Drivers of Corporate Social Responsibility

Credibility and trust are everything in business. Corporate social responsibility first caught the attention of the public in the late 1960s and early 1970s, following a host of moral failings including neglecting consumer safety, bribing government officials, polluting the environment, exploiting child labor, and even toppling governments in developing countries (Paine, 2003). Angry Americans, whose mistrust in corporations was fueled by the belief that corporations only listen to complaints when forced to do so, began boycotting major brands, throwing up picket lines outside corporate headquarters and, aided by a 1970 federal court ruling allowing shareholders to use the proxy process to raise concerns about corporate behavior, bought stock in major companies to ensure a say at shareholder meetings. Throughout the 1980s and 1990s, numerous exposes of exploitative labor practices in global supply chains put additional pressure on companies to adopt codes of conduct and demand compliance from their suppliers. The fall of Enron in 2001 - adding fuel to the fire of corporate malfeasance - renewed calls for greater corporate integrity, accountability, and transparency.

Transparency is fundamental to business. Investors need to be confident that reported profits are real, that executives will not use their positions to enrich themselves, and that accountability systems are in place to expose and punish abuses. Workers have to believe in a company's commitment to build value if they are to put their careers, and the security of their families, into their hands. Customers assume the integrity of the transaction; once that trust is broken, they rarely give the company a second chance. In the absence of transparency, all of these relationships are at risk (Batstone, 2003).

6.6.3.1 Pressures from Shareowners. Investors expect a competitive return from their investments in companies. In addition, they expect transparency, reliable forecasting, timely information, and opportunities to be heard. The quality and legitimacy of EHS, workplace and board diversity, and corporate governance and management's leadership in these areas are increasingly seen as a proxy for shareholder value. An Ernest & Young survey of 300 Wall Street analysts found up to 86 percent of oil and gas analysts confirmed that regulatory compliance, employee health and safety, community relations, and lawsuits can materially affect a company's value (Cap Gemini Ernest & Young, 1996). These performance pressures are today a normal part of corporate life.

There are also some growing investor pressures that are expanding the definition of corporate responsibility and demanding a greater say in how companies are run. There is mounting evidence, for instance, of the financial risks of global problems, such as climate change. European insurers claim that in the next decade, the annual cost to industry and governments of global warming will rise to $150 billion a year (Webber, 2002).

The social investment movement has become a significant source of pressure by investors on companies to manage more responsibly and to be more responsive to shareowner concerns. By 2001, more than $2 trillion, one out of eight professionally managed investment dollars in the United States, were part of a socially responsible portfolio. New share indexes have also emerged, such as the Dow Jones Sustainability Index and FTSE4Good, launched by the London Stock Exchange and the Financial Times publishing company, which track companies whose strategies integrate environmental and social considerations into their financial performance.

The long-held assumption that operating responsibly is too costly no longer holds up. For example, the Domini Social Index, a stock index created to track the performance of socially screened companies against other nonscreened indexes, has generally outperformed the S&P 500 on a total-return basis and on a risk-adjusted basis since its inception in May 1990, although it trailed the S&P 500 during 2000 (SRI, 2003). Furthermore, academic studies in finance and accounting have consistently found either positive or neutral performance differences between socially screened and unscreened investments.

Groups of shareholder activists, representing institutional investors, such as the Interfaith Center on Corporate Responsibility (ICCR), a coalition of 275 religious institutional investors, submit numerous shareholder resolutions annually calling on management to change their company practices. Among the issues are sweatshops and human rights abuses, global warming, equal opportunity, executive compensation, and the election of board members. In 2003, chemical and pharmaceutical companies faced 24 shareholder resolutions, filed by ICCR and other activist shareowners whose concerns ranged from eliminating PVCs in manufactured goods to phasing out the use of dioxin.

In Europe, calls for increased disclosure got a boost in 2001 when the Association of British Insurers (ABI), a 400-member trade association of Britain's insurance industry, issued new guidelines. The ABI members account for more than 20 percent of stockmarket investment in London. These guidelines ask companies to disclose information about the social, environmental, and ethical risks and opportunities they face and how they plan to handle them. ABI officials say the guidelines "represent an important opportunity for investors and companies to work together both to protect shareholder value and improve their understanding of corporate social responsibility" (see www.abi.org.uk).

6.6.3.2 Pressures from Employees. Employees want to be paid well, with competitive wages and salaries, benefits, and increasingly, stock. They want the resources to do their jobs well. And, equally important, they want an employer who treats them fairly and with respect and values their knowledge and different life experiences. Employee perceptions about how a company accepts and manages its social responsibilities are also increasingly part of employee decisions about where to work. Furthermore, unions and related institutions put pressure on companies to reform their labor practices to meet global labor standards.

6.6.3.3 Pressures from Customers. Commercial customers, especially those who have a long-term relationship with or are dependent on a company, have a vested interest in the company's future as a going concern. They want suppliers who are reliable, produce quality products and services at a fair price, and, like employees, customers want to be respected and treated fairly. Most customers also want to know about their suppliers' safety and environmental records. With this in mind, customers want to know about the values and attitudes that underpin their suppliers' business dealings and the risks associated with their business practices, products, and services. This shift towards greater accountability can be seen in the rising number of companies seeking ISO certification and the adoption of nonfinancial auditing standards such as SA8000 and the Ethical Trading Initiative.

