Corporate Governance – Principles, Policies and Practices 3e

1. Corporate Governance – Principles, Policies and Practices 3e Chapter 9 Corporate Social Responsibility and Sustainability

2. Corporate Social Responsibility and Sustainability In which we consider: - the concept of CSR - changing expectations in the governance of organisations - enlightened shareholder value - CSR strategies and policies - the CSR competency framework - balancing corporate responsibilities - sustainability and the triple bottom line • communication with stakeholders • integrated reporting - the UN Global Reporting Initiative.

3. Corporate Social Responsibility Different perspectives on CSR • The societal perspective • The strategy-driven perspective • The stakeholder perspective • The ethical perspective • The political perspective • The philanthropic perspective

4. Corporate Social Responsibility • How can compliance with voluntary codes be achieved? • Reserve powers of board – corporate governance policies • Audit, remuneration, nomination, compliance committees - separation of chairman and CEO • Disclosure of compliance in annual company report • Role of corporate compliance or corporate governance committee • Role of company secretary • Corporate compliance officer • Corporate policy statement – BP, General Motors, SIBNEFT • Exhortation - government, director bodies, academic bodies • Pressure from institutional investors • Stock exchange listing requirements • Legislation (SOX Act and 2006 UK Co. law – operating review).

5. Corporate Social Responsibility Social legitimacy of corporate entities Early attitudes to corporate governance (voluntary) – bureaucratic, expensive box-ticking exercise - ‘the job of business is to create wealth not comply with principles’ Subsequent developments - compliance increasingly mandatory - codes, rules, law - CSR and sustainability reporting encouraged - enterprise risk management became integral part of CG. What responsibilities does a business have?

6. Corporate Social Responsibility What responsibilities does a business have? A company has one and only one objective: to make long-term sustainable profits by satisfying customers for the benefit of its owners, whilst acting within the law. If society wishes to limit a company's single-minded pursuit of this goal, for example by constraining monopolies, regulating employment or preventing pollution, it must pass appropriate laws. Milton Friedman

7. Corporate Social Responsibility What responsibilities does a business have? An alternative view • Economic responsibility – first and foremost the societal responsibility to be a profit orientated and market driven business • Legal responsibility – to adhere to society’s laws and regulations as a licence to operate • Ethical responsibilities – to honour society’s wider social norms and expectations of behaviour over and above the law • Discretionary (or philanthropic) responsibilities – to undertake voluntary activities and expenditures which exceed society’s minimum expectations. Carroll 1979 Academy of Management Review

8. Corporate Social Responsibility King Report (King 1) on corporate governance in South Africa was first to recognize the interests of corporate stakeholders as well as shareholders. “That report revolutionised approaches to corporate governance around the world because it said that in the decision-making process you should take account of the legitimate needs, interests and expectations of stakeholders linked to the company. That did not mean that directors should be accountable to stakeholders, but that they should take account of stakeholder needs and expectations in their decision-making.” Mervyn King 2010

9. Corporate Social Responsibility Comment on CSR from the British Chancellor of the Exchequer The Rt. Hon Gordon Brown (2006) "Today, corporate social responsibility goes far beyond the old philanthropy of the past - donating money to good causes at the end of the year - and is instead an all year round responsibility that companies accept for the environment around them, to the best working practices, for their engagement in the local communities and for their recognition that brand names depend not only on quality, price and uniqueness, but on how, cumulatively, they interact with the companies workforce, community and environment.”

10. Corporate Social Responsibility “We have to choose between a global market driven only by calculation of short-term profit, and one which has a human face; between a world which condemns a quarter of the human race to starvation and squalor, and one which offers everyone at least a chance of prosperity, in a healthy environment; between a selfish free-for-all in which we ignore the fate of the losers, and a future in which the strong and successful accept their responsibilities, showing global vision and leadership.” - Kofi Annan, when Secretary-General of the UN

11. Corporate Social Responsibility Enlightened shareholder value (ESV) The satisfaction of the needs of stakeholders is: • crucial to corporate success • essential to creating value for shareholders.

12. Corporate Social Responsibility “For many companies, managing corporate social responsibility well is no longer seen as an extra cost or burden on hard-pressed management. Rather, CSR is increasingly viewed, not only as making good business sense but also contributing to the long-term prosperity of companies and ultimately its survival.” World Business Council for Sustainable Development

13. Corporate Social Responsibility • Increasing demands for CSR reporting UK Occupational Pension Funds DEFRA (2001) • “report whether environmental, social and ethical criteria are taken into account in investment strategy” Australian Stock Exchange • Listed companies to report performance under environmental legislation (1998) UK Companies Act 2006 • UK Operating and Financial Review requires relevant information on environmental and employee matters.

