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 ....

CSR & Corporate Governance - Part 1

Last week, I spoke on the links between CSR, corporate governance and competitiveness at the 3rd International Conference on Corporate Governance in Istanbul. It is a topic close to my heart, as I have for a long time believed that corporate governance may be the best route to mainstreaming CSR.

When I was Director of KPMG’s Sustainability Services in South Africa, we were fortunate that Judge Mervyn King – under the auspices of the Institute of Directors and through the Code that bears his name – took a global lead on integrating CSR ideas into corporate governance.

The King Report, issued in 1994, was the first corporate governance code in the world to include explicit reference to stakeholders and the 2002 revised code (King II) included major sections on business ethics and integrated sustainability reporting.

King III, launched in 2009, goes even further. According to Mervyn King – who chaired also the conference panel I spoke on in Istanbul and who I interviewed while I was there – says that “the philosophy of King III revolves around leadership, sustainability and corporate citizenship.”

The reason for emphasising the King Code is because – through a research project I am doing on sustainability and corporate boards for Cambridge University – it is abundantly clear that this approach is the exception, rather than the rule.

For instance, in all the UK codes, from Cadbury through the Combined Code to the Walker Review, there is no direct reference to CSR, sustainability or even to stakeholders. So these have to be inferred through risk and reputation, or occasional references to environment, health and safety.

The US tackles the issue differently, through the Sarbanes Oxley Act, which is heavy on accounting prescriptions, including compliance with ethics codes. But I am sceptical about its effectiveness. The onerous requirements either result in companies skipping across the Atlantic to list in London, or instil a tick-box mentality.

It is worth remembering that Enron had an ethics code, ethics officers and many lauded CSR programmes, none of which diminished the culture of greed that caused its ultimate demise. As Mervyn King says: “Moses tried it and failed; Sarbanes and Oxley tried it and they will fail. We cannot legislate against dishonesty.”

So how do you embed CSR into corporate governance, and is there a link to competitiveness?

Part 2 to follow …

Climate change & COP 15 - Part 3: Leadership response

What we need, therefore, is to strengthen the societal context – though increased public awareness and customer activism – and the market context – through stronger public policy and price incentives. This is what leadership author Manfred De Vries calls the architectural role of leaders – and that is what we see the world’s leaders here in Copenhagen striving to do: to redesign the ‘rules of the game’.

Beyond the societal and market context, however, we also need to enable individual leaders to emerge – both as strategic navigators at the helm of their organisations, and as embedded catalysts at all levels of organisation and society.

We may ask: what types of leaders are we looking for to take us through the climate crisis? There are many theories on leadership styles and traits, but it seems to me that we will need all kinds of leadership to emerge. Times of crisis do call for heroic, charismatic leaders, but quiet, servant leaders are equally needed.

Many leadership traits will come into their own in the years ahead, as climate change intensifies and we transition to a low-carbon economy. We will look to leaders with an ability to craft a compelling alternative vision in the midst of business-as-usual, to think systemically about solutions in the midst of reactionary politics, to call for action in the midst of inertia and to foster hope in the midst of despair.

The good news is we do not have to wait for these leaders to be born. We at CPSL firmly believe – and we are supported by modern leadership research in this – that leaders are made, not born. For 20 years, we have been nurturing leaders to take on the sustainability challenge. Now their time has come, and we start to see them stepping forward, through initiatives like the Corporate Leaders Group on Climate Change and the 1,000 CEOs that have committed themselves and their companies to the Copenhagen Communiqué.

It is true that it will not be easy; nor will all who tackle the challenge, succeed. But that is the challenge of leadership.

I started by saying that we need extraordinary leadership for extraordinary times, and I quoted Unilever CEO, Paul Polman. Now, I would like to end with something else he said, because I believe it captures some of the essence of what it means to be a leader for sustainability. He says, “I hope that the word integrity comes into that. I hope the word long-term comes into that. I hope the word caring comes into that, but demanding at the same time.”

Climate change & COP 15 - Part 2: Leadership crisis

This crisis in trust is closely linked to a crisis in leadership.

A McKinsey survey of global executives found that while three quarters (74%) say the CEO/chair should take the lead on socio-political issues (such as climate change), only half (56%) say the CEO/chair is taking such a lead. What’s more, less than 1 in 10 (8%) think that companies are championing environmental and social causes out of genuine concern.

In the US, almost a third (27%) of executives claim not to be playing any leadership role on public issues like climate change, and only 14% claim to be playing a direct, active role. And yet, almost half (44%) of US executives feel their peers should be taking a leadership role public issues, with only one-seventh believe they are actually doing so.

