The writing on the wall: the CSR imperative.

* How to define corporate social responsibility

* Reporting on corporate social responsibility

* Setting benchmarks for quantitative reporting

Terms such as corporate social responsibility (CSR), sustainable development, socially responsible investments and triple

bottom line reporting have become synonymous in the minds of many corporate managers, investors and academics. A solid grasp and implementation of these concepts is essential for the survival of the modern corporation, but the scope of this terminology is currently too broad and ill defined. The result is a great reluctance by many corporate leaders to delve more deeply into these uncharted and precarious waters.

The concepts must be taken outside the realm of rhetoric and demystified, to empower corporations to conduct their operations in ways that add value and exploit opportunities. With the determination of boundaries comes the increased ability to quantify and measure outcomes.

The view of the corporation as a profit-seeking machine with a ruthless disregard for long-term consequences is the way of the past. Corporate managers holding on to this one-dimensional view of the corporation will not survive, nor will the companies they manage. Old behaviour patterns need to be eliminated to make way for adaptability in rapidly changing and unpredictable markets.

Cultural patterns allowing for an alert and dynamic response, not merely a reaction, to competition, risk and opportunities are the only way forward. Corporate renewal requires genuine corporate interaction founded on the basis of lasting relationships. This is the enduring model for a successful enterprise.

The principles to be assessed using CSR-reporting tools are writ large. For those corporations with extensive multinational operations, the guidelines are perceptibly relevant. Small- or medium-sized enterprises (SMEs) argue that, as they may not be involved in global operations, such reporting is not relevant and utilises resources unnecessarily. The equation is a complex one, however. Corporations that engage in sustainable business practices ensure that their approach to all corporate endeavours is grounded in the long-term view of adding value to the corporation. This vision dictates behaviours and processes that focus on the management of assets and the minimisation of risks.

The business case for a sustainable approach is that companies will offer shareholders a superior investment, its main credentials being fewer inherent long-term risk factors. This in turn attracts more long-term capital.

But the parameters for determining the effectiveness of this mode of operating will be difficult to establish without the commitment to focus upon the individuality of each enterprise.

Clarifying the term

The most often quoted definition of sustainable development is the one emerging from the Brundtland Report in 1987: 'development that meets the needs of the present without compromising the ability of future generations to meet their own needs'.

Four moral principals are considered to underpin this definition: (1)

1 equity today

2 environmental justice

3 intergenerational equity

4 stewardship.

These are broad global concepts. Some business enterprises have such an extensive global profile that they can contribute meaningfully to change on this scale and can report realistically on their corporate response to the challenges these issues present. (2) Companies with less extensive spheres of influence will need time to clarify the role they can play in this arena.

CSR may be considered to be a subset of sustainable development and thus operates within more definitive boundaries. All enterprises need first to ascertain the interdependence of their relationships and the impact of their operations in a localised setting.

Socially responsible investments provide a link between those individuals or institutions who hold investment capital and corporations that report on their social and environmental performance. The link is provided in a way that brings the activities and results achieved by the corporation into line with the investment mandate. These types of investments may be negatively screened, therefore foregoing investment in corporations involved in industries such as alcohol, tobacco or armaments. Alternatively, investment mandates relying upon positive screens or desirable attributes of corporations will be heavily dependent upon company reports that include non-financial aspects of their impact upon, for instance, the environment or human rights. Investors who are not solely seeking short-term financial gains, but who have a longer-term view of their investment, will consider these elements.

Reporting the triple bottom line is the terminology coined to denote accounting for outcomes other than purely monetary factors. The financial data that is released by a corporation as an indicator of the success, or otherwise, of its performance is capable of manipulation and may mask systemic risks. The triple combination of reporting the social and environmental outcomes, as well as the financial aspects of a corporation's activities, gives a holistic view of the state of affairs within the corporation, the expertise of management and the potential risks associated with the operations of the corporation.

As may be seen, these concepts are inextricably intertwined, yet they are separate and distinct from each other. Triple bottom line reporting includes reporting on CSR activities, as well as sustainable development. Investors basing their decision to invest in a particular corporation on a mandate that requires taking into account socially responsible considerations will utilise these reports to facilitate their decision making.

Corporate social responsibility begins at home

Interdependence

Despite resistance, for many it is clear that there is no longer a debate as to whether CSR strategies and reporting should be introduced. For large sectors of the community, it is seen as an imperative for today's corporation.

