With corporate social responsibility part of the business mainstream, companies are now expected to make a profit and a difference. How can they ensure their corporate image aligns with their behaviour?
By David Walker
John Purcell, CPA Australia policy adviser, quotes the 18th-century English judge – Edward Thurlow, 1st Baron Thurlow – who described them as having “no soul to be damned, and no body to be kicked”.
However, in recent years, corporate social responsibility (CSR) has cemented its place as a mainstream business philosophy, as companies react to falling public confidence in them. “We need to recognise that trust has been eroded, either through instances of corporate misconduct or ... perhaps by unreasonable expectations about how corporations operate,” Purcell says.
In February 2019, the Australian Stock Exchange (ASX) published the fourth edition of its Corporate Governance Principles and Recommendations, with a new emphasis on incorporating social impact in corporate strategies. In August 2019, the US Business Roundtable issued a “Statement on the Purpose of a Corporation” affirming its members’ commitment not just to shareholders, but also to a broad range of stakeholders, including customers, employees, suppliers and communities.
As it has gained adherents, however, the CSR approach has run into cases that test corporate commitment.
Driving CSR's boom
CSR initiatives have long attracted charges of paternalism. In 1970, US economist Milton Friedman supercharged the debate in an essay published in The New York Times Magazine titled “The Social Responsibility of Business is to Increase its Profits”.
However, the modern boom in CSR has been driven by newly powerful factors. Among them are concerns about possible regulation and a rising distrust of corporations, which has been fed by a series of scandals since the global financial crisis. There is also a desire to attract scarce high- level talent, and a belief in the marketing power of a good corporate reputation.
Recent research by US-based marketing agency Cone Communications shows that about two-thirds of millennials won’t take a job at a company with poor CSR practices. The survey of 1000 people also found that 75 per cent of millennials would take a pay cut to work for a responsible company, and 83 per cent would be more loyal to a business that enables them to contribute to solving social and environmental problems.
If CSR is not tied to actual company behaviour, it risks accusations of window-dressing – or worse.
CSR initiatives may also be encouraged by research suggesting that those who pursue social responsibility make, on average, slightly higher returns. Research commissioned by CPA Australia, “Sustainability Information and the Cost of Capital – an Australian, United Kingdom and Hong Kong listed company study”, also shows that higher sustainability ratings are strongly associated with lower-cost capital (and vice versa) on three of the sustainability metrics: total sustainability ratings, total environmental ratings, and total social ratings.
Perhaps the biggest corporate driver of all has been investor demand, notes Stephen Woodhill, CEO at finance executive peak body the Group of 100.
“There are increasing numbers of ethical investors, for example, who are asking for specific things that their company should be adhering to,” he says.
Funds have responded by pressing for evidence of corporate social responsibility and sometimes selling the shares of those companies unable to offer that evidence.
At the end of last year, a Bank of America analysis – titled 10 reasons to care about environmental, social and governance (ESG) investing – claimed to have determined that environmental, social and governance disputes had wiped more than US$500 billion off the value of the US S&P 500 Index in 24 separate corporate controversies over the final five years of the 2010s.
The hard cases
In their quest to be good corporate citizens, companies can enter the difficult territory long occupied by politics. Analysts warn that businesses that take on this challenge need to understand more than just its appeal to stakeholders. “There will be risks on both sides of commenting on a social issue or taking part in a social issue,” says Megan Motto, CEO of the Governance Institute of Australia.
Steven Munchenberg, managing partner at directorship consultancy Blackhall & Pearl and a former Australian Bankers Association chief executive, says that “companies will identify a social issue they think is important, but they will often not fully understand the political pressures around that issue”.
If CSR is not tied to actual company behaviour, it risks accusations of window- dressing – or worse.
BP discovered this in 2010, when a decade of marketing and PR investment in its new “Beyond Petroleum” branding disappeared under the oil slick of the Deepwater Horizon disaster.
In Australia, the Commonwealth Bank (CBA) repositioned itself in 2015 as “the ethical bank”, following a scandal in its financial planning arm. Shareholders heard that the bank viewed strong ethics as “an ultimate competitive advantage” and was working with The Ethics Centre to strengthen its values. Then followed a string of bigger scandals – CommInsure, AUSTRAC and findings from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – that severely compromised its positioning.
Google, which still has its unofficial corporate motto “don’t be evil” at the end of its code of conduct, has also come under intense scrutiny from lawmakers, shareholders and its own employees in the past year. Concerns include its racial and gender diversity performance, disparities in treatment of workers, renewed plans for a censored search product in China, and its pursuit of a US military artificial intelligence project.
Leaping the hurdles
Not only is the CSR strategy vulnerable to events, but the scope of its application is limited by other business needs.
University of California Berkeley political scientist David Vogel, in his book The Market For Virtue, has described CSR as a “niche strategy”: it works for some firms, to some extent, in some circumstances.
Like Vogel, Munchenberg sees CSR policies as value-adding if they can leap a series of hurdles. They must at a minimum be positions that the company can embrace, that it can justify to shareholders, and that it can discuss and advance in the community without generating unacceptable hostility.
Business must “be pragmatic about and prudent about what they can do and how they should go about doing it”, Munchenberg says.
“There will be risks on both sides of commenting on a social issue or taking part in a social issue.” Megan Motto, CEO, The Governance Institute of Australia
Woodhill notes that companies wanting to press particular policy ideas, from gender equality to carbon pricing, have often sought to diffuse political pressures by forming groups that can argue a case without turning a spotlight on their members. An individual company that adopts a controversial stance on a societal issue may find itself in the glare of intense scrutiny from the media and political players on both sides of the issue.
For all the political risks, it is possible to strike a balance between conflicting interests and establish distinctive CSR positions that survive the twists and turns of public events.
They may have no soul to damn, but the demands on today’s companies to take stances are real. Munchenberg says that while views on social issues may have their pitfalls, companies need to keep examining the role they play.
“Companies do need to recognise that they operate within a social contract, and expectations of what that means have changed.”
Corporate image versus corporate behaviour
In an MIT Sloan Management Review article in 2015, business academics Jose´ Carlos Marques and Henry Mintzberg note that CSR is too often “about public relations exercises more focused on corporate image rather than corporate behaviour”.
They suggest another strategy for improving corporate reputation, minimising regulatory impact and attracting talent: concentrate on “the bread and butter of responsible corporate behaviour”. They also urge business leaders to:
- Foster ethical judgement within their company.
- Create defensible compensation.
- Acknowledge the benefits of sensible and proportionate regulation.
- Keep a rein on corporate lobbyists.
- Work with non-government and government agencies, industry partners and other stakeholders where clear social gains can be secured.
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