Cover story: The good corporate citizen

Expectations of what it takes for a company to be considered a ‘good corporate citizen’ have gone well beyond the simple signing of a cheque. Katrina Clifford explores the ethical and legal tensions of the debate on ‘corporate social responsibility’. 

From an observer’s standpoint, it seems like only yesterday that coverage of the topic of ‘corporate social responsibility’ (CSR) was concentrated on the swing away from the simple and charitable signing of a cheque by companies towards a preference for more strategic, engaging and tactile partnerships with community groups and social and environmental initiatives. With growing public mistrust and scepticism towards corporate behaviour and the social credentials of organisations following the collapse of Enron and HIH, however, the tide has turned. Now, veneration for this style of corporate dynamism has principally given way to a complex and lively debate about directors’ duties and the regulatory parameters of what defines a ‘good corporate citizen’.

In Australia, two government inquiries have been charged with the task of teasing out the legal tensions and political dimensions of CSR’s central consideration – the interests of shareholders versus those of a broader pool of stakeholders. At task is the question of whether the two, in fact, are or ever have been mutually exclusive in the minds of directors.

To some degree, the argument buys into the ongoing auxiliary debate as to whether the interests of shareholders should take primacy over those of other third-party stakeholders. Recent research released by CPA Australia suggests that, among respondents, “the majority of market participants would like to see the interests of broader stakeholders positioned on par with that of a company’s shareholders,” says Mark Coughlin, president of CPA Australia.

For the most part, general market sentiment has fallen in favour of virtue over vice, claiming that the majority of Australian companies and their boards typically do act beyond their legal obligations, because ‘enlightened self-interest’ dictates that they must do so in order to remain financially sustainable over the long-term and to effectively manage reputation risk.

Due to report at the end of the month, the Parliamentary Joint Committee on Corporations and Financial Services (PJC)’s Inquiry into Corporate Responsibility and Triple Bottom Line Reporting is focused specifically on the extent to which the current legal framework encourages or discourages directors of incorporated entities from having regard to the interests of stakeholders other than shareholders, and the broader community. Under question is whether revisions to the legal framework – namely, the Corporations Act – are warranted to legally oblige directors to account for these broader interests.

Similarly, with the deadline for public submissions having recently lapsed, a second inquiry under the tutelage of the Corporations and Markets Advisory Committee (CAMAC) has now begun the task of reviewing what convenor of CAMAC, Richard St John, has described as: “…whether companies should be judged on the way they conduct themselves in the context of pursuing their business aims, or [whether they] should be expected apart from those aims to direct their efforts to other social ends.” After consideration of the issues at hand, as well as those arguments outlined in the public submissions received, CAMAC will prepare a final report along with recommendations with regard to aspects of corporate decision-making, mandatory versus voluntary ‘triple bottom line’ reporting and whether further measures are needed to encourage socially and environmentally responsible business practices.

Stumbling over semantics

Of course, the principles of corporate responsibility, or CSR as some term it, sit at the heart of good governance. And it is fair to say that with the final recommendations of both the PJC and CAMAC inquiries yet to be handed down, no director can take their eye off the ball now and assume that they know all there is to know in this ever-changing regulatory environment. In fact, education – at a public level as well as around the boardroom table – may well be the panacea for a good deal of the confusion that the CSR debate has yielded.

From a spectator’s perspective, the problem with much of the current flavour of CSR debate and inquiry is that any progress in discussions about directors’ duties and prescriptive versus non-prescriptive reporting practices has largely been mired by semantics – the enduring search for a commonly-accepted definition as to what constitutes a ‘stakeholder’ or, for that matter, what even defines ‘corporate social responsibility’ in practice.

Herein lies the rub – part of the dilemma facing both the PJC and CAMAC inquiries is the difficulty associated with defining the parameters of each one’s investigations as to whether CSR should weigh in as a legal requirement. After all, more than most phrases, CSR means different things to different people. And, as the Australian Institute of Company Directors has clearly pointed out in its submission to the PJC [see page 58 of this issue of Company Director], it is this “threshold difficulty of a clear definition” that suggests mandated behaviour in regards to CSR and its reporting remains not only an inappropriate, but impractical option at this stage of the debate.

On this point, CPA Australia’s Coughlin agrees: “Questions about what defines a ‘stakeholder’ cut to the quick of why companies are not yet ready for mandatory reporting requirements,” he says. This is in spite of recent findings from CPA Australia’s 2005 Confidence in Corporate Reporting research that revealed, of the survey’s public respondents, some 88 per cent were supportive of mandatory reporting of CSR practices and performance.

