The importance of corporate social responsibility

November 2015  |  FEATURE  |  BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

Corporate social responsibility (CSR) has become one of the standard business practices of our time. For companies committed to CSR it means kudos and an enhanced overall reputation – a powerful statement of what they stand for in an often cynical business world.

The establishment of a CSR strategy (sometimes referred to as a sustainability strategy) is a crucial component of a company’s competiveness and something that should be led by the firm itself. This means having policies and procedures in place which integrate social, environmental, ethical, human rights or consumer concerns into business operations and core strategy – all in close collaboration with stakeholders.

For companies, the overall aim is to achieve a positive impact on society as a whole while maximising the creation of shared value for the owners of the business, its employees, shareholders and stakeholders. Not so long ago, the European Commission defined CSR as “the responsibility of enterprises for their impacts on society”, a succinct and distinct summation for sure.

A 2015 study by the Kenexa High Performance Institute in London (a division of Kenexa, a global provider of business solutions for human resources) found that organisations that had a genuine commitment to CSR substantially outperformed those that did not, with an average return on assets 19 times higher. Additionally, the study showed that CSR-orientated companies had a higher level of employee engagement and provided a markedly better standard of customer service.

And yet, despite the positivity and optimism that CSR brings to the corporate table, companies do not always accept their responsibilities in this area in good heart, with a fair number admitting to having adopted CSR mainly as a marketing gimmick. In some cases, firms may have been coerced into adopting CSR and did so with insufficient enthusiasm and vigour, leaving many of them to ponder what they could and should have done differently.

For those considering CSR as a strategic option the question to ask may very well be this: is the CSR payoff always worth the outlay?

Establishing a CSR programme

The factors driving companies to pursue a CSR agenda are fairly consistent across the corporate world; however, once a company makes the decision to adopt CSR orientated activities, a plan (involving a lot of engagement with employees, managers, suppliers, NGOs and others) must be implemented to carry out the agreed CSR programme.

Within the pages of its CSR Implementation Guide the International Institute for Sustainable Development (IISD) outlines what it considers to be the six key components which go towards a coherent CSR plan: (i) CSR Assessment; (ii) CSR Strategy; (iii) CSR Commitments; (iv) Implementation Plan and Actions; (v) Verification and Evaluation of Results, and (vi) Refinement. “Perhaps most important, however, is an underlying commitment to multi-stakeholder engagement as a foundational pillar to any credible CSR program,” says Jason Potts, a senior associate with IISD’s sustainable markets and responsible trade initiative. “CSR is fundamentally about ensuring that companies forward broader public objectives as an integral part of their daily activities and this can only be ensured with the appropriate communication channels with stakeholders.”

For Klara Kozlov, head of corporate clients at the Charities Aid Foundation, every company’s situation is unique, with many different models in existence which can help organisations to achieve their CSR aims. In turn, this preponderance of choice has led to many companies recognising that they are defined by what they do, not just what they give. “Companies are not solely providing a financial contribution but are increasingly unlocking their intellectual assets and the power of their people to achieve a positive impact,” claims Ms Kozlov. “Ultimately, coherency comes from clear purpose, programmes of work which are authentic to and valued in the business and an acceptance that it is critical to business performance.”

Tobias Webb, founder and managing director of the Innovation Forum, is clear on what a CSR programme, or a sustainability strategy, should accomplish. “It comprises re-evaluating how the company thinks about its impact, engaging stakeholders beyond shareholders and coming up with a plan to improve the impact of the business on society and seize business opportunities and make cost savings as a result,” he attests. “This would involve a lot of planning and engagement with employees, managers, suppliers, NGOs, perhaps academics and others, to figure out where and how this is best done.” 

CSR resistance

Cynics suggest that companies often develop a CSR agenda not because of an altruistic desire to assist in curing the ills of society, but for reasons more akin to a box ticking exercise. Whatever the consensus, some organisations either implement their CSR programme with a distinct lack of heart or resist adopting a CSR policy altogether.

In the opinion of Mr Potts, if a resistance to CSR policies does exist, it usually stems from the notion of allowing external stakeholders to directly influence corporate policies and strategies, an idea that is largely antithetical to the basic mindset under which many, if not most, corporations operate. “An honest adoption of CSR often requires a serious reformulation of corporate purpose and decision-making structures,” advises Mr Potts. “Such change also implies, and rests upon, the adoption of a corporate culture which actively encourages employees to consider how the company might be able to do better in the world. When CSR policies are adopted without simultaneous tools for stimulating and allowing deep change, one can expect similarly soft results in terms of CSR outcomes and impacts.”

