Corporate Social Responsibility – What Is Wrong with This Picture?

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On January 31, the New York Stock Exchange will host “Focal Point USA,” the first official event of the Global Reporting Initiative (GRI) on U.S. soil. NACD will no doubt cover this event, since we champion the inclusion of nonfinancial metrics in performance measurement—see our recent Blue Ribbon Commission report on Performance Metrics.

But back to GRI: More than 1,300 companies worldwide use GRI standards for corporate reporting on environmental, social and economic performance (we’ll call these “social” issues for short).  Most of the companies are located outside the U.S., however, hence the “Focal Point USA” campaign. The New York kickoff will be the first point in a tri-city tour. On February 3, The World Bank will host a breakfast meeting to gather the local sustainability community and discuss latest trends in social disclosure and sustainability reporting.  On February 4, Ceres, the longtime sustainability initiative that launched GRI, will host a roundtable event in Boston for sustainability reporters.  Will there be a dramatic surge in the number of companies adopting GRI and embracing social issues? The answer is yes—but only if corporate social responsibility can correct its image. Let me explain…

When yours truly was at Chesterbrook Elementary School in Falls Church, VA (later renamed as McLean), having gained a reputation as a writer for my stories on heroic figures such as “Slowpoke the Snail” (painstakingly handwritten on many pages of regulation line paper and usually circulated for only a few days before being ripped up by the school’s top bully) my peers elected me to become the editor of the school newspaper, produced with pungent purple ink on a mimeograph machine. Well, being a writer was one thing and being an editor was another. The deadline for the newspaper was fast approaching, and I had gathered no copy—not even from the boy who had taken the trouble to dance with me at Cotillion before revealing his true motives (“Will you make me a sports editor?” he asked, dashing my first hopes of unconditional love). So I had a bright idea. An artistically inclined pal of mine could draw a picture with as much incompetence as she could muster, and title it, What is wrong with this picture? The arrival of this first official submission to the school paper broke the logjam. Soon other articles appeared and I had enough copy to make a newspaper.

Alex's early ventures in editing

But when it comes to corporate social responsibility, something really IS wrong with the picture and I think I know what it is.  But like the tale of “Slowpoke,” it will take me a while to tell, and I recount it in an environment—our current business world—that tends to overpower nuance.

Here is the two-part dilemma.

1. By their very existence, corporations are based in fundamentally moral principles such as meeting needs, setting viable prices, paying wages and so forth. There are of course, outlier exceptions like monopoly, fraud and other ills but these are already combated by government with taxpayer dollars. We need to shout that business really does do good day in and day out.

2. At the same time, however, there is overwhelming proof that companies making additional investments in social issues do better financially than peer companies that ignore such issues. Don’t just take my word for it. Read the extensive writing of Steven Jordan of the Business Civic Leadership Council of the U.S. Chamber of Commerce or of Stephen Young, Executive Director of the Caux Roundtable.  Or consider the fact that a leading social/governance issues expert at the World Bank and International Finance Corporation, Mike Lubrano, cofounded the Cartica Capital and left a secure government job to invest his career by investing in companies that “get it right.”  The fund is doing quite well.

Are these additional investments optional, like giving to a favorite charity, or necessary like paying insurance premiums? In my view, they are necessary, but not because corporations have or should have a “responsibility” to contribute to society.  Any red-blooded company would rebel at such a guilt trip.  It’s because corporations are woven into the social fabric, and if they harm that fabric, they themselves are harmed.  If they help that fabric, they themselves are helped. So the problem is the picture. We need not envision a magnanimous corporation giving to society. But rather society giving to a corporation…employees give their time, customers give their treasure, and the public gives its trust. The real question is, will corporations receive or reject this wealth that is available to them in return for a modest and necessary premium?

In conclusion, what is wrong with the current picture of corporate social responsibility?  The problem is that corporate responsibility is a confusing misnomer. Social investments are not merely a “responsibility.”  They are economic necessities.  As for me, yes, there was something wrong with my picture when, out of desperation, I had to commission that illustration. I was promoted beyond my level of competency. I needed to stick to writing. The same goes for corporations. They are not there to do good. They are there to do business—making good products and services, sold in free markets, and voluntarily investing in the social infrastructure that makes those markets possible.

Now that picture is worth a thousand words—and untold returns on investment.

Corporate Governance Lessons from the Girl with the Dragon Tattoo

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Fifty years old and I still haven’t kicked the habit of the end-of-summer book report. Sad really.

The Girl with the Dragon Tatoo

I must admit I didn’t think that Steig Larsson’s first thriller would provide food for NACD thought, but listen up all you private company directors, nomination and governance chairs worried about CEO succession, and anyone concerned with boardroom ethics and director independence. This book review is for you.

Several things are well known about the author of The Girl with the Dragon Tattoo author, Steig Larsson:

  • He died before his trilogy of crime stories became best sellers.
  •  He was Swedish.
  •  He was a former journalist who was expert in covering right-wing extremism.

