Wednesday, February 15

Corporate Social Responsibility

The Discussion Paper entitled “Corporate Social Responsibility” produced by the Australian Governments Corporations and Markets Advisory Committee first caught my attention after reading about it at CPA news.
I am indebted to DA and my eldestr daughter Vanessa who provided valuable feedback on my first draft

The purpose of the Discussion Paper I think is to consider what steps should be taken to include corporate social responsibility in the business community. Such things as Directors responsibilities, reporting and changes in business practices all need to be considered. It’s interesting to note in Australia there is a plethora of different legislative requirements at every level of Government covering corporate responsibilities.

I would welcome any comments you might like to make on any aspects of my submission I intend making to the Corporations and Markets Advisory Committee which is included below.

The Discussion Paper asks those wishing to make submissions to answer the questions at the end of each section of the Report. The questions and my answers are detailed below.

1.5
How might corporate social responsibility usefully be described for working purposes.

Corporate Social responsibility is an expectation that business is to be conducted in an ethical and sustainable manner on behalf of its stakeholders and the wider community. Ethics and sustainability are linked since sustainability in the environment and its preservation is a moral responsibility for this generation to pass on to future generations.

Which approach or combination of approaches to responsible corporate behaviour is most appropriate.

The most appropriate approach to responsible corporate behaviour is to determine guiding descriptive principles, rather than to try and prescribe in detail a list of detailed obligations.

Prescriptive obligations create a compliance approach restricted to those obligations documented. Descriptive type principles on the other hand require imagination and are likely to lead to a more comprehensive review within the “Spirit of the Law” .

The same argument applies to International Accounting Standards to govern CSR which preferably be general and broadly based rather than in the form of detailed instructions, possibly leading to the creation of loopholes !.

Corporate Social Responsibility – A suggested example of a guiding principle:

Its is the responsibility of the Corporation, through its Directors and officers to ensure at all times it conducts its business in an ethical and sustainable manner. The Corporation shall include in its Corporate Governance provisions those core values considered necessary to uphold this principle in the conduct of its business. The Annual Report is to include a narrative with key indicators demonstrating its adherence to this principle.

What are the incentives or disincentives for a company to conduct its business in a socially responsible manner?

The incentives for a company to conduct its business in a socially responsible manner are evidenced in enhanced brand recognition and improved shareholder returns. This is achieved as the stakeholders and customers recognise a company’s values. Its reputation is thereby enhanced and ultimately the returns to shareholders. The disincentives arise from competitors who obtain short term advantage by unethical work practices. The latter type of activity is evidenced in secretive conduct where communication is restricted to its direct shareholders.

Different or additional implications arise depending on the nature or size of the enterprise, for instance:

___ The sector or industry in which an organizational operates.
___ whether a company has international operations
In practice
____ to what extent is corporate decision making driven by shareholder concerns _ how do companies differentiate between various categories of stakeholders
__ in what ways do companies balance or prioritise competing stakeholders interest and

__ how do companies engage with stakeholders


A company operating as a multi national will have the added difficulty of operating in countries with different cultures and beliefs that impact on the core values adopted by the parent company. What’s needed I think is a response that adopts the guiding principles but at the same time also recognise a local boards management and integrity to implement theses principles under local conditions.

Some multi national companies subscribe to a counselling service to provide on line services anywhere in the world such as that provided by St James Ethics Centre. In this way if conflicts arises management has that facility of an independent partner to assist in the timely promotion of fair and ethical work practices.

Every company I think would also need to include an adherence to human rights as a core value to be specifically included in its corpoarate governance principles. Amnesty International is a natural partner and currently is aleady assisting corporates all over the world to effectively ensure this principle is maintained in all of its activities. Click here for the reference Gary provided under his last comment Link

Traditionally the Annual General Meeting provided the opportunity for stakeholders such as their investors to meet and exchange information. Yet its significance in terms of attendance is declining. The meeting itself is costly to organise and confusion often reigns over shareholder voting rights. Clearly it’s time for a change in the nature of these meetings and the composition of Annual Reports.

Corporation decision making is driven by the returns it can achieve for its shareholders and pressure arises from analysts and Fund Mangers whose focus is largely on share price appreciation. Companies don’t formally engage their various stakeholders other than through market research and by way of references to employees and community partners in their Annual Reports.
Most negotiations with Stakeholders are due to the various legislative requirements.

In practice, to what extent do stakeholders consider a company’s social responsibility performance when making assessments or decisions about a company , including :
___increased level of clarity and comparability of these reports
___any suggested changes to external verification of those reports
__ whether any aspect of this reporting should be mandated and, if so, for what companies and in what respects (s)
__are there particular issues for small to medium enterprises

An avenue for improvement in communication with stakeholders would be a change in format and reporting by the Directors at Annual general Meetings where they reported on the broader issues of their responsibilities under CSR.
At present reporting in Annual reports is characterised by a hap-hazard approach to Ethical business practice and sustainability. The two are seen as different. I would contend they are one in the same. The question of ethics is generally covered by comment on corporate governance which defines the rules for the Board, its composition and responsibilities.

Vague notions are often included such as “To uphold high ethical standards throughout the organisation” without identifying how this is to be accomplished or what those standards represent in terms of expected behaviour. Hence I see the need for guiding principles to be included and frequently referred to in the narrative that makes up Annual Reports.

