Perspectives in Responsible Sourcing

Rating the Ratings

My friends often ask me, what is a ‘good’ company to buy from or what is a ‘good’ company to work for? Depending on how they define ‘good’, I usually start with supply chain issues. However, it’s not just consumers and job seekers asking this question. Increasingly, investors, NGOs, community groups, and possibly even governments looking to attract FDI are asking this question. Where do they go for the answer? One place they look is to sustainability ratings.

This explains why we are beginning to see a proliferation of these type of ratings. Yesterday, the Corporate Responsibility Officer’s (CRO) magazine (previously, Business Ethics) released its 8th annual Best 100 Corporate Citizens list. A few weeks ago, Innovest published their list of the Global 100 Most Sustainable Corporations. Not to mention AccountAbility’s second annual ranking of Global 500 companies on how well they conform to socially responsible business practices. I’ve heard some in the industry criticize these ratings as being at best useless and at worst a marketing ploy by the research groups that put the information out there. Furthermore, activists, environmental groups and some conscious consumers may question how, for example, any oil companies would be able to make the lists. In any case, a brief comparison of the methodologies for three sustainability ratings is provided below:

CRO/KLD Research & Analytics – Best 100 Corporate Citizens
Top 5 companies:
1 Green Mountain Coffee Roasters Inc.
2 Advanced Micro Devices Inc. (AMD)
3 NIKE, Inc.
4 Motorola, Inc.
5 Intel Corp.
Universe: The list is drawn from approximately 1,100 publicly held U.S. companies in the Russell 1000, S&P 500 and Domini 400 indices.
Methodology: The research, conducted by KLD Research Analytics, looks at seven factors: community, corporate governance, diversity, employee relations, environment, human rights, product and total return on investment (averaged over three years).
www.thecro.com/?q=be_100best

FORTUNE/AccountAbility – The AccountAbility Rating
Top 5 companies:
1 Vodafone (Computers and electronics)
2 BP (Petroleum refining)
3 Royal Dutch Shell (Petroleum refining)
4 Électricité de France (Energy and utilities)
5 Suez (Energy and utilities)
Universe: Top 50 companies on the Fortune Global 500 and 14 other large companies in five industry sectors
Methodology: The rating measures the extent to which companies have built responsible practices into the way they do business and looks at how well they account for the impact of their actions on their stakeholders. Criteria include governance, strategy, performance management, stakeholder engagement, transparency and assurance (independent verification).
www.accountabilityrating.com

Corporate Knights/Innovest – Global 100 Most Sustainable Corporations
This list is not ranked but includes some of the top five companies in the other rankings, namely: AMD, Shell, HP, Intel, and Nike. Other companies in the list include Unilever, BT, Adidas, Coca Cola, and Google.
Universe: Publicly-traded, MSCI World-listed companies
Methodology: Assess environmental and social risks along with the companies’ managerial and financial capacity to manage that risk successfully and profitably into the future. Innovest looks at more than 120 performance factors in the categories of stakeholder capital, human capital, strategic governance, and environment. Each company is rated relative to its industry competitors.
www.global100.org

This is by no means a definitive list of sustainability ratings; there are also the FTSE4Good and the Dow Jones Sustainability indices, among others (although companies are not ranked), but the above three take a similar approach.

Although Innovest makes a good point about the limitations of ranking companies in absolute terms since different industries face different sustainability issues, I like KLD's methodology the best for three reasons: firstly, it includes an explicit financial metric (return on investment), therefore, a company that engages with stakeholders, gives a lot to charity and runs on wind power would not necessarily make the list if it wasn’t actually making money. Secondly, the scores are not absolute; rather, they are adjusted to the performance of the group based on how far away they are from the average (like being graded on a curve). Lastly, a company may be eliminated from the list if a stated concern is considered too egregious. So, a company that performs well in all areas except for one major incident such as a child labour scandal or a lawsuit, they wouldn’t make the list (which is why HP and Apple are conspicuously absent this year).