The short-sightedness of shareholder value

Semantics aside, it would appear that the fundamental and essential message that much of the CSR debate has, to date, overcomplicated is that, in essence, ‘corporate responsibility’, ‘CSR’, ‘sustainability’, ‘triple bottom line’ reporting – whatever interchangeable term you prefer – is simply about companies not being captured by the short-term demands of the market nor by short-term rewards.

Rather, it is the reasonable acknowledgement that, to succeed in today’s marketplace, companies and their directors and management must adopt a long-term view of the business. No longer can they ignore the fact that long-term shareholder value is typically only derived if the social, environmental and auxiliary stakeholder issues that have a material bearing on the current and future financial performance of the business are effectively managed in an accountable and transparent manner.

“The fundamental problem,” says Tim Williams, Westpac’s senior adviser, Corporate Responsibility & Sustainability, “is that the accounting paradigm neither fully describes organisational peformance and value nor fully predicts future financial performance. And conversely, with the rise of shareholder activism there are new expectations on what companies report and there is now nowhere to hide.”

Some may say that this places a great deal of responsibility on individual directors to act ethically within the collective framework of the board and the company. But surely there is valid argument to suggest that this is by no means an unreasonable expectation? Beyond legal requirements, is this not what directors seeking success and sustainable value for their organisation should be doing in any case? And, if this is so, can there justly be an argument for imposing a generalised ‘social responsibility’ on Australian directors and their companies that is not imposed on individuals and other forms of business enterprise?

The looming threat of increased regulation

The sticking point, according to Simon Longstaff, executive director of St James Ethics Centre, is that some people believe companies should do no more than what the law sets out – the distinction between what a company ought to do and what a company must do. “This assumption is a real risk to business and to society,” says Longstaff. “It says ‘please increase regulation when something needs to be done because no-one is prepared to say what they should or shouldn’t do’. But too much regulation creates too much ‘box-ticking’ and an illusion of security – a washing of hands when it comes to responsibility, because the law then determines what should be done. This is a genuine threat to the ethical sinews of society.”

But how do we get to a point where there is a common ethical understanding among Australian directors that it is appropriate and entirely within their powers to have regard to broader social and environmental issues when considering the best interests of the company as a whole? And how do you enforce this without imposing further regulation or making the duties of directors even more onerous than they already are?

The answers are both simple, yet complex. Longstaff suggests that part of the bind for many directors is the short-sightedness of shareholders – that, although directors may feel inclined to do something that is ethically required of them, some may hesitate because they feel bound by the way the law currently operates.

On this point, and as part of his submission to the PJC Inquiry, Longstaff has proposed the concept of an ‘ethical judgement rule’ that would afford some protection to directors from liability in the event that their ethical decision caused a detrimental impact to the financial interests of the company as a whole – which many directors incidentally translate, says Longstaff, as “the interests of shareholders”.

The concern of these directors, he explains, “is not so much about whether or not that is what the law actually allows or does not allow. They stand in some dread of being sued by shareholders who claim that their interests have not been served and therefore, I think, would benefit from some degree of protection to make it clear that they can bring bona fide ethical considerations to bear in their decision-making”. Longstaff does admit, however, that with any type of ‘safe harbour’ such as this, the danger exists that some directors may use the ‘ethical judgement rule’ as an excuse or defence against poor business judgements.

The rude awakening to public expectations

The disconnect between public perceptions and business endeavours, in this respect, has proven an enduring struggle for corporate Australia – particularly given the rising levels of public mistrust and distaste towards what has been termed ‘greenwashing’ or, put simply, the exploitation of ‘CSR as PR’. Of the shareholders and the public surveyed for CPA Australia’s 2005 Confidence in Corporate Reporting survey, some 60 per cent revealed that they perceived social and environmental reporting to be a public relations exercise – although, interestingly enough, so did 50 per cent of the directors surveyed.

Which begs the question: is CSR mostly fraud or for real? Just how sceptical should the public be of the motivations behind CSR practices adopted by today’s organisations? Is it just a way, as author Joel Bakan suggests, for capitalism to ingratiate itself to a suspecting public? Or is it simply paranoid and naïve to assume that profit can only ever be mutually exclusive of public interest and the common good?
Ironically enough, Westpac’s Williams makes the point that of the Australian organisations proving most progressive in the area of CSR and its reporting, a significant number were actually forced to evolve in this manner as a consequence of a crisis of reputation or a “rude awakening to community expectations”. Westpac, of course, is an example of this.

