Wednesday, January 27, 2010

CSR & Corporate Governance - Part 2

Given the narrow, financial focus of many international corporate governance codes, how can corporate governance be used as a strategy for embedding CSR?

In fact, the basic principles of corporate governance all have CSR/sustainability implications. In a report I worked on when I was running KPMG’s Sustainability Services in South Africa, we identified 6 ‘Director’s Sustainability Imperatives’ and 12 areas for action. These covered the areas of: board accountability, values/strategy, risk management, management systems, performance monitoring/reporting and stakeholder interaction.

Of these, one of most effective levers for change in CSR is the explicit or implicit requirement for reporting in most corporate governance codes.

The UK’s abandoned 2005 Operating and Financial Review (OFR) legislation would have provided a basis for sustainability reporting. Instead, companies are now only required to conduct a Business Review, in terms of the much more limited disclosure requirements of the 2003 EU Accounts Modernisation Directive, which (much like the Turnbull Review) focuses on the major risks facing the company. The Association for Certified Chartered Accountants, among others, remain critical of this approach, saying that the Business Review “will not bring about any material improvements to corporate reporting.”

In the case of the King Code, direct reference is made to the GRI’s Sustainability Reporting Guidelines, and all listed companies need to comply. In chapter 9, the Code states: “Reporting should be integrated across all areas of performance, reflecting the choices made in the strategic decisions adopted by the board, and should include reporting in the triple context of economic, social and environmental issues. The board should be able to report forward-looking information that will enable stakeholders to make a more informed assessment of the economic value of the company as opposed to its book value.”

Even in the absence of such compelling reporting requirements, most corporate governance codes embrace the principles of ‘material disclosure’ and ‘comply or explain’. These requirements can be used to challenge companies. Have they reported on the most material social, environmental and ethical issues for the company? How do these translate into risks, liabilities and impacts? If they are not reporting these, can they explain why?

... the role of non-executive directors in Part 3 ....