CSR

Corporate social responsibility (CSR) has become part of the business lexicon but what does it really mean? Helen McCombie canvasses a range of views and outlines some implications of CSR for directors.

Defining your social responsibilities

Corporate social responsibility or CSR is no longer an issue that directors can ignore. Historically company directors have been required to act in the best interests of the corporation, and in this regard to consider the interests of shareholders, and in some limited circumstances, creditors. Now the interests of other ‘stakeholders’ are forcing their way into boardrooms and the Australian government is considering whether changes should be made to the corporations law to include corporate social responsibilities in directors’ duties.

CSR is a highly contested concept with no universal agreement on what it means. ALP Senator Penny Wong, the shadow minister for Corporate Governance and Responsibility, likes the definition provided by the World Business Council for Sustainable Development, which is: “Corporate (social) responsibility is the commitment of business to contribute to sustainable development, working with employees, their families, the local community and society at large to improve their quality of life.”

John Kluver, executive director of the Federal Government’s Corporations and Markets Advisory Committee (CAMAC) has a simpler definition; it is “companies taking into account the environmental, broader economic and social impact of their conduct and behaviour.”

CAMAC is at the forefront of current debate. Set up in 1989 to provide advice on issues that arise in corporate and financial markets law and practice, the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce, has asked CAMAC for a report on whether the current legal framework allows corporate decision makers to take appropriate account of the interests of people other than shareholders.

Kluver thinks the report will be timely. “There are some entities in Australia that are well at the forefront, of course. There are a number of companies that have taken up, and applied the Global Reporting Initiatives and have voluntarily produced CSR reports and the like. However there is also some evidence that compared with the trend across the world, that Australian business is lagging a bit, particularly on non-financial voluntary reporting,” he says.

Kluver believes the review will assist the Federal Government in further thinking about CSR as it will look at initiatives that are taking place overseas, in particular, in the UK, where some major legislation that impacts on directors’ duties is being introduced.

“We’ll be looking at the question of whether we need to go down that track or whether our current laws are quite adequate, so directors can act within the operation of the current law and feel they have sufficient discretion,” says Kluver.

In the UK, Clause 173 of the Companies Bill in effect requires companies acting in a way to ensure the success of the company for the benefit of their shareholders to take certain factors into account, and these are listed in the clause itself. They include environmental considerations, impact upon the community, and impact upon the environment.

Kluver says what the British Government is seeking to do, is to introduce a state-of-the-art provision, which tries to spell out in more detail some of the factors directors need to take into account. In Australia, he says, we have section 181 of the Corporations Act, which is written in more general form and that says “that directors are to act in good faith in the best interests of the corporation and for a proper purpose.”

Kluver points out there is a degree of case law in this area which suggests that the same sorts of factors may well be included within the existing provision that we have at the moment. He says the CAMAC report will come to a clear position “on what we think is the current state of the law and whether there needs to be any change in the direction of the UK provision, or some other type of provision.”

According to Dr Leeora Black, from the Australian Centre for Corporate Social Responsibility, CSR has not been driven by legislation; it has come from a change in what the community expects from business. She says as a result of this change, directors now need to take into account the needs of non-shareholder stakeholders and balance these competing needs and interests for the greater good of the company.

For directors who are having trouble with the concept of what corporate social responsibility entails, Black says managing risk is the key to understanding it.

Directors may need to consider what measures should be implemented at board level. “Some of the more progressive companies have established board committees to deal with corporate responsibility or sustainability issues,” says Black.

She cites BHP Billiton,Westpac, ANZ and Transurban as companies whose boards have restructured and set up CSR committees to establish board level accountability. Black also believes that directors should be requesting their management provide them with a report on how CSR risks and opportunities are being identified and managed by the company, and should ask for those reports on a quarterly basis.

Black argues that the leading edge of CSR ultimately delivers more than just a way of managing risk - it also delivers fantastic new opportunities for growth and development. “Companies that are more advanced in this area are starting to realise that by managing responsibly, they identify new opportunities for new business and new growth trajectories that they may not otherwise have been able to identify with old fashioned thinking.”

The penalties can be high if a company’s activities pose a risk that investors don’t appreciate. Take the recent decision by Norway’s $236 billion government pension fund, the third largest in the world. In June it dumped US$430million worth of shares in Wal-Mart and Freeport-McMoRan Copper and Gold, the fund’s divestment causing the price of Wal-Mart and Freeport shares to fall. The fund excluded both companies for contravening Point 4.4 of its Ethical Guidelines that “constitute an unacceptable risk of the Fund”. Wal-Mart was sold for “complicity in serious or systematic human rights violations” and Freeport for “severe environmental damage.”

For the Australian Council of Superannuation Investors, risk is very important to long term investing. The Council provides independent research to superannuation funds on corporate governance practices. Its president Michael O’Sullivan says: “We’re looking for sustainable growth in shareholder value and we are looking for the board to get a pretty solid grip on all the risks that it faces.”