So back to my friends; they usually all have something negative to say about any ‘good’ company and I’m sure we can all think of a stain on the records of some of the companies listed above and different issues resonate more strongly for different people, so what’s an ethical girl or guy to do? The rating I’m most interested in watching is a grassroots, participatory approach to tracking the real time social performance of companies. Instead of a complex ratings methodology, the website allows a virtual community to determine the criteria to be evaluated, the weighting of these criteria, and the measurement of social and environmental impacts. People can rate stories of company malfeasance or out-performance by selecting how important the issue is to them on a positive or negative scale. Yes, there are limitations (e.g. it’s based on stories that appear in the media), but people trust it (AccountAbility predicted the emergence of such ‘informal information networks’ in its publication, “What Assures Consumers”) and if it grows, it could become very influential. Check it out: www.dotherightthing.com

NGO Accountability

As the corporate responsibility movement seeks greater transparency and commitments on the part of businesses, commentators have begun asking, if governments are accountable to the people who elect them, and companies are accountable to shareholders and perhaps to society to a growing degree, who are NGO’s accountable to? What do NGOs have to report on? If I give money, how do I know where it’s going?

Coming from an NGO background, I believe NGOs or civil society organisations, to be, on the whole, as accountable as other societal actors, if not more so, as their raison d’être is to fulfill a social mission or provide a public good where government has failed, or to protect minorities from the 'tyranny of the majority'. In addition, they rely on donors’ trust in them to obtain funding and for large grants, NGOs often have to submit lengthy reports on how the money was spent. However, NGOs and other non-profits, as organisations, inevitably suffer from some of the same maladies as businesses and governments (witness the recent UN scandals, for example). Companies often question NGO campaign strategies and targets. Naming and shaming works best on well-known brands, even if some lesser known companies are doing far more damage to the environment or more egregiously violating human rights. A representative from a large NGO once told me as much – they needed to pick on high profile companies so as to keep the funding coming in.

So NGO accountability has become somewhat of a buzzword of late, and it was even the topic of a BSR session this year at their annual conference in New York. In response, a group of international NGOs has drafted the “INGO Accountability Charter”, covering topics such as independence, responsible advocacy, good governance, and ethical fundraising. However, the Charter only calls for “progressive” application of the Principles and there is no enforcement mechanism. Furthermore, to date, only 11 organisations have signed on. And this is not the first NGO code of conduct to be created; there are several others in existence already.

But there is one NGO accountability initiative that involves a comprehensive set of standards enforced through third party verification within a multistakeholder certification process. The InterAction Child Sponsorship Certification was established in 2004 in partnership with Social Accountability International (SAI). InterAction is a US-based membership organisation for NGOs with around 160 members. The certification is based on InterAction’s membership standards for “private voluntary organisations” (the PVO Standards). Previously, members were just asked to sign a document saying they were in compliance with the standards. Now, all members must complete a self-assessment questionnaire and submit it, along with supporting evidence, to InterAction. In addition, members may seek formal certification against the Standards. The process involves a third-party headquarters audit and randomly selected audits in the field to assess the extent to which centralised governance, financial, and child protection controls exist and are being applied at the field level. In July, 2005, five child sponsorship organisations (World Vision, Christian Children’s Fund, Save the Children, Plan USA, and Children International) achieved certification.

CSCC, as one of the accredited certifying bodies for InterAction, deployed auditors to various countries in Latin America, sub-Saharan Africa, and South Asia to visit programme sites that provide benefits to sponsored children and their communities. Our auditors were able to evaluate how the donor money was spent, how the benefits were tracked, and how children were protected from inappropriate correspondence, among other things. The findings were presented to the Certification Review Panel with representatives from InterAction, donors, sponsors, subject matter experts and certification body (such as CSCC) representatives. The certification lasts for four years and random surveillance audits are conducted at field sites every six months.

While this certification programme does not address responsible advocacy, it does provide a model for a credible, multistakeholder process that can serve to enhance the confidence of donors that their money is making an impact.

For more information, see the InterAction website: www.interaction.org/newswire/detail.php?id=4197

Why Report on Corporate Responsibility?

