In the post-Enron era, the number of companies reporting their social and environmental impact on society has increased immeasurably. Indeed, to its many advocates, the emergence of corporate social responsibility (CSR) today is not only a blueprint for the future, but a new highway to follow for conducting business in an uncertain world that has witnessed the evisceration of many long accepted norms of conduct. Broadly speaking, CSR, a.k.a. sustainable development, involves the increased recognition today by companies big and small that they need to address and heed not only shareholders, but all the multiple stakeholders who are impacted by the company’s behavior. These include employees, customers, suppliers, governments, and non-governmental organizations, or NGOs. In the new paradigm of social responsibility, stakeholders also could include socially responsible investor organizations (SRIs), consisting of investors who make investment decisions using various social and ethical screens.
The theory behind CSR is that companies can be profitable while at the same time minimizing their negative impact on stakeholders. As evidence, the German rating company Oekom Research and Morgan Stanley Dean Witter recently completed a study (www.socialfunds.com/news/article.cgi/1289.html) indicating that companies with higher sustainability ratings outperform their counterparts who score lower on sustainability practices. The study examined the 602 companies /in the Morgan Stanley Capital International (MSCI) World Index that have received Oekom’s Corporate Responsibility Ratings (CRR) and found that the 186 highest-ranked companies in terms of sustainability outperformed the remaining 416 companies by 23.4 percent between January 2000 and October 2003. Further, Lynn Sharpe Pains, a Harvard Business School professor looked at all 85 academic studies conducted on the subject of whether ethics pays and found a positive correlation between better financial performance and better social performance in 55, or 65 percent, of the studies.
As recently as five years ago, CSR was perceived as an either-or proposition. If a company attempted to address stakeholder concerns, it might be perceived as impacting the company’s profitability. More recently, studies and actual practice have shown that critical stakeholders -- including customers, employees and SRIs -- are actively looking for permission to do business with socially responsible companies. Increasingly, the value of those companies long term is seen as dependent upon their ability to meet these expectations.
Furthermore, a significant percentage of many companies’ value today is made up of “good will,” an asset easy to lose and difficult to regain. In consequence, companies that recognize this fact are increasingly seeing the need to take appropriate steps to minimize their negative impacts on stakeholders and thereby protect their valuable reputations and good will.
Failure to pay heed to CSR can have a dramatically negative impact on a company’s reputation and even its value. Multinationals such as Royal Dutch/Shell Group, Dow Corning Corp., Coca-Cola Co., and Nike Inc, have taken hits to their reputations for a failure a stay ahead of their stakeholders’ expectations. At Wal-Mart Stores Inc., CEO Lee Scott recently publicly apologized for letting the reputation of the company be sullied by questionable hiring practices. “For a bottom-line company like Wal-Mart, that was a significant step,” observes Bruce K. Packard, a corporate attorney at Dallas boutique firm Davis Munck P.C. (www.davismunck.com)
As the profile of CSR has increased globally, numerous governmental, non-governmental, and advocacy groups have joined the dialogue. Several European governments are looking at regulatory approaches to corporate social responsibility. France, for example, has enacted a law requiring listed companies to report annually, not merely on their financial performance, but on their social and environment performance as well. Today, the United Kingdom requires pension funds to identify social and environmental criteria relied upon in making investment decisions. Recently, the IIA-UK and Ireland (www.iia.org.uk) issued a white paper calling for both boards and internal auditors to work more closely to promote and develop the practice of internal auditing in the UK and Ireland.
Today, worldwide conferences such as the United Nations World Summit on Sustainable Development proliferate. Groups such as the Business for Social Responsibility (BSR), a global non-profit organization (www.bsr.org), help companies identify and manage their social responsibility obligations. The recently published report by GAP Inc (www.gap.com) on its socially responsibility activities attracted considerable and favorable media attention worldwide. Indeed, social responsibility reporting by publicly traded corporations has become an expected part of doing business on a global scale.
Key Global Standards On Sustainable Development
United Nations Global Compact – Launched in 2000 as a direct initiative of UN Secretary –General Kofi Annan, the Global Compact seeks to advance responsible corporate citizenship worldwide in the areas of human rights, labor, and the environment through the support of 10 principles. The Global Compact involves all relevant governments, companies, labor organizations, and civil social organizations. It also engages five UN agencies: the Office of the High Commissioner for Human Rights; the UN Environment Programme; the International Labor Organization; the UN Development Programme; and the UN Industrial Development Organization.
Nonetheless, he believes the jury is still out on whether SOX will be an effective locus for corporate social responsibility. “We don’t know where the courts are going to go. The litigation is just beginning.”
More needs to be done by companies domestically to incorporate sustainable development issues, agrees author Hollender, who is president of Seventh Generation, (www.seventhgeneration.com), a producer of natural household products. “What we need is to develop a parallel to the Generally Acceptable Accounting Principles (GAAP) financial reporting guidelines to make sure the information is complete and independently.”