In the late 1990s, the bank was struggling under the weight of potentially terminal reputational damage, following the remonstrations of disgruntled staff and customers, who were stridently opposed to Westpac’s rising account fees and branch closures. “In essence, the bank was operating out of kilter with public expectations,” says Williams.

With the situation at breaking point and little option but to face the storm head on, Westpac responded, in 2001, with the establishment of a Board Corporate Responsibility and Sustainability Committee as well as a Social Accountability Charter (recently updated as Westpac’s Principles for Doing Business). In 2002, in an ongoing attempt to address anti-bank sentiment and to be more transparent, Westpac released its first Social Impact Report (since re-badged as the bank’s Stakeholder Impact Report).

Unlike most companies, however, Williams explains that Westpac retains no corporate responsibility policy per se. Instead, the bank’s operations are guided by a strategic principles-driven approach to business that has, at its heart, a simple premise – it’s what the bank terms ‘doing the right thing’.

BHP Billiton is yet another example. Its CEO, Chip Goodyear, has previously gone on the public record, saying that the controversial Ok Tedi copper mine in Papua New Guinea (PNG) would not have been developed under the company charter BHP Billiton works by today. BHP Billiton withdrew from the project in 2002 by transferring the company’s 52 per cent shareholding into a new company (with future profits designed to fund short- and long-term sustainable development projects across PNG). Ian Wood, the company’s vice president, Sustainable Development and Community Relations, readily concedes that the environmental impacts that resulted from the development of the mine are not something of which BHP Billiton is proud. “The decisions that largely set in train the environmental impacts were taken by the project shareholders, including the PNG Government, in 1982. Faced with a similar decision point today, with the benefit of the science as we now know it, it seems certain that we would have achieved a very different outcome,” he says.

Today, the company’s formal sustainability reports have evolved into broader documents that are closely aligned to the Global Reporting Initiative (GRI)’s 2002 Sustainability Reporting Guidelines. The company’s position on CSR is set out in its charter, which is supported by a specific Sustainable Development Policy. This, in turn, is supported by the company’s 15 mandatory HSEC (Health, Safety, Environment and Community) Management Standards, which operate across BHP Billiton’s global operations. The end goal is what the resources giant calls a ‘Zero Harm’ approach to BHP Billiton’s people, its host communities and the environment.

Towards a standardised reporting framework
But while BHP Billiton and Westpac may represent two of a number of larger Australian companies reputed for having internally developed rigorous CSR policies and voluntary reporting standards, CPA Australia’s Coughlin contends that, to date, there hasn’t been any real emphasis or significant commitment made to sustainability reporting amongst corporate Australia. “Any reporting has been voluntary and some of the companies that have produced reports haven’t done too well in that,” he says. “It’s quite telling that only a few actually generate a separate sustainability report.”

The figures speak for themselves. CPA Australia’s Sustainability Reporting – Practices, Performance and Potential reveals that only 24 of Australia’s Top 500 listed companies actually produce a discrete report that covers more than one area of ‘triple bottom line’ reporting. Of these, says Coughlin, “only one company covered 30 of the 40 or so GRI-developed indicators against which to measure CSR performance. That then dropped away to single digit indicators amongst the others. There weren’t even any ‘norms’ common to industry clusters.”

This suggests that, even if a greater number of Australian companies were encouraged to adopt ‘triple bottom line’ reporting – and KPMG’s International Survey of Corporate Responsibility Reporting 2005 suggests that the numbers are steadily increasing – the problem remains that sustainability reporting has yet to develop the same rigour as financial reporting. Some companies do not audit their sustainability reports, while others do. And it is this kind of inconsistency that has given rise to doubts over the efficacy of mandatory reporting.

Bearing this in mind, the GRI has stepped up its mission – since the release of its second set of Sustainability Reporting Guidelines in 2002 – to develop a ‘universal’ reporting framework that enables market comparability and also encourages companies to view sustainability reporting as being as routine as financial reporting. Describing the guidelines as a “work in progress”, Judy Henderson, the Australian board chair of the GRI, says the third generation of reporting guidelines – dubbed ‘G3’ – is due for final release in October this year. A draft set of the guidelines and their associated protocols are available for public comment until 31 March on the G3 website: http://www.grig3.org/

The revised guidelines, according to Henderson, are aimed at “even greater comparability, clarity, ease-of-use, assurability and measurability of reports produced using the guidelines”. The changes come on the back of a Structured Feedback Process – the purpose of which, says Henderson, was to gather the opinions and ideas for improvement from around 450 organisations actually using the GRI Sustainability Reporting Guidelines to report on their CSR activities and performance. “Among the feedback was the recurring theme that some of the performance indicators were daunting,” says Henderson.

