In good company, responsible business

Most organisations would like to be thought of as a good corporate citizen.
After all, no operation wants to be classified as a rogue company and no plc can
afford to thumb its nose at public opinion. So where does this leave corporate
social responsibility? Is it enough for a company to simply be seen as doing
something socially responsible? And when a company actually does CSR, is it then
distracted from its core mission or does CSR enhance that core mission? If it
enhances the core mission, is it unreasonable to expect to see some correlation
between a strong commitment to CSR and a strong bottom line?

The Economist ran a report in January which suggested that much
corporate spending on CSR amounts to a waste of shareholder funds, conveying no
real benefit to the organisation. The good things in CSR, the report argued, are
simply good company practice in any event; everything else is ‘greenwash’ and
probably best avoided.

The Economist’s report elicited something of a storm from those in
favour of CSR. The counter argument – the one in favour of CSR – puts the idea
of a sustainable business at the heart of CSR. If you don’t focus on
sustainability as a core part of your strategy with respect to customers,
markets and staff, you are heading for a fall, proponents warn.

One might suspect that this debate is in part something of a clash over
terminology, since The Economist’s writers would doubtless argue that
what the CSR proponents call sustainability covers much of what they would
rather term sensible business practice.

Those opposed to the CSR would argue further that the use of sustainability
as a term is probably unfortunate since it suggests parallels with environmental
campaigns for sustainability. Companies that go down this road can find
themselves locked in to appeasing special interest groups that have nothing to
do with the company’s core mission.

Nick Isles, associate director at the Work Foundation, believes it is natural
for people who focus on short-term, profit-orientated goals not to get
CSR. He shares part of the ground with The Economist, in that he
believes great companies just do CSR naturally as part of good business
practice. “Good companies do not have a bolt-on addendum called CSR which says,
‘by the way, we are fundraising for the local hospice, isn’t that nice?’ They
just do CSR because they see themselves as rooted in their
communities.”

The assumption here is that behaving as if the organisation is rooted in the
community creates happier staff, more satisfied customers and better relations
with suppliers, all of which help to foster corporate success.

The Work Foundation published a report last year entitled Achieving High
Performance: CSR at the Heart of Business, which claims there is “a
sufficient weight of empirical evidence” to suggest that building CSR activities
into the heart of business strategy leads to higher productivity and
profitability.

Isles believes that the fact that plcs will have to include the operating and
financial review as a standard part of annual reports and accounts from February
2006 will be tremendously important. It will encourage organisations to develop
the metrics required to make comparative judgements about corporate investment
in human capital, social projects and environmental actions. “The OFR is where
we see a potential mechanism coming into being for entrenching better, more
measurable performance,” he says.

With an eye on the OFR, Nick Mattison, managing director of PR firm Mattison,
commissioned research among City analysts with a view to finding out what kind
of non-financial communication they valued. His research found that while
analysts value some kind of non-financial information, such as information about
brand and market development, none wanted more CSR information.

“The key question for analysts is how a particular piece of information will
affect the present value of future cash flows. They can, of course, see how to
relate brand damage to this, which is one area of concern for CSR. In general,
however, CSR activities do not seem to them to bear on cash flows in any
immediate way,” Mattison explains.

Information in corporate CSR reports about, say, the number of trees an
organisation has planted is just not meaningful. “Our research found that if you
are an analyst for the oil sector then, yes, you are likely to be concerned
about environmental risk. In general, however, the people who are promoting CSR
need to be far more hard-headed about the metrics they use,” he says.

Mattison points out that one of his prime considerations is to determine how
clients should focus and allocate their effort and time with respect to external
communications. “We have looked at how CSR can be built in to the bottom line,
and we just do not think you can build it in to bottom line reporting in a way
that would please a finance director. You always come up with a bunch of metrics
that are difficult to get to grips with in an accounting sense,” he says.

How do you value reputation, for example? Is it the difference between a
company’s tangible assets and its overall equity value? “Academics in business
schools often struggle to come up with an answer to these type of questions.
Analysts just don’t have time for fluffy communications,” he says.

Again, those in favour of CSR believe that while some CSR reports may contain
‘fluff’ that doesn’t make CSR fluffy. Martin Batt, manager of corporate
responsibility at HBoS argues that for HBoS, and indeed for any major bank, CSR
is critical, not incidental or something that is merely ‘nice to have’. “We
recognise that corporate responsibility lies at the heart of the decisions you
make in ordinary day-to-day business activities. The trust that people have in
you as a company is critical for a bank. Trust, fairness and value for money in
the products we bring to market are vital to us. For us, spend on CSR is, in
essence, about spending to derisk crucial aspects of our business,” he says.

Batt points out, not unreasonably, that all major plcs are under pressure to
report on their environmental impact. Initially, non-governmental organisations
were important in kick-starting this process, but now the CSR and environmental
benchmarking specialists in the investment community, and in responsible and
ethical investment teams, have taken this up and are running with it,” he says.

The traditional approach to ethical investment was screening out defence and
tobacco companies. The more modern approach, Batt says, is to see if companies
are adopting responsible practices that could bring them back within the ethical
investment framework.

