Corporate Governance and SustainabilityGood governance practices extend beyond financial requirements to include the corporation’s business behaviour in its operational environment. As an extension to this requirement, the operational environment, in CSR terms, includes the corporation’s social and environmental performance.
Investors can therefore be guided as much by the financial statements of an enterprise as they are by the enterprise’s business behaviour. Consumers too are increasingly supporting those products that can demonstrably show an appropriate response by the enterprise to its operational environment.
Increasingly, consumers are avoiding products produced by enterprises that fail in performing due diligence in the manufacturing and marketing of those products.
Several structural changes in the global economy have contributed to the growing interest in corporate social responsibility and codes of conduct. The increased significance of brands and corporate reputation makes leading companies particularly vulnerable to bad publicity. Changing public attitudes are also an important part of the context in which CSR has been adopted. Companies can no longer ignore the impact of their activities on the environment. Developments in global communications, which have enabled corporations to control production activities on an ever-widening scale, have also facilitated the international transmission of information about working conditions in their overseas suppliers and consumers, increasing public awareness and facilitating campaigning activities.
Corporate responsibility practices vary considerably in sectoral applicability: one of the striking characteristics of the recent growth in corporate responsibility is their tendency to be concentrated in certain sectors, particularly energy, manufacturing, chemicals and extractive industries.
Corporate responsibility practices also vary considerably in scope. Many do not even cover all of the core labour standards of the International Labour Organization (ILO). CSR at company and trade association level often has a more limited scope than that developed in conjunction with other stakeholders. There are also differences in the coverage. Although many CSR practices do cover the firm's suppliers, they often do not extend all the way along the supply chain, and very rarely cover home-based workers. Provisions for the implementation of CSR, and for effective monitoring, are crucial if it is to have any real impact. Here, too, one finds weaknesses, with only a small proportion of CSR making provision for independent monitoring.
Notwithstanding the limitations of CSR, it can and has generated positive benefits for stakeholders. Examples where working conditions have improved show that CSR can provide leverage on corporate behaviour. Furthermore, because of CSR, firms increasingly accept responsibility for the activities of their suppliers as well as their own subsidiaries.
Contextualising Corporate Social Responsibility
Establishing a proper understanding of governance is the first prerequisite to the construction of a CSR framework. It must be recognised that governance is not the sole preserve of either government or corporations: governance has to do with the way in which relationships within societies are regulated (Graham et al: 2003).
Governance is a dynamic interaction at global, national, institutional and community level. A significant characteristic of the globalising world is the dynamic shifting of relationships within the four sectors of society situated among citizens at large, both intra- and inter-nationally (business, the institutions of civil society, government and the media). For example, governments are transferring many of their functions to national and multinational businesses, either as part of a global trend toward privatisation, e.g. infrastructure, or through Foreign Direct Investment (FDI) patterns.
Since governance occurs in any form of collective action, it underscores strategic decisions regarding direction, participation and capacity. Fundamental to the strategic decisions is the dynamic interplay between issues of core values and management and operational ‘space’, i.e. cyber, global, national, organisational and community. Because this process is so complex and difficult to observe, systems or frameworks are established to define how agreements, procedures, conventions or policies are made and how accountability is achieved.
The second prerequisite for constructing a CSR framework is the establishment of a set of basic principles. Although CSR indicators may differ from framework to framework, a set of basic principles does emerge. The CSR Platform, a network of 40 NGOs and trade unions in the Netherlands, produced a Corporate Social Responsibility (CSR) Frame of Reference which encapsulates a useful broad set of standards (CSR Platform, 2005). The standards include:
Human rights obligations – The standard is based on Amnesty International’s guidelines.
Labour standards – The standard includes the four core labour standards, as well as the most commonly mentioned labour rights such as health and safety, working hours, and living wage.
Environment – The standard includes the principle of preventive action, the precautionary principle, tackling environmental damage at source, and the polluter pays principle.
Consumer protection – The standard includes the right to safety, to information, to choose, to be heard, to appeal and lodge a complaint, to consumer education, and to sustainability.
Health – The standard includes the right to a safe and healthy environment, and freedom from exposure to activities that may be harmful to personal health and safety.
Fighting corruption – The standard includes principles to combat corruption.
Intergovernmental organisations that have also produced CSR and Corporate Accountability standards include the UN Norms for Business on the Responsibilities of Transnational Corporations and other Business Enterprises with regard to Human Rights, the OECD Guidelines for Multinational Enterprises, the UN Global Compact, and the ILO Declaration of Fundamental Principles and Rights of Work.
The governance principles enunciated by the United Nations Development Program (UNDP: 1997) have received universal acceptance, and are tabulated in Table 1 below (Graham: 2003).
