The 4CR strategic approach to corporate responsibility 4CR Working Papers 4CR Part A 4CR A1.5 - 12th July 2006 A multi-dimensional view of corporate responsibility By Dr P Katsoulakos - INLECOM Ltd and Prof Y Katsoulakos - Athens University of Economics and Business www.csrquest.net www.4cr.org The main headings in this paper are links to pages in the above website providing additional information and links. The 4CR framework has been designed to integrate the various strands of corporate responsibility and to support stakeholder oriented strategic management and the staged development of strategic capabilities enabling companies to reach optimised sustainability performance. This paper describes Part A of the 4CR framework outlining concepts, principles and practices associated with corporate responsibility with specific reference to CSR, sustainability and governance. It provides A multi-dimensional view of corporate responsibility centred on stakeholder orientation and social capital. The 4CR strategic framework is being developed by Athens University of Economics and Business in collaboration with K-NET SA and INLECOM Ltd utilising their initial research work in the CSRQuest project. ©P. & Y. Katsoulakos 1 12th July 2006 The 4CR strategic approach to corporate responsibility Table of contents 1. CORPORATE RESPONSIBILITY CONCEPTS AND PRINCIPLES .......................................... 4 1.1 Corporate responsibility and visionary companies..................................................... 5 1.2 Theoretical background on corporate responsibilities ................................................ 6 Early theoretical views ........................................................................................................ 6 Early corporate social responsibility models ........................................................................... 7 The societal dimension of strategic management .................................................................... 9 Overview of theoretical perspectives .................................................................................... 9 1.3 Corporate responsibility goals and principles ......................................................... 10 CR related initiatives......................................................................................................... 10 Corporate responsibility goals and principles summary .......................................................... 10 2 CORPORATE SOCIAL RESPONSIBILITY CSR ................................................................ 2.1 Background ....................................................................................................... 2.2 CSR definitions .................................................................................................. 2.3 Views for and against CSR .................................................................................. 2.4 Business ethics .................................................................................................. 2.5 Corporate citizenship .......................................................................................... 2.6 Social accountability ........................................................................................... 12 12 13 14 14 15 16 3 CORPORATE SUSTAINABILITY .................................................................................. 3.1 Background ....................................................................................................... 3.2 The need for sustainable development .................................................................. 3.3 Corporate Sustainability definition ........................................................................ 3.4 Corporate sustainability challenges....................................................................... 17 17 18 18 19 Health related challenges .................................................................................................. 20 Environment related challenges ......................................................................................... 20 Human rights related challenges ........................................................................................ 21 A way forward ................................................................................................................. 22 3.5 An integrated perspective between global sustainable development and corporate sustainability .......................................................................................................... 23 3.6 The role of Governments in Corporate Sustainability .............................................. 23 3.7 Sustainable development milestones .................................................................... 25 4 CORPORATE GOVERNANCE ....................................................................................... 4.1 Background ....................................................................................................... 4.2 Corporate Governance definitions......................................................................... 4.3 Codes and standards on corporate governance ...................................................... 4.4 Corporate Governance Trends ............................................................................. 26 26 27 28 28 Board related changes ...................................................................................................... 28 Board committees ............................................................................................................ 28 5 CORPORATE RESPONSIBILITY DRIVERS ..................................................................... 5.1 An overview of corporate responsibility drivers ...................................................... 5.2 The evolution of corporate regulation ................................................................... 5.3 Green buying and ‘environmentally friendly products’ ............................................. 5.4 Socially Responsible Investment (SRI) .................................................................. 30 30 31 31 32 SRI strategies .................................................................................................................. 33 Comparative performance of SRI funds ............................................................................... 33 SRI indexes ..................................................................................................................... 33 5.5 Corporate responsibility and sustainability as business philosophy ............................ 34 6 CORPORATE RESPONSIBILITY INDICATORS AND REPORTING STANDARDS .................... 35 6.1 Sustainable development indicators at national and international levels .................... 35 6.2 Company level SRI associated indicators ............................................................... 36 The Dow Jones Sustainability Index assessment approach ..................................................... 37 The FTSE4Good approach.................................................................................................. 37 KLD ratings ..................................................................................................................... 38 6.3 Reporting standards and indicators ...................................................................... 38 The Global Reporting Initiative (GRI) .................................................................................. 38 The AA1000 Standards ..................................................................................................... 39 7. THE 4CR MULTI-DIMENSIONAL CORPORATE RESPONSIBILITY PERSPECTIVE ................. 41 7.1 The 4CR conceptual model .................................................................................. 41 ©P. & Y. Katsoulakos 2 12th July 2006 The 4CR strategic approach to corporate responsibility 7.2 The 4CR stakeholder oriented corporate responsibility taxonomy ............................. 42 7.3 Stakeholder management and social capital .......................................................... 43 The stakeholder perspective .............................................................................................. 43 Classification of stakeholders ............................................................................................. 47 Stakeholder management frameworks ................................................................................ 49 Stakeholder value ............................................................................................................ 52 Social capital ................................................................................................................... 53 7.4 4CR related concepts .......................................................................................... 55 Reputation risks ............................................................................................................... 55 Social innovation and marketing ........................................................................................ 55 Regulation and competitive policy ...................................................................................... 56 Eco-efficiency .................................................................................................................. 56 Fair globalisation .............................................................................................................. 57 Performance instability ..................................................................................................... 58 7.5 The 4CR Corporate Responsibility Map .................................................................. 59 7.6 The ten 4CR principles for stakeholder oriented strategic management ..................... 61 ©P. & Y. Katsoulakos 3 12th July 2006 The 4CR strategic approach to corporate responsibility A multi-dimensional view of corporate responsibility 1. Corporate responsibility concepts and principles In market economies, the primary purpose of companies is to maximise shareholder value (e.g. economic profit, share price and dividends) within the boundaries of legal/regulatory obligations which address specific social and environmental issues. For this, companies pursue competitive strategies which rely upon and develop relationships between the corporation and its stakeholders. Despite the emphasis given by corporate theory and practice on financial and legal responsibilities, the view that corporations have also social responsibilities has been around for a long time. This is evident both in literature associated with the theory of the firm and in the practices of a few visionary companies that adopted social responsibility principles as far back as the eighteenth century. Indeed it can be argued that the original meaning of companies was closer related to social aspects rather than economic ones given the derivation of the word company from the Latin companio (companion) from cum and panis which can be interpreted as baking bread together. Since the early 1990’s, corporate responsibility issues including the social obligations of corporations have attained prominence in political and business debate. This is mainly in response to corporate scandals but also due to the realisation that development centred only on economic growth paradigms is unsustainable and therefore there is a need for a more pro-active role by states, companies and communities in a development process aimed at balancing economic growth with environmental sustainability and social cohesion. This debate has motivated the following three interlinked movements in the corporate world: CSR (Corporate Social Responsibility); Corporate sustainability; Wold wide reforms on corporate governance. CSR and corporate sustainability represent the way companies achieve enhanced ethical standards and a balance of economic, environmental and social imperatives addressing the concerns and expectations of their stakeholders. Corporate governance reflects the way companies address legal responsibilities and therefore provides the foundations upon which CSR and corporate sustainability practices can be built to enhance responsible business operations. We distinguish between two interrelated dimensions for CSR and corporate sustainability: corporate responsibility and sustainability as part of a new vision for the world based on a global partnership for sustainable development; corporate responsibility and sustainability as a business management approach that should provide in the long run better value for shareholders as well as for other stakeholders. ©P. & Y. Katsoulakos 4 12th July 2006 The 4CR strategic approach to corporate responsibility It should be pointed out that CSR and corporate sustainability are overlapping movements. Both terms are evolving and there are neither standard definitions nor a fully recognised set of criteria to determine successful application by companies or busines networks. Furthermore, the terms are commonly used interchangeably and companies practicing CSR often address sustainability issues and vice versa. However there are different motivations behind the two movements which give rise to different priorities and practice characteristics as will be clarified in later sections. CSR, corporate sustainability and corporate governance collectively are shaping the identity of organisations and are therefore increasingly integrated into the business strategy of successful corporations. Consequently, the field of responsible business strategy is becoming one of the most dynamic and challenging subjects corporate leaders are facing today and possibly one of the most important ones for shaping the future of our world. 1.1 Corporate responsibility and visionary companies Early roots of corporate social responsibility can be found in the actual business practices of successful companies since the eighteenth century. A notable example is the Cadbury chocolate makers in the UK that prospered in the 1870s and moved in 1879 to a green field site which came to be called Bournville village for the benefit of its workforce. The Cadbury family introduced social responsibility practices including works committees, a medical department, pension funds and education and training for employees. In the 1900s they built “a successful business in a successful community”. Arie de Geus, in his book “The Living Company” (1997), questions whether the purpose of corporations is solely to maximise shareholder value by examining the history of great corporate success stories such as Kodak, Du Pont, Mitsubishi and Sumitomo. Taking as example an the Kodak case, the founder George Eastman is renowned for his remarkable foresight into the building of his business. In 1919, Eastman gave one-third of his own holdings of company to his employees and later fulfilled what he felt was a responsibility to employees with the establishment of retirement annuity, life insurance, and disability benefit plans. He fostered music, endowed learning, science research and teaching, promoted health, helped the needy and made his own city a centre of the arts. Another notable example of visionary CSR companies is Hewlett Packard. Dave Packard, co-founder of the company, declared in 19391: “I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so that they are able to accomplish something collectively that they could not accomplish separately – they make a contribution to society, a phrase which sounds trite but is fundamental.” A company that demonstrates how principles of corporate responsibility were put in practice over 65 years whilst performing consistently as well as any of its “profit-maximising” rivals is Johnson & Johnson (J&J). In the 1940s J&J published its Credo2 announcing that its primary stakeholders were its 1 Charles Handy, 2002, ‘What’s a Business For?’ Harvard Business Review, December 2002. 2 www.jnj.com ©P. & Y. Katsoulakos 5 12th July 2006 The 4CR strategic approach to corporate responsibility customers, employees and the communities it operated in – in that order and explicitly ahead of its stockholders. The Credo ends by affirming, “Our final responsibility is to our stockholders.…When we operate according to these principles, the stockholders should realise a fair return”. A little more recently, in 1979, Chair of Tata Steel (India’s largest integrated private sector steel company) asked their audit committee to report on “whether and the extent to which the company has fulfilled their objectives…regarding the social and moral responsibilities”. 1.2 Theoretical background on corporate responsibilities Different theories concerning the purpose of corporations define the relations and responsibilities a company has with participants in its economic activities and with regulators. Early theoretical views As early as 1916, J. M. Clark emphasised the importance of transparency in business dealings, writing in the Journal of Political Economy :"if men are responsible for the known results of their actions, business responsibilities must include the known results of business dealings, whether these have been recognised by law or not". In the early 1930s, Professor Theodore Kreps introduced the subject of Business and Social Welfare to Stanford and used the term “social audit” for the first time in relation to companies reporting on their social responsibilities. Peter Drucker argued in 1942 that companies have a social dimension as well as an economic purpose in his second book “The Future of Industrial Man” which addressed primarily responsibility and preservation of freedom. Corporate social responsibilities were defined in 1953 by Bowen 3 as "the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society." At the time, corporate social obligation was linked to the power that business holds in society. This point was stressed by K Davis who in 1960 4 described business social responsibilities as "the businessman's decisions and actions taken for reasons at least partially beyond the firm's direct economic or technical interest… which need to be commensurate with the company’s social power." The earliest reference addressing specifically social auditing was around the early 1960s in a book by G Goyder called "The Responsible Company" 1961, Goyder referred to various activities in the mid and late 1950s and suggested that social audit could provide a management tool and could offer stakeholders a platform for challenging and influencing companies. Opposition to the notion that companies have social responsibilities has been prevalent on the grounds that it will divert attention form the primary economic objectives. In 1962 Milton Friedman stated that “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance 3 Bowen, Howard. Social Responsibilities of the Businessman. New York: Harper and Row, 1953 4 Davis, Keith, "Can Business Afford to Ignore Social Responsibilities?" California Management Review, Spring 1960 ©P. & Y. Katsoulakos 6 12th July 2006 The 4CR strategic approach to corporate responsibility by corporate officials of a social responsibility other than to make as much money for their stockholders as possible”5. A balanced view of CSR is expressed by D Voge in “The Market for Virtue: The Potential and Limits of Corporate Social Responsibility”6 suggesting that CSR is not a precondition for business success but a dimension of corporate strategy: "Just as firms that spend more on marketing are not necessarily more profitable than those that spend less, there is no reason to expect more responsible firms to outperform less responsible ones. In other words, the risks associated with CSR are not different from those associated with any other business strategies. Sometimes investments in CSR make business sense and sometimes they do not." Voge also highlights that “Surveys of the world's top brands rarely cite CSR as an issue associated with a given brand. And companies that make most-admired lists do so by virtue of other factors--financial performance, customer satisfaction, innovation, and so on.” Early corporate social responsibility models Early theoretical work specifically addressing corporate social responsibilities is represented by Sethi (1975)7 who developed a three tier model for classifying corporate behaviour which he labelled "corporate social performance". The three levels of corporate social performance are based on: a) social obligation ( response to legal and market constraints); b) social responsibility (addressing societal norms, values and expectations of performance); c) social responsiveness (anticipatory and preventive adaptation to social needs). Sethi's second tier requires that a company moves beyond compliance and recognises and addresses societal expectations. The third tier requires that a company develops the competence to engage effectively with stakeholders and to take proactive measures on their issues and concerns. Sethi also emphasised the cultural and temporal dependencies of corporate responsibilities and the importance of stable management systems and standard classifications to facilitate measurement of progress and comparative analysis. Building on Sethi’s model Carroll (1979) 8 proposed a model that contains the following four categories of corporate responsibility in decreasing order of importance: a) Economic -be profitable; b) Legal - obey the law; c) Ethical- do what is right and fair and avoid harm; d) Discretional / philanthropic- be a good corporate citizen. The four classes of responsibility are seen to reflect the evolution of business and society interaction in the United States. According to Carroll “the history of business suggests an early emphasis on the economic and then legal aspects and a later concern for the ethical and discretionary aspects”. 5 Milton Friedman, 1962. Capitalism and Freedom, Chicago: University of Chicago Press. 6 David Vogel, Sept 2005, The Market for Virtue: The Potential and Limits of Corporate Social Responsibility, Brookings Institution Press 7 Sethi, S.P. (1975). Dimensions of corporate social performance: An analytic framework; California management Review 17. 8 Carroll, A.B. 1979. A three-dimensional conceptual model of corporate social performance; Academy of Management Review. 4. ©P. & Y. Katsoulakos 7 12th July 2006 The 4CR strategic approach to corporate responsibility Economic obligations are therefore seen to be tempered by ethical responsibilities or by social expectations and norms. Discretionary responsibilities go beyond ethics and include philanthropic measures and generally good citenship. In 1991, Carroll presented his CSR model as a pyramid and suggested that, although the components are not mutually exclusive, it “helps the manager to see that the different types of obligations are in constant tension with one another”. Carroll’s model has been validated9 and a summary of the empirical evidence is given in Annex 1. Aupperle, Hatfield & Carroll (1985; 1983) performed the first empirical test of the four tier CSR model by surveying 241 Forbes 500 listed CEOs using 171 statements about CSR. The statistical analysis confirmed that there are four empirically interrelated but conceptually independent components of CSR and provided tentative support to the relative weightings assigned by Carroll to each of the four components. Pinkston & Carroll (1994) performed a similar survey among top managers in 591 U.S. subsidiaries of multinational chemical companies with headquarters in England, France, Germany, Japan, Sweden, Switzerland and the U.S. Aggregate findings once again confirmed Carroll’s four tier weighted model but interestingly showed Germany and Sweden to be exceptions, where legal responsibilities were ranked the highest priority followed by economic, ethical, and philanthropic aspects respectively. Comparison with the Aupperle, Hatfield & Carroll’s (1985) findings also showed that in the intervening ten years the gap in the relative importance between economic and legal responsibilities had decreased, while the importance of ethical responsibilities appeared to be increasing and that of philanthropic responsibilities to be decreasing (Pinkston & Carroll, 1996). 