The aim of CSR is to build trust in corporate relationships. Actions, words and the quality of the interrelationship with those with whom the corporation is interdependent create a culture of trust and trustworthiness. The aim of sustainability reporting is to report on this relationship of trust in a way that is believable.

The only way to make the reporting credible is to be credible.

The question to ask, at this point, is to whom and for whom am I responsible? This could be framed at the personal level first. Do I feed my own children, or do I first go into the street and feed the children of others? The answer is clear. My primary responsibility is to my children, and then I have a mandate for assisting others in need. If I am primarily responsible to those within my direct sphere of influence, then are these the people to whom I am primarily accountable? The answer is yes.

For an organisation, being credible is about first determining with whom it has an interdependent relationship. The corporation is primarily responsible and accountable to those within its direct sphere of influence. The recognition of a tangible interrelationship with contextual parameters enables some form of qualitative or quantitative measurement. This is CSR.

CSR is the beginning for any corporation embarking upon the entrepreneurial agenda of operating its business in a way that implements strategies that have a long-term focus. The starting point is the same whether the business operates in two hundred, twenty or two localities. CSR is about internalising externalities and then reporting the outcomes. Perceived external factors that will have a positive or negative flow-on effect for the enterprise are potential risk factors and need to be accounted for when considering the overall value of a corporation.

Although a number of social, environmental and ethical accountability tools are available in the public domain, there is no definitive reporting methodology for CSR. This may have contributed to the lack of acceptance of the inevitable need to adopt systematic standards for reporting on externalities and their impact on corporate operations.

Corporate citizenship is about secondary responsibility, and operates toward society as a whole. Sustainable reporting needs to be comprised of primary and secondary information before it becomes manageable, measurable and credible.

Who are stakeholders?

Reputation, corporate governance, ethics and corporate responsibility have long been considered to be intangibles, which by nature are difficult to measure. However, they do impact on the bottom line of the corporation. They need to be accounted for with as much precision as possible.

The current line of thought is to first map and categorise the stakeholders of a corporation. This may be achieved by determining their relationship with the corporation, the stakeholders' power base and their interests.

In a study in 1998, Warticke and Wood defined the power bases from which stakeholders operate. (3) Those holding voting rights have formal power and are the traditional stakeholders, such as shareholders and directors. The groups able to affect revenue flows, such as employees, suppliers, creditors and customers, wield economic power. Pressure groups, the community, activists and governments hold political power.

The sustainability reporting tools in current use determine stakeholders to be any of those from within these groups.

By looking too far afield, genuine attempts to engage with those outside the corporation cannot be made. For example, corporate philanthropy has societal value, but this is not what CSR should be about. CSR should begin at home. Donating large sums of money may 'feel good', but if it is unrelated to core values, the effect is one of a dilution of efforts, as there is often a lack of true commitment and continuity.

In the United States, social data was provided by KLD Research and Analytics, Inc. (4) to ascertain the Business Ethics' 100 Best Corporate Citizens in 2004. (5) The ratings were determined not just by the total return to shareholders but also by taking into account the service provided by the corporation to seven stakeholder groups. These groups were stockholders, the community, minorities and women, employees, the environment, non-US stakeholders and customers.

Arguably, if CSR is seen to be merely appeasing a broad base of multiple different stakeholders, the resultant changes will only affect the surface and will not penetrate to the core of how the company does business. A genuine commitment to CSR principles determines the operating values of the company. With the term CSR, the emphasis should be placed upon responsibility, rather than upon the very broad social aspects of this concept. Immediately, this reins in the concept to deal with the actual engagements of the corporation with others who may not be considered to come within the definition of 'the company' itself.

The primary element to be determined, as has been noted, is: 'For whom may I be considered to be responsible?'. In similar fashion to Lord Atkin's neighbourhood principle in the case of Donoghue v Stevenson (6), I am first responsible for those directly within my sphere of influence. My immediate influence exists within the boundaries formed by those with whom I interact, and upon whom my business operations impact. The essence of responsibility is accountability.

So, the first tier of interaction may be defined to be, for example, employees, suppliers, the local community and the local environment. For a company operating in a number of different spheres, whether geographical or operational, the starting point is likewise one of determining the identities of the stakeholders in each distinct region.

Once the specific individuals or groups have been identified, the next step is to determine the extent of the relationship. What is the degree of interdependence between those identified and the corporation? It is only upon the basis of a realistic assessment of the degree of importance of the interaction that a meaningful and sincere approach toward engagement will result. It is essential for these relationships to be considered as being tangible and real, not broad and indefinable. For instance, satisfied or, conversely, disgruntled employees can have a potentially greater impact on the corporation, even though they do not have the media exposure of a non-governmental organisation (NGO) such as Greenpeace.