It is not known how much he knew or cared about fiduciary responsibility or the governance practices of the best-run family businesses, and midway through the book it becomes obvious that the corporation and the magazine company around which most of the action is set, have not based their governance practices on the NACD Key Agreed Principles. Sure, both are private (not public) companies and being based in the frozen north of Sweden and in Stockholm respectively, are not bound by U.S. law. Nonetheless, the conditions under which old man Vanger joins the magazine company board, and the threats subsequently made to the company co-founders, would raise the eyebrows of anyone with even a rudimentary knowledge of the Duty of Loyalty. Transparency is not a core value and self-interest rules the day.

The Vanger family who run the company—and, indeed, the community at the heart of the book—would benefit from attending the family business session at this year’s NACD conference. As usual, the session will be facilitated by Jack Moore, a member of the Benjamin Moore Paint family and well-seasoned in helping directors and executives of family-run companies deal with some very sensitive interpersonal issues. Jack will be joined by Linda Thomas, the CEO of Wilcox Farms, an egg distribution company based in the Pacific Northwest. Chris Wilcox, one of the family members now involved with running the 100-year-old egg farm, will be there too. This will be textbook—not crime thriller—corporate governance, but the panel have promised some lively stories even if they can’t manage mystery and intrigue. Don’t miss it.

Later in Larsson’s novel (and I must be careful not to give away the plot) there are serious questions about who should lead the Vanger empire, although the old man is still very much alive at the end of the story. It all comes out all right in the end, but there’s no doubt that their succession planning and executive evaluation process was sadly lacking. The company counsel, Frode, is pretty much a good guy throughout, but really questions must be asked about the board process and how he allowed it to become so compromised. HealthSouth director and law professor Charles Elson, Heidrick and Struggles’ Bonnie Gwin, and Peter Wiley, chairman and former CEO of Wiley and Sons, will discuss C-suite succession planning at the NACD Conference. Join them to find out how it should be done.

And if a girl with a dragon tattoo offers to invest in your latest venture, give her a wide berth. I have reason to believe her fortune was not made honestly.

 

The M&A Litmus Test: Part 4

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Today is the penultimate day of your M&A Litmus Test, so we’ll continue by testing your board’s…

…Info Flow.

How good is your information flow? For the board, knowledge is not merely a source of power; it is the very key to effectiveness. The following wisdom is adapted almost verbatim from the Report of the NACD Blue Ribbon Commission on Director Liability.

When it comes to M&A information, flow is critical.  The type, quantity, format, timing, and source of the information that fuels board knowledge will vary from board to board and will also change over time for a particular board. It will also vary among board members, who have different levels of experience and expertise with different topics.

Information flow is critical for directors with respect to capital allocation decisions—in particular, mergers and acquisitions. This area requires special attention to the long-term interests of the corporation and the ways in which management’s interests may affect transactions. As the report noted, the board and management need to regularly discuss the opportunities for and threats to the company, even in the absence of any planned or foreseen transactions, so that directors have an understanding of the business context in which these issues may arise.

Depending on the size and business context of the company, notes the report, directors should periodically receive information related to, and discuss with management, the following:

  • Comparative studies and analysis concerning whether the company would be more viable by merging with, or entering into alliances with, another candidate, or standing alone;
  • Possible acquisition candidates. When discussing the fulfillment of certain of the company’s business strategies, such as entering into new lines of business, directors should receive information on possible alternatives, such as an acquisition or strategic alliance, to achieve the same objectives; and
  • The merger activity of competitors, including the impact of recent activities on the company’s market share. Competitive analysis as to other suitors for the same potential acquisition candidates might also be warranted.

Maintaining an up-to-date understanding of these issues will help directors to remain prepared for the time when management actually proposes a transaction. This is particularly critical for directors of public companies, who should understand the company’s plans and legal options for responding to unsolicited takeover offers.

In evaluating a particular transaction, notes the Report, directors should seek specific information about the price, timing, and certainty of the transaction, and should be proactive in overseeing negotiations. Directors should understand how the transaction will be financed, and the projected financial impact on the company under reasonably likely scenarios. Where the sale of the transaction warrants it, directors should seek independent financial advice from outside experts to consider together with management’s financial assessment.

Directors should also obtain a high-level analysis of the merger documentation, including an understanding of the most important representations, covenants, and indemnities contained therein and their application to the company and the transaction. In addition, directors should receive input from market and investor relations experts about the best manner in which to position the transaction and the likely reception from investors and creditors. As with any other matter before them, directors should crucially evaluate all the information they have obtained and arrive at an independent assessment instead of relying exclusively on management’s views.

Directors should also be alert to differences between management and shareholder interests in negotiating a particular transaction. For example, shareholders will be far less interested than managers in knowing who will continue to work for the merged company and with what responsibilities. These employment issues are important but they should not override concerns about long-term returns to shareholders.

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