I was surprised when I first started working at CSCC to learn how few of our clients report on corporate responsibility. Given that they are working with us, they are obviously committed to having a socially responsible supply chain so why wouldn’t they want to shout this from the rooftops? Our clients who do report are in many cases first or second-time reporters. This reflects a national trend that puts the US far behind in the UK and Europe, and even the Fortune Global 100 in terms of the number of companies producing a report.

We recently held a seminar at Columbia University on CSR reporting as a kind of ‘how-to’ workshop session that was designed to nudge participants in the direction of disclosure by developing the business case and aligning the goals of reporting with the mission, values, and strategic objectives of the company, as well as providing an overview of tools available for measuring ESG (environmental, social, and governance) data.

I believe there is a clear business case for companies to report on their ESG performance and the sooner companies start a dialogue internally about a progressive disclosure plan, the better. To help participants articulate the value of reporting internally, we started with the reasons a company would not want to report and developed our rebuttals along the way:

• It’s voluntary…at the moment
France, Norway, Japan, and other countries have laws requiring companies to disclose information on their ESG performance. Most recently, the UK came close to passing legislation that would have required companies of a certain size to report on sustainability. Some stock exchanges require listed companies to report on corporate responsibility, including the stock exchanges of France, Denmark, Holland, and South Africa. The Securities and Exchange Commission in the US requires reporting on environmental liabilities. In addition, the US Equal Employment Opportunity Act of 1972 requires companies to report their EEO statistics through an annual EEO-1 report, which some companies are choosing to make public (Wal-Mart, Citigroup, Coca-Cola, HP, Intel , IBM, and Merck).

• It’s risky…if we’re not truthful
The Nike v. Kasky case (where Nike was sued for making false statements in its CSR report), may have had a temporary chilling effect on companies in the US but in 2005, Nike came out with an award-winning CSR report that raised the bar for disclosure by providing a list of its suppliers. As long as companies are truthful in their reports and do not over-promise, legal risks should be mitigated.

• It’s costly…but it could be profitable
According to the ethical consumerism organization, Lifestyles of Health and Sustainability (LOHAS), there is a $230 billion marketplace for goods and services focused on health, the environment, social justice, personal development and sustainable living and approximately 30 percent of the adults in the US are considered LOHAS Consumers. Furthermore, the process of evaluating ESG performance necessarily involves identifying risks and opportunities, which can point to latent issues and potential new markets, and may also highlight new business opportunities and ideas for product and/or service innovations. 

• It’s only for big-brand companies…who may be our clients
As a small service provider with an unrecognizable name, CSCC had little incentive to produce a CSR report. However, as a member of the UN Global Compact and as a service provider to socially responsible companies, there was a clear business case for us to report. Furthermore, as a result of the Global Compact reporting requirement, many more small and medium-sized companies are beginning to disclose information on ESG performance, even if on a limited scale. With close to 3,000 member companies, the Global Compact is a major driver of corporate responsibility reporting, and it provides companies with the tools to help them develop their ‘Communication on Progress’.

• We haven’t had any negative publicity…yet
Producing a sustainability report before activists and media come knocking on your door can be a proactive approach to safeguarding your reputation. It gives you the opportunity to address issues before your critics have a chance to accuse you of being unresponsive and it can help to build trust among stakeholders. The report itself can be used as a tool for stakeholder engagement, to engage critics and solicit input, and to evaluate prospective long-term partnerships with other sectors. There is also the possibility that you will eventually come under scrutiny as the number of NGOs and the growth of campaigns targeting companies increases. According to a report from Social Technologies, ‘tech-enabled activism’ will mean that campaigns will have global reach, increased speed, and will enable more grassroots content.