CSR needs to be differentiated from corporate citizenship (see Figure 1). Each geographical location or sphere within which the corporation operates will have a distinct group of stakeholders to whom the company will owe certain responsibilities. These responsibilities are separate from broad citizenship duties, such as lessening or eliminating carbon emissions, although at times they may overlap.

[FIGURE 1 OMITTED]

Therefore, the nature and extent of the operations of a corporation will define the stakeholders. A large multinational corporation such as Shell, which has operations traversing the world, will have many more stakeholders than a smaller enterprise. However, the process of determination of the stakeholders will not differ. The question to be determined is: 'With whom does the company have a relationship of interdependence?'.

Reporting on corporate social responsibility

Why report on CSR?

Institutional investors such as superannuation trustees, pension funds managers and insurance companies are already the major audience for sustainability reports. (7) Long-term considerations are not merely risk-management tools but also opportunities for efficient responses to rapidly altering global markets. They are indicators of corporate longevity and profitability.

Twenty of the world's major investment companies, that control assets worth $6 trillion, including Morgan Stanley, HSBC, Credit Suisse Group, Banco do Brasil, Goldman Sachs and Deutsche Bank, have supported the connecting of financial markets to environmental, social and governance criteria. These companies endorsed a financial industry initiative released in June 2004, which called for corporate citizenship and stakeholder engagement to become standard components in investment decision-making analysis. (8)

The financial sector presented its case at the United Nations Global Compact Summit, the United Nations Secretary-General's initiative in the private sector, with the release of a report Who Cares Wins: Connecting Financial Markets to a Changing World--Recommendations by the financial industry to better integrate environmental, social, and governance issues in analysis, asset management and securities brokerage. (9)

Any corporate enterprise that wishes to be taken seriously in the investment market must begin to report in this way. Public praise or pressure by analysts and other financial observers will have a direct bearing upon the corporation's access to capital.

What should be disclosed?

Materiality of relationships and the impact of operations will determine the starting point for any business enterprise beginning to report on sustainability. The delineation to be drawn at this point is between the concept of CSR and the wider aspect of corporate citizenship.

Materiality is ascertained by considering the impact, interdependence and immediacy of the relationship. The major constituencies upon whom business operations impact are the shareholders, employees, business partners, customers and members of the local community. Likewise, although global warming may ultimately be a consideration, the starting point for corporations when considering their environmental effect is to first ascertain their level of impact on the local environment within which they operate.

The more dispersed the operations of the business, the greater the number of impacts that will need to be accounted for. However, the materiality will still be determined by the immediate parameters of influence.

What is the process for disclosure?

Stakeholder engagement

Building relationships with stakeholders is about corporate leaders engaging constructively with those with whom they have dealings.

The underlying element is to build trust and to open channels of communication with those who are affected by the operations of the business. With open and honest engagement, conflicts of interest can be defined and areas of common ground upon which to base relationships may be found.

On a local level, the activities of corporations are likely to impact upon or be affected by employees, trade unions, suppliers and other business partners, and local communities. The higher the global profile of an organisation, the greater the likelihood that stakeholders will include governments, NGOs, pressure groups and not-for-profit organisations.

Research has shown that a competitive edge can be achieved, utilising greater innovation and creativity, as a result of dialogue with stakeholders which may indicate consumer trends and new market opportunities. (10)

Analysis

A lack of genuine commitment to honestly engage on this level will ensure the corporation is worse off than if the managers had not attempted to embark on this path. Acting purely to be 'seen to be doing the right thing' will be evidenced by the failure to act upon or attempt to analyse the information provided by stakeholders.

For example, local residents whose complaints about paper waste blowing in from an industrial site are ignored may involve the media or the regulators in response to their voice not being heard. The resultant publicity and reputation damage is likely to be extremely costly. However, admitting a procedural failure along with a proactive response from the enterprise can establish a lasting relationship. The strategy may involve the employment of local youths to maintain the site, thereby alleviating not just one but a number of the community's concerns--a result far beyond the community's expectations.

In the final analysis, CSR is about building genuine relationships combined with long-term commitment.

How is performance benchmarked?

