vice president of Worldwide Quality Assurance (who oversees CR as part of his duties). Chiquita, for example, has had a full-time CR executive for four years who reports to the board of directors.
At other companies, CR is regarded as a public relations or marketing function, often relegated to a junior public relations staffer who writes a one- or two-page CR study that forms part of the standard annual report. Other companies practice CR without using the term. They engage in activities that could be described as CR, such as the promotion of philanthropy, fair trade, environmental protection, human rights and so on, but don’t know or don’t care to include these activities under CR. On the other side of the coin, many companies like to promote various activities as being “CR”-friendly, but appear to be normal business practice. For example, the Japanese convenience store chain, Lawson, boasts that it is environmentally friendly by reducing power consumption in its stores and having more fuelefficient delivery trucks, but both measures are ones that any company would pursue to save money, with or without CR.
CR practice varies widely, but the overall trend is clear. General Electric, for example, appointed a full-time vice president for “corporate citizenship” two years ago. The CEO of GE, Jeff Immelt, was recently quoted as saying “It’s up to us to use our platform to be a good citizen, because not only is it a nice thing to do, it’s a business imperative.”
Intel has also for the last three years appointed a full-time person to be responsible for CR, but someone based in the public affairs division rather than at an executive level. “We need a single person who can manage the relationships with the various CSR, NGO and sustainability groups,” says David Stangis, who is charged with the task. Intel issues an annual CR report that uses GRI standards. Its 2003 “global citizen” report is 40 pages long, covering issues such as the recycling of electronic waste, community programmes and labour relations. The company also holds special briefings about its non-financial accounting for socially responsible investors and other groups.
The idea of better communication is an essential one to CR. Among executives in the survey, the three top ways in which they report they are improving CR are strengthening governance structures (63%), implementing open and candid conversations with stakeholders (60%), and providing special training for executives and employees (46%).
Investors have a similar attitude, saying that they can improve CR through private dialogue with companies and also requests to companies to improve governance structures. These results show the importance of transparency in dealings with stakeholders, such as employees and shareholders.
The business case
Few corporate executives these days would deny that robust CR practices yield intangible benefits, but it continues to be difficult to quantify the impact, if any, of CR on profits. Although CR dates back several decades, it has taken a long time to gather momentum, because it was perceived in the boardroom as a cost rather than an investment. “The CR movement never really took off until there was a business case for it,” says Sunny Verghese, the CEO of Olam.
Developing a link between “doing good” and “doing well” is now a major focus of many CR advocates. “All the companies we talk to tell us one thing: show us the business case. Everyone is doing analyses now, trying to pull this together,” says Ms Slater. One term often used is the “triple bottom line,” that is, a bottom line for profits, but also for social and environmental benefits, often defined as “economic prosperity, social responsibility and environmental sustainability.”
But does CR actually improve profits? “There is mixed evidence on CR and performance. No one has been able to pin it down,” says Mr Davis. While the idea of a company with good CR having better financial performance makes intuitive sense, it is hard to verify. “It is really difficult to measure the bottom-line impact of CR. I have gone through plenty of data and there is not much correlation. That [connection] is elusive,” says Intel’s Stangis. Others claim the question is irrelevant. “We don’t even calculate a return on our investment in CR,” says Ericsson spokesperson, Pia Gideon. “It is one of our core values, so we must do it.”
The survey results confirm the difficulty of justifying CR on a return-on-investment basis. Among both executives and investors, when asked what are the biggest obstacles to CR, they both picked two main factors: unproven business benefits and the cost of CR programmes.
Major CR programmes are not cheap. Intel spends around US$100 m on improving various programmes, such as its chemical and solid-waste recycling programmes and college scholarship programmes. Infosys estimates it spends around 1% of its corporate profits on programmes such as offering free IT courses to poor communities. An American toy maker, Mattel, estimates it spends about 2% of total revenue on its programmes and APRIL spends about 1% of its revenue on CR.
In the survey, both executives and investors tended to choose a middle course between making a profit on their shareholdings and investing according to their conscience. Both groups were asked to choose between three companies in which to invest. One company had a good performance and no CR, another had lower performance and good CR and the third company had achieved a moderate performance and modest CR. The overwhelming majority chose the last company.
In terms of personal investments, both groups also put little emphasis on using CR as an investment criterion. In both cases, one quarter of them were “not sure” how much of their investments were in companies with good CR. The next biggest group of 23% said that “none” of their personal investments was with “ethical investments.”
