Corporate social responsibility can be summed up with the 'four Bs of integration', according to Danka Starovic from the Chartered Institute of Management AccountantsOn his website, the leading environmentalist thinker and co-founder of strategy consultancy SustainAbility, John Elkington, lists the following slide as one of his favourites when presenting on corporate social responsibility:
He calls it the "four Bs of integration". These are the four areas where "blended value" will be sought.
Blended value is a concept developed by Jed Emerson and Shiela Bonini. It is based on the premise that all organisations, whether for-profit or not, create value that consists of economic, social and environmental value components, and that investors simultaneously generate all three forms of value through providing capital to organisations.
Whether you believe in blended value or not, the slide neatly sums up corporate social responsibility. However, it also illustrates the dichotomy in some of the current discourse.
Much of what is written and said about corporate social responsibility fits firmly in the governance column, which includes balance sheets (financial accounting, reporting and assurance) and boards (the realm of corporate governance).
On the other side of the diagram is the less visible column called markets, which includes business models and brands - what Elkington describes as "how companies create and destroy value" and "ongoing conversation between companies and consumers, customers, investors and media".
Elkington himself acknowledges that this is where some of the biggest challenges now lie.
Of course, this split is not surprising. Various reporting regulations dictate that the initial focus of engagement for many companies is around the 'balance sheets' and 'boards' quadrants. For those in the UK, for example, the obligation to comply with the now mandatory Operating and Financial Review has placed the onus firmly on developing systems and procedures to facilitate compliance.
But this could also risk diverting attention. As far back as 1999, Elkington was saying that reporting should only be the visible part of the structure - anything that a company publishes externally should be supported by robust management systems and performance indicators.
These should come before auditing, reporting and benchmarking. In other words, external reporting should be the outcome, not the starting point.
This is where the biggest gaps in sustainability currently lie - for companies, at least. Many of them, although seriously committed to the idea of sustainability, struggle to understand how they can strive for superior financial performance and manage this other, slightly nebulous, stuff.
A recent academic conference on performance management and management control, partly sponsored by the Chartered Institute of Management Accountants (CIMA), highlighted some of the issues companies are grappling with.
Professor Mark Epstein of Rice University, in Texas in the US, suggested that most companies rarely give serious thought to the consequences of their quest for superior financial performance, both internally (on employees) and externally (on the environment and suppliers, for example).
He quoted the supermarket giant Walmart as an example. Although the company claims it is simply meeting its customer needs by pursuing a low-pricing strategy, there are arguably additional, and less welcome, consequences inherent in such an approach.
For example, there are costs to employees in terms of low wages and poor healthcare and to suppliers, who get squeezed by Walmart's awesome purchasing power.
Walmart may not immediately feel the effect of these issues and may therefore dismiss them as irrelevant. But stakeholder or regulatory pressure could eventually force it to make some kind of a trade-off, which would balance the costs and benefits in a different way. The sooner the company starts managing the risk this poses, the more chance it has of preventing a large-scale crisis.
Many companies, though committed to shareholder value, find that the way in which value is realised may be a little circuitous. As with Walmart, there are often trade-offs, especially in terms of weighing up short-term gains against possible long-term losses, and vice versa.
Decision-making and risk-management systems and processes have to accommodate sustainability issues in a way that means they can become an integral part of how a company is managed and not a bolt-on. Some companies, such as Shell, are already trying to do this.
This is far from easy because there are currently more questions than answers. For example, what kind of processes do companies need to have in place in order to foresee a major crisis related to their external impacts? How can they manage risks - both real and perceived - and be better prepared? How can they decide which trade-offs are worth making and which of their sustainability initiatives are likely to create more value? Should managers' behaviour be changed? Does this also include changes to remuneration structures?
Although far from easy, companies that fail to develop the 'business models' and 'brands' part of their CSR engagement risk unwelcome surprises. And, apart from anything else, without this internal architecture in place, they will struggle to produce convincing OFRs.
As companies will know only too well, the OFR legislation does not include the provision of a 'safe harbour' or exemption from liability for directors.
When CIMA sought legal advice about directors' liability in the context of OFR, Allen & Overy LLP's key piece of advice was that the real issue is not whether the forward-looking statements are ultimately accurate but whether they were made in good faith and with due skill and care.
According to their advice, directors are responsible for approving the process by which they will satisfy the content requirements of the OFR, and for the execution of the process, the quality of reporting channels and recording of the information as well as the consistency and inclusiveness of the process.
In other words, they have to ensure that there are systems and processes in place that will provide relevant information for decision-making. Which takes us back to performance management and control.
Most of what we would classify as sustainability information - employee, environmental, social and community matters - should, according to the Accounting Standards Board's (ASB) Reporting Standard One, be reported "to the extent necessary" as specified in the paragraph 29 of the disclosure framework.
What this means is that, for many companies, there will only be two or three issues that should rightfully find their way into the OFR.
Obviously, companies in, for example, capital-intensive or extractive industries, will have sustainability issues at the heart of their strategy, so these are also likely to form a significant chunk of their OFRs.
Investors at the recently held CIMA/University of Cambridge OFR and Sustainability roundtable confirmed that this was what they expected. They did not want the OFRs to include a long list of CSR measures and they certainly did not want an abbreviated version of the company's CSR report.
Instead, they said the OFR should be about the board selecting two or three major issues - more for companies with significant impacts - that are truly relevant for its strategy.
They added that, however important CSR issues may be in themselves, many are quite simply not material to shareholders.
It should be up to directors to decide where to draw the line and companies should resist the pressure from stakeholder groups and activists to include more information as this may result in a cluttered and irrelevant OFR.
For most companies, picking a few issues for inclusion in the OFR will depend on their boards having informed discussions about strategy. 'Informed' is the key word
here - the OFR is not designed to be a checklist that can be ticked off.
Instead, the ASB Reporting Standard makes it clear that the OFR is principles-based - and that means there is no standard set of performance measures for companies to use. Instead, it should be about what is relevant to shareholders.
Over time, however, there is likely to be some level of convergence so companies in similar industries may start reporting a similar set of KPIs.
There should also be enough pressure from investors to keep the good quality information coming and the bar high enough for us to see some real improvements. In any case, sound performance management will remain at the heart of good reporting.
Danka Starovic is a Technical Specialist for CIMA. For more information email email@example.com, or visit www.cimaglobal.com
© Faversham House Group Ltd 2006. edie news articles may be copied or forwarded for individual use only. No other reproduction or distribution is permitted without prior written consent.