9 Pinkston, T. S., & Carroll, A. B. 1996. A Retrospective Examination of CSR Orientations: Have They Changed? Journal of Business Ethics, 15(2). ©P. & Y. Katsoulakos 8 12th July 2006 The 4CR strategic approach to corporate responsibility The societal dimension of strategic management In 1979, around the time Carroll published his CSR model, the societal dimension of strategic management was explored by Igor Ansoff in “The Changing Shape of the Strategic Problem” 10. He proposed that an “enterprise strategy”, describing the interaction of a firm with its environment, should be added to the corporate, business and functional levels of strategic management. According to Ansoff, an enterprise strategy was needed in order to enhance a company’s societal legitimacy and to address new variables in strategic management such as “new consumer attitudes, new dimensions of social control and above all, a questioning of the firm’s role in society”. These ideas are today at the heart of stakeholder approaches to strategic management. The stakeholder theory, emphasising a broad set of social responsibilities for business was established by R Freeman in 1984 through the ground breaking work published in his book “Strategic management: A stakeholder approach”11 which effectively established the field of Business & Society. Freeman defined stakeholders as “any group or individual who is affected by or can affect the achievement of an organisation’s objectives”. According to Freeman, the use of the term stakeholder grew out of the pioneering ideas at Stanford Research Institute (now SRI International) in the 1960’s which were further developed through the work of Igor Ansoff and others. The basic SRI concept was that “managers needed to understand the concerns of shareholders, employees, customers, suppliers, lenders and society, in order to develop objectives that stakeholders would support. This support was deemed necessary for long term success and therefore management should actively explore its relationships with all stakeholders in order to develop business strategies.” Stakeholder approaches to strategic management provide the foundations for the 4CR methodology and are described in some detail in section 7.3 Overview of theoretical perspectives A summary of the theoretical streams described above is presented in the following diagram. 10 H. Igor Ansoff, 1979 "The Changing Shape of the Strategic Problem." in Schendel and Hofer, Strategic Management. 11 Freeman, E. R., 1984, Strategic management: A stakeholder approach, Pitman, Boston. ©P. & Y. Katsoulakos 9 12th July 2006 The 4CR strategic approach to corporate responsibility We can distinguish two main theoretical streams associated with corporate responsibility. The first stream represents the CSR perspective emphasising ethical issues and social audit. The second stream represents the social dimension of strategic management based on stakeholder approaches. It should be noted that sustainability related responsibilities do not feature in the described theoretical framework. However corporate sustainability issues are related to environmental economics established also in the 70s-80s to address environment as a scarce resource and to ensure that the costs and the benefits of environmental measures are well balanced. 1.3 Corporate responsibility goals and principles CR related initiatives The influential initiatives that are shaping the goals and principles underpinning the field of corporate responsibility are: the Global Compact initiated by the UN Secretary -General in 1999 as a network involving “governments, who defined the principles on which the initiative is based; hundreds of companies from all regions of the world, whose actions it seeks to influence; labour, in whose hands the concrete process of global production takes place; civil society organisations representing the wider community of stakeholders and the United Nations”. the Millennium Development Goals representing a road map for Millennium Declaration unanimously adopted in September 2000 by the member states of the United Nations. the 'United Nations Norms on the Responsibilities of Transnational Corporations and other business enterprises with Regard to Human Rights' providing the baseline for human rights principles. The Business Leaders Initiative on Human Rights (BLIHR) extends this baseline by mapping issues from the UN Norms to essential, expected and desirable business actions; the World Commission on the Social Dimension of Globalization was established by the International Labour Organization (ILO) in February 2002 and provided a final report in February 2004 complementing the Millennium Development Goals and creating a major contribution "to international dialogue towards a fully inclusive and equitable globalization". A historic review of milestones associated with corporate social responsibility and sustainability is given in Annex 2. Corporate responsibility goals and principles summary The fundamental CSR, sustainability and governance goals and principles are summarised in the following table based on the initiatives outlined above. The areas addressed are: a) Human Rights b) Labour Standards c) Environment d) Health e) Anti-Corruption f) Economic responsibility g) Corporate Governance ©P. & Y. Katsoulakos 10 12th July 2006 The 4CR strategic approach to corporate responsibility Corporate Responsibility and Sustainability Goals and Principles Global Compact Human Rights Labour Standards Environment AntiCorruption Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; Principle 2: Make sure that they are not complicit in human rights abuses. Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: The elimination of all forms of forced and compulsory labour; Principle 5: The effective abolition of child labour; Principle 6: The elimination of employment discrimination. Principle 7: Businesses should support a precautionary approach to environmental challenges; Principle 8: Undertake initiatives to promote greater environmental responsibility; Principle 9: Encourage the development and diffusion of environmentally friendly technologies. Principle 10: Businesses should work against all forms of corruption, including extortion and bribery. The Millennium development Goals Goal 1 Eradicate extreme poverty and hunger; Goal 2 Achieve universal primary education; Goal 3 Promote gender equality and empower women. The 'United Nations Norms on Human Rights' B. Right to equal opportunity and non-discriminatory treatment; C. Right to security of persons; E. Respect for national sovereignty and human rights. D. Rights of workers. Goal 7: Ensure environmental sustainability. Health Goal 4 Reduce child mortality; Goal 5 Improve maternal health; Goal 6 Combat HIV/AIDS, malaria, and other diseases. Economic responsibility Goal 8 Develop a global partnership for development. G. Obligations with regard to environmental protection. F. Obligations with regard to consumer protection. OECD Principles of Corporate Governance - 2004 Ensuring the Basis for an Effective Corporate Governance Framework The Rights of Shareholders and Key Ownership Functions The Equitable Treatment of Shareholders The Role of Stakeholders in Corporate Governance Disclosure and Transparency The Responsibilities of the Board ©P. & Y. Katsoulakos 11 12th July 2006 The 4CR strategic approach to corporate responsibility 2 Corporate Social Responsibility CSR 2.1 Background In the 1990s, the Corporate Social Responsibility (CSR) movement gained prominence in the politicaleconomic debate and in the strategies of leading business organisations. CSR stressed corporate selfregulation associated with ethical issues, human rights, health and safety, environmental protection and social and environmental reporting and voluntary initiatives involving support for community projects and philanthropy. The underlying principles of the CSR movement are represented by the Global Compact principles for responsible corporate citizenship. In march 2000, the European Council meeting in Lisbon placed Corporate Social Responsibility in the European Social Program. The Commission published the Green Paper entitled 'Promoting a European Framework for Corporate Social Responsibility' in July 2001. The aims of this document were to launch a public debate in European, national and international level, about the concept of CSR and to identify how to build a partnership for the development of a European framework for the promotion of CSR. It was followed between 2002 and 205 by the Communication 'Corporate the European Social Responsibility: a business contribution to Sustainable Development' which set up a European Multistakeholder Forum on CSR, to be used as a platform to promote transparency and convergence of CSR practices and instruments. In its contribution to the March 2005 Spring Council, the Commission recognised that CSR “can play a key role in contributing to sustainable development while enhancing Europe’s innovative potential and competitiveness” 12. In the Social Agenda13, the Commission announced that it would, in co-operation with Member States and stakeholders, present initiatives to further enhance the development and transparency of CSR. In the revised Sustainable Development Strategy14, the Commission called “on the business leaders and other key stakeholders of Europe to engage in urgent reflection with political leaders on the medium- and long-term policies needed for sustainability and propose ambitious business responses which go beyond existing minimum legal requirements”. In 2006 the Commission and business representatives have launched a European Alliance for CSR. To inspire more European enterprises to go beyond their minimum legal obligations in favour of society and sustainable development and to mobilise the capacities of European enterprises in order to make Europe a pole of excellence on CSR (Corporate Social Responsibility). A major force in the CSR movement is CSR Europe established in January 1996 by a group of 57 European companies with the mission to help companies integrate CSR into the way they do business. CSR Europe reaches out to 1400 companies through 18 National Partner Organisations. 12 13 14 COM(2005) 24. COM(2005) 33. COM(2005) 658. ©P. & Y. Katsoulakos 12 12th July 2006 The 4CR strategic approach to corporate responsibility 2.2 CSR definitions CSR is generally understood to be the way a company balances the economic, environmental and social aspects of its operation, addressing the expectations of its stakeholders. CSR definitions have proliferated in the literature particularly since the 1980s. Nevertheless, common ground between CSR concepts and definitions is widely acknowledged and evident from the representative definitions given below. “CSR is a company’s positive impact on society and the environment through its operations, products or services and through its interaction with key stakeholders such as employees, customers, investors, communities and suppliers” - Business in the Community. “CSR means open and transparent business practices that are based on ethical values and respect for employees, communities and the environment” - CSR Forum. “CSR is about how companies manage the business processes to produce an overall positive impact on society”- Mallen Baker. “Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large” - World Business Council for Sustainable Development. “CSR is defined as ‘a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis’ as they are increasingly aware that responsible behaviour leads to sustainable business success” - EU Green paper on CSR. “CSR is defined as operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of business. CSR is seen by leadership companies as more than a collection of discrete practices or occasional gestures, or initiatives motivated by marketing, public relations or other business benefits. Rather, it is viewed as a comprehensive set of policies, practices and programs that are integrated throughout business operations, and decisionmaking processes and are supported and rewarded by top management” - Business for Social Responsibility.. “Corporate Social Responsibility involves the conduct of a business so that it is economically profitable, law abiding, ethical and socially supportive. To be socially responsible then means that profitability and obedience to the law are foremost conditions when discussing the firm’s ethics and the extent to which it supports the society in which it exists with contributions of money, time and talent”- Carroll (1983) To summarise, a CSR practising corporation should strive to obey the law, make a profit, be ethical and provide societal value and accountability. ©P. & Y. Katsoulakos 13 12th July 2006 The 4CR strategic approach to corporate responsibility 2.3 Views for and against CSR To complete the picture of what CSR s about representative views for and against CSR are given in the following table. Social responsibility is just a PR tool for businesses, says report’ A report from Christian Aid warns that businesses are using corporate social responsibility as a shield to hide behind to campaign against environmental and human rights regulations, reports Terry Macalister. The report claims CSR is in some cases counter-productive, worsening relations between business and local communities. The report is called Behind the Mask: The Real Face of Corporate Social Responsibility and calls for new international guidelines to govern company behaviour. T Macalister, The Guardian 21st January 2004 ‘Two-faced capitalism’ Corporate social responsibility is all the rage. Does it, and should it, make any difference to the way firms behave? The Economist 22nd January 2004 'A crisis of legitimacy' ‘Business route to make the world better’ ‘The misguided moral code of corporate responsibility Why should business engage in social responsibility? Despite the rallying economy, despite management shake-ups, reforms and diversity programmes, the idea persists that companies are inherently selfish entities, intent only on maximising their profits. There is scepticism about corporate responsibility, and in particular, the flood of selfpromotional material that companies around the world have begun to produce - the glossy publications, the social and environmental reports, the declarations of good intentions and best practice. Corporate leaders should make sure that statements and reports produced are not just pretty words and phrases but are backed up by real action. CSR has to be part of the "DNA" of a company with everyone involved because they wanted to be. Regulation is an imposition on the free spirit of business. It is important to have rules, for example on health and safety, but over-regulation, especially in areas like CSR is counter-productive. The hypocritical behaviour of companies that undertake some high profile social responsibility projects whilst major business activities have a negative impact on society or the environment is exposed. The fact that companies exist to make profit is highlighted. The first thing people need to understand around corporate social responsibility is that the business case is very strong. If you look at any survey, all other things being equal (such as price and quality), the consumer will buy from the company that has a responsible attitude towards its community. In recruitment, people want to work for a company with a responsible social attitude. David Varney, Chairman, mm02 and Business in the Community March 2004 Digby Jones, Confederation of British Industry 7th April 2004 J Guthrie, Financial Times20th April 2004 Michael Rake, KPMG- DAVOS World Economic Forum interview 29th January 2005 Irrespective of positions for or against CSR there are a number of generally accepted positive impacts that are attributed to the CSR movement. The main one is that CSR is credited with re-humanising a business world that had become dangerously detached from the physical and cultural environment in which it operates. Corporations have recognised the importance of CSR practices on ethics of resource and people management even if the reasons are mainly linked to protecting reputations. 2.4 Business ethics Business ethics represent the broad principles of integrity and fairness associated with governance, human rights and ethical trading. Most companies have well documented standards and ethical codes (90% of FTSE 100 43% of FTSE 250) proclaiming their commitment to conducting business responsibly thus avoiding corporate scandals that have dominated the business news in recent years. Quality varies widely BUT even having an excellent code is no guarantee that it will be followed. To be effective, a code needs to be rigorously enforced by embedding its principles into the company’s culture ©P. & Y. Katsoulakos 14 12th July 2006 The 4CR strategic approach to corporate responsibility and managing properly its implementation. Research shows that “there is a gap between the existence of company codes of ethics and the embedding of its substance in the organisation’s ‘blood stream’15”. The Sarbanes-Oxley Act in the USA and European Union directives continue to raise the bar for corporate ethics and compliance programs. However, enforcement is also difficult at the level of government agencies and is likely to remain so. Possibly, real solutions can only be achieved by improved transparency systems at company level coupled with stronger efforts by administrations. Good business ethics practices include: publishing a Code of Conduct/Ethics; providing examples of business ethics dilemmas; defining ethical tests that can be used by staff to facilitate decision-making; making the company’s conflict of interest guidelines publicly available to investors and other stakeholders, as appropriate; designating an Ethics/Compliance Officer easily accessible by relevant stakeholder groups; communicating the codes and procedures to all employees, agents and other appropriate stakeholders; establishing systems for monitoring and overseeing the actions of the organisation, its employees, agents and other critical stakeholders and detecting / preventing unethical and/or illegal activities; gathering relevant data and reporting on a regular basis those charged with ethical oversight; providing code enforcement mechanisms; specifying appropriate offence responses; providing an easy ethics complaint self-disclosing process. 2.5 Corporate citizenship Corporate citizenship emphasises the contribution a company makes to society through its core business activities, its social investment and engagement in good causes. Good corporate citizens are companies behaving according to values that society expects them to hold or more specifically according to what is expected from a ‘good’ company from its stakeholders. The emphasis is therefore on stakeholder engagement, accountability, trust and reputation management. The Center for Corporate Citizenship at Boston College identifies four core principles that define the essence of corporate citizenship: Minimize harm: minimize the negative consequences of business activities and decisions on stakeholders, including employees, customers, communities, ecosystems, shareholders, and suppliers; Maximize benefit: contribute to societal and economic well-being by investing resources in activities that benefit shareholders as well as broader stakeholders; 15 More, E., & Webley, S. (2003). Does Business Ethics Pay?; London: Institute of Business Ethics ©P. & Y. Katsoulakos 15 12th July 2006 The 4CR strategic approach to corporate responsibility Be accountable and responsive to key stakeholders: build relationships of trust that involve becoming more transparent and open about the progress and setbacks businesses experience in an effort to operate ethically; Support strong financial results: the responsibility of a company to return a profit to shareholders must always be considered as part of its obligation to society. 2.6 Social accountability Social accountability is primarily concerned with the management and reporting of quantitative and qualitative aspects of social, ethical and environmental performance to both internal and external stakeholders. A number of initiatives/organisations are promoting social accountability including: a) The Institute of Social and Ethical AccountAbility established in 1995 to promote accountability for sustainable development by providing tools and standards (AA1000 Series); b) The Social Accountability International (SAI) dedicated to promoting human rights for workers around the world and best known for the SA8000 standards for managing ethical workplace conditions throughout global supply chains; c) The Business Social Compliance Initiative BSCI is the European approach to improve social performance in supplier countries through a common monitoring system simplifying and standardising the requirements and individual monitoring procedures. ©P. & Y. Katsoulakos 16 12th July 2006 The 4CR strategic approach to corporate responsibility 3 Corporate Sustainability 3.1 Background Corporate Sustainability is related to the broader concept of sustainable development which originated with the 1987 report ‘Our Common Future’ by the World Commission on Environment and Development (known as the Brundland Commission). Sustainable development refers to “meeting the needs of the present without compromising the ability of future generations to meet their own needs". Sustainable development emphasise intergenerational responsibilities and the need for multistakeholder coalitions to create the conditions for better quality of life for everyone, now and for future generations The first conference on sustainable development was held in Stockholm in 1972 where 113 nations and 500 non governmental organisations attended. It was the first time that “attention was drawn to the need to preserve natural habitats to produce a sustained improvement in living conditions for all, and the need for international cooperation to achieve this”. The emphasis was on solving environmental problems but without ignoring social, economic and development factors. The World Conservation Strategy of 1980 clarified the ideas of sustainable development defined as “development improving the quality of human life while living within the carrying capacity of supporting eco-systems” "This is the kind of development that provides real improvements in the quality of human life and at the same time conserves the vitality and diversity of the Earth. The goal is development that will be sustainable. Today it may seem visionary but it is attainable. To more and more people it also appears our only rational option". (The World Conservation Strategy, IUCN, UNEP, WWF 1980). The Brundland Report in 1987 provided a detailed analysis of sustainable development and alerted the world to the urgency of making progress toward economic development that could be sustained without the destruction of natural resources or the harming of the environment. The report highlighted three main components to sustainable development: environmental protection; economic growth; social equity. In 1992 The 'Earth Summit' (UN Conference on Environment and Development) in Rio de Janeiro agreed the Rio Declaration setting out 27 principles supporting sustainable development, a plan of action (Agenda 21) and a recommendation that all countries should produce national sustainable development strategies . Closely linked with the sustainability movement is the Millennium Development Goals promoting human development as the key to sustaining social and economic progress in all countries and recognising the importance of creating a global partnership for development. ©P. & Y. Katsoulakos 17 12th July 2006 The 4CR strategic approach to corporate responsibility The Global Reporting Initiative (GRI) that grew out of the Coalition for Environmentally Responsible Economies (CERES) and the United Nations Environment Programme (UNEP) produced, in June 2000, the GRI Sustainability Reporting Guidelines with reporting principles and specific content indicators to guide the preparation of organisation-level sustainability reports. 