A recent survey shows corporate Australia has been slow to make the connection between good corporate citizenship and a good bottom line.
But doing well by doing good is not only aspirational or altruistic. Investors and shareholders worldwide are attracted to companies who offer more than P/E ratios. As John Arbouw reports, good corporate social responsibility is an idea whose time has come.
Corporate citizenship, corporate social responsibility, enlightened self-interest, corporate community activity, stakeholder relations and the triple bottom line (financial, social and environmental) are now part of the business lexicon. But, according to a report from the Corporate Citizenship Research Unit at Deakin University, there is still some way to go to get corporate Australia to walk the talk. The Deakin University survey of corporate Australia, partially sponsored by the AICD, points to a considerable level of confusion in the business community as to what corporate citizenship means. All too often corporate citizenship is equated to corporate philanthropy that says a company "earns" its licence to operate in the community through its "good deeds". The survey of 98 companies was designed to assess the extent to which an understanding of corporate citizenship is ingrained in the corporate culture and whether there are other perceptions of corporate citizenship beyond those generally understood through community-oriented activities of companies.
Survey findings According to Professor David Birch, who headed up the survey, the results suggest that:
• corporate citizenship is generally seen as a short term community involvement and a more favoured term for describing this activity was corporate social responsibility;
• stakeholder relations are not considered by a significant proportion of the companies to be central to its core business or to the way the company is organised and run;
• corporate citizenship tended not to be mainstreamed with environmental issues in most company cultures, and overall, environmental issues played a much more marginal role in a company's understanding of corporate citizenship than did community involvement, thus signalling that there is little ownership of these issues embedded at all levels;
• Environmental issues were not seen as core to most companies' culture, with few companies being prepared to risk affecting the financial bottom line in favour of the natural environment, or indeed, the environment within the company itself.
• Corporate citizenship, as a concept understood to be mostly about community activities, is considered by corporate Australia to be important, but there is a strong sense that Australia is lagging behind other countries;
• corporate citizenship, for the most part was seen to be a top-down process, from the board, the CEO or management, with only a marginal perception that individuals within a company could drive the agenda;
• overall, the agenda of corporate citizenship was seen to be one that always had to answer to the financial bottom line, and there was little sense of the mainstreaming of a triple bottom line philosophy within companies, despite there being a generally wide acceptance of the need to include social, generally understood rather narrowly as community activities, and environmental issues on a company's agenda – but generally not if this threatened the financial bottom line.
• there was little understanding of how to make a triple bottom line approach work;
• overall, there was considerable hesitation in positioning corporate citizenship as a proactive, long term, internal corporate culture process. The emphasis throughout the survey was generally on short-term community activities;
• the development of long term business/community partnerships, with charities, NGOs or other organisations, for example, was not high on the agenda ;
• while there is clearly a general commitment to corporate citizenship as expressed in short term corporate community investment and involvement, this is not, at the moment in corporate Australia, generally managed in a disciplined, transparent and accountable way;
• the level of public availability of company policies and procedures for community investment, for example, is not high, and the level of published accounts and evaluations very low;
• while there is clearly a willingness to engage in corporate citizenship – much of it is aspirational and not actually embedded in company policy or practice, even when narrowly interpreted as short term community activities; and,
• clearly, significant links have yet to be made by corporate Australia to have the financial, social and environmental bottom lines connect, and inform, not only core business, at every level, but to determine how a company is organised and run.
"What the findings of this survey has demonstrated is that there is a fairly fragile, short-term approach to corporate citizenship and that this has yet to become part of the corporate culture," says Professor Birch. "Businesses want to be good corporate citizens but they don't know enough about it or how to embed this into corporate culture without a serious long term commitment. The easier route is to concentrate on shorter, community-based involvement. "This provides immediate measurements. It is much harder to measure the long term intangibles of good corporate citizenship but you can measure for your annual report the money you have given a local community and the volunteer work by your staff. "There is huge pressures on companies to highlight their community involvement in a social report or as a section in the annual report but this ends up being short term involvement." A change of duty The debate about business and social responsibilities originated in the 1960s and 1970s and economists such as Milton Friedman, Friedrich von Hayek and others have contributed to this debate.
The nexus between business and social responsibility goes back to Adam Smith's Wealth of Nations theory that a company's pursuit of profits and strict accountability to owners (shareholders) of capital will create wealth and that the act of wealth creation will by implication have social benefits. Indeed, at the very heart of a director's duty is the mantra that a director, as a shareholder representative, is there to ensure that the company creates wealth for the shareholders. The traditional view is that social obligations are best met through making a profit for shareholders because if shareholders prosper, society prospers in terms of jobs, consumer consumption and taxes. Anything, which interferes with this wealth creation or the bottom line, is therefore sacrificed. This remains the dominant view and helps explain some of the findings of the Deakin University survey. However, the ground is shifting. The shareholder is no longer alone on centre stage and has been joined by what are termed stakeholders. The term stakeholders define the company as a complex entity comprising shareholders, customers, suppliers, employees, specific communities and the public.
