Two recent reports are sending a message to publicly traded companies: Get onboard if you want to succeed in an era of corporate and social responsibility (CSR).
“Firms are coming to understand the importance of corporate social responsibility and sustainability (in relation to) competitive performance, but their focus on CSR at the operational level has kept these issues out of boardroom strategy,” says Coro Strandberg in the report The Role of the Board of Directors in Corporate Social Responsibility, by the Conference Board of Canada.
“Increasingly, boards are starting to understand that environmental, social and ethical issues can be of material significance. Therefore, they are starting to exercise their fiduciary responsibility in this area.”
The report, released last month, is the “first such look into Canadian boardrooms to determine the role boards play, or ought to play, to influence a firm’s social and environmental performance,” says Prem Benimadhu, vice-president of governance and human-resource management at the Conference Board of Canada.
Coro Strandberg, Conference Board of Canada
The key players driving these issues from the C-suite to the boardroom are institutional investors concerned about long-term performance.
Strandberg says the report “explores the basic premise that there is a relationship between CSR and corporate governance.”
One significant result is that “one of the bottom-line benefits of effective CSR governance is long-term corporate success,” says Strandberg. “If a board fails to govern the company in a way that is congruent with CSR, the company is likely to fail.”
Yet a gap continues to exist between the desires and the actions of board members.
“In Canada and elsewhere, a gap exists in board oversight and the strategic direction-setting of corporate environmental, social and ethical performance – with more firms focused at present on operations than on governance,” says Strandberg.
As a result, the report noted fewer than 10 Canadian firms have CSR or sustainability explicitly in their governance mandates.
This is disconcerting, says Strandberg, since “it has been clearly established that companies that consider their social and environmental performance are more successful over the long term.”
Dr. Randall Gossen, division vice-president of health, safety, environment and social responsibility at Calgary-based energy company Nexen Inc., says investors need to assess a company by assessing the board to determine if attention is being paid to all bottom-line factors, financial and otherwise. “Studies have proven that, in the long term, companies that follow sustainable business practices outperform those with narrower priorities,” he says.
Meanwhile, a report released in March by McKinsey Global Institute, a global strategy consultant and research firm with Canadian offices in Toronto and Montreal, revealed that the shift from short-term compliance to long-term strategy was the No. 1 desire of the board members who responded to the survey.
It’s a shift that signals a move away from day-to-day compliance to broader strategies that include assessing and developing the social and environmental impact companies have on their industry, their community and the global market.
“Most developed countries’ corporate boards have spent a great deal of time focusing on meeting regulatory requirements and other short-term goals. This survey suggests that directors now want to focus on the long term, including analysis of trends, future scenarios and global forces,” write the report’s authors, Andrew Chen, Justin Osofsky and Elizabeth Stephenson.
They continue by saying that “as competition for consumers and talent intensifies worldwide and executives increasingly expect social and political trends to influence the bottom line, this shift in focus seems timely.”
The Conference Board report suggests that boards and investors can examine a framework to determine the proper role of a board, as well as assess the degree to which a firm takes CSR risks and opportunities seriously.
The 12-step framework is organized into two stages and provides a “comprehensive CSR governance model,” writes Strandberg. Stage 1 enables boards new to the assessment to take steps toward more CSR. Stage 2 is for boards already engaged in CSR to take this participation to the next level.
* Stage 1: Step 1 asks boards to build CSR into a firm’s mission and values.
Step 2 asks boards to communicate these revamped values to stakeholders – both internally and externally.
Step 3 prompts boards to build CSR into risk management (including social and environmental considerations).
Step 4 prompts boards to integrate CSR into the business’s strategy and provide oversight on this strategy. The board is asked to set goals for the business, in relation to CSR, to provide objectives, targets and deadlines and to monitor performance of the business against these targets.
Step 5 invites boards to develop a committee solely responsible for CSR, or to develop a CSR mandate with a pre-existing committee.
Step 6 encourages boards to report to internal and external stakeholders on CSR performance.
* Stage 2: Step 7 wants boards to reward executives within the business that reach or exceed CSR performance targets.
Step 8 prompts the current board to recruit directors with CSR perspectives.
Step 9 suggests the board provide training and orientation to directors on CSR.
Step 10 recommends providing mechanisms for stakeholder input.
Step 11 prompts the board to recruit C-suite and other executives with CSR competency.
Step 12 advises the board to consider CSR in all business decisions.
“It’s not a question of choosing profitability or responsibility,” says Gossen. “The growth of socially responsible investment funds over the past two decades has been one of the most obvious manifestations of how investors and society at large increasingly expect companies to behave in more responsible ways.”
Originally published on Business Edge on August 8, 2008