So much for the numbers; what are the implications for leadership? The same McKinsey survey may give us a clue: Of those who claim not to be playing any role in leadership on public issues, 71% cite ‘business reasons’, while of those who say they are playing a role, 64% cite ‘personal reasons’. This suggests that – in order to have transformational leadership on climate change – we need to look at both the business ‘rules of the game’ and the role of individual leaders.

Interestingly, this conclusion dovetails nicely with the leadership research coming out of academia, which emphasises importance of both the context for leadership and the individual traits of leaders.

Part 3 - The leadership response

... follows tomorrow

Climate change & COP 15 - Part 1: Extraordinary times

In the midst of the UN Climate Negotiations in Copenhagen, I want to talk about leadership, because I believe this climate agenda – and the wider sustainability agenda – will succeed or fail depending on the quality of leadership that emerges - not only this week, but over the coming decade.

Extraordinary times

Let me begin with something that Unilever CEO, Paul Polman, said in a recent interview. He said that “part of leadership is to look reality in the eye”.

Well, at an event such as COP 15, I hardly need remind anyone that the reality we face on climate change is extremely serious. Not only is the problem potentially catastrophic, but the solution requires nothing short of a second industrial revolution.

This is not a problem we can incrementally manage our way out of. It is a crisis that requires extraordinary leadership – the kind of leadership that creates transformational change on a scale and with an urgency that the world has seldom ever seen before in peace time.

Not only do we face this extraordinary challenge, but our trust in the ability of society’s institutions to deliver the solutions is at an all time low. The latest Edelman Trust Barometer (2009) shows that nearly two-thirds of the public (62%) trust corporations less than they did a year ago. In the US, only 38% said they trust business to do what is right—a 20% plunge since last year—and only 17% said they trust information from a company’s CEO.

Part 2: Crisis in leadership

... follows tomorrow

Reflections on "The Top 50 Sustainability Books"

On 8 December 2009, I spoke at the launch event for my new book - The Top 50 Sustainability Books - at Heffers bookshop in Cambridge. At the end of this 3 year project, it is both a relief and a triumph to see the book in print - and it looks great, even if I say so myself! :)

One of the comments by our bookshop host was that they were surprised (and delighted!) that the 50 books were so diverse. That is certainly true, and there were some surprises even for us - books like A Sand County Almanac and The Dream of Earth were not even on our radar screen before we conducted the poll among the Cambridge alumni (on which the list is based).

In addition to this, I had three main reflections that I touched on in my brief talk, largely based on the

interviews I did with around 30 of the authors:

1. Worldviews - It was very clear that the books said much more about the authors' worldview - the lens through which they see reality - than the actual 'facts' of sustainability. Someone like Paul Ehrlich (The Population Bomb) was very pessimistic, while Jeffrey Sachs (The End of Poverty) was very optimistic.
2. Stories - I soon realised that the books mostly represent stories - possible futures that the authors' have imagined, based on their own culture, knowledge, experience, etc. Whether we buy into 'The Limits to Growth' or 'When Corporations Rule the World' story depends on where we are at in our own journey, as much as the authors'.
3. Hope - Finally, I deliberately asked them all where they derive their hope from, and almost without exception, it was the inspiration from people who are working tirelessly and selflessly to solve social and environmental problems.

Two anecdotes about the late Donella Meadows stick with me (as told by her ex-husband Dennis). On her door, she had a quote that said: If I die tomorrow, I would still plant a tree today. And when people used to ask her if we have enough time to solve our global problems, she would always say: Yes, precisely enough time, if we start today!

To me, these capture the spirit the lies at the heart of sustainability. It is an optimism built on making a difference; an attitude of action for hope.

For more information on the book, see here.

CSR Gives Companies a Competitive Edge

This is a translation of an interview for Capital newspaper in Armenia, conducted when I was recently there delivering training (hosted by the UNDP/Global Compact, British Council and Eurasia Partnership Foundation) on CSR and Marketing. The interviewer was Habeth Madoyan.

Question: Mr. Visser, it is no secret that labour is cheaper in developing countries than in the developed world. Developing countries have weaker legislation on environmental issues, which gives them a kind of competitive edge in attracting foreign investment. Wouldn’t the promotion of CSR in a developing country deprive it of this edge?

Developing countries do have advantages as far as labour is concerned. To some extent, business and capital will go to those places where costs are less or standards are lower. That is why we need a system of CSR standards.

An interesting piece of research on Responsible Competitiveness, which covers 108 countries, has been published. This research shows that those countries where CSR is embedded in business and the government, and is also reflected in civil society, have a greater competitive advantage. In these cases, the link between responsibility and competitive advantages is always obvious.

So if developing countries have advantages based on lower costs, but do not have responsibility, then over time they will inevitably lose their competitiveness.