3.2 The need for sustainable development The requirements for sustainable development come from the realisation that development, centred only on economic growth paradigms is unsustainable and there is a need for a more pro-active role by states, companies and communities in the development process. Creating a sustainable future, economically, socially and environmentally requires governments, society, corporations and individuals to rethink their expectations, their responsibilities and their interactions. A central concept in corporate sustainability is participation in the establishment and expansion of international institutions for co-operation to confront common concerns for sustainable development such as climate change, energy and poverty issues. “By 2050, 85% of the world’s population of some nine billion people will be in developing countries. If these people are not by then engaged in the market place, business cannot prosper and the benefits of a global market will not exist. Clearly it is in our mutual interest to help societies shift to a more sustainable path.” WBCSD’s -Sustainable Livelihoods Project There is increasing recognition that we are all part of a complex dynamic system whose sustainable development is dependant on establishing a responsible global partnership between people, companies and governments. Such a global partnership should strive towards growth with equity whilst preserving the integrity of the environment and natural resources for future generations. This mandates a collaboration process in which the use of natural resources, the directing of investments at national and corporate levels, the orientation of technological developments and international co-operation must converge to create conditions for better satisfying human needs and aspirations now and in the future. Sustainable development is possibly, in the first place, a priority for governments that need to set policies and strategies to mobilise the required actions. However it is recognised that sustainable development poses a challenge to the balance of responsibilities between companies, governments, non government organisations and individuals. In the new order of global governance it is not unreasonable to assume that companies will have to play a more proactive role to get things moving. 3.3 Corporate Sustainability definition Corporate Sustainability can be regarded as the corporate response to sustainable development represented by strategies and practices that address the key issues for the world’s sustainable development. Sustainable development is about creating the conditions for better quality of life for everyone, now and in the future, based on eco-efficiency and innovative solutions for engaging everyone and particularly the developing countries in the global economy. ©P. & Y. Katsoulakos 18 12th July 2006 The 4CR strategic approach to corporate responsibility “Corporate sustainability means that your service or product does not compete in the marketplace only in terms of its superior image, power, speed, packaging, etc. Additionally, your business must deliver products or services to the customer in a way that reduces consumption, energy use, distribution costs, economic concentration, soil erosion, atmospheric pollution, and other forms of environmental damage.” The Ecology of Commerce (1993) PricewaterhouseCoopers now define corporate sustainability as aligning an organisation's products and services with stakeholder expectations, thereby adding economic, environmental and social value. According to Dow Jones Sustainability Index., “Corporate Sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments”. The corporate sustainability movement is about companies contributing effectively to a global partnership for sustainable development. It is about companies delivering wide societal value including support for health and human rights improvements, regional development and fair globalisation and respecting the environment by promoting technologies to reduce the emission of greenhouse gases and by implementing effective environmental risk management systems. It is also about companies that make long term performance stability a top priority in corporate strategy. 3.4 Corporate sustainability challenges “Sustainability is about living and working in ways that meet and integrate existing environmental, economic and social needs without compromising the well-being of future generations”. Related aspects are the Environmental Justice and contemporary international law dealing with Intergenerational Equity under environmental protection, human rights and economic development. The World Economic Forum16 has repeatedly emphasised that poverty, climate change, education, equitable globalisation and good global governance is the responsibility of all society. In the 2005 closing session, business, government, academic and civil society leaders urged adoption of technology to reduce the emission of greenhouse gases, the creation of a fund to accelerate financial aid to the poorest nations and the removal of trade barriers that deprive developing countries of the dividends of global economic growth. In 1996 the call is very similar, even though disaster relief takes prominence, and using the "creative imperative" is suggested as a way of making progress. According to Hawken 199317, creating a restorative economy means rethinking the fundamental purpose of business and “creating a very different kind of economy, one that can restore ecosystems and protect the environment while bringing forth innovation, prosperity, meaningful work and true security”. For this, companies must minimise harmful exploitation of natural resources, generation of excessive amounts of toxins, pollutants and waste. 16 http://www.weforum.org/ 17 Paul Hawken, 1993. The Ecology of Commerce a Declaration of Sustainability; HarperCollins ©P. & Y. Katsoulakos 19 12th July 2006 The 4CR strategic approach to corporate responsibility We could summarise that the main corporate challenges in supporting sustainable development lie along two interrelated dimensions: accelerating the pace of improving corporate sustainability performance; participating actively in partnerships and networks that can create the capacity for sustainable development. Companies need to accept a new proactive role in shaping the future of the world by supporting and developing the social dimension of globalisation and taking when necessary a leading role in: organising responsible supply chains; investing in innovative health, energy and environmental products; establishing business models that will work in poorer countries; transferring knowledge and improving conditions and infrastructure in developing countries. partnerships and dynamic coalitions to strengthen the world’s sustainability capacity. Specific issues associated with health, environment and human rights are outlined in the following subsections. Health related challenges Unprecedented economic change and increased global instabilities over the last decade have created acute new challenges for health. Persistent poverty, accelerated by population growth and large scale migration, has a large impact on health issues. Nearly half of the world’s population have inadequate access to medicine and health care, diseases assumed to have been conquered are re-emerging and obesity and stress related problems are becoming new health challenges. Additionally, the HIV/AIDS problems are far from contained. Recent statistics indicate that: three million children die every year due to lack of clean water; 12 million children die every year due to disease; 18 million people worldwide have been infected with HIV and 2.5 million have died of AIDS. 90% of new infections are in developing countries; AIDS is now the leading cause of death for adults under the age of 45 in Europe and North America. A crucial factor in successfully addressing the health challenges is the effective development of partnerships between business organisations, the World Health Organisation (WHO) and health authorities. Corporate participation in health promotion is important either through core business activities, management expertise, training, health and safety policies or through social investments and engagement in health promoting initiatives. Environment related challenges Management of environmental issues has reached relative maturity compared to other corporate responsibility and sustainability issues as many organisations have been reporting on environmental ©P. & Y. Katsoulakos 20 12th July 2006 The 4CR strategic approach to corporate responsibility performance for some 10 years and in some sectors compliance to environmental standards is mandatory. This has been helped by the ISO 14000 environmental management standard. Companies are nowadays expected to integrate environmental responsibility at all levels of their operations; to find sustainable solutions for natural resources use in order to reduce company’s impact on the environment; to manage environmental risks ensuring reduction in waste, pollution and emissions; to maximise the efficiency and productivity of all assets and resources including improvements in the management of water, energy and materials. Corporate environmental performance should be measured against evolving environmental priorities and targets formulated collectively by stakeholders including governments, environment support organisations, sector associations and businesses. Companies themselves should be aiming at improving elements of their environmental programs including broader participation in combating critical environmental problems, working with local authorities to build capacity and enhance their organisational ability to develop integrated approaches to environmental management. Global efforts to reduce the greenhouse gas emissions from human activities that threaten the world’s climate are beginning to make an impact. The Kyoto Protocol is now legally binding, and the European Union has introduced its pioneering Emissions Trading Scheme. Discussions have started on the global framework beyond Kyoto. Despite the success in understanding the environmental issues and addressing environmental risks in business processes there is certainly substantial room for improvement. The main challenge is to create a global participative network that raises the standards and monitors and responds to environmental challenges. The crucial goal is the development of responsiveness capabilities and adaptive capacity to reduce vulnerability from climate change and other environmental risks particularly in the high risk industrial sectors and vulnerable regions. The Global Environment Outlook (GEO), published periodically by the United Nations Environment Programme (UNEP)18, provides an assessment on the state and trends of environmental parameters across the world. The assessment tries to answer the following questions: What is happening to the world's environment? Why is it happening? What are we doing to address the problems? How would alternative decisions affect the future? Human rights related challenges Amidst an increasing climate of mistrust around the world fuelled by terrorism threat and conflict, balancing human rights issues and security concerns is a major Human Rights challenge. 18 http://www.unep.org/geo/yearbook/yb2006/ ©P. & Y. Katsoulakos 21 12th July 2006 The 4CR strategic approach to corporate responsibility The role of business organisations on human rights is complex. The United Nations Global Compact first two principles are that: "Businesses should support and respect the protection of internationally proclaimed human rights within their sphere of influence; and make sure that they are not complicit in human rights abuses." The basic corporate obligation of ensuring equal opportunities for all employees and taking adequate measures to assure that suppliers also have proper policies and processes on human rights is a matter reaching relative maturity. However, given the increasing influence of corporations in the global economy a more proactive role in the guardianship of human rights is possibly the new challenge. Former UN High Commissioner for Human Rights, Mary Robinson, has stressed the need to find common ground about the role of the private sector in contributing to the realisation of human rights 19. “This means businesses avoiding policies and practices that lead to rights violations. But it also means fulfilling appropriate responsibilities for positive actions which promote greater respect for fundamental rights around the world as extreme poverty is the single biggest human rights challenge facing the world today.” Quoting statistics such as the 6.3 million children that die each year of hunger and the more than 30,000 children that die every day from preventable diseases, Mary Robinson argued that poverty on this scale translates into a denial of fundamental rights to life, to adequate food, healthcare and education on a massive scale. A way forward The outlined corporate sustainability challenge represents a tall order for the business world that is accustomed to worry about the next contract and the annual financial performance rather than climate change, ecosystem capacity and poverty issues. The emerging requirements for corporate support to sustainable development probably represent a cultural shock that will take time to sink in the business way of thinking and working. Practically and realistically only the very successful companies could take up the challenge and hopefully will establish the required new sustainability bound business models that can be followed more widely in the future. 19 The Human Rights and the Private Sector Symposium, Novartis; Basel, Switzerland, 27 November 2003 ©P. & Y. Katsoulakos 22 12th July 2006 The 4CR strategic approach to corporate responsibility 3.5 An integrated perspective between global sustainable development and corporate sustainability Despite the obvious interrelationship between sustainability issues at global/national/sector level and corporate level, as yet, there are no serious attempts to link the two together. This effectively undermines both the national sustainability policies and strategies and reduces the potential impact of the corporate sustainability movement. An integrated perspective between sustainable development and corporate sustainability is shown in the following diagram. The approach highlights the following aspects: harmonisation of corporate strategies with national sustainability strategies; harmonisation of sustainability indicators measuring the impact of national and international policies with corporate sustainability criteria; establishing feedback loops from corporate sustainability performance and best practices to corporate strategy and to the broader sustainable development goals and action plans at national and international levels. 3.6 The role of Governments in Corporate Sustainability Chapter 8 of the Agenda 21 (Rio declaration) calls on countries to adopt national strategies for sustainable development that “should build upon and harmonize the various sectoral economic, social and environmental policies and plans that are operating in the country.” In 2002, the World Summit for Sustainable Development (WSSD) urged States not only to “take immediate steps to make progress in the formulation and elaboration of national strategies for sustainable development” but also to “begin their implementation by 2005.” ©P. & Y. Katsoulakos 23 12th July 2006 The 4CR strategic approach to corporate responsibility In addition, integrating the principles of sustainable development into country policies and programmes is one of the targets contained in the United Nations Millennium Declaration to reach the goal of environmental sustainability. Governments are expected to formulate fiscal, energy, transport, urban development and other policies supporting sustainable development, to invest in infrastructure that stimulates sustainable growth and to create awareness and transparency on sustainability issues, promoting knowledge sharing and innovation. Governmental commitment to sustainable development is reflected in the ratification of the Kyoto Protocol and the European Environmental Liability Directive 2004/35/EC and Emissions Trading Scheme (EU ETS). The Environmental Liability Directive 2004/35/EC20 relating to EU policy on the environment is "based on the precautionary principle and on the principles that preventive action should be taken, that environmental damage should as a priority be rectified at source and that the polluter should pay". Government sustainability strategies have been formulated in many countries to address sustainability issues including climate change focusing on high impact sectors such as power generation and transport. The EU overall sustainable development strategy includes economic policy and production changes that influence demand for transport, urban policies and energy policies. Of particular interest are the transport policies that emphasise "Putting Users at the Heart of Transport Policy” by providing a system that meets their needs and expectations. Proposed actions include: improve road safety; reform legislation on charging for the use of transport infrastructure; develop proposals on fuel taxation; provide easier intermodal travel for people; enhance cohesion. An example of a governmental response to sustainable developments is the UK Government’s strategy, which is based on the following four objectives: a) social progress which recognises the needs of everyone; b) effective protection of the environment; c) prudent use of natural resources; d) maintaining high and stable levels of economic growth and employment. Business should align their strategies with national strategies as outlined in the previous section and activate sustainable solutions applying when necessary innovative business models in collaboration with NGOs and other stakeholders. 20 Directive 2004/35/EC of the European Parliament on environmental liability with regard to the prevention and remedying of environmental damage has been published in the Official Journal L 143 of 30 April 2004. ©P. & Y. Katsoulakos 24 12th July 2006 The 4CR strategic approach to corporate responsibility 3.7 Sustainable development milestones Source: Sustainable Development the UK Approach, UN Commission for Sustainable Development Since 1987 the progress achieved in "sustainable development" can be traced by the following landmarks represented by policies and initiative by the UN and various governments 1987 The World Commission on Environment and Development chaired by the Prime Minister of Norway, Mrs Gro Harlem Bruntland, publishes a report Our Common Future (The Bruntland Report) which brings the concept of sustainable development onto the international agenda. 1992 Nearly 180 countries meet at the 'Earth Summit' (UN Conference on Environment and Development) in Rio de Janeiro to discuss how to achieve sustainable development. The Summit agrees the Rio Declaration on Environment and Development which sets out 27 principles supporting sustainable development. Also agreed is a plan of action, Agenda 21, and a recommendation that all countries should produce national sustainable development strategies. The Earth Summit also establishes the UN Commission on Sustainable Development, which meets every year, as well as important UN bodies - the Framework Convention on Climate Change and the Convention on Biological Diversity. Towards Sustainability, the Fifth Environmental Action Programme of the European Union is adopted 1997 A special UN conference is held to review the implementation of Agenda 21 (Rio+5). This repeats the call for all countries to have sustainable development strategies in place - in particular by the time of the next review of Agenda 21 in 2002 (Rio+10). In Europe, changes to Articles 2 to 6 of the Treaty establishing the European Community are agreed in the Treaty of Amsterdam, give sustainable development a much greater prominence. 1999 In May, the UK Government launches its new strategy, A better quality of life - A strategy for sustainable development for the UK. In December, Quality of life counts - Indicators for a strategy for sustainable development for the United Kingdom: a baseline assessment is published. 2000 The UK Government publishes its first review of progress towards sustainable development, Achieving a better quality of life, Government annual report 2000. 2002 The World Summit on Sustainable Development – Johannesburg 26 August - 4 September 2002, in the face of growing poverty and increasing environmental degradation, succeeded in generating a sense of urgency, commitments for action, and partnerships to achieve measurable results. More than 220 partnerships, representing $235 million in resources, were identified during the Summit process to complement the government commitments. Report of the World Summit on Sustainable Development. 