• Our reputation speaks for itself…except when no one is listening
Corporate scandals and the crisis in trust has led to an erosion of public trust in companies over the last few years.  According to the World Economic Forum, trust in global companies is now at its lowest level since tracking began. Do you believe your company has a good reputation/is ethical/is values-driven/is socially responsible? Do you believe your business relationships are built on reputation and trust? If you answered yes, then you also have to ask yourself, how does your company communicate its values to employees, investors, consumers, and others? A CSR report can be used as a tool to set the record straight, provide employees with the information they need to talk to customers, or to promote investor confidence in your stocks. British Telecom estimates that corporate (social) responsibility accounts for over 25% of image and reputation impact on customer satisfaction. A good CSR report defines the company spirit, which can serve as the glue that holds a geographically dispersed company together under a common mission and values, and communicates to investors, employees, customers, and the public, the company’s commitment to operating responsibly.

• None of our competitors are doing it…so we can gain first-mover advantages
If your competitors are not publishing sustainability reports, then you can use the opportunity to differentiate your brand and gain a competitive advantage to attract ethical investors and consumers.

• We don’t have socially responsible investors…but we probably will
Socially responsible investment (SRI) assets grew faster than the entire universe of managed assets in the United States during the last 10 years, according to the Social Investment Forum. Total socially responsible investment assets rose more than 258 percent from $639 billion in 1995 to $2.3 trillion in 2005, representing almost 1 in 10 dollars of all assets under management. Proxy resolutions filed by socially responsible investors are garnering more shareholder support than ever before. Even if your company is not listed in an SRI index, activist shareholders can bring resolutions against any company in which they hold shares. One of the topics that shareholders are filing resolutions on this year is asking companies to produce sustainability reports.  In addition, the UN launched the Principles of Responsible Investment (PRI) earlier this year that seeks to mainstream the incorporation of social and environmental risks into investment analyses. Currently, investors representing over $4 trillion worth of assets or 10% of global capital are behind the initiative.  So even your non-SRI investors may soon be asking you more questions about your ESG performance.

• Nobody reads CSR reports…but the process has value
The process of developing a sustainability report provides an opportunity to explore areas for integration and internal efficiencies, it promotes inter-departmental communication and facilitates strategic linking of corporate functions (e.g. marketing, R&D, finance). Targets set out in the report drive continuous improvements and, if strategically aligned, can add value to internal benchmarking and measurements. And guess what? People do read CSR reports. According to a recent poll by GlobeScan, half of the general public in North America, Australia, and some parts of Europe say they have either read a CSR report themselves, briefly looked at one, or heard about one from someone else. In addition, prospective employees will surely look to CSR reports to get an idea of the type of company they are going to work for as more and more job-seekers, including MBA graduates, are looking to work for socially responsible companies.

Sources:
www.lohas.com/about
www.socialtechnologies.com/lifestyles/Tech-Enabled%20Activism.pdf
www2.weforum.org/site/homepublic.nsf/Content/Full+Survey_+Trust+in+Governments,+Corporations+and+Global+Institutions+Continues+to+Decline.html www.socialinvest.org
www.unpri.org
www.globescan.com/news_archives/csr04_gri_PR.html
www.csrwire.com/PressRelease.php?id=6046
www.netimpact.org/displaycommon.cfm?an=1&subarticlenbr=1179

UN Global Compact – Toothless Initiative or Catalyst for Corporate Responsibility?

The United Nations Global Compact (UNGC), an initiative launched by Kofi Annan in 2000, attracted the attention of many skeptics, including myself. A voluntary set of principles, loosely encompassing human and labour rights, environmental responsibility, and later, anti-corruption that companies could sign on to at the drop of a hat (or, in  this case, a brief letter of intent to the UN Secretary-General). Cynics called it an exercise in PR, critics called it toothless since there was no enforcement mechanism, and some NGOs denounced the initiative as a ‘corporatisation’ of the UN. Then, in 2003, the UNGC introduced mandatory reporting for members requiring disclosure of their efforts to implement the ten principles. Still, I was not convinced. I had read some of the ‘Communications on Progress’ (CoP) as they are called, and apart from the larger companies that were already producing sustainability reports, these CoPs did not seem to delve very deeply into the company’s social and environmental impacts. Furthermore, the vague language in the principles appeared to set a very low standard for performance.