Consumers too are increasingly pressuring companies to accept and manage more responsibly through their purchasing power. Many want to know that the products they are buying are environmentally safe and that companies recognize that their "license to operate" is a privilege, not a right. Studies by reputation experts point out that consumers admire most companies that consistently demonstrate their concern for employees, the environment, product quality and reliability, the communities in which they operate, as well as financial performance.

6.6.3.4 Pressures from NGOs and Activists. Aided, in part, by the speed and ease of using the Internet, global activists and NGOs have emerged and are increasingly vocal in their demands that companies adhere to high expectations regarding safety, labor standards, the environment, human rights, and corporate governance. The capacity of activists to mobilize their own resources, disseminate negative information about companies, and take concerted action against practices they find offensive or problematic has never been greater (Waddock et al., 2002).

6.6.3.5 Pressures from Communities and Governments. Communities and even nations, many of which fiercely compete for foreign investment by companies, are becoming aware of the negative consequences of eroding tax bases and a general lack of long-term commitment by companies to where they operate. While still offering generous incentives to induce companies to bring jobs and tax revenues to their communities, municipalities also expect companies to obey the laws, protect the environment, and help solve community problems. Consequently, companies find it increasingly necessary to act or become a "neighbor of choice," by partnering with local citizen groups and living up to high standards of excellence with respect to communities (Burke, 1999).

Within the chemical industry are hundreds of local citizen advisory panels. Company representatives meet several times a year with interested residents, who represent schools, hospitals and health care specialists, businesses, environmental associations, community groups, and municipal authorities, to discuss immediate concerns such as emissions and traffic problems.

The chemical industry is one of the most regulated industries in the developed world. In general these regulations primarily relate to worker safety, air, soil and water quality, groundwater contamination, and waste handling and disposal. In response to the acceleration of a global marketplace, regional and country governmental entities are raising the safety bar for chemical manufacturers and users. One legislative proposal, which has far-reaching implications for the makers and users of chemicals, is REACH (Registration, Evaluation, Authorization of Chemicals). Proposed by the European Commission in May 2003, the REACH System - created to allow users to choose safer alternatives - would require producers, importers, and users of chemicals to provide public information on the risks associated with their use. Registration of chemical substances, an integral part of the new system, would involve the release of extensive information on the intrinsic properties and hazard of each substance, intended use, and potential exposure and risks to people and the environment (see Section 3.4 for a more detailed discussion of REACH).

6.6.3.6 Pressures from Institutional Developments. A number of institutional developments have led to pressures for more responsible corporate behavior, creating a need for greater transparency of and accountability for corporate actions.

A major source of pressure on company performance is the numerous ratings and ranking schemes from prominent business publications in recent years, as well as highly visible awards for best practices. In contrast to traditional corporate rankings that have largely evaluated companies on financial criteria, size and growth, for example, the Fortune 500, these new ratings and rankings evaluate companies' performance with respect to their treatment of a variety of stakeholder issues. Fortune magazine's widely recognized "Fortune's Most Admired Companies" has been ranking companies on multiple criteria other than financial since the early 1980s. Employee issues are now covered, for example, in Working Women magazine, and Black Enterprise magazine. These rankings compete with BusinessWeek's "Best Companies for Work and Family," rankings. Management quality is covered by Fortune's rating as well as Industry Week's "100 Most Admired" company ratings. Further, global "most admired" rankings of businesses are now published in Europe and Asia (Waddock et al., 2002).

These rankings are more than a name on a page. At 3M, ranked among the top ten companies on The Harris Annual Reputation Survey, company officials believe that its high scores for quality of management and innovation translate into shareholder value by enhancing brand preference amongst consumers and attracting and retaining a diverse and talented workforce (Low and Kalafut, 2002).

Global standards and principles are another source of institutional pressure. The UN's Global Compact represents one prominent example to promote values-based practices in global corporations. The Global Compact is only one of over 400 different initiatives related to codes of conduct, principles, and standards globally, according to the International Labor Office. This proliferation of standards suggests that there are certain baseline expectations or responsibilities to which companies are increasingly expected to advance by a wide range of stakeholders. Codes related to corporate social policy encompass employment issues, training, working conditions, labor relations and child labor, anticorruption, as well as environmental performance and sustainability. Codes of any sort, whether internally or externally generated, will be respected and credible only when they are consistently reported. Public reporting of corporate activities provides the transparency necessary for codes to be implemented and monitored (Waddock et al., 2002).

Standards, principles, and codes are only useful if they are implemented and to the extent that companies can assure stakeholders that they are living up to them. To establish credibility with stakeholders, particularly activists and critics, companies are beginning to engage in more transparent reporting practices, many of which are now emerging from international multistakeholder coalitions. According to one study, some 54 percent of the world's largest companies now disclose some type of social and environmental information on their websites. Perhaps the most prominent reporting and accountability initiative, which is linked to the implementation of both standards and codes, is the Global Reporting Initiative or GRI. Like the Global Compact and many other initiatives, the GRI is voluntary and companies are not currently required to provide external assurance as to the accuracy of the information reported (Waddock and Bodwell, 2002).

For an inventory of CSR standards, codes, guidelines, and organizations, refer to Appendix 2.

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