2003 The Commission on Sustainable Development, 11th Session, New York, 28 April - 9 May 2003, adopts new work programme for the Commission on Sustainable Development (CSD), based on two-year cycles with a clear set of thematic issues, provides the global community with a unique opportunity to focus indepth attention on specific issues. Building on the outcomes of the twelfth session of CSD’s (CSD-12) focus on water, sanitation and human settlements, the thirteenth session of CSD (CSD-13) will strive to be forward looking and action orient 2006 CSD-14 begins the second cycle of the Commission’s new work programme. Scheduled for 1 to 12 May 2006, the Commission will review progress in the following areas: Energy for Sustainable Development; Industrial Development; Air pollution/Atmosphere; and Climate Change ©P. & Y. Katsoulakos 25 12th July 2006 The 4CR strategic approach to corporate responsibility 4 Corporate Governance 4.1 Background Corporate governance denotes the entire range of mechanisms and arrangements that determine the way key decisions are made in corporations including policies and practices that shareholders and boards of directors use to manage themselves and to fulfil their responsibilities to investors and other stakeholders. As corporations are chartered institutions regulated by state corporation law, fundamentally corporate governance is about accountability of decision making and conformance with applicable laws. Following the financial accounting scandals and discontent over stock market losses in recent years, improved corporate governance practices have become critical to worldwide efforts to protect investors and to stabilise and strengthen global capital markets. Corporate governance reforms are occurring in countries around the world and representative outputs include: the OECD Principles of Corporate Governance first issued in 1999 (outlined in section 1.4); the Sarbanes-Oxley Act of 2002 in the USA; the Action Plan "Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward", adopted by the European Commission on 21 May 2003. In developing countries reforms are aimed at promoting “development” and economic globalisation. In this context, corporate governance reforms in combination with liberalising reforms, in effect, represent a new development strategy for third world countries.21 There are many styles of corporate governance, including U.S., European, and Asian styles, or marketbased, stakeholder oriented and state oriented systems. The market approach followed in the United States, UK, Canada and Australia stress the primacy of ownership, property rights and maximising shareholder value. The stakeholder oriented approach followed in Western Europe and specifically Germany, France, the Netherlands and the Scandinavian countries, emphasise society's expectations of governance systems and especially the interests of employees and other stakeholders. Despite the differences between different national styles of corporate governance there is convergence on the importance of: transparency integrity accountability 21 Darryl Reed 2002, Corporate Governance Reforms in Developing Countries Journal of Business Ethics 37 ©P. & Y. Katsoulakos 26 12th July 2006 The 4CR strategic approach to corporate responsibility Corporate Governance looks at the institutional and policy framework for corporations including governance structures, company law, privatisation and market exit. Good Corporate Governance enables corporations to realise their corporate objectives, protect shareholder rights, meet legal requirements and create transparency for all stakeholders and the public on how they are conducting their business. Corporate Governance is a key instrument in the achievement of CSR and corporate sustainability objectives both because it provides the means of enhanced transparency on CSR concerns and because it highlights through guidelines what is expected from socially responsible businesses. A key question however is whether there is room for convergence between the markets oriented governance system and stakeholder-oriented corporate governance. Will “responsible” corporate governance trigger an increased level of stakeholder orientation? 4.2 Corporate Governance definitions Corporate governance refers to the way a corporation is directed under applicable laws and norms. It includes the laws governing the formation of firms, the bylaws established by the firm itself and the organisational structure of the firm. Issues of fiduciary duty and accountability are within the framework of corporate governance. The following definitions clarify the objectives and scope of Corporate Governance. “Corporate governance ensures that the board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations.” - The International Chamber of Commerce. The following definition highlights the importance of clear responsibilities and rules in making and monitoring decisions. "Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance", OECD April 1999. The crucial dimension of transparency is emphasised in the following definition. "Corporate governance is about promoting corporate fairness, transparency and accountability" 22. Corporate Governance systems should ensure that: accountancy standards are beyond reproach; audit quality is safeguarded; the board of directors is effective and properly constituted; 22 J. Wolfensohn, Word bank, article in Financial Times, June 21, 1999 ©P. & Y. Katsoulakos 27 12th July 2006 The 4CR strategic approach to corporate responsibility governance structures are fostering efficiency and competitiveness of business; disclosure and transparency is enhanced to satisfy all key stakeholders; the interests of shareholders and other key stakeholders are protected; corporate risks are properly managed. 4.3 Codes and standards on corporate governance There are hundreds of codes and standards on corporate governance reflecting differing legal traditions and national practices. Given the variety of ownership structures, cultural differences and the changing nature of capital markets and legal environments, there is no best governance structure for all. Information on the different corporate governance codes per country are provided by the International Chamber of Commerce. Failure to adhere to the standards of corporate governance can have severe consequences for the individuals involved as well as for the companies they manage. Bad governance practices damage investor confidence, whereas the adoption of good corporate governance practices can enhance a company’s share prices. This has given rise to corporate governance reforms outlined earlier and more rigorous assessment of companies by market analysts. Across the world, all codes of corporate governance recognise that the directors of a company must take responsibility for understanding and addressing the risks a company faces; understand business opportunities and take measures to enhance performance; providing accountability to both the company and the shareholders; providing broad, timely and accurate disclosure of information about financial and operating performance; informing the outside world on matters that impact external stakeholders. 4.4 Corporate Governance Trends Since the end of 2001 corporate governance reforms in many countries are aimed to improve auditor independence, corporate responsibility, financial disclosure, and corporate accountability while guarding against conflicts of interest. Board related changes The main changes associated with boards are: more non-executives directors possibly having the majority to strengthen the independent voice in the boardroom; independent chairpersons separating the roles of chairpersons and CEO; appointing a senior non-executive director to represent the interests of shareholders. Board committees A number of board committees are suggested to provide increased transparency on sensitive issues such as the audit process, nominations and remuneration of directors. ©P. & Y. Katsoulakos 28 12th July 2006 The 4CR strategic approach to corporate responsibility Audit Committee The primary role is to ensure the integrity of financial reporting and the audit process. The purpose is not to manage the preparation of financial statements or to conduct the financial audit but to oversee the financial control system and the audit function. It is important to bear in mind that the directors are responsible for producing correct financial statements and the auditors have a legal and professional obligation to ensure the accounts comply with applicable standards prescribed by various governing bodies. The role and responsibilities of the committee should be available on request and preferably published on the company’s web site. Nominations Committee The role of the Nominations Committee is to review the balance and the effectiveness of the Board and help ensure that the company has the best possible Board. The Nominations Committee also provides a formal function for recruitment of directors. Remunerations Committee The purpose is to ensure that remuneration of executive directors is properly monitored and is justified. Companies produce a Directors Remuneration Report to ensure transparency. ©P. & Y. Katsoulakos 29 12th July 2006 The 4CR strategic approach to corporate responsibility 5 Corporate responsibility drivers 5.1 An overview of corporate responsibility drivers The main driving forces for corporate responsibility are investor and consumer demands and governmental and public pressures as shown in the following diagram. Governments are tightening corporate governance and sectoral compulsory standards making selfregulation an appealing option for most businesses. The loss of public confidence in the corporate word drives the markets down and therefore has a significant impact on the value and growth potential for many companies. As a consequence, public expectations on corporate integrity and ethical operations are particularly important drivers for corporate responsibility. Consumers are increasingly exercising their green buying power exerting pressure on companies to address their environment impact and to invest in ‘environmentally friendly products’. The Code of Practice for Transnational Corporations initiated by the UN in the early 1970’s, in collaboration with many organisations including Consumer International, defined what consumers expect from businesses in terms of ethics, product standards, competition, marketing and disclosure of information. Finally the growth of a strong Socially Responsible Investment movement gives distinct advantages to companies performing well on sustainability criteria and therefore provides a key driving force for improved corporate responsibility practices. The increasing interest in social responsibilities can be associated with various factors from stabilising markets to avoiding increased regulation, to taking advantage of ‘green’ consumer preferences and to doing the ‘right thing’ to strengthen corporate reputation. ©P. & Y. Katsoulakos 30 12th July 2006 The 4CR strategic approach to corporate responsibility However, potentially the strongest driving force is the recognition by an increasing number of people that it is time for a fundamental change in the role of businesses in a world that has to develop in a sustainable manner. This strengthens the motivation for companies to join the relatively few companies that have adopted corporate responsibility and sustainability as a business philosophy. 5.2 The evolution of corporate regulation Business organisations are established to pursue profit mainly by selling products/services that address market demand in specific areas. This invariably involves the use of various types of resources in business processes. In some cases, especially when the objective is short-run profit maximisation, there are abuses of resources and disregard of the impact of business processes or products in social and environmental factors. Further, the pursuit of profit maximisation often involves the use of monopolisation and/or unfair practices at the expense of other firms and consumers. To restrain business miss-conduct, legislation and regulation has been used by national governments prescribing rules under which companies are obliged to operate. Governmental agencies have been set up to manage corporate legislation including registration and reporting obligations and trading, health and safety, human rights, consumer and environmental protection standards. Further, a number of international organisations have been established to supervise the implementation of mandatory sector standards. In this context the financial sector is a good example of the way regulatory standards have been applied. First, rules and regulations were established to govern how shares and other financial instruments are traded. Commercial banks then became heavily regulated to raise public confidence. More recently the Basel global supervisory standards came in force regulating the capital adequacy of internationally active banks. Another good example is shipping safety regulations supervised by IMO, the International Maritime Organisation, which mandated since the 90s the ISM code for safety management and environmental protection. Socio-legal research in the late 1970s raised many questions regarding the effectiveness of strict regulation and of the associated command-control approaches. This supported the neo-liberal discourse of the 1980s, which emphasized deregulation and corporate rights. The corporate world responded positively by voluntarily adopting management standards which, in the main were developed by the International Organisation for Standardisation (ISO). ISO 9000 became an international reference for quality management requirements in business-to-business dealings and ISO 14000 has been widely used by organisations to meet their environmental challenges. Since the 1990s, the Corporate Social Responsibility (CSR) is seen as a way for corporate self- regulation involving, codes of conduct, improvements in occupational health and safety, environmental protection and social and environmental reporting, According to the UN Research Institute on Social Development, the CSR approach to regulation is nowadays evolving to public-private partnerships and multi-stakeholder initiatives for standard setting, reporting, monitoring, auditing and certification. 5.3 Green buying and ‘environmentally friendly products’ Public concern on environmental issues has been translated in consumer preferences for green products, which are becoming an effective CSR driving force. Governments are further increasing the impact of ©P. & Y. Katsoulakos 31 12th July 2006 The 4CR strategic approach to corporate responsibility this trend through green procurement policies. The net result is that many companies are committing to green product policies and are using environmental performance indicators as critical success factors. The development of ‘environmentally friendly products’ is also supported by governmental policies exemplified by the European Commission’s Integrated Product Policy (IPP). IPP is aimed at creating conditions in which environment-friendly products, or those with a reduced impact on the environment, will gain widespread acceptance among the European Union's member states and consumers. The development of IPP goes back to 1997, culminating in the February 2001 Green Paper on the rationale for developing product-related environmental policies and its implementation in 200323. Generally, environmentally friendly products will need to use fewer resources, have lower impacts and risks in the environment and prevent waste generation. To support such products, IPP suggested the following three strategies: pricing; promoting green consumer demand; stimulating the supply of greener products through eco-design guidelines, standardisation, regulation and problem solving product panels. 5.4 Socially Responsible Investment (SRI) Socially responsible investing (SRI) is an investment process that considers the social and environmental consequences of investments, both positive and negative, in addition to the normal financial analysis. In other words, investment managers often “overlay a qualitative analysis of corporate policies, practices, and impacts onto the traditional quantitative analysis of profit potential”. This leads to the identification of companies that meet certain standards of corporate social responsibility and sustainability for investment purposes. SRI was originally promoted by church related and pension funds. The Christian church from 1970 adopted policies for financial investment promoting corporate responsibility: "Investors should seek the best investment opportunities on financial grounds and then work from within to alter corporate practices that are at variance with social concerns of the church”. SRI funds today have a significant position in the capital markets having grown during the last decade to represent close to 10% of available resources. SRI has established a number of sustainability indexes assessing and ranking companies according to sustainability criteria which provides valuable benchmarking data and have created a driving force towards improved sustainability performance. Socially responsible investment (SRI) assets grew faster than the entire universe of managed assets in the United States during the last 10 years, according to the Social Investment Forum’s fifth biennial report on SRI trends (Washington, D.C. 24th January, 2006). 23 http://cleantech.jrc.es ©P. & Y. Katsoulakos 32 12th July 2006 The 4CR strategic approach to corporate responsibility According to Steven D. Lydenberg24, chief investment officer of Domini Social Investments, European institutional investors are leading the way with National pension funds in Sweden and Denmark using social and environmental screens; two large pension funds in the Netherlands having pilot investment programs with environmental screens, and France's state pension reserve fund incorporating social and environmental issues in some investments. SRI strategies Three SRI strategies have evolved over the years: Screening, Shareholder Advocacy, and Community Investing. These are defined as follows: Screening: the practice of including or excluding publicly traded securities from investment portfolios or mutual funds based on social and/or environmental criteria. Socially concerned investors generally seek to invest in profitable companies with respectable employee relations, good environmental performance, respect for human rights around the world, and safe and useful products. A special category of screening strategy is the Social Venture Capital supporting companies creating innovative solutions to social and environmental problems. Shareholder Advocacy: describes the efforts of socially concerned investors to influence the behaviour of a company. This strategy gained prominence during the boycotts of companies doing business in South Africa during apartheid. There are different types of shareholder activism: voting proxies on social and environmental issues at annual meetings, initiating dialogue with company management, sponsoring shareowner resolutions and divestment. Community Investing: represents the flow of capital from investors to communities that are underserved by traditional financial services. It provides access to credit, equity, capital and basic banking products. Assets held and invested locally by community development financial institutions (CDFIs) based in the United States totalled $14 billion in 2003, up from $7.6 billion in 2001. Comparative performance of SRI funds The key question is “do socially responsible investments deliver comparable returns to their investors as non-binding ones?” It is clear that values and ethics have attained higher priority with some investors than getting best possible returns. Despite this fact, the performance of SRI funds demonstrates that their investors can achieve competitive returns. A report from the Social Investment Forum noted that well over two-thirds (71 percent) of the largest (over $100 million in assets) socially and environmentally responsible mutual funds in the US earned the highest possible ratings through the end of 2003 from Morningstar and Lipper. In general it is accepted that there are good securities to choose from in both socially responsible companies and those that are not. However, by investing in socially responsible companies, individuals obtain the added value that they are contributing to a ‘better’ future for generations to come and are becoming part of a growing force that wants to make a difference in the world’s sustainability challenges. SRI indexes A number of SRI indexes have been established to support socially responsible investing. They include: 24 Steven D. Lydenberg, 2005, “Corporations and the Public Interest: Guiding the Invisible Hand2, Berrett-Koehler Publishers ISBN: 1576752917 ©P. & Y. Katsoulakos 33 12th July 2006 The 4CR strategic approach to corporate responsibility Dow Jones Sustainability Indexes (DJSI) established in 1999, including the global, European, Eurozone, North American and US benchmarks. DJSI World consists of more than 200 companies that represent the top 10% of the leading sustainability companies in 64 industry groups in the 33 countries covered by the DJGI. DJSI uses the SAM assessment methodology which will be explained later. FTSE4Good Index Series encompassing four tradable and four benchmark indices, representing Global, European, US and UK markets. The Global index consists of over 600 companies. Companies are assigned a high, medium or low impact weighting according to their industry sector. The higher the environmental impact of the company’s operations, the more stringent the inclusion criteria. Ethibel Sustainability Index (ESI) including four regional indexes: ESI Global, ESI Americas, ESI Europe and ESI Asia Pacific. The ESI screening methodology uses a checklist of “sustainability criteria”, divided into four areas: internal social policy, environmental policy, external social policy and the ethical economic policy. KLD Domini 400 Social Index (DSI) supporting investors who integrate environmental, social and governance factors into their investment decisions. KLD Social Ratings consist of two categories: Social Issues and Controversial Business Issues. Social Issue ratings measure corporate social responsibility across a range of issues that affect the company's various stakeholders. Controversial Business Issues reflect company involvement in lines of business of interest to social investors. Innovest EcoValue Index supporting investors interested in companies associated with "ecoefficiency" or capabilities to maximize shareholder value while minimizing the financial and business risks from any adverse impacts on the environment. Environmental data compiled for the EcoValue '21 platform include emissions of harmful substances, hazardous waste disposal, and whether products can be easily recycled. The Calvert Social Index providing a broad-based benchmark for measuring the performance of large, US-based socially responsible companies focusing on products, environment, workplace and integrity. 5.5 Corporate responsibility and sustainability as business philosophy A number of companies have adopted corporate responsibility and sustainability as a business philosophy. In these cases, companies believe that integrating social and sustainability principles in their operation provides the best possible strategic approach and strive to deliver long-term shareholder value through practices that are increasingly satisfying to all its stakeholders. Corporate strategy is developed taking into account, as part of business opportunities, environmental and social opportunities and strategic capabilities are developed to exploit efficiently such opportunities. The main principles of a responsibility driven business philosophy are: serving all the company’s stakeholders is accepted as the best way to produce long term success and to create a growing, prosperous company; the company’s products and technologies are directed to contribute (as much as possible) to the culture, benefits and welfare of people throughout the world; the company creates long term win-win relationships with stakeholders; ©P. & Y. Katsoulakos 34 12th July 2006 The 4CR strategic approach to corporate responsibility the company grows hand-in-hand with its employees supporting them to reach their full potential and to improve their standard of living; company success is directly linked to optimising stakeholder value. A corporate responsibility driven business philosophy is often about how to resolve conflicting stakeholder demands. It is therefore about leadership and how a company can shape the expectations of its marketplace. 