However, at the beginning of 2005, I was recruited to help CSCC draft their Communication on Progress as they had been a member for almost two years and were due to report in the summer of ’05. I was interested in the work that CSCC was doing so I decided to apply for the position. I quickly realised that the undertaking was no walk in the park. Not only did it require a gap analysis of all of our policies and procedures related to the corporate responsibility, it also required significant energies in collecting and analysing data (even for our relatively small company) to assess our current levels of performance in the ten areas. We set up a CSR Committee to oversee the work and I regularly reported to senior management on our progress (from why we were doing it to our data needs, to our dissemination strategy) over the course of the project.

Our ten-page CoP took six months from conception to publication and continues to impact the way we do business today. I saw first-hand the process of public disclosure as a driving force for transparency, change, and improvements in all our operations from living our values to delighting our clients. Our second report is due to be published by the end of the year.

Today, the UN Global Compact has almost 3,000 member companies representing the largest voluntary corporate responsibility initiative in the world. And what strikes me the most is that, unlike most CR initiatives, the Compact consists of a broad membership base that includes almost fifty per cent developing country members. In addition, almost half of the companies are small and medium-sized enterprises. Yes, the principles are broad and the standards for performance and reporting are low, but as a learning forum and an inclusive network for sharing best practices and driving continual improvements, there are few initiatives that can boast a similar scope.

To view our 2005 CoP, follow this link: www.cscc-online.com/cscc_ungc_cop.pdf
To look up member companies and their CoPs by country, company, sector, or size, see: www.unglobalcompact.org/ParticipantsAndStakeholders/search_participant.html

Product Responsibility in the Automobile Industry

The recent lawsuit in California intending to sue six major automobile companies for greenhouse gas emissions raises some interesting questions about product responsibility. While some may think it’s a bit of a stretch to hold companies accountable for how their product is used (e.g. McDonald’s obesity cases and the popular ‘gun manufacturer’ retort – are you going to prosecute arms companies for deaths caused by their products?), there is growing pressure for companies to ensure their products minimise harm to society and the environment. In addition to the McDonald’s cases, there has been pressure on video game companies to tone down the violence in their games, there have been campaigns against the alcohol industry to stop advertising to teenagers, and, in what might serve as a precedent for the current case, tobacco companies were sued by states in the 1990’s for contributing to public health costs.

So what can we expect to be the outcome if this case is successful? Ideally, we will see more fuel-efficient technologies applied to all types of vehicles so that consumers can purchase a style of car that meets their aesthetic needs but will also not cost too much more.

Waiting for market forces to create the economic conditions that would spur the large-scale development of more environmentally-friendly cars has proven to be ineffective so far. The technology has been around for years (in some form or another) and could have been produced earlier but there has not been sufficient demand. Companies may blame this on individual consumers but it is really up to the companies to generate demand through marketing. After all, how many useless products have companies managed to generate demand for where there was none?

At the same time, though, government has a responsibility to act when the market is egregiously failing to internalise social and environmental costs. Hence we have laws on minimum wage, pollution, etc. In this case, the state government should consider investing in public infrastructure. Having lived in five major cities in various countries, I can comfortably say that Los Angeles is by far the worst in terms of public transportation. Of course, one of the reasons for this is because in the 1930’s and 40’s General Motors bought up the streetcar lines in LA and other cities and dismantled them to boost sales of its automobiles.

Another way the government can take action is by setting legal limits on emissions and California has done just that, recently announcing an ambitious target to reduce greenhouse gas emissions 25% by 2020. It will be interesting to see how these moves, judicial and legislative, will affect the automotive industry. While each strategy may have its critics, at the very least, it should encourage more industry-wide solutions to climate change.

Sources:
‘California to cut gas emissions’, BBC NEWS, 09/27/06, http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/5387198.stm

‘California Sues 6 Automakers Over Global Warming’, Nick Bunkley, New York Times, 09/21/06, www.nytimes.com/2006/09/21/business/21auto.html

Global Corporate Accountability

The recent debacle in Côte d’Ivoire highlights the need for global social and environmental standards for companies.

