Companies are facing a growing challenge in how to respond to the development of Corporate Social Responsibility (CSR). CSR programmes are undertaken by companies for a wide variety of reasons including a commitment to the community in which they operate, to differentiate themselves from their competitors, to attract customers, or to counter the damage inflicted on them, both on their sales and reputation by attacks from activist groups.
Increasingly, it is now no longer appropriate for companies merely to make a profit, the way in which the profit is generated is under scrutiny as activists drill down into a business’ market behaviour, trade policies, employment relations, sourcing of raw materials, human rights, and for many, the most important, a company’s environmental credentials. If a company were being exploitative in any of these areas then the activists would place pressure on them, through the media and other activities, making the issue public in order to force a change in behaviour.
However, there is confusion. Many people still have a far from clear understanding of what CSR actually means and there is no one single method of measuring CSR activity. Whilst many companies issue CSR reports detailing their good work, the form that these reports take varies enormously – from simple statements of intent through to full colour glossy brochures roughly approaching the size of “War and Peace”.
Much of this confusion has, in turn, led to a huge suspicion amongst the general public about CSR, its role and what it really means. In essence, the public does not believe that the companies do what they say they do and much CSR is deemed to be driven by the PR needs of the business. In a report by Tomorrow’s Company, “Redefining CSR”, it was suggested that CSR is seen as merely a ‘box ticking’ exercise driven by external pressures rather than by a genuine desire to conduct business in an ethical manner. Research published by the Salvation Army demonstrated that 8 out 10 Britons believed that companies should contribute to the society in which they operate but there was a serious concern about the emergence of a “responsibility gap” which threatened the elderly, children, carers and other vulnerable people in society. Christian Aid’s report suggested that businesses are using CSR as a front behind which they campaign against environmental and human rights regulations.
Yet, increasingly CSR activity has been seen to have a beneficial effect on the company’s “bottom line”. Some of this evidence has only more recently come to light but it is gathering momentum. An Institute of Business Ethics report has suggested that companies with ethical commitments have 18 per cent higher profits on average than their competitors. In a survey by CSR Europe and Euronext, 51 per cent of fund managers and 37 per cent of financial analysts said they would put a premium on socially responsible companies. Research from the Chartered Institute of Personal Development (CIPD) and the Future Work Institute showed a clear connection between responsible business practice and a positive impact on “bottom line” because it helps to attract, motivate and retain a talented and diverse work force.
So there is a paradox – companies are wary about CSR but they realise that it can be good for the business. There will soon be a further complication for business. The Department for Trade and Industry (DTI) has begun the process of introducing Operating and Financial Reviews (OFRs) as part of the annual reports of large companies. This would contain information on a company’s relationship with its stakeholders, its environmental and community impact, corporate governance and risk management. This move to include non-financial elements marks a significant change from traditional financial reporting. The DTI established an OFR working group on materiality to provide guidance for directors on how to prepare and organise their company so that they are ready to provide OFRs. It will be up to the Boards to decide what constitutes materiality and therefore merits inclusion in the report. OFRs can be viewed as the first stage towards the institution of formal CSR reporting. The DTI is ‘shortly’ to publish draft regulation on OFRs.
Instead of spreading themselves too thinly companies need to start focusing on their core activities and devise their CSR strategies based on these activities. Instead of trying to do 10-15 areas of CSR well, the company should concentrate on the 2 or 3 that are fundamental to the business. Companies should also concentrate on financial considerations and financial audiences in their CSR activity to make it fundamental to the very operation of the company. The financial community needs risk to be minimised and this includes CSR-type risks. Finance and CSR need to be reconnected.
Companies need to re-focus their attention on their core risks and ensure that they fully address their financial audience otherwise they will continue to flounder.
Company and Shareholder