6 Corporate responsibility indicators and reporting standards Sustainable development indicators are being developed by the UN and other international organisations. Corporate sustainability indicators have been mainly developed by SRI indexes to evaluate corporate responsibility performance. A number of award schemes also provide useful corporate responsibility criteria. A number of reporting standards have been developed, notably GRI and AA1000 which should provide in the future the definitive set of indicators for benchmarking purposes. Additional contributions are made by common reporting adopted by membership organisations such the Corporate Impact Reporting framework from BITC supporting their members with measuring and communicating their key impacts. 6.1 Sustainable development indicators at national and international levels The United Nations’ Commission on Sustainable Development (CSD) has defined a working list of sustainability indicators from which countries can choose indicators according to national priorities, problems and targets. The Environmental Sustainability Index (ESI) 25 also provides a useful source of data. ESI is a measure of overall progress towards environmental sustainability developed for 122 countries. A high ESI ranking indicates that a country has achieved a higher level of environmental sustainability than most other countries and a low ESI ranking signals that a country is facing problems in achieving environmental sustainability along multiple dimensions. The ESI assessment is based on 22 core indicators (Annex 3). Two popular methods for organizing sustainability indicators are: a) The goal-indicator matrix which is the most traditional approach used for measurement analysis and allows multiple levels of decomposition from primary goals to quantifiable measurements; b) Driving force-state-response tables, which attempt to balance measures of causes, or driving forces; measures of the results, or state; and measures of programs and other human activities designed to alter driving forces to improve the state. The Driving Force-State-Response framework shows the connections between human activities and environmental states. It is mainly used by policy-makers or decision-makers and has been adopted by the UN Commission on Sustainable Development. 25 established through collaboration among the World Economic Forum, the Yale Center for Environmental Law and Policy (YCELP) and the Columbia University (CIESIN) ©P. & Y. Katsoulakos 35 12th July 2006 The 4CR strategic approach to corporate responsibility The OECD and the European Environmental Agency (EEA) have also developed response indicators to describe responses by groups in society and enterprises as well as governmental attempts to prevent, compensate or adapt to changes. Impact level is then differentiated in the following categories: Global European National Regional Local Many organizations in the public and private sector generate information on sustainable development including: a) The World Resources Institute provides EarthTrends, an online database on environmental, social and economic trends (statistical, graphic, and analytical data). b) The Earth Policy Institute reports on twelve Eco-Economy Indicators including population and economic growth and status on fish, forests, emissions, water and climate change. c) The Worldwatch Institute produces fact sheets. The Worldwatch Institute provides a number of publications including Vital Signs on the transition to an environmentally sustainable and socially just society—and how to achieve it. d) The European Environmental Agency reports progress in a number of policy areas including: Agriculture, Air, Air Quality, Climate change, Coasts and seas, Energy, Nature, Transport, Waste, Water. The need for harmonisation of indicators and improved co-ordination of assessment methods is recognised and a number of projects are addressing these issues. Founded in 1990, the International Institute for Sustainable Development (IISD) is in the business of promoting change towards sustainable development26. IISD's strategic objective on Measurement and Assessment is to facilitate the development of robust sets of indicators for public and private-sector decision-makers wishing to measure progress toward sustainable development and to build an international consensus to promote their systematic use in assessment, reporting and planning. 6.2 Company level SRI associated indicators At the company level, corporate sustainability indicators have been produced by various SRI indexes to assess sustainability performance in order to identify and select leading companies for investment purposes. In this context corporate sustainability performance is regarded an investable concept which creates motivation for investments in sustainability performance improvements. According to the Dow Jones Sustainability Indexes, leading sustainability companies display competencies in the following areas: a) Strategy: integrating long-term economic, environmental and social aspects in their business strategies to support global competitiveness and reputation. b) Financial: meeting shareholders' demands for sound financial returns, long-term economic growth, open communication and transparent financial accounting. 26 http://www.iisd.org/measure/ ©P. & Y. Katsoulakos 36 12th July 2006 The 4CR strategic approach to corporate responsibility c) Customer & Product: fostering loyalty by investing in customer relationships and product and service innovation taking into account eco-efficiency requirements. d) Governance and Stakeholder engagement: setting the highest standards of corporate governance and stakeholder engagement, including corporate codes of conduct and public reporting. e) Human: Managing human resources to maintain workforce capabilities and employee satisfaction through best-in-class organisational learning and knowledge management practices and remuneration and benefit programs. The Dow Jones Sustainability Index assessment approach The Dow Jones Sustainability Index approach, summarised in the following table, represents a practical way to highlight key sustainability performance areas measured through questionnaire-based techniques and weighted to provide overall sustainability ratings. The criteria reflect organisational design, processes and outputs. The FTSE4Good approach For inclusion in the FTSE4Good Indexes, eligible companies must meet criteria requirements in three areas: working towards environmental sustainability; developing positive relationships with stakeholders; up-holding and supporting universal human rights. Interesting features include: evolving selection criteria to reflect changes in globally accepted corporate responsibility standards; higher impact companies have to meet higher standards; criteria covering policies, management system and reporting. The FTSE4Good Indexes Sector Classification is given in Annex 4. ©P. & Y. Katsoulakos 37 12th July 2006 The 4CR strategic approach to corporate responsibility KLD ratings An interesting evaluation approach is the KLD rating method utilising strength and concern criteria for each responsibility category. To illustrate the approach an example of product strength and concerns criteria is given below. Product strengths: a) Quality: long-term, well-developed, company-wide quality program, or quality program recognised as exceptional in U.S. industry. b) R&D/Innovation: leadership for research and development (R&D), particularly by bringing notably innovative products to market. c) Benefits to Economically Disadvantaged: provision of products or services for the economically disadvantaged. d) Other Strength: products with notable social benefits that are highly unusual or unique for the company's industry. Concerns: a) Product Safety based on fines or civil penalties, or involvement in major recent controversies or regulatory actions, relating to the safety of products and services. b) Marketing/Contracting Controversy reflecting major marketing or contracting controversies, fines or civil penalties relating to advertising practices, consumer fraud, or government contracting. c) Antitrust: reflecting fines or civil penalties for antitrust violations such as price fixing, collusion, or predatory pricing, or involvement in recent major controversies or regulatory actions relating to antitrust allegations. 6.3 Reporting standards and indicators A number of reporting initiatives were established in the 1990s to develop standards for CSR and sustainability related reporting. The main ones are GRI, AA1000 and ISO 2600. The Global Reporting Initiative (GRI) The Global Reporting Initiative (GRI) is independent institution (started in 1997 by the Coalition for Environmentally Responsible Economies (CERES) and became independent in 2002) whose mission is to develop and disseminate globally applicable Sustainability Reporting Guidelines. The GRI incorporates the active participation of representatives from business, accountancy, investment, environmental, human rights, research and labour organisations from around the world, and is an official collaborating centre of the United Nations Environment Programme (UNEP) The GRI performance indicators are grouped under three sections covering the economic, environmental, and social dimensions of sustainability and are intended to aid users of the Guidelines. GRI highlights that advancing sustainable development requires coordinated movement across a set of performance measurements, rather than random improvement within the full range of measurements and has introduced a fourth dimension of information integrated performance to address this issue. It is worth noting that GRI economic indicators in the sustainability reporting context focus more on the manner in which an organisation affects the stakeholders with whom it has direct and indirect economic interactions. Therefore, the focus of economic performance measurement is on how the economic status ©P. & Y. Katsoulakos 38 12th July 2006 The 4CR strategic approach to corporate responsibility of the stakeholder changes as a consequence of the organisation’s activities, rather than on changes in the financial condition of the organisation itself. Further economic indicators address direct impacts designed to measure the monetary flows between the organisation and its key stakeholders and indirect impacts stemming from externalities that create impacts on communities. The environmental dimension of sustainability concerns an organisation’s impacts on living and nonliving natural systems, including ecosystems, land, air and water. With respect to the environmental measures in the report, organisations are encouraged to relate their individual performance to the broader ecological systems within which they operate. For example, organisations could seek to report their pollution output in terms of the ability of the environment (local, regional, or global) to absorb the pollutants. The social dimension of sustainability concerns an organisation’s impacts on the social systems within which it operates. GRI has selected indicators by identifying key performance aspects surrounding labour practices, human rights, and broader issues affecting consumers, community, and other stakeholders in society. The new GRI draft G3 Guideline, to be published on 31st March 2006, has adopted a multi-stakeholder approach to its development and it is expected that will enable reporting to be both rigorous and flexible. A linkage document was developed by GRI to help businesses assess and report how their activities are contributing to the achievement of the Millennium Development Goals The AA1000 Standards The AA1000 Framework is designed to improve accountability and performance by learning through stakeholder engagement. The building blocks of the process framework are planning, accounting, auditing and reporting. It does not prescribe what should be reported on but rather 'how' and is designed to complement the GRI Reporting Guidelines AA1000 standards include the AA1000AS Assurance Standard and the AA1000SES Stakeholder Engagement draft Standard The AA1000 Assurance Standard was launched on March 25th 2003 by AccountAbility, following an extensive international consultation process with the business, public and civil society sectors. The Standard addresses the qualitative as well as quantitative data that makes up sustainability performance plus the systems that underpin the data and performance. It is designed to complement the GRI Reporting Guidelines and other standardised or company-specific approaches to disclosure. The AA1000 Assurance Standard is based on assessment of responsibility related reports against three Assurance Principles: a) Materiality: does the sustainability report provide an account covering all the areas of performance that stakeholders need to judge the organisation's sustainability performance? b) Completeness: is the information complete and accurate enough to assess and understand the organisation's performance in all these areas? c) Responsiveness: has the organisation responded coherently and consistently to stakeholders' concerns and interests? ©P. & Y. Katsoulakos 39 12th July 2006 The 4CR strategic approach to corporate responsibility The AA1000 Stakeholder Engagement draft Standard (AA1000SES) is a generally applicable to the quality of the design, implementation, assessment, communication and assurance of stakeholder engagements including: a) functional engagements (e.g. customer care); b) issue-based engagements (e.g. human rights); c) organisation-wide engagements (e.g. reporting and assurance). Engagements may range from micro-level (organisation-stakeholder specific issues) to macro-level engagements on major societal concerns. AccountAbility and csrnetwork have developed the first global index, the Accountability Rating®, which measures the state of corporate accountability by ranking individual companies against six key areas: stakeholder engagement, strategy, governance, performance management, public disclosure and assurance. ISO 2600 The International Standards Organisation (ISO) is developing the ISO 2600, a "guidance document" on social responsibility with a 2008 deadline. ISO 2600 is aimed to provide practical guidance to a wide variety of organisations on a range of methods and options for implementing social responsibility. Other standards The accountancy profession has introduced a standard for assurance on non-financial information, the International Standard for Assurance Engagements (ISAE) 3000. ©P. & Y. Katsoulakos 40 12th July 2006 The 4CR strategic approach to corporate responsibility 7. The 4CR multi-dimensional corporate responsibility perspective 7.1 The 4CR conceptual model The 4CR multi-dimensional corporate responsibility perspective is aimed at establishing a coherent approach to addressing the various strands of corporate responsibility and their integration with strategic management. The approach is based on a revised Carroll model for corporate responsibility, as shown in the following diagram. The 4CR model retains four corporate responsibility layers but the discretionary responsibilities in the Carroll model are replaced by the sustainability responsibilities The main reason for the revision is that the sustainability aspects which were not included in the Carroll model represent today a major corporate responsibility which is distinctly different from the other responsibilities. On the other hand, the relative importance of philanthropy in the context of corporate responsibility is diminishing as evident from the empirical studies on the Carroll model and the fact that philanthropy does not feature in the goals and principles for corporate responsibilities as summarised in section 1.3. Furthermore, philanthropy can be included either within the sustainability layer or the ethical layer. Arguably corporate sustainability could be merged with the ethical layer but the separation serves to highlight two possibly ‘equally’ important areas for corporate attention, namely ethics and sustainability. In this context it is also useful to clarify the main differences between these two dimensions. Ethical responsibilities are primarily inward looking, asking companies to put their house in order, particularly with respect to labour standards, health and safety, environmental impact and anticorruption. Sustainability responsibilities are distinctly different; outwards looking with a macro perspective addressing intergenerational responsibilities and the need for multi-stakeholder coalitions to create capacity for sustainable development. ©P. & Y. Katsoulakos 41 12th July 2006 The 4CR strategic approach to corporate responsibility 7.2 The 4CR stakeholder oriented corporate responsibility taxonomy The 4CR taxonomy described in the following table highlights four corporate responsibility areas: a) Corporate Competitiveness b) Corporate Governance c) CSR d) Corporate Sustainability The 4CR taxonomy summary Responsibility Areas FocusApproach Key Issues Related concepts Measurement Corporate Positioning Responsiveness Reputation risks Economic National Social innovation performance competitiveness and marketing Competitiveness Differentiation Corporate Codes of National models Competitive policy Governance conduct Sectoral and regulation Transparency regulations Voluntary Mainstreaming Business ethics ethical Social welfare Corporate citizenship performance Social accountability Social CSR regulation Compliance Stakeholder Management management accountability Social reporting Social capital Ethical contribution Corporate Support for Climate change Eco-efficiency Sustainability Sustainability sustainable Quality of life Fair globalisation performance development Intergenerational Performance stability responsibilities The first area of responsibility in the 4CR taxonomy, representing economic performance, is Corporate Competitiveness. Next, Corporate Governance (CG) represents legal responsibilities providing accountability and conformance with applicable laws. Good Corporate Governance promotes transparency to stakeholders which creates a crucial link between Corporate Governance with CSR and Corporate Sustainability. CSR and Corporate Sustainability share the same approach involving the assessment of the company’s economic, social and environmental impact, taking steps to improve it in line with stakeholder requirements and reporting on relevant measurements. CSR is specifically associated with ethical issues – doing what’s right and fair, and avoiding harm. Related concepts are business ethics, corporate citizenship and social accountability. More specifically, CSR represents commitments and activities that extend applicable laws and regulations on trading, health and safety, human rights, consumer and environmental protection and reporting. This creates a continuation from corporate governance responsibilities and facilitates harmonisation across these two areas of responsibility. Corporate Sustainability is specifically associated with support for sustainable development (ecoefficiency and fair globalisation) and the long term performance stability and survival of the corporation. ©P. & Y. Katsoulakos 42 12th July 2006 The 4CR strategic approach to corporate responsibility It addresses the needs of present stakeholders while seeking to protect, support and enhance the human and natural resources that will be needed by stakeholders in the future. There are a number of related concepts to each area of corporate responsibility with stakeholder management and social capital being common to all of them. Stakeholder management relates to each area of responsibility as follows: stakeholder approaches to strategic management provide credible options for sustainable competitiveness; stakeholder oriented governance models are dominant in many countries; both CSR and corporate sustainability approaches are aimed at dealing with stakeholder concerns and requirements in a balanced way. The concept of social capital described by OECD as “…networks, together with shared norms, values and understandings which facilitate cooperation within or among groups” is closely related to stakeholder management. Stakeholder oriented governance, CSR and corporate sustainability, all generate social capital which facilitates business networking, enhanced learning and organisational responsiveness all of which are directly linked with corporate competitiveness. Naming convention Responsibility Areas Corporate competitiveness Corporate governance CSR Corporate sustainability Corporate Responsibility CR Corporate Responsibility and Sustainability CRS Total Corporate Responsibility TCR 7.3 Stakeholder management and social capital The stakeholder perspective In market economies, companies normally pursue maximisation of shareholder value (profit, share price, etc). According to the agency theory of the firm, directors of an organisation are agents of the owners and are duty bound to act to maximise the interests of those owners. In contrast, the corporate responsibility and sustainability movement represents companies that voluntarily recognise and address their responsibilities to all their stakeholders for mutual benefit or even purely on ethical/moral grounds. Stakeholder theory emphasising responsibility to stakeholders over profitability and shareholder interests was established by R Freeman27 in 1984 as indicated earlier. Stakeholders in the broader sense are everyone and everything affecting or being affected by the company. Stakeholders normally include investors, customers, employees, business partners, local communities, the environment and society. However, it should be pointed out that there is an ongoing debate about who are the key stakeholders and about criteria for shareholder classifications. 27 Freeman, E. R., 1984, Strategic management: A stakeholder approach, Pitman, Boston. ©P. & Y. Katsoulakos 43 12th July 2006 The 4CR strategic approach to corporate responsibility J Post et all in Redefining the Corporation 28 states: “The legitimacy of the corporation as an institution, its ‘license to operate’ within society, depends not only on its success in wealth creation but also on its ability to meet the expectations of diverse constituents who contribute to its existence and success. These constituencies and interests are the corporation’s stakeholders—resource providers, customers, suppliers, alliance partners and social and political actors. Consequently, the corporation must be seen as an institution engaged in mobilizing resources to create wealth and benefits for all its stakeholders.” Jim Collins and Jerry Porras29, in their landmark book “Built to Last”, show how organisations with a strong sense of identity and a clearly defined set of enduring values tend to prosper and evolve over time. In “Good to Great” Collins again shows that greatness in an organisation, defined as sustained top level performance, is directly related to a clear, compelling sense of purpose that enables an organisation to gain a positive identity with customers, investors, employees and other stakeholders. Based on extensive empirical research, Clarkson’s 30 view of corporations is a “system of primary stakeholder groups, a complex set of relationships between and among interest groups with different rights, objectives, expectations and responsibilities”. This undoubtedly pragmatic view of the corporation points to the complexity of stakeholder management. Ideally the stakeholder approach, as shown in the following diagram, could be interpreted as an extension of the traditional agency approach as shareholders are also key stakeholders with ultimate control on strategy and profitability remains a key performance indicator. However, addressing the requirements of many stakeholders with conflicting objectives and expectations increases corporate management complexity exponentially and therefore poses difficulties and risks. 