It is part of the shift in the conception of the corporation as the private property of its shareholder owners to the view that a corporation is an institutional entity comprising a social compact among various constituencies. The social entity view of the corporation accepts the mandate that the contributors of capital must be assured of a rate of return in order for them to risk their capital through investment in the company but it does not ring fence this definition. Donald S. Perkins the former chairman and CEO of Jewel Companies Inc articulated the shareholder/stakeholder conundrum in Ivor Francis's book Future Directions – The Power of the Competitive Board. "I once described my role as simply representing shareholders. But over the years, that role definition did not work in many situations in which I found myself. Did I mean long-term or short-term shareholders? Did I mean employee shareholders or arbitragers? In my redefined role, a director's responsibility is to do everything possible to assure the long-term health of the enterprise … you will immediately recognise that this may be inconsistent with the short-term wealth of shareholders. My approach requires thoughtful consideration of all of a corporation's constituencies including management, unions, suppliers, communities – and though, often overlooked, future constituencies including future employees who will be impacted by current board decisions – and current board non-decisions".
Inherent in the view of the corporation as an entity as opposed to private property is the shift away from short-term financial imperatives to long-term broad-based strategies. Shifting focus Finding an alignment between the aspirations of corporate Australia to be better corporate citizens while looking after the bottom line is now receiving a fillip from the very market forces that drive short-termism. Doing well by doing good is not just a cute phrase. Companies across the globe are finding that the very shareholders and investors they want to attract are not solely interested in the price/earnings ratio. Lumped under the term ethical investing, large and small investors are running a rule over the companies they invest in to see if good corporate citizenship is part of the corporate culture. And it is not simply a case of whether a company is environmentally responsible. The definitions of ethical investing can encompass socially-ethically motivated criteria, pure ethical investments or pure environmental funds. The latest term is EcoEthical investment.
Socially responsible investments will account for more than $35 billion in Australia within the next 10 years. A recent report in The Financial Review says SRI investments among institutional and superannuation funds are at the $2 billion mark. In the US, 13 percent of the $US16.6 trillion in funds under professional management are managed in a socially responsible manner. Investment house Rothchild Australia announced last month their intention to launch two trusts designed to appeal to investors who want outlets that match their values and concerns. The Rothchild Ethical Share Trust will invest only in Australian companies that they believe are trading below their value and who have been screened by the Sustainable Investment Research Institute. Canberra-based Australian Ethical Investment Ltd is an independent funds manager owned by 100 investors with a shared commitment to improve ethics of corporate Australia and promote ecologically sustainable and socially just enterprises through judicious investments. It currently manages four unit trusts.
The rational for companies adopting an ethical, good corporate citizenship stance is simple. Companies that leave no toxic waste, no human destruction in their wake, who value and develop their employees have better long term returns because
• management can focus on genuine growth without worrying about public reactions;
• legal and employee turnover related costs are cut;
• the brand image of the company is enhanced;
• ethical investors provide excellent word of mouth advertising;
As the survey results pointed out companies need to measure the results of their actions and is the reason why they opt for the short-term benefits inherent in community involvement. Measure and manage Measurement over the long-term and its effect on the profitability of the company has proved more difficult – until now. In the US, the Dow Jones Sustainability Group Index (DJSGI) consists of more than 200 companies that represent the top 10 percent of the leading sustainability companies in 64 industry groups in 33 countries covered by the index. At the end of 2000, the market capitalisation of the DJSGI exceeded $US5 trillion. According to Dow Jones, increasingly investors are diversifying their portfolios by investing in companies committed to corporate sustainability. This business approach creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments. "Corporate sustainability leaders achieve their business goals by gearing their strategies and management to harness the market's potential for sustainability products and services while at the same time successfully reducing and avoiding sustainability costs and risks. It is this pursuit and management that creates long-term shareholder value."
In the DJSGI criteria there are five corporate sustainability performance principles: Innovation: Investing in product and service innovation that focus on technologies and systems that use financial, natural and social resources in an efficient, effective and economic manner over the long-term; Governance: Setting the highest standards of corporate governance, including management quality and responsibility, organisational capability and corporate culture; Shareholders: Meeting shareholders' demands for sound financial returns, long-term economic growth, long-term productivity increases, sharpened global competitiveness and contributions to intellectual capital; Leadership: Leading the industry toward sustainability by setting standards for best practice and maintaining superior performance; and, Society: Encouraging long lasting social well-being in communities where they operate, interacting with different stakeholders and responding to their specific and evolving needs thereby securing a long-term "licence to operate", superior customer and employee loyalty and ultimately superior financial returns.
In Australia, efforts to make corporate sustainability an investment rather than a concept is gathering pace with the development of the Westpac-Monash Eco Index, modelled on the DJSGI. The future for corporate social responsibility and its adoption by Australian business seems assured. Shareholders, investors and the market will provide the driving force. The key will be education and raising awareness.
"Australian companies do not necessarily want to put profits before people, it just that they do not know how to put people before profits,'' Professor Birch says.
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