Table 1: Five Principles of Good Governance
From the above it is clear that the expectations of good governance and therefore CSR practices extend beyond financial requirements to include the corporation’s business behaviour in its operational environment. A fundamental component of CSR is the inclusion of the social dimension because of the critical role it plays in determining societal well-being: this is highlighted by the comment made by the Secretary-General of the United Nations, Kofi Annan, “good governance is perhaps the single most important factor in eradicating poverty and promoting development” (Annan: 2003).
One of the critical drivers of good governance is the environment. The United Nations Conference on Trade and Environment (UNCTAD) has released new guidelines on eco-efficiency indicators that also link the environmental performance of corporations to their financial performance. Intended for both preparers and users of financial statements, they cover accounting treatment of such areas as water use, energy use, contributions to global warming, ozone-depleting substances and waste (GreenBiz: 2004).
Furthermore, securities exchanges around the world are introducing various indices to measure the CSR of listed companies. In Britain, the Co-operative Bank’s Ethical Purchasing Index, which annually analyses the extent of ethical consumerism, calculated that the cost of consumers switching brands for ethical reasons during 2002 was £2.6 billion in lost business. The reverse of this scenario is equally true: the total sales of ethical products rose by 44% from £4.8 billion to £6.9 billion between 1999 and 2002.
As investors increase their expectations for greater corporate responsibility and demand access to information about the institutions they own, managers increasingly have to learn and adapt. The list of CEOs under scrutiny for wrongdoing or poor job performance continues to expand. It could therefore be expected that, in the light of this closer scrutiny of public companies by law enforcement agencies, shareholders, investors and stakeholders, business leaders would embrace the concept of corporate social responsibility (CSR) – “the recognition by corporations that their actions must take into account the needs and ethical standards of society” (McGraw Hill) – as central to good governance.
Integrated Sustainability Reporting
1992 marked a watershed in the management of the Earth’s finite resources: in the three decades prior to the Rio Declaration on Environment and Development , the sustainable development debate focused predominantly on protection of the natural environment. The Rio Declaration of 1992 , while seeking to build upon the United Nations Conference on the Human Environment held in Stockholm in 1972, developed the theme further to resolve the antagonism between environment (the green issues), and development (the brown issues).
The Rio Declaration’s Principle 1 shifted human beings to “the centre of concerns for sustainable development.” Principle 3 requires the exercise of this development right to “equitably meet developmental and environmental needs of present and future generations.” The notion of meeting the needs of today without denying future generations the ability to meet their own needs is of course encapsulated in the Bruntland definition of sustainable development.
It was this approach that gave rise to the notion that development must be subjected to triple-bottom line auditing. Triple bottom line accounting interrogates development beyond its performance in the realm of economic viability: social well-being and environmental stewardship are to receive equal consideration.
The notion of accounting – being held accountable – generated a new demand within corporate governance. Corporate governance extends the 1992 Heads of State Global Agreement into the realm of the private sector, and requires enterprises to ensure that their business practices satisfy the standards of sustainable development. Current corporate social responsibility has therefore consolidated the partnership between the public and private sectors.
However, the green agenda was the first to find expression in legislation. Environmental legislation requiring statutory Environmental Impact Assessments (EIAs) for certain categories of development was introduced. Initially the intention was to determine whether the proposed development would have negative impacts on the environment in which it was to be executed and, if so, to take steps to reduce those impacts. This too has developed further: current thinking, in the form of Strategic Environmental Assessments (SEAs), has shifted the assessment criteria from what impacts the development has on the environment, to what impacts the environment has on the development.
Sadly, legislation has not yet been promulgated that acknowledges the triple bottom line approach. The people-centred agenda has therefore not yet progressed into legislation, except for labour legislation. Furthermore, and rather more excitingly, current thinking in this regard is suggesting that to be consistent with the shift in agenda focus and to give effect to Principle 1 of the Rio Declaration, the triple bottom line is in fact a single bottom line, i.e. social equity. This notion places environmental stewardship and economic feasibility as sub-sets of social equity.
Notwithstanding the extensive literature available, and the many advocacy initiatives launched by global organisations, many corporate executives fundamentally misunderstand the concept of corporate social responsibility (Ethical Corps, 2005). CSR is fundamentally about businesses holding themselves accountable for their impact on people and the planet. It is a comprehensive approach that a business takes to meet or exceed stakeholder expectations beyond the measures of revenue, profit and legal obligations. What critics fear about CSR is increased scrutiny and accountability as the intention of CSR is to expose businesses to reputational, financial and legal risks, either way.
The response by corporation owners and shareholders to advocacy and legislation has largely been, up to fairly recently anyway, a “business response”, although there is growing consensus amongst business leaders that corporate responsibility can enhance business value through the mitigation of risks and building reputation and competitive advantage (Milford, 2004).