28 James E. Post, Lee E. Preston, and Sybille Sachs, 2002, Redefining the Corporation - Stakeholder Management and Organizational Wealth, Stanford University Press 29 J. Collins and J. Porras, “Built to Last”, New York: Harper Business, 1994; Good to Great, New York: Harper Business, 2001. 30 Clarkson, M. B. E., 1995, A stakeholder framework for analyzing and evaluating corporate social performance, Academy of Management Review, 20(1). ©P. & Y. Katsoulakos 44 12th July 2006 The 4CR strategic approach to corporate responsibility Stakeholder management approaches can be very different in practice, spanning from instrumental approaches which use stakeholder relationships strictly as an instrument to maximise profit to intrinsic approaches where fundamental principles guide how a company does business particularly with respect to how stakeholders are treated31. National Corporate Governance approaches, being either market oriented or stakeholder oriented, will also have a direct bearing on the way stakeholder approaches may be practised by companies around the world. Donaldson and Preston suggested that stakeholder theory encompasses descriptive, instrumental and normative aspects which are in reality intertwined and mutually supportive. However, they argued that “the fundamental basis” of stakeholder theory is normative on the basis that the justifications for favouring stakeholder theory over other management theories ultimately rely upon normative arguments. The instrumental and normative stakeholder concepts have received more attention possibly because they have a value perspective which provides a basis for creating stakeholder specific management frameworks and tools. The descriptive aspect of stakeholder approaches is illustrated by the conclusion drawn by Clarkson from fifty case studies that corporate social responsibilities, responsiveness and performance are best understood by analysing and evaluating the way in which corporations actually manage their relationships with employees, customers, shareholders, suppliers, governments, and the communities in which they operate. The descriptive power of stakeholder approaches can therefore provide a means to enhanced understanding of responsiveness and performance issues. As such it is argued here that the descriptive dimension of stakeholder approaches provides an important tool for strategic management not just in explaining why a company behaves in certain way but also in reasoning about performance deviations and in the identification of corrective actions. Instrumental stakeholder management Instrumental approaches are aimed at maximising shareholder value paying attention to stakeholder relationships. The basic assumption in this model is that stakeholders control resources that can facilitate or slow down the implementation of strategies and therefore must be managed to create competitive advantage to maximise profits and ultimately returns to shareholders. Clearly, in all cases, instrumental stakeholder management is a means to an end which may have nothing to do with the welfare of stakeholders. An instrumental approach is essentially hypothetical; it is based on causal rules such as “to achieve (avoid) X, Y, or Z, then adopt (don’t adopt) practices A, B, or C”. In a defensive situation, stakeholder concerns could be managed to avoid stakeholder action that may undermine the company’s objectives [e.g. to avoid action X from stakeholder P adopt practice A]. In a proactive situation, stakeholder concerns could be managed by building trust with stakeholders [e.g. to achieve customer retention build trust on product dependability]. Such rules in different formats and complexity can be used to represent organisational knowledge on how to manage stakeholder relations. 31 Donaldson, T., & Preston, L. E., 1995, The stakeholder theory of the corporation: Concepts, evidence, and implication, Academy of Management Review, 20. ©P. & Y. Katsoulakos 45 12th July 2006 The 4CR strategic approach to corporate responsibility Instrumental approaches are often associated with stakeholder analysis used to improve strategic decision making. Examples include the work by Mason and Mitroff on SAST (Strategic Assumption Surfacing and Testing), which primarily aims at assisting decision makers in the problem formulation stage of planning32 and the ‘unbounded systems thinking’ approach of Mitroff and Linstone 33 that recognizes and seeks to manage the complexity and interconnections of business problems, ‘messes’ in Ackoff’s terms34 or system archetypes in Senge’s terms35. The breadth of stakeholder theory (Phillips, Freeman, & Wicks, 2003) and its complexity are a potential explanation for the lack of empirical support to the instrumental power of stakeholders36. Instrumental stakeholder management is regarded part of corporate strategy but does not drive strategy. Two variants of the strategic stakeholder management approach are the direct effects model and the moderation model. In the direct effects model, manager’s attitudes and actions towards stakeholders are perceived as having a direct effect on the company’s financial performance independent of the strategy. In the moderation model, managerial orientation towards stakeholders does impact strategy by moderating the relationship between strategy and financial performance. Intrinsic or normative stakeholder commitment Intrinsic stakeholder approaches imply that stakeholder relationships are based on moral commitments accepted as norms. The company adopts certain fundamental principles on how it treats its stakeholders which affect strategy and decision making at all levels of the company’s operation. Stakeholder interests form the foundation of corporate strategy itself representing what the company stands for. Stakeholders enter into decision making before business considerations and success is measured by the satisfaction among all stakeholders. Social norms are not outcome-oriented and usually can be described by prescriptive rules: Do X, or: Don't do X. Social norms represent informal, decentralized systems of consensus and cooperation and influence long-term relational exchanges between firms and their stakeholders. It has been argued that to reap the benefits of an instrumental approach a company must built trust with its stakeholders which can only be done through commitment to ethical relations with stakeholders regardless of expected benefits. The counter argument is that the use of ethics for acquiring good reputation is essentially part of an instrumental approach. Obviously there is a difference between behaving well so that people like you and behaving well because that’s how you are. In other words, trustworthiness, honesty and integrity are difficult to fake. The normative ‘core’ of stakeholder theory has been criticised on the grounds of inconsistencies or conflictive demands. Typical of criticism is represented by the stakeholder paradox37 describing the 32 Mason, R. O., & Mitroff, I. I. (1981). Challenging Strategic Planning Assumptions; New York: John Wiley & Sons 33 I. I Mitroff & H. Linstone, (1993), The unbounded mind: breaking the chains of traditional business thinking, Oxford University Press. 34 R. L. Ackoff, (1974), Redesigning the future, New York: Wiley. 35 P. Senge, (1990). The Fifth Discipline: The Art and Practice of the Learning Organization. New York : Doubleday 36 R. Phillips, R. E. Freeman, A. Wicks, 2003, What stakeholder theory is not, Bus. Ethics Quart. 13(4) 37 K. E. Goodpaster, (1993), Business Ethics and Stakeholder Analysis, In T. L. Beauchamp & N. E. Bowie (Eds.), Ethical Theory and Business, N. J Englewood Cliffs, Prentice Hall. ©P. & Y. Katsoulakos 46 12th July 2006 The 4CR strategic approach to corporate responsibility result of contradictory duties of the managers to various stakeholders that can result in “business without ethics” if the shareholders’ interests are given priority and “ethics without business” if other stakeholders’ interests are served at the expense of profits. The second generation of normative theory emphasise the multilateral view of stakeholders’ relations 38 with increasing emphasis on co-operation and collaboration39. Classification of stakeholders Review of stakeholder classifications Stakeholder classification schemes are often based on the level and type of influence a stakeholder group exerts on the company; what Freeman (1994) called “the principle of who or what really counts”. Consequently, stakeholder classifications often reflect criteria representing stakeholder’s ability to influence the company’s direction, behaviour, process or outcome. Freeman’s definition of stakeholder—‘any group or individual who can affect or who is affected by the achievement of the company’s objectives’ provides the baseline position of who are stakeholders. Clarkson (1995) defined stakeholders more narrowly as risk-bearers, arguing that a stakeholder must have some form of capital at risk (either financial or human) and therefore has something to lose or gain depending on a company’s behaviour. However it should be pointed out that human capital risks are more difficult to define and to compare with financial risk. Mitchell et al. (1997)40 suggested that stakeholders can be classified according to whether they have, or perceived to have one, two, or all three of the following attributes: power to influence, legitimacy of their claim and urgency of their claim. Stakeholder power exists where one stakeholder can get another to do something that would not have otherwise done. Stakeholder legitimacy represents the belief that the actions of a stakeholder or stakeholder group are desirable or appropriate within the company’s accepted norms and values. Stakeholder urgency includes both criticality and time urgency, with a stakeholder claim considered to be urgent both when it is critical and/or when a response delay is unacceptable. According to this approach, stakeholders with power can influence or disrupt the company’s core business operations, so powerful stakeholders are important. However, some stakeholders are not powerful but still influential because their claims are legitimate and therefore acted upon by the company. Some powerful and legitimate stakeholders may not have influence when their claims are recognised but are not actioned due to lack of urgency. 38 E Freeman & J Liedtka, (1997), Stakeholder capitalism and the value chain, European Management Journal, 15 (3) 39 Jones, T. M. (1995). Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics. Academy of Management Review, 20 (2) 40 R Mitchell, B Agle and D Wood, 1997, Towards a theory of stakeholder identification: defining the principle of who and what really counts, Academy of Management Review, 22(4) ©P. & Y. Katsoulakos 47 12th July 2006 The 4CR strategic approach to corporate responsibility Stakeholder salience represents different combinations of the power, legitimacy and urgency attributes and provides the basis for the typology of stakeholders described in the following table. The Mitchell typology of stakeholders Stakeholder category Stakeholder Attributes Stakeholder subcategory Legitimacy Discretionary stakeholders Power Dormant stakeholders Urgency Demanding stakeholders power and legitimacy Dominant stakeholders legitimacy and urgency Dependent stakeholders power and urgency Dangerous stakeholders salience Latent stakeholders with only one of the three attributes Expectant stakeholders with two of the three attributes Definitive stakeholders with all the three attributes Low moderate power, legitimacy and High urgency Stakeholders’ salience could increase/decrease by changes in one or more of their attributes and as a result stakeholders can shift from one category to another. Agle et al41 confirmed the above typology empirically in 1999. Kochan and Rubinstein (2000)42 suggested that all stakeholders should be categorized by the role they play in the enterprise and list three criteria to identify the saliency of potential stakeholders: a) the extent to which they contribute valuable resources to the enterprise; b) the extent to which they put these resources at risk and would incur costs if the enterprise were to fail or their relationship with the enterprise was terminated; c) the power they have over the enterprise. Performance related criteria provide the basis for alternative stakeholder classification approaches, obviously akin to instrumental approaches. An example of a performance oriented classification is provided by Atkinson, Waterhouse and Wells (1997)43. Their approach is based on the premise that companies exist to achieve their primary objectives, which are controlled by the organization’s owners. What the company expects from and gives to other stakeholder groups relates to their involvement in achieving the secondary objectives representing the operational targets dictated by the primary objectives. The contribution and performance of each stakeholder group is evaluated to guide rewards and other measures to improve or maintain progress. The approach makes use of a classification of stakeholders into two groups: a) environmental (customers, owners and the community) b) process (employees and suppliers). 41 B. R. Agle, R. K. Mitchell and J. A. Sonnenfield, (1999), “Who matters to CEOs? An investigation into stakeholder attributes and salience, corporate performance and CEO values”, Academy of Management Journal, 42(5) 42 T.A. Kochan and S.A. Rubinstein, 2000, ‘Toward a Stakeholder Theory of the Firm: The Saturn Partnership’, Organization Science, 11:4 (July-Aug 2000). 43 Anthony A. Atkinson, John H. Waterhouse and Robert B. Wells, 1997, “A Stakeholder Approach to Strategic Performance Measurement”; MIT/Sloan, Management Review Vol. 38, No. 3 ©P. & Y. Katsoulakos 48 12th July 2006 The 4CR strategic approach to corporate responsibility Who are regarded business stakeholders in practice There is no clear picture of who companies regard as their business stakeholders, although shareholders, employees and customers seem almost undisputed. The role of employees as stakeholders has been explored extensively (Blair, 1995, 1996; Blair and Stout, 1999; Child and Rodriguez, 2004) as that of customers and suppliers (Freeman, 1984; Freeman and Evan, 1990; Freeman and Liedtka, 1997). Additional stakeholders highlighted in literature include options and debt holders (Parrino and Weisbach, 1999), local communities (e.g. regional agencies, charities) (Morris et all 1990), environment as “latent” stakeholders (Driscoll and Starik, 2004; Phillips and Reichart, 2000) and the government (Brouthers and Bamossy, 1997; Buchholz and Rosenthal, 2004), future generations (Wheeler and Sillanpää, 1997). A useful survey of stakeholders included in various academic/professional lists and company reports is provided in reference44 (Annex 5). Stakeholder management frameworks Freeman’s analysis framework Freeman proposed three levels of stakeholder analysis - rational, process and transactional. At the rational level, an understanding of ‘who are the stakeholders of the organisation’ and ‘what are their perceived stakes’ is necessary. Freeman uses a generic stakeholder map as a starting point which can be also specified for each major strategic issue. The stakes of each specific stakeholder group are identified and analysed and linked to their ‘power’ characteristics. At the process level, the organisation either implicitly or explicitly manages its relationships with its stakeholders, and therefore processes should designed/refined to reflect the rational of the stakeholder map of the organisation. According to Freeman, existing strategic processes that work reasonably well could be enriched with requirements for multiple stakeholders. For this purpose, he uses a revised version of Lorange’s schema for strategic management processes. At the transactional level the organisation manages stakeholder negotiations in line with the stakeholder map and the organisational processes. According to Freeman successful transactions with stakeholders require an understanding of the legitimacy of the various stakeholders and processes enabling stakeholders to routinely surface their concerns. 44 R Maessen, P van Seters & E van Rijckevorsel, Globus Circles of Stakeholders, Institute for Globalization and Sustainable Development, Tilburg University, the Netherlands ©P. & Y. Katsoulakos 49 12th July 2006 The 4CR strategic approach to corporate responsibility Freeman has also established a set of fundamental principles/characteristics for ‘stakeholder firms’ including: a stakeholder approach emphasizes active management of the business environment, relationships and the promotion of shared interests to ensure the long-term success of the firm; the interests of key stakeholders must be integrated into the very purpose of the firm, and stakeholder relationships must be managed in a coherent and strategic fashion. Good stakeholder management develops strategies that are viable for stakeholders over the long run so that while individual stakeholders may lose out on some individual decisions, all stakeholders remain supporters of the firm; a stakeholder approach is intended to provide a single strategic framework, flexible enough to deal with environmental shifts without requiring managers to regularly adopt new strategic paradigms; a stakeholder approach is a strategic management process actively plotting a new direction for the firm by considering how the firm can affect the environment as well as how the environment may affect the firm. Therefore understanding stakeholder relationships is, at least, a matter of achieving the organization’s objectives which is in turn a matter of survival; The stakeholder framework does not rely on a single over-riding management objective for all decisions. As such it provides no rival to the traditional aim of “maximizing shareholder wealth”. Stakeholder management is a never-ending task of balancing and integrating multiple relationships and multiple objectives; Diverse collections of stakeholders can only cooperate over the long run if, despite their differences, they share a set of core values. For a stakeholder approach to be successful it must incorporate values as a key element of the strategic management process. Quality of stakeholder relationships At the Centre for Innovation in Management (CIM), Ann Svendsen and her co-workers have developed a stakeholder oriented management framework based on the quality of stakeholder relationships 45 which are seen to underpin the emerging dominance of network organisations 46. The basic premise is that “the network economy is founded on technology, but it can only be built on relationships. It starts with chips and ends with trust.” 47 Relationship quality is measured using Nahapiet and Ghoshal’s three dimensions of social capital: a) The structural quality of a relationship referring to the structure of the social network in which the relationship is embedded; b) The relational quality of the relationship associated with the levels of mutual trust and reciprocity; c) The cognitive quality of the relationship reflecting the levels of shared understanding and goals. 45 A. C., Svendsen, R.G. Boutilier, R.M. Abbott & D. Wheeler (2002), Measuring the Business Value of Stakeholder Relationships: Part One, Vancouver: Centre for Innovation in Management 46 Manuel Castells, (2000), The Rise of the Network Society, Malden: Blackwell Publishers. 47 Kevin Kelly, (1999), New Rules for the New Economy Penguin, USA. ©P. & Y. Katsoulakos 50 12th July 2006 The 4CR strategic approach to corporate responsibility The CIM approach, based on a multilevel model shown in the following diagram, reflects collected evidence that links the quality of stakeholder relationships to competitive advantage. The main goals at each level are described below: Level 1 Compliant: avoiding harm in the three dimensions of sustainability, for example ensuring safety of products and workers, avoiding economic losses, corruption and (illegal) environmental damage. Level 2 Responsive: meeting reasonable individual stakeholder expectations in the three dimensions of sustainability, for example, achieving good levels of customer satisfaction, employee morale, returns to investors and reducing environmental impacts of operations, products and services. Level 3 Engaged: maximizing economic, social and environmental value, for example, achieving simultaneous sales and stock value growth, customer and employment growth and eliminating or offsetting environmental impacts. We can associate structural quality of social capital with information dissemination/ acquisition efficiency; relational quality with transactional efficiency and cognitive quality with enhanced learning. The relational dimension of social capital is based on three interlinked concepts: trust, norms, and reciprocity. If a member of the network ceases to follow established norms or if trust and reciprocity are withdrawn, social capital may be depleted or cease to exist. The cognitive dimension of social capital deals with shared codes, language, and narratives. Tsai and Ghoshal (1998) extended the cognitive dimension to include shared goals, values, and vision. In a case study, Boutilier and Svendsen (2001) found the cognitive aspects of a company’s stakeholder relationship to be more important to the emergence of inter-organizational trust. ©P. & Y. Katsoulakos 51 12th July 2006 The 4CR strategic approach to corporate responsibility Stakeholder value Freeman (1994)48 advocates that stakeholder theory is based on the assumption that values are a necessarily part of doing business and management should articulate the shared sense of the value they create and what brings ‘core’ stakeholders together. He argues that the firm is in relationship with its stakeholders supports “the human process of value creation”. In a recent article answering critics of stakeholder theory Freeman states “that many firms have developed and run their businesses highly consistent with stakeholder theory” including the companies featured in Built to Last and Good to Great (Collins 2001, Collins and Porras 1994). It is argued that whereas all these firms value their shareholders and profitability, none of them make profitability the fundamental driver of what they do. These firms also see the importance of values and relationships with stakeholders as a critical part of their ongoing success.” Donaldson and Preston argue that the interests of all stakeholders are of intrinsic value. “That is, each group of stakeholders merits consideration for its own sake and not merely because of its ability to further the interests of some other group, such as the shareowners.” Kochan and Rubinstein [42] highlight the concept of “value exchange” between the company and their stakeholders. They suggest that ‘shareholder firms’ should balance value distribution to their stakeholders according to their value contributions; in other words they should ensure a fair corporate value distribution addressing the value needs of stakeholders. In general, stakeholder approaches should be aimed at increasing in the long-run shareholder value beyond the levels normally achievable with the agency approach by optimising profitability and intangible assets such as reputation and intellectual capital. This requires the development of strategic capabilities possibly centred on efficient stakeholder engagement processes and optimised development of social capital. It is clear that the concept of stakeholder value is not as yet clearly defined. We can assume that stakeholder value can be regarded as the sum of value distributions to the company’s stakeholders and that this may contain instrumental and intrinsic elements. However the difficulty comes in defining value measurements for each stakeholder group, ranking their value contributions and quantifying the effect of various elements of stakeholder value on economic performance indicators. 