An avenue to effectively reflect CSR is also in accounting standards and more particularly what is referred to as Triple Bottom Line Reporting which adds environment and social responsibility to existing traditional financial performance measures.
Eg : Key Performance Indicators could be included to show such things as reductions in green house emissions, electricity and water consumption per employee, or for multinationals to give examples of how adherence to universal human rights and labour standards cover employee benefits.


I think requirements to include guiding principles and reports on ethics / sustainability should be mandated for all substantive private companies (currently required to lodge accounts) and public groups.

2.00: whether, or in what circumstances, companies feel constrained by their understanding of the current law of director’s duties in taking into account the interests of particular groups who may be affected, or broader community considerations, when making corporate decisions.

if so, is there any useful scope for clarifying the current law in this respect
does the current law give directors sufficient flexibility to balance long terms and short term consideration in their decision making

Are any changes needed to the current law regarding the right of shareholders to express their view by resolution at general meetings on matters off environmental or social concern.

Directors take a legalistic view of their responsibilities, relying heavily on Executive Directors. Corporate Governance principles tends to be relied upon in terms of their commitment to stakeholders and the wider community.
I think the law does give sufficient power to Directors to balance long-term considerations in decision making.

I believe the provisions relating to shareholder voting are already confusing and require revision. Matters of social or environmental concerns are to be included.

Should the Corporations Act be revised to clarify the extent to which Directors may take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?
Should the Corporations Act be revised to require directors to take into account of specific classes of stakeholders or the broader community when making corporate decisions?

As previously mentioned I think the Directors currently have sufficient power to make decisions in the best long term interests of the company, but it’s advisable that a general provision be included in the corporation law outlining their responsibility to maintain CSR aspects. Such a broad provision should be descriptive and not prescriptive to specify responses to different classes of stakeholders.
Eg

Its is the responsibility of the Corporation, through its Directors and officers to ensure at all times it conducts its business in an ethical and sustainable manner. The Corporation shall include in its Corporate Governance provisions those core values considered necessary to uphold this principle in the conduct of its business. The Annual Report is to include a narrative with key indicators demonstrating its adherence to this principle.

4.00 Should the Corporations Act Require certain types of companies to report on the social and environmental impact of their activities

I think all substantive private and all public companies should have an obligation to report on the social and environmental impact of their activities.

As mentioned earlier I think it is a mistake to view sustainability as a separate aspect to that of ethics, since sustainability is a moral question to sustain that which we have for future generations.

Hence it’s preferable to include this requirement as a central principle of corporate governance requiring boards to ensure they have sufficient information and expert reports to discharge their CSR responsibilities.

5.00 Should Australian Companies be encouraged to adopt socially and environmentally responsible business practices and if so how?

Conclusion.

Australian companies should be actively encouraged to adopt socially environmental responsible business practices. In fact this should always have been the case it is an indictment of our civilised state to think otherwise. The alternative is to give no consideration to sustainability and disregard the rights of future generations.

My preference is for descriptive provisions to operate by way of guiding principles enacted in law and within corporate governance structures.

Otherwise I think we are in danger of thinking of ethics and environmental sustainability as something only very highly trained people are capable of thinking about. CSR needs to stay in the mainstream of shareholder and stakeholder concerns, acknowledged at every level in the community.

As mentioned in the discussion paper over 80% of investors want to see more reporting of CSR by companies. Educational bodies need to encourage education and ethically based subjects in their courses

Descriptive provisions create a clear responsibility. Imagination and morality have always been required for civilisations to deliver results for its populace along with new knowledge and understanding.

7 comments:

DA said...

Hi Lindsay,

I'd say it covers the biggest part. Allthough I apppreciate a working paper isn't the work itself it remains somewhat theoretical.

I would consider adding some words to the paper on the way of involving the people that can't read annual reports or don't understand business slang. Why not make some kind of CSR scorecard based on max 30 indicaters in plain traffic light style? I also imagine that CSR kpi's are a set of local indicators that reflect local needs and appeal to local people.

And the most important party to my humble opinion -the funding parties- are left out of the equation.. As long as banks don't require -and monitor the execution - csr in the business case that is provided, the few things that remain are EVA, PBP and ROI.

While writing this I thought about credit rating agencies. A tripple A rating by Moodies or S&P's doesn't have anything to do with CSR (yet). Just imagine what a few basis-points would do as a reward system as a direct consequence of a positive outlook upgrade because of good CSR.

It is an interesting subject Lindsay and I could write pages full about it. Best of luck with the working paper.

DA

Gary said...

Interesting!

I will read more carefully tomorrow. Here is a link to some interesting UN work around business and human rights

http://web.amnesty.org/pages/ec-unnorms_2-eng

Interesting comments Dimitri.

Lindsay Lobe said...

Hi DA and Gary
I have tried to incoporate your responses in the amended post which will be my final my submission.
However please add any other aspects of interest, or items you would like me to consider.

DA --Included a reference to KPI's and new accounting standards that would be of interest to financiers/other stakeholders, and more practical !!

Best wishes and thankyou for your interest

DA said...

Nothing to add (for now:-) Lindsay. This covers it.

Take care

Granny said...

Delurking long enough to say hello from the other side of the world.

Hope all is well with you.

Tina said...

Oh if only US corporations felt it even necessary to say that they have an obligation to society... They believe the buck stops at an obligation to their shareholders-- period-- all other be damned.

Lindsay Lobe said...

Hi Gran /Tina

Thanks for visiting.

They tell me their is some change a-foot in the US ....but you don't sound convinced of that Tina!!

Best wishes