In the years of growth following the end of the Second World War the consumption of the Earth’s natural resources steadily increased as economies developed. This initiated a growing concern among consumers and investors about environmental pollution and over-consumption. The ‘live for today and don’t worry about tomorrow’ attitude lost its cachet. People began to realise that our long-term future and the health of the planet was at stake.
In the 1970s, the concept of ‘peak oil’, the point at which the world’s oil reserves would start an inevitable and terminal decline, circulated widely. No one knows exactly when the world will be forced to transition from a carbon-based economy to a post-carbon one, but it will happen. Despite the expert debates and industry disagreements, things are definitely going to change.
The last few decades have witnessed rapid growth in the Chinese and Indian economies; both are heavy consumers of natural resources. This has also increased awareness of the international nature of green issues. Climate change and global warming are global realities and it will take a global effort to address them.
How long can this go on? Are companies part of the problem, the solution or both? Can our consumer and investment choices really drive behavioural change? How are boards of directors addressing their corporate social responsibilities?
Rise of corporate social responsibility
Corporate social responsibility (CSR) is a self-regulatory effort by businesses to exert smart and sustainable strategies related to environmental, social and governance (ESG) issues. Very few companies had a CSR policy a generation ago and now it is an essential strategic tool. It is now the rule, rather than the exception, to expect corporations to do everything possible to operationally mitigate adverse social or environmental effects – now and in the future.
Among other duties, the board of directors must demonstrate that investor concerns are being addressed. One of the most effective ways of doing so is to create and manage an effective CSR programme. This can be achieved by creating policies and overseeing performance at a high corporate level. But it must be reinforced by implementing accountability measures and training for employees.
Reputation and other risk factors
Not implementing CSR is a risky strategy. Failure to engage with interested stakeholders creates knowledge gaps and adversarial dynamics, which might become major problems for a board of directors. These can include less access to capital, higher costs of capital, declining workforce morale (which impacts recruitment and retention costs), greater exposure to lawsuits and even fines from regulatory bodies. Opposition to a corporation’s everyday business activities could also grow troublesome in the communities where it operates.
There is even more risk in the reputational damage to a company. This can arise from a single catastrophic incident, tarnishing the company’s public image and business connections for years. This fallout could alienate allies and make it much more difficult to move forward with business strategies over the short and long term. In a recent study conducted by Eisner, 54 per cent of directors questioned stated that reputational damage was a major concern for their companies.
The board of directors needs to be aware of developments and trends in the world of CSR. This particularly applies in an area that is sometimes overlooked: that of changing stakeholder expectations. Stakeholders that have a particular interest in CSR expect companies to go beyond merely complying with regulatory and legal requirements; such expectations are possibly predictive of future legal or regulatory requirements.
All boards should have a fundamental understanding of human rights and the societal impacts of corporate operations. If the company uses manufacturing facilities overseas, for example, you could suffer severe reputational damage because of poor working conditions, worker deaths or injuries, or even public scrutiny over the low wages paid in factories abroad. And even the more distant parts of a supply chain, parts not owned or directly operated by the company, may become a public (if not legal) liability.
If the board does not exert due diligence, this reflects very badly on the company concerned. The general public and investors have been besieged with abhorrent and tragic stories in the last few years. When unsafe or exploitative working conditions appear in media reports, company PR teams have to work extra hard to counteract that bad publicity. The board should help to craft company policy that ensures adequate oversight and proper control over corporate systems.
Members of company boards have a responsibility to formulate and direct policy that addresses key risks, including the very important one of potential reputational damage. This is an economic and a legal concern. Regulatory bodies now have great powers and there is always the possibility of legal action and punishment due to a systemic or strategic failure. Lawsuits brought by an individual or an organisation for some adverse environmental or social impact is a fact of life; the board can help guard against them.
The CSR policies created and overseen by a board of directors should enable management to effectively promote key values and pursue the core strategies of the business. Managing the concerns of stakeholders and meeting the company’s economic expectations must be balanced; an effective CSR programme can do just that. It also might just help directors sleep a bit more soundly at night.
About The Author:
Evan Harvey is the Director of Corporate Responsibility for Nasdaq. He is responsible for gathering, analyzing, reporting, and improving key ESG metrics across the global organization, as well as managing investor and issuer company outreach on corporate sustainability topics, practices, and partnerships. This includes the research, analysis, and disclosure of all ESG reports, including the Global Reporting Initiative, Carbon Disclosure Project, and the United Nations Global Compact Communication of Progress. In addition, Evan directs the Nasdaq Corporate Philanthropy and Employee Volunteering projects. He serves on the Board of Directors for the UNGC U.S. Network and on the Advisory Board for SASB. He holds a B.A. and an M.A. from the University of Texas, and lives outside Washington DC.