48 R. E. Freeman, 1994, The politics of stakeholder theory, Bus. Ethics Quart. 4 (4). ©P. & Y. Katsoulakos 52 12th July 2006 The 4CR strategic approach to corporate responsibility Social capital Social capital can be broadly defined as the current and potential advantages a person or organisation or community has from social relations and networking. According to James Coleman 49 social capital represents: a) Features of social organisations, such as trust, norms, and networks that can improve the efficiency of society by facilitating coordinated actions; b) An attribute of an individual in a social context determined by: the individual’s connections (i.e. whom he/she knows and group memberships); the strength of the connections’ ties; the resources available in connection groups. Social capital can be acquired partly through purposeful actions and can be transformed into conventional economic gains. Gabbay & Leenders (1999) 50 describe social capital as the productive set of resources, tangible or virtual, that accrues to an actor through the actor’s social relationships and facilitate the attainment of goals. Such definition views social capital in terms of the competitive or value generating outcomes of social networks, rather than as the structural appearance of the network itself. According to Don Cohen and Laurence Prusak51 “Social capital consists of the stock of active connections among people: the trust, mutual understanding, and shared values and behaviours that bind the members of human networks and communities and make cooperative action possible”. This definition which reflects the knowledge management background of the authors can be extended to clarify the interrelationship between social capital and intellectual capital. Intellectual capital is knowledge that can be exploited by organisations in pursuit of their objectives. Intellectual capital include organisational or structural capital (the knowledge that is embedded in its organisational design, processes and IT applications), human capital (the human resources within the organisation and its suppliers) and customer capital (company's ongoing relationships with the people or organisations to which it sells). The later can be extended to social capital representing the company's knowledge and relationships with its stakeholders. 49 J. S Coleman, (1990), Foundations of Social Theory. Cambridge/London: Bellknap Press of Harvard University Press. 50 S M Gabbay and R Th A J Leenders, (1999) ‘CSC: The structure of advantage and disadvantage’ in R Th A.J. Leenders and S M Gabbay (eds), Corporate Social Capital and Liability. Boston/ Dordrecht /London: Kluwer Academic. 51 Don Cohen and Laurence Prusak (2000), In Good Company: How Social Capital Makes Organizations Work Harvard Business School Press, Boston, MA ©P. & Y. Katsoulakos 53 12th July 2006 The 4CR strategic approach to corporate responsibility Nahapiet and Ghoshal (1998)52 identified the following three dimensions of social capital: a) structural b) relational c) cognitive The structural dimension of social capital facilitates information dissemination and acquisition and relates to an individual's or organisational ability to make connections to others within a community. Features include network ties, density, configuration and appropriateness. The relational dimension of social capital is associated with trust, norms and obligations and the extent to which such qualities are shared among the parties. It supports efficient transactions between people and organisations from improved customers and supplier relations to enhanced transfer of best practices within organizations. The cognitive dimension of social capital has attracted significant interest as it is linked with the learning capabilities of organisations specifically organisational knowledge absorptive capacity denoting the ability of the firm to identify, value, assimilate and exploit information. Narayan and Pritchett53 suggested that communities with high social capital have frequent interaction, which in turn cultivates norms of reciprocity through which learners become more willing to help one another thus facilitating coordination and dissemination of information and knowledge sharing. Features include shared meanings, language, symbols, etc. across the members of a network. Finally in the context of corporate sustainability environmental capital is another concept used. Natural capital represents natural resources and ecological systems which form the basis of life, on which all organisations (and wider society) depend. However the concept is not as yet well defined and associated measures such as air, water and soil quality are need further development to be practically useful in corporate sustainability or stakeholder management. 52 J Nahapiet & Ghoshal, (1998), Social capital, intellectual capital and the organizational advantage, Academy of Management Review, 23(2), 53 Narayan, D. and Pritchett , L. (1997). Cents and sociability: Household income and social capital in rural Tanzania. Washington, DC: World Bank ©P. & Y. Katsoulakos 54 12th July 2006 The 4CR strategic approach to corporate responsibility 7.4 4CR related concepts Related concepts in the 4CR taxonomy include: 1. reputation risks 2. social innovation and marketing 3. regulation and competitive policy 4. eco-efficiency 5. fair globalisation 6. performance stability Reputation risks Boards responsible for risk management under Sarbanes-Oxley and similar legislation face a challenging time ahead, both in establishing a good understanding of the risks affecting their companies and in setting policies and controls for their management. Part of the challenge is dealing with reputation risks that are becoming a critical threat to the performance and even survival of many companies. As can be seen from the following Reputation Risk Matrix the sources of reputation risk are all associated with corporate responsibility and sustainability issues which makes reputation risk management an integral part of corporate responsibility and sustainability management. Reputation Risk Matrix Risk source area Products/ services and supply chain Governance and legal compliance Environment Risk type Specific consequences Customer dissatisfaction Loss of client trust with product value and/or Damage to brand value quality Cancellation delays of major Human rights abuses contracts Financial, security, Critical shareholder regulatory, compliance and resolutions / actions governance areas which Loss of high calibre personnel result in stakeholder views Cost of capital of integrity Security cost Environmental operational Loss of major asset(s) impact Disruption of essential Industrial accidents programs/services Increased insurance Common Consequence Loss of market confidence Reputation damage Loss of Key Corporate knowledge Litigation Negative media attention criticism by NGOs and review groups Underachievement of business objectives premiums Social innovation and marketing Social innovation refers to new or enhanced products or services that have a positive impact on social or environmental issues; often termed ‘environmentally friendly or green products’. Examples illustrating possibilities for social innovation include production of fibres entirely from renewable resources, fuel oils ©P. & Y. Katsoulakos 55 12th July 2006 The 4CR strategic approach to corporate responsibility from vegetation, energy and water savers, chemical free cleaning, recycled materials, organic food and cosmetic products, natural home furnishings etc. Social innovation represents social learning and problem solving in areas ranging from improvements in human health, education, human welfare, environmental protection and energy. Innovation capabilities are no different than those needed to create new products with novel functionalities. The difference is on the focus and perhaps on a stronger emphasis on understanding social problem areas and creating new forms of alliances to create solutions. Corporate Social Marketing (CSM) is aimed at behaviour changes that improve health, safety or the environment and the consequent development of new markets. In other words CSM is a strategy that uses marketing principles and techniques to foster behaviour change in a target population leading to social improvements while at the same time building markets for products or services 54 . A CSM initiative combines business strategy with a social need and thus provides opportunities for simultaneous social and business returns. Recent trends focusing on marketing playing a central role in the enablement and acceleration of organizational learning can be particularly important in this area. Key aspects of social innovation and marketing are: assessing the company’s potential for social innovation; social innovation networking; marketing, social understanding and organisational learning; promoting a culture for social innovation and marketing; promoting social innovation in R&D activities. Regulation and competitive policy Regulation and Competition Policy aims to constrain the behaviour of corporations when the latter are directed towards strengthening and/or exploiting significant market (or monopoly) power, to the detriment of competitors and, more significantly, to the detriment of consumers. It has been a particularly popular microeconomic policy tool in the USA since the late 1800s and in Europe after the World War II, but especially in the last 20 years or so. Emphasis has been recently placed by the European Commission on the Regulation of liberalised public utilities and on Competition Policy for oligopolistic markets. Eco-efficiency The World Business Council for Sustainable Development (WBCSD) defines eco-efficiency as being achieved by the delivery of competitively priced goods and services that satisfy human needs and bring quality of life, while progressively reducing ecological impacts and resource intensity throughout the life cycle, to a level at least in line with the Earth’s estimated carrying capacity. 54 “Best of breed,” Kotler, P., and Lee, N., Stanford Social Innovation Review, 14-23, 2004. ©P. & Y. Katsoulakos 56 12th July 2006 The 4CR strategic approach to corporate responsibility The Council has identified the following four aspects that can make eco-efficiency a strategic element in today’s knowledge-based economy: a) de-materialisation: developing ways of substituting material flows with knowledge flows; b) closing production loops: learning from the biological designs of nature which provide a role model for sustainability; c) service extension: moving from a supply-driven economy to a demand-driven economy; d) functional extension: manufacturing smarter products with new and enhanced functionality and selling services to enhance the products’ functional value. Fair globalisation Globalisation has set in motion a process of growing interdependence in economic relations (trade, investment and global production) and in social and political interactions among Organisations and individuals across the world. Despite the potential benefits, it is recognised that the current process of globalisation is generating unbalanced outcomes both between and within countries. The World Commission on the Social Dimension of Globalisation (WCSDG) was established by the International Labour Organisation (ILO) in February 2002 and produced a final report in February 2004. Recommendations were based on six broad policy themes for detailed reflection: a) national policies to address globalisation; b) decent work in global production systems; c) global policy coherence for growth; d) investment and employment; e) constructing a socio-economic floor; f) the global economy and the cross-border movement of people; g) strengthening the international labour standards system. According to WCSD fair globalisation means: a) A focus on people. The cornerstone of a fairer globalisation lies in meeting the demands of all people for respect of their rights, cultural identity and autonomy, decent work and empowerment of the local communities they live in; b) A democratic and effective State. The State must have the capability to manage integration into the global economy and to provide social and economic opportunity and security. c) Sustainable development. The quest for a fair globalisation must be underpinned by the interdependent and mutually reinforcing pillars of economic development, social development and environmental protection at the local, national, regional and global levels. d) Productive and equitable markets. This requires sound institutions to promote opportunity and enterprise in a well-functioning market economy. e) Fair rules. The rules of the global economy must offer equitable opportunity and access for all countries and recognize the diversity in national capacities and developmental needs. f) Globalisation with solidarity: there is a shared responsibility to assist countries and people excluded from or disadvantaged by Globalisation helping to overcome inequality and contribute to the elimination of poverty; ©P. & Y. Katsoulakos 57 12th July 2006 The 4CR strategic approach to corporate responsibility greater accountability to people by public and private actors at all levels with power to influence the outcomes of Globalisation. g) Deeper partnerships: dialogue and partnership among all stakeholders is an essential democratic instrument to create a better world; an effective United Nations. A stronger and more efficient multilateral system is the key instrument to create a democratic, legitimate and coherent framework for Globalisation. Performance instability Performance instability is a problem that has affected almost every company during the last two decades sometimes with devastating effects on local communities; and the situation is deteriorating. In recent years there rarely passes a day without news of restructuring taking place in major corporations usually accompanied with employee reductions and a redefinition of the corporation’s relations with its stakeholders and wider social environment. Down sizing, outsourcing and layoffs are still part of the traditional response to the unstable economic environment. Patterns of restructuring vary from one country to another and across sectors. The European Commission established the European Monitoring Centre on Change in 2001 to help offset the negative long-term impact of restructuring by examining how best to manage and anticipate social and economic change in our society. Further, the European Commission's Communication on "The future of the European Employment Strategy (EES)”, aims to re-design the EES as a key tool to underpin and better deliver the Lisbon strategy. The Lisbon strategy, by embracing change as a key factor for economic and social renewal, further verifies the critical importance of finding innovative solutions to address restructuring and enhance corporate sustainability. Solutions to performance instability may require a two prong approach emphasising long term performance optimisation rather than short term profit maximisation and developing responsiveness capabilities. The new global economy is distinguished by its emphasis on early recognition of change triggers and adaptation, in contrast to the traditional emphasis on optimisation strategies based on prediction of relevant business patterns. Organisational responsiveness can be defined in terms of alertness, resilience and adaptability as shown in the following diagram. ©P. & Y. Katsoulakos 58 12th July 2006 The 4CR strategic approach to corporate responsibility Alertness is dependent on the effectiveness of the company’s business intelligence system, and it is recognised that stakeholder engagement can become an important element of such a system. Resilience effectively denotes the capacity a company has to absorb adverse events (e.g. economic down turn, negative publicity, etc) and is dependent on the strength of the company’s social capital. Adaptability is mainly associated with knowledge based dynamic capabilities enabling companies to combine knowledge on change processes with knowledge on market changes to adapt their offerings and maintain competitive advantage. 7.5 The 4CR Corporate Responsibility Map The 4CR Corporate Responsibility Map shown diagramatically below illustrates the interelationships between the main areas of corporate responsibility and associated concepts and the potential for a common management system. The main driving forces behind each of the main responsibility areas are drawn in the map indicating potential tensions and balancing actions. A typical tension example is when corporate competitiveness related activities conflict with environmental sustainability policies or even short term ethical norms. A typical balancing example is increased compulsory regulation if CSR and sustainability principles are not properly practiced by the majority of companies. ©P. & Y. Katsoulakos 59 12th July 2006 The 4CR strategic approach to corporate responsibility The key issues in each of the Four Corporate Responsibilities are as follows: Corporate Competitiveness addressed by strategic management is a subject rarely discussed in the context of corporate responsibility. However, unless all strands of corporate responsibility are brought together under a common management framework, CSR and sustainability will remain peripheral activities and their impact is likely to remain well below required levels to achieve the Millennium and related goals. Corporate Governance sets the legal framework to protect a company’s shareholders and stakeholders; the relative emphasis being dependent on national models. CSR is aimed at extending the legal requirements promoting ethics, philanthropy and social reporting to satisfy stakeholder concerns. Corporate sustainability focuses on long term economic and social stakeholder expectations both by optimising their sustainability performance and by participating in networks with governments, NGOs and other stakeholders that can provide the capacity for the world’s sustainable development. Business ethics and social accountability create important bridges between CSR and corporate governance. Investor demands and specifically SRI, philanthropy and corporate citizenship provide a common ground for CSR and corporate sustainability. Performance stability and fair globalisation are important aspects both in strategic management and corporate sustainability. Competition policy and regulation affects strategic management and corporate governance but has also implications for business ethics and CSR. Similarly, risk management is a key issue for strategic management and governance and specifically in terms of reputation risks it becomes a common aspect in all the responsibility areas. At the centre of the 4CR Corporate Responsibilities Map is stakeholder management which provides the common link between corporate competitiveness and corporate responsibility and sustainability. ©P. & Y. Katsoulakos 60 12th July 2006 The 4CR strategic approach to corporate responsibility 7.6 The 4CR principles for stakeholder oriented strategic management The following principles provide the foundations of the 4CR stakeholder oriented strategic management approach building on Freeman’s work and developments in the fields of corporate responsibility and sustainability. 4CR Principles for Stakeholder oriented Strategic Management. No 1 Principle Explanation Single stakeholder A single stakeholder driven strategic framework incorporating driven strategic stakeholder strategy (classification, relations map, indicators) aligned framework with business and corporate responsibly and sustainability strategy. Sustainable competitiveness requires strategic dynamic capabilities 2 Central concern is relying on the support of those who can affect the company sustainable (stakeholders) and enabling the plotting of the firm’s direction based competitiveness on enhanced understanding of how the environment may affect the firm and how the firm can affect the environment. Core values is a key 3 element of strategy and corporate identity 4 5 Company specific stakeholders Diverse groups of stakeholders can cooperate effectively only if they share a set of core values. Thus, for a stakeholder approach to be successful it must establish and promote shared values and shared interests as a key element of the strategic management process. The stakeholder approach is about concrete “names and faces” for stakeholders and about establishing and analysing company specific stakeholder roles facilitating stakeholder engagement. The set and number of Stakeholder management that will ensure long-term success entails stakeholders are constant monitoring of stakeholder relations and identification and context and time management of new ones. dependent Integrated approach to 6 strategic decision making Successful strategies integrate the perspectives of all stakeholders rather than offsetting one against another. Both benefits and harms are distributed in a way that ensures the long-term support of all the stakeholders Stakeholder management provides a tool for examining the external 7 Networking orientation organizational environment and exploring the strategic options that can be created through networking. 8 9 Stakeholder supported innovation Stakeholder networking and related participation in learning processes should be designed to optimise social capital development , accelerated learning and responsiveness Balancing and Stakeholder management is a continuous process of managing integrating stakeholder stakeholder contributions and stakeholder satisfaction levels by contributions and promoting and supporting stakeholder participation on company’s satisfaction learning processes. ©P. & Y. Katsoulakos 61 12th July 2006 The 4CR strategic approach to corporate responsibility Annex1 Comparison of CSR studies using Carroll’s pyramid concept Studies Mean values Economic orientations 3.50 Legal orientations 2.54 Ethical orientations 2.22 Philanthropic orientations 1.30 3.28 3.07 2.45 1.15 England 3.49 3.15 2.29 0.98 France 3.60 3.04 2.35 0.98 Germany 2.86 3.21 2.46 1.42 Japan 3.34 2.76 2.42 1.41 Sweden 3.27 3.30 2.43 1.00 Switzerland 3.11 3.04 2.70 1.10 USA 3.11 2.96 2.48 1.19 3.16 2.12 2.19 2.04 Hong Kong 3.11 2.32 2.32 1.84 USA 2.81 2.42 2.51 1.99 Aupperle, Carroll & Hatfield (1985) Pinkston & Carroll (1994) Edmondson & Carroll (1999) Burton, Farh & Hegarty (2000) ©P. & Y. Katsoulakos 62 12th July 2006 The 4CR strategic approach to corporate responsibility Annex 2 Key corporate responsibility and sustainability milestones Corporate responsibility and sustainability in the 60’s Date Event OECD Created Convention signed in Paris 14/12/60 which came into force 30/9/61, the Organisation for Economic Cooperation and Development was created to promote policies designed: to achieve the highest sustainable economic growth and employment and a rising standard of living in 1960 Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; to contribute to sound economic expansion in Member as well as non member countries in the process of economic development; and to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations The earliest reference to social auditing is sometime around the early 1960s in a book by George Goyder 1960’s called "The Responsible Company". He refers to various activities in the mid and late 1950s and proposes that a social audit can act as both a useful management too and offer stakeholders a platform for challenging and influencing companies. 