Responsible Business Conduct : There's nothing 'fluffy' about CSR
Author:
Niamh Whooly
In practical terms CSR translates into 'the integration of stakeholders' social, environmental and other concerns into a company's business operations'. The benefits of addressing these issues can include enhanced brand value and reputation, better risk management, good relations with the community, improved regulatory relations, increased worker commitments - essentially a business that is trusted by its most important stakeholders.
Despite the growing recognition of these important benefits of Corporate Social Responsibility (CSR) and its rise up the corporate agenda in this country, there is continuing confusion as to what the phrase actually means for Irish businesses. The first difficulty is often with the term itself - many mistakenly view it in terms of involvement in the community and corporate giving to charities. As such, CSR is seen as a 'nice to have' that makes employees and communities feel good about the business. However, a maturing CSR message that is increasingly being broadcast and accepted is that trust must be built at a much more fundamental level - at the core of a company's products and services and how it conducts its business. The primary focus here is on how business is done, and involves embedding responsibility into everyday decision-making right across the business. The new buzzwords are 'mainstreaming' and 'integration', meaning that what was previously a peripheral activity must be absorbed into a firm's core functions and value systems. This requires a shift in thinking towards viewing CSR as a management practice that is fundamentally based on the 'conduct of business'.
Reputational Risk
Yet, despite a clearer definition of what CSR is about, you could argue that it still remains a formidable challenge for corporate leaders beset by other urgent agenda items. However, first you need to understand the power of this new thinking.
The starting point for CSR that PwC uses is reputational risk exposure. There's nothing fluffy about the importance of your reputation. Get it right and it will enhance your profitability and contribute to overall long-term success. But if your reputation gets damaged, it can impact on earnings and create negative public opinion, resulting in loss of sales, a plummeting share value and breakdown of relationships. Among our clients we see many companies struggle with the real significance of CSR. However, no Board or management team will dispute or ignore the need for reputational risk awareness to inform choices, alter policies and mitigate against decision-making that damages trust in the business or the sector. This awareness must go deep into the corporate bloodstream.
In turn, the best way for a business to report on reputational risk management is to demonstrate the strength of its stakeholder relationships and the benefits that these can bring. For any company, the ingredients of growth lie in the interplay between business goals and the dynamics of the wider environment and society. This wider world is its marketplace and it lives and dies by the relevance, reputation and excellence it creates. An organisation's unique set of stakeholders - such as employees, regulators, customers and local communities shapes and influence the organisation's ability to succeed. If you can identify your stakeholders and what motivates, influences and impacts them, you have gone a long way towards understanding the potential risks to the long-term value of the business. The position of CSR issues in respect of reputation exposure is frequently the starting point from which effective and innovative programmes are built.
Focus on the marketplace
Next, your business needs to draw boundaries around the CSR programme as to what will be included in terms of issues, and which ones are priorities for real attention. A note of caution here is that scope and content are under increasing scrutiny as organisations avoid dealing with the issues that are of primary materiality and relevance. Companies often pull together, manage, and report only on CSR issues for which information is easy to obtain - typically in workplace, community and environmental components. The marketplace is a far more nebulous, and risky, terrain. Yet, this is where the key challenge to CSR management is at - because the marketplace is a key source of reputational damage.
The marketplace is essentially concerned with the costs or benefits of the company's products and services, and their social and environmental impact. Each sector has its own very specific red flags and concerns. So for the Food sector, marketplace issues range from supply chain labour practices right through to societal issues such as obesity and public health. In Financial Services there is increasing pressure for transparency in fees, responsible debt, customer care, financial exclusion and other concerns.
Companies need to tackle and demonstrate improvement on the issues important to stakeholders and the business over time. There are no easy or immediate answers to some of these problems. However, a flow of transparent and meaningful communication with stakeholder groups, target setting, and communication of performance around their concerns goes a long way towards strengthening public trust and confidence in your business. The boundaries of these issues need to be kept under regular review as progress is made in areas of focus, the external environment, and the business develops.
In a recent Economist survey on CSR, corporate giving was ranked as a priority by only 6% of corporate executives and institutional investors. In contrast, the most important stakeholders were listed as customers (65%) and employees (61%), underscoring the importance of business conduct in the marketplace.
Implementation - the hard part
The challenge then is for companies to successfully integrate CSR into business-as-usual - throughout every level of the organisation in day-to-day decision-making - with the objective of demonstrating tangible improvements in performance.
This process should be assisted by the internal credibility gained by a CSR business case that has complete synergy with organisational priorities, driven in large part by reputational risk and marketplace matters as outlined above. However, success is also dependent on the specific characteristics and culture within the organisation. It takes time - and change management - to embed policies, procedural and behavioural changes, to capture information and to decide what CSR issues are important. It is about a way of thinking, behaving and doing. Board level sponsorship is critical - the companies at the forefront have a CEO entirely committed to CSR. It requires senior management to lead from the top and front. It needs middle management to recognise the value, and for this to be reflected into accountabilities.
CSR cannot be delegated to a specialist function. It is not about setting a policy and supporting procedures that are labelled 'corporate responsibility' that are detached from the existing business processes. It is about building this dimension into existing procedures, controls, internal mechanisms, training programmes and internal audit. The points of control within an organisation typically include risk, communications/ IR, brand, strategy, compliance and internal audit. However, ownership needs to be given to the business units, departments or functions to deliver the appropriate response to the CSR hotspots that fall within their area.
In this way it understood what CSR means right across the business - it encompasses everything an organisation does, so that everybody is to some extent involved. Setting meaningful objectives and targets, linked to performance appraisal, also is also important in focusing minds and commitment to CSR performance.
Getting credit for your achievements
As CSR management matures within the business, success will be measured by demonstratable improvements in both internal process and innovation, and by internal and external communication that shows stakeholder concerns are incorporated and understood. This ability of a company to demonstrate the 'connected-ness' of thinking - from the most distant supplier to the boardroom - helps in identifying early warning signs of problems in the key activities that drive value in the business. As such, it is increasingly seen as critical by capital markets and other stakeholders, with socially and environmentally responsible behaviour regarded as simply part and parcel of good management.
It is this thinking that is behind the recent legislating for the Operating and Financial Review (OFR) of UK companies to cover broad risks and relationships, including social and environmental performance. This new development is likely to impact on Irish companies, particularly those with UK investors and/or listed on the London Stock Exchange, as it opens up areas such as corporate reputation to public scrutiny. Similarly, rating agencies such as Moody's are increasingly looking for 'proof' of corporate reputation.
This growing emphasis on non-financial performance, together with new measurement tools and sectoral guidelines on key performance indicators, is likely to herald increased CSR reporting from Irish businesses. Having your house in shape is essential if you decide to report on your company's social and environmental performance, as you will be held accountable for the accuracy of the information you share. Companies that move towards reporting to benefit from the reputational upside must ensure that they have a robust framework in place. Reporting needs careful planning, including what information is relevant, how this information may be gathered and checked and what, if any, external assurance (verification) of the non-financial information provided that management wants in place.
As the debate on Corporate Social Responsibility intensifies, Irish companies have to define what it means for their business. Community programmes and environmental management systems are a necessary element of CSR business practice; however they are not substitute for addressing critical marketplace issues for the business and the sector. The heart of 'responsible behaviour' revolves around the design, delivery and management of products and services. Leading Irish companies are now starting to address these issues from a responsibility perspective.