A ship carrying toxic waste dumped its contents around the capital city of Abidjan last week causing 6 deaths and prompting 9,000 people to seek treatment so far. In an unprecedented move, the fragile government resigned in response to widespread protests, putting in jeopardy the stability of a country that is already teetering on the precipice of a shaky 2003 peace agreement between the rebel-held north and the ruling party in the south.

While sharply bringing into focus the powerful impact that environmental disasters can have on fragile economies, failed states, and countries in transition, this incident also raises the issue of global corporate accountability.

According to news reports, various companies were involved from the Greek company, Prime Marine Management that owned the Panamanian-registered vessel sailed by a Russian crew to the Netherlands-based company, Trafigura, that chartered the ship through its wholly-owned subsidiary in Abidjan, Puma Energy, and the Ivorian company, Tommy, that had been entrusted with handling the toxic waste after it was unloaded.

So who is responsible for this mess? Trafigura claims to have operated “lawfully”, however, the laws on pollution in Africa as in many developing countries are notoriously weak, not enforced, or non-existent. In such situations it is not enough for a company to say, “we comply with the laws in all countries where we operate”. Corporations have an added responsibility, I believe, to operate according to the highest global standards where there is a regulatory void. The problem with this stance, of course, is that there are no universally agreed upon standards for companies. We have the Universal Declaration of Human Rights that has been widely agreed to by governments but this only loosely applies to ‘non-state actors’, i.e. companies and other non-governmental entities.

In the US, this kind of environmental negligence would no doubt lead to numerous lawsuits and victims would seek compensation for their losses. In Côte d’Ivoire, however, it is unclear what legal recourse Ivorian victims would have. Even if their case was justiciable under Ivorian law and assuming a functioning court system, the web of companies and ownership structures involved could restrict domestic prosecution to the Ivorian company and possibly the wholly-owned subsidiary.

Although locals have decried the contamination as a “crime against humanity”, as yet, courts in the US have not interpreted the Alien Tort Statute to encompass environmental crimes. Furthermore, unless the Netherlands has an extra-territorial law on pollution that applies to corporations, it would be impossible to bring a case in the company’s home country.

Meanwhile, Ivorians are left to suffer the short- and long-term effects of toxic waste in a place where the life expectancy is already barely reaching the mid-fourties and the average salary is $840 a year. And regulatory debates aside, is it ethical for Western companies to be dumping toxic waste in developing countries even if it is legal? I’ll leave that question for a future post…

Sources:

• ‘Ivory Coast PM to form new cabinet after toxic scandal’, Emmanuel Duparcq, Agence France-Presse (AFP), 07 Sep 2006
• ‘More die from Ivory Coast waste’, BBC News, 12 Sep 2006
• GNI Per Capita, 2005, World Bank
  http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf (accessed 9/18/06)

In (Grudging) Support of the Business Case

Recently, I read a provocative article in the Ethical Corp magazine that critised the ‘preoccupation’ with the business case for corporate responsibility.

My first reaction, before I had finished reading, was of immediate disagreement. While I had the luxury of being in the academic world before working at CSCC, I myself thought that we should not have to make the business case for complying with human rights and environmental standards. After all, not only is it morally the right thing to do, but the business case itself relies a lot on first mover advantages and brand differentiation. If all companies were ‘good’ corporate citizens, they would not be able to charge an ethical premium on their products and their stocks would not be listed in preferred indices based on their CR performance. Not to mention that in some situations, there is a strong business case (at least in the short term) against taking a socially or environmentally responsible course of action.

However, out in the ‘real world’, working on solutions-based approaches to sustainable compliance with basic labour standards at the factory level, the necessity of the business case came sharply into focus for me. For example, in many cases we are dealing with factories who are not paying minimum wage, enforcing overtime, and failing to provide personal protective equipment (by no means a definitive list of common violations). As we were developing training and consultation materials to build capacity in factories with recurring non-compliance issues, it became clear that, in order to motivate factory managers running their businesses on slim profit margins and tight deadlines, unless we could articulate the financial benefits of compliance (beyond just the threat of a client withdrawing their work – a difficult and costly decision in any case), it would be impossible to get management buy-in and ownership of CR.