In the past, he says, fund managers, brokers and analysts generally chose relatively narrow financial models to measure prospects of a company’s potential risks and they missed things. Now O’Sullivan says: “We are looking for a general incremental improvement in the reporting of CSR, a lot of companies do it, but in some cases it’s almost like a marketing product, rather than a disclosure.”

He acknowledges that other companies are disclosing fully what they are doing in the area of corporate social responsibility, in effect stating that “we are meeting environmental standards, and our meeting them is audited against the standards, so we can tell our shareholders we have a clean bill of health on the environment.”

O’Sullivan says the Council is anxious to see that the research and analysis of companies is a bit broader than it is now. He cites Westpac as a terrific example of a company that has looked at the whole of its operating environment and has set out to mitigate any risk that might arise.

O’Sullivan can see no need for a change to the corporations law. “I think there is a danger in over-regulating this kind of thing. If everybody was ignoring it maybe there would be a case for it,” he says. O’Sullivan wants management and directors to regard CSR as being part of the culture of the corporation. “It’s not something that you can pick up and put down. I don’t think it’s something out of left field, I think it is just a broadening of the issues that directors have to be across, to make sure that their managements are not allowing things that should have been avoided.”

Senator Wong says directors should look at their business, look at what they do, and try and determine some of the non-financial risks that they face. In short, board members should be asking: “What is our social impact, what is our environmental impact, and what is the way in which we can minimise those risks and are there any opportunities in terms of managing those risks?”

Wong believes that while companies do have a choice in terms of whether or not they embrace CSR, long term they will inevitably have to deal with it. “We have a long way to go in Australia but certainly I think there is a growing awareness of these issues,” she says.

Also, if you believe that governments are going to have to respond on a range of fronts, there is a business benefit in being ahead of that curve. Senator Wong points to the changes that have been made by companies in the mining sector as another example.

She says: “They have tried quite hard to deal with the environmental and social impacts of their operation because they understand the impact on their business operations. If you talk to significant mining companies they will say we do this because we understand we have a licence to operate, and if we don’t do it right, there is always the possibility that there will be community pressure for it to be impinged on.”

But not all Australian companies have yet come to grips with CSR and what it means for them. Wong says the range of understanding and engagement with these issues through the directors’ community in Australia varies considerably. “There are some who are highly engaged with this, there are some companies who are well down the track, integrating a sustainability approach into the way they operate and it is very much part of their corporate culture. There are others for whom this is still an unknown quantity,” she says.

Senator Wong believes that the leading companies in the corporate sector are probably beyond where most parliamentarians are in terms of their thinking. But the politicians are going to be brought up to speed, with the CAMAC report due by the end of the year.

Cumberland Industries: corporate social responsibility in action

According to Professor David R Stevens, head of marketing and strategic development, Cumberland Industries, the responsibility for both the community and environment can be viewed as an opportunity. He says: “The social and natural environments a company operates in must be sustainable. An investment in CSR supports sustainability. There are short-term benefits in reputation, risk management and recruitment and longer-term benefits in energy and materials savings, a committed workforce, new markets, good governance and even product/service development.

“Many organisations have begun to seek partners (usually NGOs or NFPs) and by embarking upon a plan and documented ‘partnership’ are able to demonstrate their commitment to corporate social responsibility by either carrying out pro bono activities, as in the case of professional services organisations, or allowing employees time to do voluntary work or engage in many other voluntary activities.”

Cumberland Industries Limited, a not-for-profit organisation that employs more than 500 people with a disability, has taken an innovative approach which in many ways is an extrapolation of this partnership process. Recently, Taronga Zoo was able to contribute $5,000 towards accredited training packages to be supplied to people with a disability who are working in a ‘business services/social enterprise’. Marrickville Library Services was able to contribute $10,000 for accommodation and residential support to people with a disability contributing to the purchasing of land, building material and subsiding support and care costs for people with an intellectual disability.

Roche Process Engineering part of Roche Mining and a subsidiary of Downer EDI (a high profile publicly listed company and strong supporter of corporate social responsibility) was able to provide nearly $60,000 for funding of a part time trainer/support staff to provide additional and one to one support to employees that require high levels of support assistance and training.

Organisations like QNI (Queensland Nickel industries) a subsidiary of BHP, the Roads and Traffic Authority, Cardno, Parsons Brinckerhoff through the Panama Canal Authority, Burns and Roe Worley Pty Ltd, The Hong Kong Housing Authority, OAMPS the large publicly listed insurance brokers, Hyder Consulting, and many others have followed suit. They have nominated one or more in a series of specific projects offered by Cumberland Industries Limited and contributed significant funds.

In aggregate, in just one year over $500,000 in total revenue has been received by Cumberland Industries Limited from 20 different organisations to support people with a disability.

Helen McCombie is a communications expert, working in a boutique media and government relations company. After a decade of reporting for Australia’s premier business current affairs program, Channel Nine’s Business Sunday, Helen now consults to a wide range of companies on media and communications strategies.