Benchmarking is a vital factor in the reporting agenda. However, the risk of providing a certified common standard is that businesses may be tempted to believe that achieving a minimum compliance level is adequate. For this reason, the innovators in this area have tended to devise broader principles-based indicators. While encouraging strategic responses, this initiative has hindered the uptake of reporting, especially by those businesses with fewer resources for experimentation. (11)

To have relevance, the report should enable comparisons between historical data and the implementation of future technologies and strategies aimed at overcoming deficiencies in corporate responsibility and accountability. Further, investors need to be able to relate the performance of nonfinancial indicators to the financial aspects of enterprises. The major requirements, therefore, are comparison, replication and elements of practical implementation.

There are a number of globally-endorsed reporting tools available. The reporting guidelines specify that full disclosure of all aspects should be available in the report or, if a particular indicator is excluded, the reasons for omitting it should be explained. The aim is to give a comprehensive, balanced and reasonable overview of the company's performance in all areas.

Industry-specific parameters can be determined and reported. This provides a gauge for outsiders, and the corporation itself, to assess its quality in relation to others within the same industry sectors. Identifying shortcomings and consequently determining strategies and setting goals for overcoming these is a vital element of the reporting process.

The challenge for SMEs has been to adapt and narrow these broad citizenship concepts so that they have relevance for the CSR agenda of those enterprises with either a less significant global profile or none at all.

The United Nations Global Compact (12)

This Compact was established as an initiative of the United Nations Secretary-General. It is a voluntary network that has the promotion of corporate citizenship as its primary goal. Participants support 10 general principles in the areas of the environment, labour standards and human rights.

A working group comprising predominantly business practitioners has devised practical guidelines to assist companies to incorporate the Global Compact Performance Model in their business practices. The key elements of the model are explained in the document, along with the practices and tools required to make them functional. It is a multi-local and a global challenge to show results against the principles contained in the Global Compact for the impact of the business on society and the environment.

The Global Reporting Initiative (GRI) (13)

The GRI 2002 Sustainability Reporting Guidelines, the UN Global Compact and the OECD Guidelines for Multinational Enterprises (14) are complementary.

Performance indicators are determined with reference to a number of broad categories. The indicators are direct economic impacts, environmental impacts, labour practices and decent work, human rights, and social and product responsibility. They align with the majority of major international agreements.

Quantitative measures were considered to be inappropriate for indicators dealing with complex social or economic systems. Although a qualitative approach to these factors has been encouraged, general descriptive statements will not be the expected response. Responses that can be expressed along a scale facilitate one of the major reporting objectives of enabling comparisons between different organisations. The indicators are classified along the general lines of the relevance to different stakeholders.

Small- or medium-sized enterprises and first-time reporters may begin reporting on an incremental basis, although most organisations are actively encouraged to report fully in accordance with the guidelines.

The AccountAbility AA1000 series (15)

The AccountAbility AA1000 framework is a measurement tool devised by the Institute of Social and Ethical AccountAbility to complement and build upon the GRI Reporting Guidelines. The focus of the framework is to establish systematic processes for the implementation of stakeholder engagements that are effective because they are integrated into the daily activities of the corporation.

The basis of the framework is inclusivity and it has three foundational principles. The first principle is the heart of the framework, which is stakeholder engagement. The second aspect is accountability, determined by the active responses of the organisation to the stakeholders' voices. The third principle incorporates learning and innovation as a result of stakeholder engagement. A number of industry-specific specialised modules have already been developed and more are planned for the near future.

The AccountAbility Rating has been created by two organizations (16) to assess the learning and innovation aspects of the framework. The internal aspects of performance management, governance and strategic intent are measured, as well as the external factors of stakeholder engagement, assurance and public disclosure. Corporations are then given an overall assessment rating which enables management to focus upon strategies for future improvement.

External verification

The assurance or assessment of reports should fulfil a similar function to a financial audit. The aim is to enable those making decisions for the company to show the integrity of the organisation, by indicating the positive changes implemented by the organisation in relation to any external impacts it has wrought, following consideration of the reported findings. If the reporting process does not identify weaknesses and the necessity for change, arguably it has failed in its relevance to all those relying upon its veracity.

Robust and independent external scrutiny of sustainability reports is still in its infancy, as reporting in these areas has, until recently, been less reliant upon quantitative data. (17) Independent external verification of non-financial information is increasingly vital when company directors are considering aspects of personal liability. (18)

Conclusion

The change agent is CSR. The dynamic and innovative decision-making processes resulting from a proactive approach to CSR will enhance business performance, brand value and reputation, and increase shareholder value.