The ‘client threat’ of potentially withdrawing orders is not a sustainable incentive since 1) it depends on the continual auditing of 100% of the supply chain and 2) there is no consensus on whether closing a factory down resulting in workers losing their jobs would actually be more detrimental to a community than keeping it open (see Nicholas Kristoff’s op-eds in the NY Times for more - although controversial, in my opinion - comments on the latter position).

Therefore, our intent is to make the business case for compliance at the factory level. One example is where we present data on the rate of accidents by hour of shift work (the number of workplace accidents and injuries shoots up in the 10th – 12th hours of work). While this may appear obvious to some, to others it may help to make the case for shorter work hours. The problem is, much of the data is western-focused. We really need region-specific data from factories on the implications of long work hours (more accidents, higher rate of quality defects?), low pay (higher turnover rate?), and shoddy health and safety practices (higher insurance premiums?). In addition, for the factories to truly see the results for themselves, they would need to track their accident rates by hour of shift work over time. In some cases, factories don’t even record workplace injuries because of the insurance liabilities.

Anyway, while I ended up agreeing with many of the points made in the Ethical Corp article, in my work at least, I cannot afford to abandon the business case just yet.

Sources:
‘So What is the Business Case for Corporate Social Responsibility?’, Mallen Baker, Ethical Corp Magazine, 15th August 2006

Corporate Governance and Ethics: Lessons for the Corporate Responsibility Movement

It has been a year since I began working with our parent company on restructuring and implementing our internal corporate ethics program. Attending trainings and workshops, and reading manuals almost as thick as my International Law textbook, I steeped myself in ethics terminology, corporate governance regulations, and anti-corruption policies. Coming from a corporate responsibility (CR) perspective, I found myself continually asking the same two questions:

• How does the corporate governance function – also called ‘ethics’ or ‘compliance’ in the US – interact with the CR function within a company?
• What lessons can the CR movement take from decades of companies attempting to embed ethics into their systems?

A note on definitions: my favourite distinction between ethics and CR is Phillip Rudolph’s definitions that appeared in a recent article in Corporate Responsibility Management. Rudolph defined ethics as, ‘a values-based…concept…[that] help[s] people make choices in situations in which the rules are unclear, silent or off-point. Like [compliance], however, ethics tend to be inwardly focused,’ whereas corporate responsibility, Rudolph defines as ‘externally-focused ethics…embrac[ing] a far broader array of stakeholders than traditional notions of ethics typically encompass’. Rudolph also makes a distinction between governance and ethics but for the purposes of this post, I’ll group those terms together since as a function they usually fall into the same department or position.

On the first point, as far as I can tell there is very little interaction between the ethics department and anyone working on CR in a company. Perhaps this is due to ethics being traditionally perceived as a very legalese function. However, even in that case I can see an immediate connection to the job of the social compliance manager, those people we work most closely with who are responsible for the ethical sourcing of products from subcontracted manufacturing entities. Similarly, in the US, more traditional CR approaches have been in the realm of corporate philanthropy and would therefore have had little connection to the ethics office.

Current trends in ethics and CR are now, I believe, bringing these two concepts closer together. On the one hand, regulatory developments in the US are mandating that companies not only comply with the law, but also demonstrate an ‘ethical culture’. On the other hand, CR is becoming more mainstreamed within companies. For example, companies are hiring dedicated CR managers and industry buzzwords include ‘strategic alignment’ and ‘business integration’ of CR. Furthermore, the trend towards regulation (and some would say over-regulation) of corporate governance issues, which accelerated in response to the corporate scandals of the last decade, and the mandatory public disclosure (to the government or government agencies) of equal opportunity data and CEO compensation may signal what’s ahead for CR, in which case the two functions may have to work more closely together in the future. Such a convergence can already be inferred from the recent announcement of the ‘Business Ethics’ magazine – an 18-year-old, US publication – to merge with the newly created CRO, a corporate membership organisation for Corporate Responsibility Officers (ring any bells?).   