Avoiding ethical blowback

According to Mr Webb, many companies are shackled by an adherence to a 20th century mindset imbued by the Milton Friedman paradigm of ‘only shareholder returns count’. Instead, companies should be looking at business strategy through the lens of sustainable supply or resilience – a very different proposition from the Friedman philosophy. “Tesco suffered hugely because all their suppliers hated them, and so did everyone else,” says Mr Webb. “This was because they squeezed everyone and it backfired on them in the end. The Wharton Business School professor Thomas Donaldson calls this type of scenario the ‘ethical blowback’.”

Sustainability is clearly important. More businesses are adopting a strategic approach to their CSR policies because they are increasingly seeing the benefit across their business and for their stakeholders. “Many businesses have made significant strategic advances in sustainability,” affirms Ms Kozlov. “CSR allows businesses to demonstrate their values, engage their employees and communicate with the public about how they operate and the choices they make, to ensure a sustainable future. CSR helps pave the way for partnerships between businesses and civil society that are based on common goals and shared actions to deliver impact-driven outcomes.”

Pressure to deliver strong financial results

As CSR programmes continue to evolve and extend their reach, it may well become the case that companies find themselves under added pressure to have their CSR initiatives deliver a strong financial result. If this is indeed true, many would question whether this financially-orientated approach is not somewhat at odds with what the core aims of a CSR programme are supposed to be. “This depends on your timescale,” suggests Mr Webb. “In three to five years, a good CSR strategy will have delivered more engaged employees, better access to talent, lower capital constraints and a better reputation. In the longer term it can deliver serious business innovation and transformation of the company culture and how the firm sees its role in the world. Companies attempting this – not yet successfully, but on the way – include Unilever and Nestle, among others. Two well-known examples of those that are already there are Interface and Patagonia.”

Others are not convinced that organisations are feeling extra pressure due to a need to demonstrate stronger financial outcomes in conjunction with their CSR activities. “Significant pressure to bolster financial outcomes has always existed and will continue to exist,” says Mr Potts. “There is no reason why CSR commitments cannot deliver strong financial results, and it would be folly to expect companies to throw this core corporate objective out the window altogether.”

The problem arises when companies attempt to measure the financial results of their CSR policies independent of their other corporate activities. Rather, CSR policies need to be considered as a core and inseparable component of the overall service or product offering. Furthermore, the costs related to CSR should not be expected to demonstrate traceable financial gains.

CSR policies should set the ‘rules of the game’ which the company concerned has established, and within which broader corporate financial returns need to be secured. “Basic CSR principles and commitments should be considered non-negotiable parameters of business operations rather than being subject to specific financial performance requirements,” says Mr Potts.

Future embrace

At present, the incorporation of CSR programmes by businesses on a fundamental level appears as prevalent as ever. However, the jury is still very much out as to whether companies have it within them to embrace a broad or multifaceted vision of CSR. “It would be utopic to expect a sea change among industries,” says Mr Potts. “While there are plenty of examples of companies using strong CSR performance as a brand-building and product marketing strategy, far too many corporate executives still rely on the old financial and hierarchical models of yesteryear as the basis of their own planning. The biggest and most influential companies also tend to be the most reliant on the ‘conventional way’ of doing business. What is happening, however, is a broad transition to the adoption of external multi-stakeholder processes – in the form of multi-stakeholder sustainability standards and labels – as a way of outsourcing the stakeholder engagement process.”

Ultimately, there are no hard and fast rules governing CSR. The more companies understand the growing resilience, reputation and legal risk they face, the more opportunities our globalised and connected world has to offer them. “This often depends on the sector,” points out Mr Webb. “If you make mining equipment, your focus will be energy efficiency and perhaps new technology that is safer. If you sell chocolate, your concerns are around the economic viability of your supply chain.”

With a number of recent legislative and behavioural developments, such as the transparency of supply chains, sustainable development goals, the ramifications of the Modern Slavery Act 2015 and the zero landfill initiative, all contributing to the CSR melting pot, Ms Kozlov is in no doubt that companies are unifying their CSR activities under an overarching, business-aligned strategy, and using them as a tool to drive innovation, tackle material issues, strengthen community engagement and mitigate risks.

Whether a force for good or an exercise in brand enhancement, what cannot be denied is that CSR is very much an integral part of the global business landscape.

© Financier Worldwide

BY

Fraser Tennant