Good business practice requires non-financial considerations

A recent report by the Conference Board of Canada suggests that advisors can help mitigate their clients’ investment risks by examining a board’s commitment to corporate social responsibility (CSR).

Report author Coro Strandberg explained that “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. 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 in early July, 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, explained Prem Benimadhu, vice-president of governance and human resource management at the Conference Board of Canada. She continued by saying that the key players driving these issues from the C-suite to the boardroom are institutional investors concerned about long-term performance.

As a result, corporate governance is on the radar of corporations, regulators and stakeholders as never before, said Benimadhu. For example, in early April, the Ontario Securities Commission’s released Staff Notice 51-716. According to industry pundits, this notice signaled a shift mindset of Canada’s oldest regulator: rather than just examine disclosure matters, the regulator was beginning to turn its attention to anticipated enforcement of environmental infractions.

“There is now a trend toward greater consideration of CSR by boards. The result is the mainstreaming of CSR as a governance concern.”

Advisors, well aware of the volatile market and the need for downside portfolio management, should pay attention to these trends. “Corporate social responsibility and corporate governance are converging as a result of global forces,” writes Strandberg. “This 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,” said Strandberg. “If a board fails to govern the company in a way that is congruent with CSR, the company is likely to fail.”

The report noted that, “while not all directors explicitly connected CSR to shareholder value, implicit in most definitions was the idea that directors saw CSR as contributing to sustainable value creation.”

Yet a gap continues to exist between the desires and the actions of board members.

Strandberg, a 25-year veteran in the field of sustainability, asserts: “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 [sic] operations than on governance.”

As a result, the report noted fewer than 10 Canadian firms that 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.”

While causality is much more difficult to observe and deduce, there have been a number of studies over the years to try to find a correlation between CSR and financial performance.

“If the goal is to balance economic, environmental and social imperatives, today’s business decisions need to carefully balance all three,” explained Dr. Randall Gossen, division vice-president of health, safety, environment and social responsibility at Nexen Inc. Investors need to assess a company by assessing the board, to determine if it is paying attention 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,” stated Gossen.

Bruce Simpson, managing partner, McKinsey & Company Canada, also believes that C-suite executives need to be “fully committed… [not] half-hearted or cynical,” about investor values and adhering to financial and non-financial factors that affect the bottom line. “Business sustainability must be a central element of the corporate strategy to ensure it is in sync with the company’s other business concerns. That requires a CEO’s personal involvement.”

Advisors can help investors by determining which companies are steered by boards and C-suite executives engaged in broader fiduciary responsibilities, explained Peter Sinclair, senior director of CSR at Barrick Gold Corporation, during a recent panel on the role of boards in corporate decision-making. “Is [ESG] a burden? Not if different individuals and entities see that different opportunities exist. The extent to which a company or a board capitalizes on these opportunities is the extent of differentiation in the marketplace.”

Yet Gossen emphatically believes that incorporating responsible values into the business model is “only words, if actions don’t match up.” As such, he adds that “clear structures and accountability are key.” This requires boards (in conjunction with executives) to set objectives, measure performance and provide transparent reporting to stakeholders.

Originally published on Advisor.ca on July 25, 2008