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Special Report

ESG: The metrics jigsaw

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Being good corporate citizens

The idea that businesses might integrate socially responsible practices into their core activities is an anathema to some free-market advocates. At a recent debate at the London Business School, the former chief economist at OECD, David Hendersen, accused the doctrine of corporate social responsibility (CSR) of being “misguided” and based on “false virtue”. Hendersen, and other proponents of the neo-classical economic tradition, regard CSR as the antithesis of the free market. They argue that the common good is best served by the uninhibited pursuit of self-interest (ie profit), within the rule of law.1

The development of the global marketplace
However, new environmental pressures are forging a fundamental shift in mindset about the corporation’s role in the 21st century global marketplace. Supporters of CSR are calling for a re-evaluation of how companies achieve profit, by taking into account social and environmental considerations, as well as economic ones. Since the fall of the Berlin Wall in 1989 and the breakdown of Communism, the concept of aligning profit with social justice has gained critical momentum.
These events paved the way for the new
era of globalisation, that provided enhanced legitimacy to the free market and capitalism. International trade barriers were lifted, dissolving nation state borders and helping to increase capital flows across jurisdictions. At the same time, rapid advances in technology and communications created global networks. Industries consolidated, such as energy, mining and telecommunications, and supply chains deepened as companies chose to outsource to cheaper labour markets.
As corporate power has grown, the legislative role of national government has reduced in the wake of privatisation and deregulation. Yet issues such as climate change, human rights, poverty (in particular, the widening economic gap between the developed and developing world) and global disease have intensified. Their solution is seen as beyond the power of individual governments’ control. The atrocities of 11 September exposed the underlying weaknesses of the global system and its implications.
In the absence of any binding global governance structure, corporations are increasingly viewed as part of the solution. Some 70% of international trade is controlled by multinational companies, while 1% of multinationals owned 50% of foreign direct investment stock in 1995. Indeed, the total value of some multinational companies far exceeds most economies’ GDP levels.2

A new corporate citizenship role
Hence, the newly coined phrase ‘corporate citizenship’ prescribes that corporations have a responsibility within the setting of the global market.3 They are not just economic conglomerates, but represent communities of shared values and goals. At the organisational level, stakeholders include: employees, consumers, suppliers, and shareholders, while external relationships include: media, government and interest/ pressure groups. Each group is contingent on the other and held together by a mutuality of interests. In effect, a healthy macro-economy depends on a civil society and a sustainable planet. The theory is that companies should therefore act with ‘enlightened self interest’ and consider the “triple bottom line” (people, planet and profit), a term introduced by Elkington in 1997.4
Some observers believe, that as artificial entities, corporations cannot have responsibility. They imply that business has no political basis and as a result, the corporate executive’s sole purpose is to pursue profit for the company. In consequence, the legitimacy of the social responsibility movement is also questioned. Highly vocal interest groups are seen to hijack certain causes that are not necessarily representative of the majority view. Without being elected, it would be undemocratic if corporations were to respond to the interests of a few and reshape the business and political agenda.5
But in a changed external context, private sector decisions in the global marketplace are having unequivocal political outcomes. These range from issues such as the environment – whether civil engineering firms decide to build dams and upset natural habitats; employment practice – whether major store brands choose suppliers that are using child labour; and human rights – whether familiar names benefit from the use of forced labour. Certainly, when it suits, corporations are the most effective lobbyers of government and, indeed, some of them contribute substantially to political parties.
Furthermore, many democratically elected governments are advancing the CSR agenda. Cognisant of the need to seek compliance rather than coercion, in an attempt to limit bureaucratic costs, the preferred regulatory approach is one to enable rather than enforce.
Last July, the European Union published the Green Paper: ‘Promoting of a European framework for Corporate Social Responsibility’. In recognising the growing importance of the concept for European businesses, the paper aims to promote debate and encourage the development of innovative practices, transparency as well as increasing the reliability of auditing.
The new political approach of partnership, marrying the goal of social justice with the pursuit of profit, has been endorsed, if not led, by the UK government. The white paper, ‘Eliminating World Poverty: Making Globalisation Work for the Poor’ (December 2000)6 emphasises that CSR is a business-led agenda. The government has also created a new post, a minister for CSR, as well as establishing a Business Partnership department in 1998. The most significant measure to date is the change to the rules on pension fund disclosure. On 3 July 2000, trustees were forced to state, in the statement of investment principles, whether funds’ investments took account of social responsibility. Other jurisdictions, notably Germany, are following suit.
And it is not just isolated national responses. In 1999, Kofi Annan, UN Secretary General, challenged business leaders to enact the UN’s Global Compact. Fifty corporations (including DaimlerChrysler, Nike, Ericsson, Rio Tinto) and 12 labour organisations signed the Compact, which established nine principles based on internationally accepted principles on labour standards, human rights and environment protection. Other developments have included the Global Reporting Initiative (GRI), a multi-stakeholder undertaking to develop globally applicable social and environmental reporting guidelines. OECD has issued guidelines, signed by 33 countries, on activities of multinationals. Certain international standards – SA 8000 (based on ILO standards) and ISO14001 (underpinning environmental management systems) have also been accepted as almost hallmark.