14. Corporate Social Responsibility In economically advanced world growing demands, encouraged by investigative media, for acceptable corporate behaviour on, for example: • Employment of children in manufacturing in third world countries • Ill treatment of animals in pharmaceutical product testing • Pollution in manufacturing and transportation processes The risk to corporate reputation needs to be assessed along with other elements of risk.

15. Corporate Social Responsibility UK Companies Act (206) introduced CSR criteria for directors: "A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to: • the likely consequences of any decision in the long term • the interests of the company's employees • the need to foster the company's business relations with suppliers, customers and others • the impact of the company's operations on the community and the environment • the desirability of the company maintaining a reputation for high standards of business conduct • the need to act fairly as between members of the company.

16. CSR competency framework To encourage commitment to CSR practices the British Government created a CSR competency framework; a flexible tool, which is offered as a "way of thinking" for companies of all sizes The framework has six core characteristics with five levels of attainment for each.

17. CSR competency framework The core characteristics are: • Understanding society • Building capacity • Questioning 'business as usual' • Stakeholder relations • Strategic view • Harnessing diversity

18. CSR competency framework Understanding society: • A knowledge of how the business operates in the broader societal context and a knowledge of the impact that the business has on society; plus a recognition that the business is an important player in society, seeking to make that impact as positive as possible.

19. CSR competency framework Building capacity • Working with others to build the capability to manage the business effectively, helping suppliers and employees to understand your environment, and apply social and environmental concerns.

20. CSR competency framework Questioning 'business as usual‘ • Constantly questioning your business in relation to a more sustainable future and being open to improving people's quality of life and the environment, acting as an advocate engaging with bodies outside the business who share this concern for the future.

21. CSR competency framework Stakeholder relations • Recognising that stakeholders include all those who have an impact on, or are impacted by, your business • Understanding the opportunities and risks they present and working with them through consultation, taking their views into account.

22. CSR competency framework Strategic view • Ensuring that social and environmental concerns are included in the overall business strategy so that CSR becomes 'business as usual', with leadership coming from the top and resulting in everyone in the business having an awareness of the social and environmental impacts.

23. CSR competency framework Harnessing diversity • Recognising that people differ and harnessing this diversity, reflected in fair and transparent employment practices, promoting the health, well-being and views of staff with everyone in the business feeling valued.

24. CSR competency framework The five levels of attainment are: • Awareness • Understanding • Application • Integration • Leadership (The ability to help managers across the organisation in a way that fully integrates CSR in the decision-making process).

25. Balancing CSR responsibilities Balancing corporate responsibilities A company does not have morals: directors do A board has to be the company’s conscience Directors need to provide the moral compass In fulfilling its role the board is responsible for: - considering the potential effect of the strategies it formulates • identifying the likely impact of policies it approves both short and long term - recognizing possible outcomes on people - accepting its duty to be accountable.

26. Corporate Social Responsibility • CSR priorities today are human rights, employee rights, environmental protection, community involvement and supplier relations • A coherent CSR strategy, based on integrity, sound values and a long-term approach, offers clear business benefits • Companies should articulate their own core values and codes of conduct, or failing that, to endorse and implement codes produced by others • Emphasise the importance of being responsive to local and cultural differences when implementing global policies. World Business Council for Sustainable Development (1999)

27. Corporate Social Responsibility Increasingly companies are reporting in their annual accounts and on their web pages their CSR policies and performance on the environment, employee welfare, ethics and sustainability.

28. Corporate Social Responsibility EXXON CSR Policy “We take our responsibilities very seriously - for our employees, shareholders, customers, communities, the environment and society at large.”“We strongly believe that the way we achieve results is as important as the results themselves. Therefore, we are working hard to embed CSR into the way we do business”. “We have integrated CSR policies and practices into our business, which help us ensure that we meet standards of integrity, safety, health, environment and social responsibility day in and day out and across our worldwide operations. We believe that this approach is essential to achieving superior business results.”

29. Corporate Social Responsibility Increasingly boards include a CSR policy within their corporate governance policies, for example: "In addition to the implications for continuing economic success, all company strategies, polices and management decisions should take account of the following long-term effects • The firm's impact on all its stakeholders including: • customers of the end product or service • agents, distributors and others in the down-stream supply chain • original suppliers and others in the up-stream supply chain • other creditors • bankers and non-equity sources of finance • employees including managers • self-employed contractors to the company • The firm's impact on all the communities in which it operates (consider local, regional and national) • The firm's impact on the environment (consider all the relevant communities, regions and countries).”

30. Corporate Social Responsibility An organisation's response to the social and environmental impacts recognised through CSR awareness can provide: • basic information for the company's CSR report • cost-effective yet comprehensive ways to manage social and environmental risk across the organization.