A fire-fighting reaction to environmental incidents or workers' complaints sends the clear message of a lack of willingness by managers to engage in forward-looking strategies for external risk management. Businesses will discover that corporate regulators, financial analysts and market participants will impose external reporting mechanisms upon them if CSR-reporting strategies are not adopted rapidly and voluntarily.

Institutional investors utilise CSR information to decide factors such as the quality of a company's management. When formulating opinions about a company, institutional investors rank this indicator very closely in importance to financial performance. (19) It is therefore extremely important for CSR reports to adequately reflect both the positive and the negative impacts of the company's activities, so that investors are able to make informed decisions based upon accurate and honest data.

Unlike financial reports that look backwards in time at past performance, CSR reports, while outlining and admitting past failures, should focus upon improving both the quality of relationships and the future impacts of corporate activities. CSR reports should prove an effective tool for corporate decision makers themselves to implement systems and determine outcomes in keeping with the values at the very heart of the organisation.

Reports clarify the values of the corporation and acknowledge the importance of the company's interactions, for those within the corporation and also for those individuals and groups who have an external relationship with the corporation. Even if a quantifiable determination cannot be made, the identification of and commitment to finite corporate values will enhance awareness of the necessity to implement these values in all aspects of the operations of the corporation.

Any person, whatever their position in the spectrum of the organisation and whether they are involved in everyday operations or in a managerial role, will be empowered to act autonomously and with integrity to further the company's stated values, secure in the knowledge that it is those values that are the primary drivers of the corporation.

Notes

(1) Just Values: Beyond the business case for sustainable development, British Telecommunications 2003. A record of consultative activities is available from their website <http://www.bt.com/Betterworld/Stakeholderdialogue/JustVa lues/index.htm>

(2) The Shell Report 2003: Meeting the energy challenge, <www.shell.com>

(3) King, D, Corporate Citizenship and Reputational Value: The Marketing of Corporate Citizenship, The Hawke Institute, University of SA, 2000, p 39

(4) This is an independent research firm that provides data to professionals involved in the investment management of socially responsible investments

(5) Business Ethics Corporate Social Responsibility Report, Vol 18 No 1, Spring 2004, pp 8-9

(6) Donoghue v Stevenson [1932] AC 562 at 581. To establish the elements of the tort of negligence, the essential relationship known as the neighbourhood principle must exist between persons and was stated by Lord Atkin to be 'such close and direct relations that the act complained of directly affects a person whom the person alleged to be bound to take care would know would be directly affected by his careless act'

(7) Cooper, B, 'Corporate Social Responsibility the Holy Grail?', Chartered Secretary, June 30, 2003, p 14

(8) Press Release 24 June 2004, Investment Houses Endorse Assessing Businesses on Social, Environmental Performance, At United Nations Global Compact Summit <http://www.un.org/ News/Press/docs/2004/eco68.doc.htm>

(9) Copies of the report are available from the Global Compact Office <www.unglobalcompact.org>

(10) Sabapathy, J et al, Community-enabled innovation: Companies, communities and innovation--An innovation through Partnership Report, September 2003. This report may be obtained from AccountAbility <http://www.accountability. org.uk/resources>

(11) GRI plans to release a beginner's guide, the GRI Handbook on Sustainability Reporting, which will enable SMEs to better understand their contribution to sustainable development and outline the practicalities of sustainability reporting for SMEs; GRI June News Update, <www.globalreporting.org>

(12) <www.unglobalcompact.org>

(13) <www.globalreporting.org>

(14) <www.oecd.org/daf/investment/guidelines/index.htm>

(15) <www.accountability.org.uk/>

(16) AccountAbility, <www.accountability.org.uk>, and csrnetwork, <www.csrnetwork.com>

(17) AccountAbility has released an AA1000 Assurance Standard that provides guidance for an external evaluation method to enable the assessment of the quality of reports. It is based on the AA1000 framework, <http://www.accountability.org.uk/resources>

(18) s 299 of the Corporations Act; CLERP 9 s 299A. Directors may need to address significant environmental issues that affect the business, eg, climate change, water pollution, greenhouse gas emissions and extended producer responsibility. ASIC has released guidelines in accordance with s 1013DA of the Corporations Act, that must be complied with when releasing Product Disclosure Statements that make claims regarding labour standards or environmental, social or ethical considerations

(19) Cooper, B, 'Corporate Social Responsibility the Holy Grail?', Chartered Secretary, June 30, 2003, pp 13-14

Anne Durie, Part-time Lecturer in Law, University of Technology