As for lessons learned, I think CR will gain from studying the tools companies have used to implement ethics programs. Firstly, internal messaging and ethical leadership are key components of both a successful ethics program and a socially responsible business. Ethics officers have experience in selling a ‘soft’ program to management and communicating it to employees. How many CR programs focus on internal communication? It’s often a big area of weakness and missed opportunities in CR. Secondly, risk analysis is often a feature of a good ethics program and since they are designed to identify potential threats to the company’s financial and reputational integrity, the same methodologies could also be applied to an analysis of internal and external sustainability issues. Thirdly, CR mechanisms such as data collection for reporting can probably utilise some of the internal ethics structures that are already in place such as the internal audit system and employee interfaces. Lastly, the structure of the ethics personnel within a company may provide a model for how to structure the CR department. Many publicly traded companies have at least one full-time staff member in charge of ethics who reports directly to the Internal Audit Committee, the CEO, or the Board.

So, if you’re working on any aspect of CR within a company, dust off the Code of Ethics and make a date in your calendar to invite the Ethics Officer for lunch – I’m sure it will be a rewarding discussion and maybe, the beginning of a beautiful partnership.

Sources:

‘Don’t Obsess About Corporate Responsibility and Governance – Corporate Culture is What Counts’, Phillip Rudolph, Corporate Responsibility Management, Volume 2, Issue 1 August/September 2005

Business Ethics Magazine: www.business-ethics.com

Book Review: “Corporations and the Public Interest: Guiding the Invisible Hand”, Steven Lydenberg

Data, Debate and Consequences. According to Steven Lydenberg, author of, “Corporations and the Public Interest”, these are the three elements needed to create the market mechanisms that will drive corporations to act in society’s best interests. Lydenberg advocates a long-term view of wealth-creation that forces companies to look beyond quarterly earnings data and annual profits towards making positive contributions to communities and the environment that outlast the life of the corporation itself.

Lydenberg defines long-term wealth creation as the internalization of social and environmental costs that companies have hitherto imposed on society, the preservation and renewal of natural resources, and a commitment to stakeholder engagement. Using Adam Smith’s metaphor of the ‘invisible hand’, a classical economic theory that pursuing profits automatically benefits the public interest, Lydenberg argues that government, consumers, investors, and employees have a role to play in guiding that ‘hand’.

Lydenberg outlines three strategies that can encourage companies to operate in a socially responsible manner: (1) the business case; (2) values-driven models; (3) systems of measurement and consequences.

Focusing on the third strategy, Lydenberg describes the growing trend in public disclosure of non-financial data that has led to companies publishing sustainability reports and many attempts to measure social and environmental impacts. In some cases, regulation has spurred the trend, although the scope and comparability of data still has a long way to go. In order for market mechanisms such as purchasing and investing to be able to effectively use this data to reward good corporate citizens and punish bad ones, Lydenberg affirms that there must be sufficient public debate and analysis of the data.

Socially responsible investment (SRI) firms have already developed ways to analyze company data and evaluate performance that enable them to make ethical investment decisions. The SRI movement is small but growing, accounting for just under 10% of all assets under management in the US. Online tools such as Calvert’s Know What You Own® Tool and Amnesty International’s Shareholder Advocacy guides are indicative of a groundswell in popular support for and understanding of SRI, which had previously been limited to large institutional and religious investors.

Lydenberg also advocates the provision of more company data on social and environmental impacts at the point of sale to encourage consumers to make ethical purchasing decisions. Some certification programs like the fair trade or organic labels are signs of a trend in that direction, and recently, Timberland went out on a limb and announced that it would add “nutritional labels” detailing the environmental and community impacts of its products on its shoe boxes.

CSCC is one cog in the wheel of this process of internalizing costs and engaging stakeholders through auditing. As we create new services around sustainability reporting and verification, we hope to further contribute to the development and analysis of social and environmental data that will allow the market to drive a race to the top rather than a race to the bottom.