Engagement with stakeholders
Public policy responses, such as those described, are important because they are creating a forum for dialogue. The Global Compact, for example, was drawn from a cross-section of views, ranging from governments, interest groups and corporations. Corporations are also convening their own networks to encourage proactive private sector responses, while another objective might also be to level the playing field to establish consensual standards. Business leaders from diverse industries established The World Business Council for Sustainable Development. Other examples include the Global Environmental Initiative and the Caux Round Table, which promotes principles for business. In the UK, the Association of British Insurers has issued guidelines on CSR7 and the Prince of Wales Business Leaders’ Forum also promotes partnership between corporations and other stakeholder groups. In the academic field, dedicated research units have been established to help businesses plan and devise CSR policies.8
Acknowledgement that CSR is perceived as integral to business strategy is one implication of these trends, but more important is that the concept itself is entering into mainstream thinking. However, if public and private efforts are voluntary, is there a business case for CSR?

Brand value
Aside from product innovations, one of the most important market incentives is public perception. Significant value is now attached to that intangible asset – the brand. Corporations are keen to embrace CSR because, first, it is considered a risk management exercise and, second, they are keen to promote a positive corporate image. Globalisation has not only been effective in strengthening corporate power, but also that of non-governmental organisations (NGOs), which have gained increased professionalism in the last few years. High profile campaigns on Nike (child labour), Shell (Brent Spar and Nigeria) and Cadbury Schweppes (forced labour) not only created awareness, but pressured major enterprises to re-evaluate their business strategies.
Indeed, Shell has made extensive efforts to revise business practice, engage in dialogue with various groups and increase transparency. Since 1997, the company has regularly reported on social and environmental activities. It is also noteworthy that some of the major investment banks have set up SRI units in their sell-side analyst business. Corporations are being asked to present and explain their CSR strategy to these units. Moreover, well-known organisations are recruiting former environmental activists to advise them on their CSR and public relations strategies. Lord Melchett, a former executive director of Greenpeace, was vilified when he accepted a position with the PR company Burson-Marstellar as its clients include some of the companies that Melchett virulently campaigned against.
The idea of corporate citizenship challenges organisations to rethink the way
market-orientated reforms might bring about sustainable economics. Trends (not discussed here) impacting on corporate governance, in particular the encouragement of increased shareholder participation, as well as growing consumer demands for environment-focused products, are reinforcing the CSR debate. CSR is still an evolving concept that is not accepted by all. Nevertheless, the collective pressure of wider environmental, government and industry trends is pushing CSR towards the cusp of mainstream thinking.
Fiona Leonard is assistant vice president, client communications at T Rowe Price Global Investment Services in London

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