Tobacco group BAT, he points out, is now one of the most highly respected
reporting companies, addressing all the issues raised by its core product. The
main pressures that banks are under are the environmental and social risks of
lending, he says. Increasingly, investors in banks will look to see that banks
are taking the right steps to assess the risks in those environmental and social
issues. “You have to look afresh at investment decisions and opportunities.
These are things we should be looking at anyway because if there are adverse
environmental issues, then there is a financial and social risk to consider,” he
says.

Batt points out that HBoS’s finance director, Phil Hodkinson, is an
enthusiastic champion of CSR as an integral part of corporate performance and is
a director of Business in the Community. “Hodkinson has been instrumental in
helping us to co-ordinate our thinking on CSR across the divisions and to embed
it at board level.”

HBoS moved from 29th position in the Business in the Community CSR Index to
9th this year and Batt reckons this performance pleased everyone in the company.
It also got listed in the Dow Jones Global Index in September. “At the World
Economic Forum in Davos in February we were the only UK bank listed in the
Forum’s 100 most sustainable companies. That kind of measure has a huge
resonance with our staff, and we regard our staff as our most important audience
as far as our CSR reporting is concerned,” he says.

Adrian Hosford, BT director of corporate responsibility, reckons that CR (BT
drops the S) is very much a part of BT’s mainstream business strategy. “It is
not something bolted on to buff up our reputation. This is intrinsic to our
brand, to our people motivation and to our values. It is about supporting and
helping to deliver our mainline strategy,” he says.

In Hosford’s view, mainstream City analysts are “among the slowest audiences
to appreciate CSR”. However, like Isles, he believes the introduction of the OFR
will push even this group to start thinking more carefully about the value of
CSR. “The non-financials are a critical part of the health of a company and CSR
is mainstream to understanding corporate health. It is part of the risk
assessment, so mainstream analysts will not have the luxury of ignoring CSR
indefinitely,” he says.

In fact, Hosford points out that, increasingly, he and his team find
themselves being called on to do briefings that include City analysts. “They
have a history of not being interested, but that is changing,” he says. He
argues that because the KPIs for CSR include things such as measures of customer
satisfaction, brand values, employee motivation and environmental initiatives
that cut operating costs, they cannot be dismissed as fluff.

“The fact that we are number one in the Dow Jones CSR Index helps us to build
a picture for the City of how we operate. Moreover, we have market opportunities
that arise directly out of our CSR work. We can sell products on to other
companies that help them to become more sustainable,” he says.

Hosford points out that last year, BT responded to more than £2bn worth of
tenders that required strong CSR credentials. “All these things are a strong
part of the business case for CSR,” he explains.

Ewan McCulloch, government and CSR manager for Clydesdale Bank, which is part
of the National Bank of Australia group, makes a similar point. “Some of the
invitations to tender that we receive ask us to put forward our environmental
policy before we even submit our tender. Companies today want to protect their
reputations. They want to ensure that their business partners have a solid CSR
record,” he says.

McCulloch believes The Economist’s report has mistaken CSR for
community-facing projects. “That is the old, traditional view of CSR and it is
fundamentally mistaken. There is a cost to CSR, of course, but it is no more a
cost you could avoid than a staff cost. It is not merely a ‘nice to do’, it is a
‘must do’. You are trying to calculate your profit in a holistic way, looking at
long-term costs. It is about understanding how your business operates and
evaluating non-financial risks,” he says.

What is your staff turnover? What is your environmental impact? How can you
reduce energy consumption? McCulloch believes these are the kind of CSR-related
questions that companies should address.

One reason why some boards, and doubtless some analysts, still have problems
with CSR is the sense in business circles that the issue has been somewhat
hijacked by the loony left. Mallen Baker, development director at Business in
the Community, believes that part of the challenge with CSR reporting is that
there are two distinct strands to it. There is a business-led movement focusing
on sustainable business – and that has varying degrees of commitment in
different economies around the world. The other comes from a camp that latched
on to CSR about seven years ago which, in essence, consists of a group of
campaigning organisations that saw CSR as a way of forcing business to do more
of what they wanted business to do, he says.

“Increasingly, this group is getting more cynical about CSR since they see
business as not moving at the pace, or in the direction, they want it to. But
the two versions of CSR are not describing the same thing,” he says. One example
of this is a recent polemic from Christian Aid, which produced a report entitled
The Real Face of CSR, he says.

The Christian Aid analysis, in a funny kind of way, has much in common with
The Economist’s view in that it dismisses CSR as reputational greenwash. “In
simple terms, companies make loud, public commitments to principles of ethical
behaviour and undertake good works in the communities in which they operate. ‘We
can’t be so bad,’ would go a company’s clichéd CSR-backed response. ‘Look at all
the nice things we do.’” (For the whole text, see
www.christian-aid.org.uk).

For Baker, this focus on good works completely fails to get CSR. The essence
of any good critique is that you try to demolish your opponent’s best case, not
some parody of it. Baker also believes that sustainable business is not an idea
that is amenable to demolition. It works, he says, and if you don’t do it,
sooner or later the wheels will come off.

“Basically, companies just work through all the confusing nonsense about CSR
and move forwards. The people who really get CSR are the business leaders who
have been the most engaged in looking at how they can create wealth in a
sustainable way rather than at how they can give away a portion of the wealth
they create,” concludes Baker.