The response by corporation shareholders has been to recognise that corporate social and environmental responsibility can be an indicator of “Quality of Management” – that commodity that makes a company a good investment (Little). As a result, there has been an increase in the number of companies publishing social and environmental responsibility reports which, in turn, is having a positive impact on placing these companies on a path supporting the objectives of sustainable development. This response has also been largely driven by the actions of investment advisers and institutions.
The response by investment institutions has included the establishment of “Socially Responsible Investment” (SRI) reporting products linking corporate responsibility management to their SRI assessment of companies. More and more institutional investors and fiduciaries to individual investors are demanding specific, in-depth information about the performance of public companies on social and environmental issues. Investors either will seek businesses that uphold their “values” or believe that companies with good CSR track records make better long-term investments.
The response by global business has been the launching of a number of major initiatives aimed at constructing and co-ordinating a collective response to the imperatives of sustainable development. One of these is the establishment of the “World Business Council for Sustainable Development” (WBCSD [a]). Interestingly enough, the Chairperson of the WBCSD is also the Chairperson of Lafarge Cement, a major participant in the global construction sector. The WBCSD, a coalition of 160 international companies, advocates integrated sustainable reporting by its members. Of the Council’s 160 members, 7 percent are in the cement industry, 4 percent in construction, and 2 percent in engineering. These members represent most of the big global construction players, indicating that, at least at this level, the mitigation of risk and the building of reputation is recognised as a key driver to effective participation in the global market.
In addition, a number of major global initiatives have been launched: one is the “Global Reporting Initiative” (GRI) which is affiliated to the UN Environmental Programme (UNEP). The GRI produces globally applicable “Sustainability Reporting Guidelines” which have been adopted by many corporations, including many of the large materials manufacturing companies (GRI, 2002).
Another initiative by the investment institutions is the drafting and acceptance of the “Equator Principles” by several leading international banks including the World Bank. The “Equator Principles” is a voluntary set of lending guidelines developed by the participating banks for managing social and environmental issues related to the financing of development projects.
Other global initiatives include investment indexes established by various stock exchanges around the world, including the Dow Jones (DJSI), the FTSE , and lately the Johannesburg Securities Exchange (JSE).
The FTSE4Good index for socially responsible companies has recently revealed future plans for tightening up corporate ethical related criteria, raising questions about the links between policy and business performance. It also announced criteria for future development, in particular with regard to the inclusion of nuclear power companies in the index. When the index announces criteria for inclusion – companies have no choice about being assessed on these – companies interested in remaining included are given specific timeframes in which to meet the new criteria. Non-compliance results in their publicly announced deletion from the index.
Non-disclosure is another barrier to implementation of environmental criteria, which is recognised by the ethical index. Additional criteria under consideration for inclusion are bribery and corruption criteria, climate change, board-level governance of corporate responsibility and corporate responsibility towards customers and employees.
In summary, the reasons for supporting good corporate governance practices by these and other companies are to:
- Reduce costs through eco-efficiencies, especially energy costs;
- Mitigate risks (environmental and social);
- Build reputation and competitive advantage;
- Comply with regulations;
- Satisfy investor conditions; and
- Support advocacy.
Regardless of their motivations, investors and consumers want information they can trust about companies seeking their business. The recent wave of unethical behaviour by corporate CEOs has eroded their trust. As investors and consumers increase their expectations of greater corporate social responsibility and demand greater access to information about the institutions they own or do business with, owners, managers and consultants must learn to adapt to new market conditions.
A recurring theme throughout corporate social responsibility centres on the fact that the scope, scale and quality of CSR essentially depends on the institutional and political contexts in which companies operate. Despite some tendencies within the CSR movement to see voluntary approaches as an alternative to government regulation and law, the research highlights the crucial role of public governance—involving government policy, civil society activism, international regulation and rights-based institutions—in shaping effective CSR practices, as well as the need to better articulate voluntary and legalistic approaches.
Cognisance must be taken of the reality that governance is not the sole preserve of either government or corporations: governance has to do with the way in which relationships within societies are regulated. If CSR reporting is to become a respectable and useful business activity within the South African business sector, businesses need clear standards and concise fundamentals with which to report. Standard-setting bodies, industry associations and research institutes will need to engage the issue with rigour. CSR is fundamentally about businesses holding themselves accountable for their impact on people and the planet.
It may well be that acceptance of the principles contained in the corporate social responsibility framework could give rise to secondary and complementary initiatives such as CSR Management Systems and CSR Management Plans associated with standard setting, reporting, monitoring, auditing and certification.
Nonetheless, compliance with these defining characteristics by all participants in industry can lead to an enabling environment for effective delivery and for growth, improved performance and continuous development of the industry. Good corporate governance is, after all, about the values supporting excellence as well as the creation of an ethical culture.