1961 The World Wildlife Fund WWF, now the World Wide Fund for Nature, is created at Morges, Switzerland; it will become a leading non-governmental actor in international conservation Rachel Carson publishes "Silent Spring bringing together research on toxicology, ecology and 1962 epidemiology to suggest that agricultural pesticides are building to catastrophic levels. New wave of environmentalism. 1962 1966 Consumer Bill of Rights - USA International Covenant on Economic, Social and Cultural Rights adopted by the UN International Covenant on Civil and Political Rights adopted by the UN In the Sixth General Synod (1967), the Action on Poverty and Economic Justice declared that: "Social value and social justice ought to be given consideration together with security and yield in the 1967 investment of funds held by religious Organisations. Requests the Instrumentalities with substantial investments to study the social aspects of policies and practices with respect to investments and to report on such studies to the Executive Council” creating the foundations for SRI. The Club of Rome, commissions a study of global proportions to model and analyse the dynamic 1968 interactions between industrial production, population, environmental damage, food consumption and natural resource usage (later published as “The Limits to Growth”). 1968 1969 1969 The Intergovernmental (UNESCO) provides a forum Conference for Rational Use and Conservation of Biosphere for early discussions of the concept of ecologically sustainable development. The US Congress passes the National Environmental Policy Act (NEPA) creating the first national agency for environmental protection - the EPA. Commonwealth Arbitration Commission adopts the principle of equal pay for equal work regardless of gender ©P. & Y. Katsoulakos 63 12th July 2006 The 4CR strategic approach to corporate responsibility Corporate responsibility and sustainability in the 70’s Date 1970 1971 Event The first Earth Day was held as a national awareness campaign on the environment. An estimated twenty million people participate in peaceful demonstrations all across the USA. The Man and the Biosphere MAB program is founded by Unesco; it will have a major role in promoting international scientific cooperation on environmental problems Henderson Poverty Index developed in Australia. In France, companies with more than 300 employees required by law to produce an employee report: the Bilan Social. 1970s Germany engaged in the social model of corporate management. Council on Economic Priorities and others in USA began to rate companies publicly on their social and environmental performance Social Audit Limited was set up in the UK in 1978 undertakes external audits of a small number of companies 1970s Greenpeace, in the 1970s was the first major NGO to adopt policies which shifted the emphasis away from governments and more towards direct action on the corporate sector. The United Nation’s Code of Practice for Transnational Corporations was an early attempt in the 1970s early 70’s to define CSR businesses principles in terms of ethics, product standards, competition, marketing and disclosure of information. The United Nations Conference on the Human Environment in Stockholm considers the need for a common outlook and for common principles to inspire and guide the peoples of the world in the 1972 preservation and enhancement of the human environment. The concept of sustainable development is cohesively argued to present a satisfactory resolution to the environmental vs. development dilemma. The conference leads to the establishment of numerous national environmental protection agencies and the United Nations Environment Programme (UNEP). An article in The Ecologist magazine, endorsed by a large number of UK scientists, and entitled ‘The 1972 Blueprint for Survival”, warns of the "breakdown of society and irreversible disruption of lifesupporting systems on this planet" and proposes the concepts of “sustainability” and “sustainable development” as an alternative to an ethos of ‘expansionism”. 1972 The first alternatives to GDP as a measure of economic progress, the Measure of Economic Welfare, is created by Nordhaus and Tobin; used today for measuring TLB performance. Rowland and Molina release a seminal work on CFCs in Nature magazine calculating that 1974 if use of CFC gases is to continue at unaltered rate the ozone layer will be depleted by many percent after few decades. 1979 1979 J. Coomer (ed.) publishes the book “Quest for a Sustainable Society”. Emphasising that society must recognise limits of growth and to look for alternative ways of growing. Chair of Tata Steel (India’s largest integrated private sector steel company) asks audit committee to report on “whether, and the extent to which the company has fulfilled the objectives…regarding the social and moral responsibilities” Corporate responsibility and sustainability in the 80’s ©P. & Y. Katsoulakos 64 12th July 2006 The 4CR strategic approach to corporate responsibility Date Event The “World Conservation Strategy” is released by IUCN (World Conservation Union) as "the modification of the biosphere and the application of human, financial, living and non-living resources 1980 to satisfy human needs and improve the quality of human life". The section “ Towards Sustainable Development” identifies the main agents of habitat destruction as poverty, population pressure, social inequity and the terms of trade. It calls for a new International Development Strategy with the aims of redressing inequities, achieving a more dynamic and stable world economy, stimulating accelerating economic growth and countering the worst impacts of poverty. “The Global 2000 Report to the President”, is submitted to US President Jimmy Carter 1980 providing comprehensive projection of global environmental impacts and resource supply issues over the next 20 years. The Report recognises biodiversity for the first time as a critical characteristic in the proper functioning of the planetary ecosystem. 1982 1983 1984 1985 1986 Business in the Community is founded by UK based business organisations focussed on corporate social responsibility. Australia adopts a National Conservation Strategy to implement the objectives of the World Conservation Strategy. CSR becomes part of mainstream management theory at least since the publication of Edward Freeman’s 1984 classic, Strategic Management: A Stakeholder Approach The Antarctic ozone hole is discovered by British and American scientists The Toxics Release Inventory (TRI) was established under the Emergency Planning and Community Right-to-Know Act of 1986 The Brundtland Commission, appointed by the United Nations to study the connection between 1987 development and the environment publishes report: “Our Common Future". The report introduces the term “sustainable development” defining it as: “development that meets the needs of the present without compromising the ability of future generations to meet their own needs". An Inter-governmental Panel on Climate Change (IPCC) is established with three working groups to 1988 assess the most up-to-date scientific, technical and socio-economic research in the field of climate change. The Co-Operative (UK) publishes its first Social Report. 1988 Ben and Jerry’s (Ice Cream Company) in USA produces first Social Performance Assessments. Establishment of the Resource Assessment Commission to evaluate best use of resources in Australia 1989 Report published for the UK government – Blueprint for Green Economy by David Pearce et al. Introduction of the concept of natural capital and definition of sustainable development as nondeclining per capita human well-being over time. Corporate responsibility and sustainability in the 90’s ©P. & Y. Katsoulakos 65 12th July 2006 The 4CR strategic approach to corporate responsibility Date 1991 Event IUCN/UNEP/WWF publish “Caring for the Earth: 2nd World Conservation Strategy” focusing on “sustainable society”, “sustainable living” and “sustainability” itself 'Earth Summit' in Rio de Janeiro with 180 country delegations addressed ways to halt the destruction of irreplaceable natural resources and pollution of the planet twenty years after the first global environment conference. The Summit agrees the Rio Declaration on Environment and Development which sets out 27 principles supporting sustainable development. Also agreed is a plan 1992 of action, Agenda 21, and a recommendation that all countries should produce national sustainable development strategies. The Earth Summit also establishes the UN Commission on Sustainable Development, which meets every year, as well as important UN bodies - the Framework Convention on Climate Change and the Convention on Biological Diversity. The Earth Summit influenced all subsequent UN conferences, which have examined the relationship between human rights, population, social development, and the need for environmentally sustainable development. 1992 A USA based business led membership organisation, Business for Social Responsibility BSR is founded 1992 FairTrade is founded with mission to improve the position of the disadvantaged producers in the developing world, by setting the Fairtrade standards and supporting their interests. The European Union (EU) announced a framework of environmental policies applicable to the EU and its member states for the period 1993 – 2000. The World Conference on Human Rights, held in Vienna, underscored the right of people to a healthy 1993 environment and the right to development, controversial demands that had met with resistance from some Member States until Rio. 1993 US President Bill Clinton announces (Oct 20th) an ambitious plan to combat global warming through over 50 initiatives affecting all sectors of the economy. European Universities Charter for Sustainable Development agreed ; promoting university education 1994 for the training of decision-makers and teachers, oriented towards sustainable development and fostering environmentally aware attitudes, skills and behaviour patterns, as well as a sense of ethical responsibility. Caux Round Table Principles for Business adopted – The Caux Round Table (CRT) was established as 1995 an international network of principled business leaders advocating implementation of the CRT Principles for Business through which principled capitalism can flourish and sustainable and socially responsible prosperity can become the foundation for a fair, free and transparent global society. The World Business Council for Sustainable Development (WBCSD) sets a permanent base in 1995 Geneva to provide business leadership as a catalyst for change toward sustainable development, and to promote the role of eco-efficiency, innovation and corporate social responsibility. 1995 Formation of the World Trade Organisation replacing GATT as the Organisation overseeing the multilateral trading system. Key functions include: handling trade disputes and technical assistance and training for developing countries. COP I in Berlin, Germany-Each year, the countries that ratified the Rio Convention held a Conference 1995 of Parties (COP). The first of these happened in 1995 and reviewed the adequacy of the Rio Convention's goal of stabilizing greenhouse gas emissions. 1996 The OECD, introduced the concept of environmentally sustainable transportation (EST); “Pollution Prevention and Control, Environmental Criteria for Sustainable Transport” In January 1996 a group of 57 European companies signed the European declaration of businesses 1996 against social exclusion, and established CSR Europe with the support of Jacques Delors President of the European Commission at that time. ©P. & Y. Katsoulakos 66 CSR Europe mission is to help companies achieve 12th July 2006 The 4CR strategic approach to corporate responsibility profitability, sustainable growth and human progress by placing corporate social responsibility in the mainstream of business practice. The Kyoto Protocol for the implementation of the Framework Convention on Climate Change is negotiated. After reviewing the original targets of the Rio Convention and finding them to be too 1997 weak, the countries came up with new targets. Now, 1990 greenhouse gas emissions would be cut by 5% between 2008 and 2012.Though 5% is a global target, different countries have different targets. The European Union's target is a 8% cut (Germany committed to a 25% cut and the U.K. to 15%). The United States had a target of 7%, while Canada had a target of 6%.) 1997 SA8000 launched by Social Accountability International SAI a U.S.-based, non-profit Organisation dedicated to the development, implementation and oversight of voluntary verifiable social accountability standards. A special UN conference is held to review the implementation of Agenda 21 (Rio+5). This repeats the call for all countries to have sustainable development strategies in place - in particular by the 1997 time of the next review of Agenda 21 in 2002 (Rio+10). In Europe, changes to Articles 2 to 6 of the Treaty establishing the European Community are agreed in the Treaty of Amsterdam, give sustainable development a much greater prominence. 1997 John Elkington publishes Cannibals with Forks in it he coins the term Triple Bottom Line. 1997 The Global Reporting Initiative launched to develop Sustainability reporting guidelines. November - Around 170 nations gather at the United Nations global warming conference 1998 in Buenos Aires to discuss ways of cutting emissions of greenhouse gases by 20082012. - Specialists from the US and Canada tell the summit that global warming is killing the world's coral reefs, and with them the swarming sea life they shelter and support. 100 The UK Government launches its new strategy (May), A better quality of life - A strategy for 1999 sustainable development for the UK. In December, Quality of life counts - Indicators for a strategy for sustainable development for the United Kingdom: a baseline assessment is published. 1999 1999 Paul Hawken and Amory and Hunter Lovins publish “Natural Capitalism: The next industrial revolution” The Global Sullivan Principles launched In an address to The World Economic Forum on 31 January 1999, United Nation Secretary-General 1999 Kofi Annan challenged business leaders to join an international initiative – the Global Compact – that would bring companies together with UN agencies, labour and civil society to support ten principles in the areas of human rights, labour and the environment.. 1999 Creation of the Dow Jones Sustainability Indexes as the first global indexes tracking the financial performance of the leading sustainability-driven companies worldwide UK Corporations Disclosure Legislation passed. The Turnbull Report on corporate governance added 1999 reputation, probity and other non-financial risks to the necessary criteria for reporting risk to shareholders ( September 1999) Environment ministers from 173 countries meeting in Bonn (Nov 4th) to discuss the Kyoto 1999 Agreement, end talks without any breakthroughs and with many difficult issues remaining unresolved. One involves the penalties payable if nations do not meet their pollution targets. Another is the extent to which nations will be able to pay others to reduce pollution on their behalf Corporate responsibility and sustainability in the 2000s ©P. & Y. Katsoulakos 67 12th July 2006 The 4CR strategic approach to corporate responsibility 2000 UK Pension Act amended to require the trustees of occupational pension schemes to disclose their policy on socially responsible investment in their Statement of Investment Principles. In the UK the government appointed the world’s first minister for CSR-Spring 2000 2001 2001 2001 Transparency International increases its activities. Anti Bribery Legislation with extra-territoriality clauses tabled in 8 nations. The 10th IACC Anti-Corruption Conference took place in Prague. The UK Government publishes its first review of progress towards sustainable development, Achieving a better quality of life, Government annual report 2000. Launch of the FTSE4Good index. Japanese Environment Minister Yoriko Kawaguchi says there seems to be no 2001 likelihood of a breakthrough at the next round of talks but suggests the deadline for final agreement on the rules of the Kyoto pact should be late October when a United Nations conference on climate change is to start in Marrakech, Morocco The World Summit on Sustainable Development – Johannesburg 26 August - 4 September 23002, in the face of growing poverty and increasing environmental degradation, succeeded in generating a 2002 sense of urgency, commitments for action, and partnerships to achieve measurable results. More than 220 partnerships, representing $235 million in resources, were identified during the Summit process to complement the government commitments. Report of the World Summit on Sustainable Development. 2002 2002 Business in the Community celebrated its 20th anniversary with a 2 day ‘A Better Way of Doing Business’ conference on corporate responsibility- July 2002 Business in the Community launches first Corporate Responsibility Index- October 2002 The Commission on Sustainable Development, 11th Session, New York, 28 April - 9 May 2003, adopts 2003 new work programme for the Commission on Sustainable Development (CSD), based on two-year cycles with a clear set of thematic issues, provides the global community with a unique opportunity to focus in-depth attention on specific issues. Building on the outcomes of the twelfth session of CSD’s (CSD-12) focus on water, sanitation and human settlements, the thirteenth session of CSD (CSD-13) will strive to be forward looking and action oriented There over 60 UK Government initiatives of relevance for CSR. The UK parliament has two all-party 2004 groups on corporate citizenship: the All-Party Parliamentary Group on Corporate Social Responsibility and the All-Party Parliamentary Group on Social Responsible Investment-mid 2004 ©P. & Y. Katsoulakos 68 12th July 2006 The 4CR strategic approach to corporate responsibility Annex 3 Environmental Sustainability Index Components of Environmental Sustainability Environmental sustainability is presented as a function of five phenomena: (1) the state of the environmental systems, such as air, soil, ecosystems and water; (2) the stresses on those systems, in the form of pollution and exploitation levels; (3) the human vulnerability to environmental change in the form of loss of food resources or exposure to environmental diseases; (4) the social and institutional capacity to cope with environmental challenges; (5) the ability to respond to the demands of global stewardship by cooperating in collective efforts to conserve international environmental resources such as the atmosphere. Environmental sustainability is defined as the ability to produce high levels of performance on each of these dimensions in a lasting manner. These five dimensions are referred to as the core “components” of environmental sustainability defined as follows: Environmental Systems: a country is environmentally sustainable to the extent that its vital environmental systems are maintained at healthy levels, and to the extent to which levels are improving rather than deteriorating. Reducing Environmental Stresses: a country is environmentally sustainable if the levels of anthropogenic stress are low enough to engender no demonstrable harm to its environmental systems. Reducing Human Vulnerability: a country is environmentally sustainable to the extent that people and social systems are not vulnerable (in the way of basic needs such as health and nutrition) to environmental disturbances; becoming less vulnerable is a sign that a society is on a track to greater sustainability. Social and Institutional Capacity: a country is environmentally sustainable to the extent that it has in place institutions and underlying social patterns of skills, attitudes and networks that foster effective responses to environmental challenges. Global Stewardship: a country is environmentally sustainable if it cooperates with other countries to manage common environmental problems, and if it reduces negative extra-territorial environmental impacts on other countries to levels that cause no serious harm. ©P. & Y. Katsoulakos 69 12th July 2006 The 4CR strategic approach to corporate responsibility Environmental Performance Index Framework Indicators Policy Categories Broad Objectives Overall Performance Child Mortality Indoor Air Pollution Environmental Health Drinking Water Environmental Health Adequate Sanitation Urban Particulates Regional Ozone Nitrogen Loading Air Quality Water Resources Water Consumption Wilderness Protection Environmental Eco-region Protection Performance Index Timber Harvest Rate Agricultural Subsidies Over-fishing Energy Efficiency Renewable Energy CO2 Per GDP ©P. & Y. Katsoulakos Biodiversity and Habitat Ecosystem Vitality Productive Natural Resources Sustainable Energy 70 12th July 2006 The 4CR strategic approach to corporate responsibility Annex 4 FTSE4Good Indexes Sector Classification FTSE4Good Indexes Sector Classification55 Companies are assigned a high, medium or low impact weighting according to their industry sector. The higher the environmental impact of the company’s operations, the more stringent the inclusion criteria. High Impact Sectors Medium Impact Sectors Low Impact Sectors Agriculture DIY & Building Supplies Information Technology Air Transport Electronic and Electrical equipment Media Energy and Fuel Distribution Consumer / Mortgage Finance Engineering and Machinery Property Investors Quarrying) Financials not elsewhere classified Research & Development Chemicals and Pharmaceuticals Hotels, Leisure Construction Management Major Systems Engineering Manufacturers Fast Food Chains classified Telecoms Food, Beverages and Tobacco Ports Wholesale Distribution Forestry and Paper Printing & Newspaper Publishing Mining & Metals Property Developers Oil and Gas Retailers not elsewhere classified Power Generation Vehicle Hire Road Distribution and Shipping Public Transport Airports Building Materials (includes Catering and Facilities not elsewhere classified (Gyms and Gaming) not elsewhere Support Services Supermarkets Vehicle Manufacture Waste Water Pest Control 55 http://www.ftse.com/ftse4good/index ©P. & Y. Katsoulakos 71 12th July 2006 The 4CR strategic approach to corporate responsibility Annex 5 Stakeholder classifications Different lists of stakeholders arranged according to category Empel et al.2003 Clarkson 1995 Preston 1990 GE Co. early 1930s Preston 1990 Johnson & Johnson 1947 Preston 1990 Sear’s 1950 Kaptein & Wempe 2002 KPN 1998 Graafland & ADES Eijffinger Management 2003 Consulting 2002 employees employees employees employees employees employees employees employees company managers shareholders shareholders shareholders shareholders shareholders shareholders shareholders shareholders sponsors customers customers customers customers customers customers customers Target groups suppliers suppliers business partners competitors suppliers business partners competitors unions NGOs NGOs special interest groups interest groups communities communities the general public citizens society society society The media CSR organisations The environment government government government Source: Circles of Stakeholders Rob Maessen, Paul van Seters & Eleonore van Rijckevorsel Globus, Institute for Globalization and Sustainable Development Tilburg University, the Netherlands ©P. & Y. 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