Mandatory versus voluntary reporting

For those unfamiliar with its foundations, the GRI framework includes both reporting principles and specific content indicators that canvass three general categories (‘economic’, ‘environmental’ and ‘social’) with subset criteria listed correspondingly. The indicators are considered to be broadly relevant to all organisations – regardless of size, sector and location.

Based on a unique multi-stakeholder process, the GRI Sustainability Reporting Guidelines are currently utilised across 54 countries and 38 industry sectors. They are also translated into nine languages. Out of a total of 781 registered organisations, Henderson says, around 39 Australian companies report against the GRI – although, in truth, the figure is likely higher with a considerable number of un-registered companies also suspected to be reporting against the framework.

While Henderson claims that the GRI does not take any one particular position in relation to mandatory versus voluntary reporting, she does concede: “More and more now, the carrot approach is as effective as the regulatory approach”.

In the United Kingdom, for instance, the government has recently done a volte-face on its statutory Operating and Financial Review (OFR) in favour of a ‘lighter touch’ regulatory approach to CSR reporting – requiring businesses to instead produce what is known as a ‘business review’. Some industry commentators have indicated that the requirements set down by the latter will end up being just as onerous as the OFR, despite the fact that the business review will not require companies to report on social and community issues, as the OFR did. Nor will the business review require companies to declare their policies on social, environmental and employee issues and how these have been put into practice.

To this, Wood offers: “BHP Billiton, for one, has been reporting completely voluntarily since 1997. Over the course of this period, there’s been a significant amount of flexibility and innovation in the styles and form of reporting – precisely because of the voluntary nature of it. I don’t know whether a regulatory approach would put a ceiling on this. Companies that are progressive in CSR reporting are that way because they see the value in ‘triple bottom line’ reporting. If that becomes a mandatory measure, it could very well reduce CSR to PR spin.”

Of course, on the flipside, it is precisely because of this diversity of styles and form among the companies that produce sustainability reports that stakeholders have found it incredibly difficult to compare ‘apples with apples’ when weighing up CSR performance across companies.

Also worth noting is the fact that, while companies themselves may find value in voluntary reporting, the results of CPA Australia’s Sustainability Reporting – Practices, Performance and Potential research, indicate that the sharemarket has yet to value sustainable disclosures. Which poses the question: what clear incentives are there for companies to voluntarily incorporate CSR disclosures into their overall business strategy if reporting of their sustainability practices is not even valued by the market?

While no conclusive evidence has been found to substantiate claims that more extensive ‘triple bottom line’ reporting necessarily engenders an improvement in the financial health or governance of an organisation, Henderson claims it is globally recognised that “good sustainability performance and financial performance go hand in hand”.

Drawing the threads together

It is likely that the outcomes of both the PJC and CAMAC inquiries will lead the way in setting the tone of CSR discussions moving forward. Although, early signs suggest that it is doubtful that the basic obligations of directors’ duties to act in the best interests of the company will be broadened to include a legal requirement to consider the best interests of all stakeholders.

Longstaff, however, does hesitate to suggest that the ‘safe harbour’ for directors “may get up” to enable protection for directors in the event that they make ethical judgements – despite these judgements not necessarily being in the best interests of all shareholders. This, Longstaff says, would likely require amendments to the Corporations Act.

If submissions to both the PJC and CAMAC inquiries are anything to go by, one thing remains certain: any recommendations in favour of mandatory ‘triple bottom line’ reporting may well be met with harsh criticism from industry. There have been calls, however, for government to take a proactive role in the debate – not in relation to the legislative agenda, but rather in regards to configuring and promoting an education process that actively encourages organisations to change their internal culture in favour of a broad-based voluntary reporting of CSR practices and performance.

Says Coughlin: “CPA Australia’s view is that there needs to be a collaborative approach to the CSR debate. The Government should take the lead on this issue and engage academia, business, professions, standards setters and regulatory agencies to draw together a framework for sustainability reporting and a sensible model for the future,” he says.

“The GRI is a good framework, but questions need to be asked about its effectiveness in the Australian context. There also needs to be internal education about CSR and non-financial risk management within companies. And there needs to be an auditing process put in place to ensure people feel confident in those sustainability reports that are being produced,” he adds.

Surely, the end sum must be a recognition from companies that CSR is no longer incompatible with their business interests, nor with sustainable profit creation. More to the point, CSR is now less of an option and more of a ‘given’. But then, as some naysayers would suggest, if all directors took the attitude of long-term viability and prosperity for their company, then perhaps the issue of CSR wouldn’t be as high on the agenda as it has been…