I think that, over the short term, it is possible to have economic growth without taking standards into consideration. But today, the CSR sector is seeing the integration into business of standards on quality, environmental issues and work conditions. So it is possible to sell a bad quality product at a cheap price and get to economic growth that way. But that is not a long term solution, because it leads to only short term economic growth.

After all, developed countries need more products of good quality. Their demand for responsible and ethical goods is constantly increasing.

Question: How should CSR standards and principles be introduced to developing countries?

The first path is through multi-national companies. In developing countries, they often use the same CSR principles and standards which are part of their operations at headquarters. This leads to the introduction of responsibility from developed countries to the developing world.

I think there is some pressure from the governments of developing countries too. China, for example, is saying that if the world wants it to become more responsible, then the world has to transfer the knowledge and technology necessary for this, preferably for free.

Today there is an interesting tension between the developed and developing world especially around the issue of climate change. The West has no moral right to tell developing countries that they cannot develop and grow or produce more and copy that which they have done. The West has no moral right to do this because it has already been on that path.

If the West is asking developing countries to adopt a new model of development and to produce cleaner, socially responsible and ethical products, then it should be ready to help them financially, through training and providing technology. Only through this kind of support does the West gain the right to demand a new model of development.

Question: How can one find the middle path between CSR and profit maximisation?

It is quite difficult to find the point of perfect balance between these two. Developing countries often find themselves faced with this problem. But it is necessary to seek and find the opportunities which allow cost reduction through steps aiming at environmental management. These are new business solutions that everyone is looking for today.

But in order to find these business solutions, it is important to have a strong system of governance, a well established civil society as well as pressure from the international community. In these cases, avoiding environmental issues could end up being more costly for companies.

One has to ask a simple question – what costs will I be facing ten years from now, if I avoid solving environmental issues today?

Economists have calculated that the money spent on climate change issues today could account for only about 1% of the world’s GDP. But if we leave avoid those issues now, then the costs could come to 20% of global GDP. This is the logic that we need to explain to our business community – by avoiding these expenses now you face much larger costs over a long term.

A few developing countries are bringing forward the concept of “environmental justice”, i.e. they are linking social issues to those of the environment. Their governments are coming up with legislation which encourages companies not only to spend on social issues. They demand that companies implement environmental programmes as well.

After all, it is the poorest layers of society that bear most of the ill effects of a polluted environment and it would be only fair for companies to deal with environmental issues as well.

Question: In our country, there are cases when companies are very active in philanthropy. Many people think that this is a “cheap” marketing ploy. How can one differentiate between them and draw the line between Marketing/PR and charity?

One first needs to understand the concept of strategic philanthropy. This is the theory of American academic Michael Porter. He says that companies should be involved with the philanthropy that deals with their area of business directly.

When a company works in agriculture, its philanthropy could be linked to food security issues. When that company is Coca-Cola, then its philanthropic work should involve water issues. In those cases, it is less likely that philanthropy will be used as a PR or marketing tool, because in reality it helps the business itself.

Corporate Social Responsibility is a much broader concept.

CSR is not about how a company spends the money it makes, but rather about how it makes that money. The weaker the link between CSR and the company’s main business, the higher the probability that it is being used for PR or marketing purposes.

There are a number of initiatives in the CSR industry that help us avoid these issues. One of these is the Global Reporting Initiative and its Sustainability Reporting Guidelines. These are very similar in nature to accounting standards. Accounting methods and standards are similar for all companies.

Through these, companies present their social activities, such that society also gets a chance to see and evaluate them. This would make it difficult for companies to use CSR as a PR or marketing tool.

Question: In your opinion, how will the global economic crisis affect CSR? Should we expect companies to lower their standards?

I think this question is linked to the last one. Those companies which are dealing only in philanthropy will suffer during the economic crisis. In these cases, philanthropic activity will lessen. Those companies which have strategic CSR will be less likely to reduce costs.

Coca-Cola will not be inclined to reduce its expenditure on water issues. They know that if the water situation worsens, the company would have serious problems.

Some time ago, that company had faced a conflict situation in India. They were accused of wasting water reserves there. It was not true, but that was the impression that people had there.

Coca-Cola is a huge consumer of water and, according to the people, they were responsible for water issues. That led to the problems for their brand reputation. But I don’t think that the crisis will affect the standards of those companies which have strategic CSR and ethical operations in any way; that is their way of working.

On the other hand, I think that a lot depends on the stage at which CSR is in a specific company. We may begin to see a tendency where companies that have well developed CSR gain additional competitive advantages in times of crisis.

That is natural – they have implemented a number of social programmes and so have a greater share of the public’s trust, which means better conditions of business for them.