31. Corporate Social Responsibility General Motors (USA) CSR Key Performance Indicators Economic indicators Revenues US$ Net income US$ Earnings per share US$/share Vehicle sales numbers of vehicles Product indicators Fuel economy miles per US gallon CO2 emissions CO2 per mile by model year Quality GM and industry % initial quality problems Environmental indicators Energy use CO2 emissions Mil. Metric tons Waste Mil. Metric tons Recycling rate % Water use mil. Cubic litres Social indicators Donations, Employee diversity, discrimination, satisfaction

32. Corporate Social Responsibility Sustainability reporting “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” - Brundtland Report UN 1987

33. Corporate Social Responsibility Examples of demands for sustainable development • China's Guangdong Province requiring companies that pollute the ground water table to clear up or close down. • The European Union establishing fishing quotas and other fishing limits to sustain fish stocks. • South American and European Union controls on forestry products to protect the rain forest and to ensure that woodland is sustained by replanting. • Since 1997 190 nations, representing half the world's greenhouse gas emissions, have ratified the Kyoto Protocol, committing to reduce the world's greenhouse gases below 1990 levels by 2012 and ultimately to reverse the greenhouse effect.

34. Corporate Social Responsibility Swire Pacific’s Sustainable Development Policy • Swire Pacific Ltd. publicly-quoted London and Hong Kong • Diverse range of businesses - Cathay Pacific Airways, property, beverages and Coca-Cola bottling, retail, support services for the offshore oil and gas industry worldwide • Group adopts decentralized approach.

35. Corporate Social Responsibility Swire Pacific’s Sustainable Development Policy Board of Swire Pacific accepted 2007 UN Environment Agency Report on Global Environmental Outlook: “We appear to be living in an era in which the severity of environmental problems is increasing faster than our policy responses. To avoid the threat of catastrophic consequences in the future, we need new policy approaches to change the direction and magnitude of drivers of environmental change and shift environmental policy making to the core of decision making.”

36. Corporate Social Responsibility Swire Pacific’s Sustainable Development Policy Recognising global warming problem would impact the development of their businesses, Board endorsed Sustainable Development programme throughout group. (http://www.swirepacific.com/eng/global/home.htm) Company appointed Director of Sustainable Development, Robert Gibson, 2007.

37. Corporate Social Responsibility Swire Pacific’s Sustainable Development Policy We adopt this policy because: Long-term value creation for our shareholders depends on the sustainable development[1] of our businesses and the communities in which we operate. We wish to excel as corporate citizens [1] Sustainable Development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. - Our Common Future", 1987 - World Commission on Environment and Development.Sustainable development covers environment, health and safety, employment, business partnerships and community matters.

38. Corporate Social Responsibility Swire Pacific’s Sustainable Development Policy Our business policy: Industry leadership: We will work with others to promote sustainable development in the industries in which we operate.

39. Corporate Social Responsibility Swire Pacific’s Sustainable Development Policy Our operating policy: In our operations: We will meet or exceed all legal requirements and: • Be a good steward of the natural resources • Operate in a manner which safeguards health and safety of all stakeholders. • Strive to be an employer of choice respect • Favour suppliers and contractors who promote sustainable development • Promote good relationships with the communities of which we are a part.

40. Integrated reporting non-financial information “The ICGN believes that reporting of relevant and material non-financial information is an essential part of the disclosure required to enable shareowners and investors to make informed investment decisions. We use the term ‘non-financial’ to refer to information relevant to the assessment of economic value, but which does not fit easily into the traditional accounting framework. In a fast-changing, globalising world, information material to investor decision-making is becoming increasingly diverse and dynamic. Long term success in managing a business is increasingly dependent on factors not reflected in financial statements ICGN (2009).

41. UN Global Reporting Initiative The principles are that businesses should support • protection of internationally proclaimed human rights • make sure that they are not complicit in human rights abuses.   • uphold the freedom of association and the effective recognition of the right to collective bargaining • the elimination of all forms of forced and compulsory labour; • the effective abolition of child labour • the elimination of discrimination in employment and occupation.

42. UN Global Reporting Initiative The GRI has been adopted by organisations around the world and now produce sustainability reports using the GRI framework. Three types of standard disclosure are included: • The organization's profile - information that sets the overall context including its strategy, profile, and governance. • The organization's management approach - information that provides the context for understanding its performance. • Performance indicators - which provide information on the economic, environmental, and social performance.

43. Corporate Social Responsibility and Sustainability In which we considered: - the concept of CSR - changing expectations in the governance of organisations - enlightened shareholder value - CSR strategies and policies - the CSR competency framework - balancing corporate responsibilities - sustainability and the triple bottom line • communication with stakeholders • integrated reporting - the UN Global Reporting Initiative.