Patchy CSR leads to high corporate risk

Corporate boards are failing to grasp the full meaning of corporate social responsibility (CSR), leaving companies at the mercy of risks that can cause massive corporate meltdowns, said a prominent global CSR expert on Wednesday.

Badly managed CSR policies were behind some of the world’s most infamous – and preventable - corporate disasters, said National University of Ireland international law professor Dennis Driscoll at a seminar in Singapore.

He cited widely-publicized cases such as the 2001 Enron scandal, in which the upstart United States energy firm plunged into bankruptcy from its spot as the country’s seventh largest company after shady financial dealings came to light.

The 2006 British Petroleum oil spill in the Gulf of Mexico was an example of how alleged systematic failures in health and safety policies could lead to unnecessary accidents and extensive damages to the environment, local communities, share values and company reputations, he added.

“It is really expensive to get CSR wrong,” said Professor Driscoll.

Most executives equate CSR with philanthropy or the environment, but these are only two pieces of the overall CSR objective, he noted, adding that the other aspects of CSR are corporate governance, human rights, labour rights and ethical business practices.

Firms need to pay attention to the whole CSR spectrum not only for their long-term well-being, but also because society has begun to question business values and practices in a fundamental way, he said, pointing out that investors and consumers are beginning to demand much more transparency and accountability than previously.

Recent studies have found that, increasingly, big name brands cannot rely on the customer loyalty that they depend on for their profit margins – and this should make chief executives nervous because any negative press is likely to scare customers off, said Professor Driscoll.

Yet, while he has noticed an overall lack of consciousness within the more than 600 companies he has trained globally over the years, the professor said substantial progress is underway.

For example, although corruption and bribery are still rampant in many cultures, governments have begun to heed the World Bank’s warnings that such practices are barriers to both human rights and to economic development, he told Eco-Business on the sidelines of the event.

He said he is also encouraged that many companies are including their supply chains in their CSR strategies, and that investors are taking note of such measures.

“Changing consciousness in so many cultures is not an easy thing to do,” he said, pointing out that media has a large to play in raising awareness.

While Professor Driscoll was in Singapore to provide corporate training at a CSR seminar hosted by the non-profit Singapore Compact, office equipment firm Fuji Xerox Singapore and corporate training experts Affinitas, he also gave one of a series of free media trainings to raise awareness of the broader CSR issues.

Participants at the seminar noted that Singapore’s boardrooms are no exception to the global tendency to oversimplify CSR.

Fuji Xerox sustainability ambassador Mok Chee Hong, who participates in several of the region’s CSR forums such as Singapore Compact, said that the focus is almost exclusively on environment and philanthropy. He added that many companies currently target environmental improvements because they can lead to cost savings.

That does not mean companies are ignoring aspects such as governance, but rather that firms see them as compliance issues to be handled by separate departments, he noted.

In areas of potential tension, such as discontent over foreign labour, companies here tend to be reactive and wait for the government to set policies, said Mr Mok.

Professor Driscoll noted that Singapore’s typically high ratings in terms of governance and lack of corruption compared to many of its Asean neighbours were no reason for executive boards here to neglect broader CSR strategies.

“It is easy to misunderstand the difficulties ahead. Unless companies have a robust sense of CSR, they could be felled by problems they never knew they had,” he said.

One way to develop a good overall view of CSR issues is to report on them – a practice that is gaining ground globally, he added.

The number of multinational firms publishing reports on their CSR policies and strategies has leapt from 26 in 1992 to about 6,000 in 2010.

To build on this momentum, a growing global movement led by groups such as the United Nations-backed Principles for Responsible Investment (PRI) and the non-profit Global Reporting Initiative are recommending that governments and stock exchanges require large companies to report on environmental, social and governance(ESG) issues in addition the financial data currently required.

Moreover, many investors and financial institutions are backing this movement. PRI has signatories from nearly 1,000 companies - who collectively manage about US$30 trillion – that have agreed to integrate ESG considerations into their investment decision-making.

One initiative that may make investment decisions easier for such investors is a pilot programme by the International Integrated Reporting Council (IIRC) that involves some 70 companies and a network of 20 institutional investors working on ways to improve corporate reporting.

IIRC released a draft outline of its Integrated Reporting Framework this week, and said it would launch a prototype by the end of the year aimed at streamlining the reporting process and making reports consistent from company to company.

Chief executive of IIRC Paul Druckman said in a statement that the market-led initiative was driven by the need of businesses and investors to gain better insight into the long-term performance and value of companies.

“The concept of ‘integration’, embedding value-relevant financial and non-financial information into strategic decision-making and a company’s reporting cycle, is gaining momentum as a vital step in the evolution of corporate reporting globally,” he added.

If successful, the new integrated reporting framework may help highlight CSR issues that Professor Driscoll said are currently often neglected in boardrooms, such as workplace bullying and discrimination and a lack of independent-thinking board members who will speak their minds when they spot problems.

“At the boardroom level, I don’t think they understand that these things are rudimentary to [an effective CSR strategy],” said Professor Driscoll.

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