There are plenty of examples of companies that say CR has helped profits. Chiquita said last year that it saved US$5 m a year in fertilizer costs through an eco friendly programme developed by the Rainforest Alliance and US$4 m by recycling pallets—significant savings for a company with a net profit of US$99 m last year. “Most of those savings went to the bottom line,” says company spokesman, Michael Mitchell.
Of course, in the Chiquita and Lawson cases, the hard-headed response would be that companies are taking normal cost savings and labelling them as CR. But this would seem to imply simplistically that CR has to be painful and costly to be genuine. The reality is more complex. As Mr Aguirre says: “You can’t say [our efforts] are all due just to CR, but much of it is—there are a number of elements at play.”
Indeed, among investors surveyed, they ranked “evidence that it offers a competitive advantage” as the second most important reason for companies to adopt CR.
Respondents in our survey appear to be inconsistent. They agree that CR is good for long-term performance but cite CR’s unproven business results as the main reason for not implementing such programmes. There is wider agreement, however, about the intangible value of CR. A good CR programme has enormous value in areas such as brand-enhancement, company morale and investor satisfaction. As Olam’s Verghese says: “Some people will do CR to motivate staff, others to get a higher stock price. A third reason could be regulatory. Sometimes you have to look very hard for a company that’s just wanting CR for its own sake.”
The idea that intangibles are important supports the view that CR can be evaluated statistically. A New Yorkbased investment advisory firm, Innovest, has developed a proprietary “intangible valuable asset” (IVA) measurement to gauge the value of such assets as “sustainable governance,” “eco-value,” “human capital” and “stakeholder capital.” The group argues that traditional accounting methods cannot capture the value of such intangibles as intellectual property, customer loyalty, strategic alliances and a company’s ability to innovate. It assigns a value to IVA, a heavy part of which is derived from CR aspects. Innovest’s approach has found some serious supporters. The group is chaired by Jim Martin, the former chief investment officer of TIAAF-CREF, and among the minority shareholders is Europe’s largest pension fund, APB.
Here again, the survey respondents strongly agreed on the value of intangible benefits of CR. Both executives and investors picked the same two variables, by a wide margin, as those benefiting the most from good CR practices. The two variables were enhancement of the brand and higher employee morale.
This view was supported by some interviewees. “For Mattel, it’s the lack of a negative, that’s how our CEO puts it,” says Mr Walter. “We make toys, we’re in a very public arena and we have a sensitive consumer base. It’s a type of insurance policy. We are trying to avoid any [bad] event.” The same rationale is true for Chiquita. “CR gives you brand strength with consumers. It’s an intangible benefit to invest in the brand. Some of the return is measurable and some of it is not,” says Mr Aquirre.
About 40% of American and European respondents to the survey said that the main reasons for emphasizing CR included the need to improve community relations and to deflect pressure from regulators. In Asia, where companies are less sensitive to community relations and where regulators are less powerful, only 33% of respondents took this view.
Employee morale is also important. Mr Walter puts it this way: “It is hard to quantify sometimes. The company is dedicated to a clean, safe and healthy workplace. Our workers work harder, more productively and with less turnover.” Mattel says that the number of work days lost owing to work-related injuries has been cut almost in half between 2000 and 2003, a clear improvement in worker productivity. “CR makes a difference,” says Stefano Pessina, chief executive of Europe’s leading drug distributor, Alliance Unichem, based in the UK. “We have fewer problems if our employees are happy. We get a big gain in productivity. Absentee rates fall.”
Then there is the issue of shareholder returns. “If you have a company with good CR, it is also a confident company. It is happy to have high disclosure. Analysts can more easily understand it, so they give it higher ratings,” says Mr Anderson. Mr Murthy gives one example: “In 1995 we pulled out of contract talks with General Electric over a disagreement on pricing. Within 48 hours we met with all the analysts and they liked [the fact that we spoke to them]. Anyone can tell good news. We want to be known for proactively telling the bad.” Having good transparency and high ratings by analysts not only helps the stock price, but can also lower the cost of capital for companies, as several studies have shown. Clear communication with stakeholders can help companies withstand a crisis, as when Johnson & Johnson quickly withdrew Tylenol from the market in 1982 and 1986, when capsules were tampered with.
Many Asian executives in the survey disagreed with the idea that a high standard of CR can help a company in the financial markets, however. Only 3% of them said that good CR helps them to obtain cheaper capital. This may reflect the fact that CR is not a very important consideration for local banks and investors. For Europeans and Americans, about 9% of these two groups on average felt that good CR lowered their cost of capital.
