Topics:   Business Ethics,Corporate Governance,Corporate Social Responsibility

Topics:   Business Ethics,Corporate Governance,Corporate Social Responsibility

January 10, 2011

Corporate Social Responsibility – What Is Wrong with This Picture?

January 10, 2011

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.

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.

Comments

Robert AG MonksJanuary 21, 2011

Well said, Alex. Indeed, this is what must happen if we are to avoid a wasteful and disastrous confrontation between business and the public good. To be precise, first, accounting regulations have to incorporate external costs into a generally accepted practice; and two, trustees must act as majority shareholders and take a holistic view of their costs and impact on society.

This is exactly what you and I worked on all last year for our book: the principle that a well-governed company is worth more than one that is not. This is a rather blatant plug but I hope your readers will pick up the book (Corporate Valuation for Portfolio Investment) and read a fuller explanation of just what you’re saying here. The table of contents and a brief excerpt are over at my site if anyone wants a quick look (www.ragm.com/BlogPosts/CorpValSample.pdf).

Alexandra R. LajouxJanuary 12, 2011

Thank you for the four comments received so far.
To Matthew Orsagh, thanks for tweeting this blog.
To Mike Wallace and Allen White, NACD is exploring ways to help advance your goals; it’s an honor.
To Kevin Moss, thank you for your two sage and irrefutable points: 1) evidence does not equal proof, and 2) sole focus on financial returns may not deter antisocial corporate behavior. Still, I for one believe that the more corporations and their owners know about the positive long-term financial returns from corporate social responsibility, the more likely it is that they will voluntarily engage in it. Indeed, CSR will become such a natural part of doing business that the very term will fade from the lexicon, much like coeducational schools, unisex hair salons, and integrated schools. But of course!

Kevin mossJanuary 12, 2011

I think that there are strong indicators that companies making additional investments in social issues do better financially than peer companies that ignore such issues, but I think “overwhelming proof” is an overstatement. Resting the corporate responsbility argument on the financial case also implies that companies should only be good corporate citizens if it is in their financial interest. The corrolary being that it is OK to be a bad corporate citizen if it is in your financial interest to do that.

Allen WhiteJanuary 12, 2011

As a GRI Co-Founder and former CEO, it is very gratifying to see NACD’s interest in GRI at time when corporate governance is high on the agenda of companies, regulators, the media and the pubic at-large.

The financial crisis and ensuring recession have raised fundamental questions about the way companies–both financial and non-financial–are governed and whether the whole concept of fiduciary duty warrants rethinking in light of 21st needs and expectations. Already, states like Marlyland, Vermont and California are redefining fiduciary duty through reform of state corporate charters law. Globally, in countries such as Brazil and South Africa, corporate law, governance associations and stock exchanges are pushing the frontier in redefining the meaning good governance and directors’ duties. GRI’s fingerprints are visible in virtually all these initiatives.

NACD-GRI collaboration offers the promise of rich rewards for both parties. Corporate directors have a pivotal role to play scaling up GRI reporting in the US. A goal of 1000 US reporters by 2015 is within reach, especially if directors, through board committees and interaction with top management, position sustainability reporting as a top priority.

I would be happy to discuss any of the above with NACD.

Allen L. White
Vice President and Senior Fellow
Tellus Institute
11 Arlington St.
Boston MA 02116
awhite@tellus.org
http://www.tellus.org
617 266 5400
http://www.tellus.org

Mike WallaceJanuary 11, 2011

Dear Alex –

Thank you for helping spread the word about GRI’s upcoming event, as well as the outline you provided on developments in this field.

We are honored to be featured on NACD’s site, as well as mentioned in your Performance Metrics publication. Especially at such a key moment in our own expansion into the US market, and to such an exclusive audience.

Since landing back in the US last October from GRI’s headquarters in Amsterdam (I’m originally from Ohio), my blackberry has been buzzing with inquiries about sustainability reporting, and GRI. GRI has definitely re-entered at the right time, as well as in the right place – New York, New York.

Not only are the points you made very poignant, but there’s an entirely new level of market involvement in these “social” and “non-financial” performance metrics that is unknown to most US companies and their Boards.

For instance, information providers like Bloomberg now embed sustainability information right into the screens of their research platforms. Now hundreds of thousands of their subscribers can quickly compare and contrast not only financial performance, but also energy, water and waste figures, as well as board diversity and annual philanthropic contributions – in quantified terms.

While these metrics are still considered “non-financial”, all these quantified metrics can be quickly connected back to financial costs and benefits. As such, these new (and very relevant) performance metrics ARE being used by interested parties around the world – including shareholders, current and future employees, customers, regulators and local communities. These end users are no longer just looking at a single companies glossy report, they are comparing and contrasting this information across entire sectors.

While some companies in the US are still worrying about whether or not to disclose on this information, many of their competitors are probably already reporting. And while some companies might be worried about whether or not reporting on these issues creates some undue exposure, a blank space or the inability to report when many competitors are disclosing, sends its own very loud message to the market.

GRI’s reporting framework is used by more than 70% of the Global 250. As such, it is recognized as the most credible method for presenting sustainability performance and is the most efficient and effective manner by which companies can get sustainability information directly to the market and other key stakeholders.

Here are a couple of quick links to GRI resources for those interested:
• Global 250 & GRI – the GRI Guidelines are used by more than 70% of the world’s largest companies – http://bit.ly/fdlF8M
• G3 Reporting Guidelines – review the GRI Guidelines in short form – http://bit.ly/d533Ed
• GRI Reporters List – download the spreadsheet and review over 1300 GRI reporters from around the globe and from every sector – http://bit.ly/9pIDBO
• Latest Trends – see some of the most up-to-date presentations on this subject – http://bit.ly/cfpli3

I invite NACD members and other corporate directors to contact me directly about the benefits of GRI reporting, or for a more comprehensive list of GRI resources and links.

Kind regards;

Mike Wallace
Director, GRI’s Focal Point USA
wallace@globalreporting.org