Corporate Social Responsibility

Steven Cole and Eve Regnard believe that there are already market forces at work which encourage companies to be good corporate citizens. Increased government regulation is inappropriate and unnecessary as it is likely to unbalance a process that forces companies to take into account the interest of all their stakeholders.

Balancing regulation and market forces

Corporate Social Responsibility (CSR) is a contemporary mantra which is increasingly being used as a call for regulatory response to the perceived growth of corporate power. The backdrop of major corporate failings (such as Enron and HIH), and the ethical void revealed by the forensic analysis of their collapses, have fuelled calls for enhanced regulation to assure that corporations, and their governing boards, act responsibly. But should society and business bow to this call, or wait and allow the natural processes of the checks and balances in the market place to find its own level? Or is there some point in between the regulatory prescriptive and the laissez faire approach?

An empowered market perspective

Corporations and society interact in ways that influence their respective actions and the resulting outcomes. This creates a ‘virtuous self-adjusting cycle’ which acts to place the dynamic tensions between unbridled corporate wealth generation and social and environmental concerns in relative balance.

Corporations are virtual creations designed to deliver economic outcomes for the betterment of society. The mandate for corporations to exist and operate is given by society through legislation and regulation. Society also has the power to restrict or qualify that mandate through other means.

Different sections of society have the power to influence corporate behaviour to deliver outcomes aligned to their own objectives. In addition, the reactions of sections of society to corporate behaviour can significantly impact on, and condition, future corporate conduct. Community stakeholders have various levers and tools which can influence corporate activity. For example, investors can buy or sell a corporation’s shares; employees can commit or withdraw their services; consumers and suppliers can support or boycott a corporation or its products; social advocates can generate positive or negative publicity which impacts upon a corporation’s reputation, brand or products.

These levers and tools can have either subtle or profound effects on a corporation and its future performance. In a democratic nation such as Australia, where a high level of information flow exists and the powers of different sections of society are relatively well balanced, the interactions between corporations and society create relatively finely-tuned outcomes.

Armed with responses (either real or anticipated) from each section of society, the board of directors will assess and weigh the relevance of these responses in:

• defining the company’s values and culture;
• formulating objectives and mission statements;
• developing and implementing corporate strategies; and
• operating and dealing with stakeholders.

For corporations with diverse objectives and value bases, or at various stages of their evolution with competing pressures and drivers for ‘corporate success’, these factors will have different relevance.

It is the interaction of these societal expectations and responses with the corporation’s resource and strategic inputs, and the company’s corporate governance practices which gives rise to the ‘corporate crucible’ – the dynamic medium in which all these expectations, resources, strategies and practices are synthesised by the corporation and its board of directors to deliver ‘corporate performance outcomes’.

Generally corporate performance outcomes can be categorised under the following outcome headings:

(a) Financial:
short term: dividends, current and future share prices.
long term: total sustainable shareholder returns (say 3 -10 years).

(b) Non-financial:
internal: human resource policies, occupational health and safety practice, corporate integrity and ethical standing.
external: community resource depletion (eg environmental, heritage), community exploitation (eg human rights), constructive societal contribution (eg community, health, charity, the arts, sport etc).

Individual corporations will not give the same weighting to these outcomes. Similarly, different sections of society will determine their own rankings of these outcomes. For example, investors may place more weighting on a corporation’s financial performance; regulators are likely to place a higher weighting on strict regulatory compliance; ‘pro-green’ consumers are likely to be influenced by the corporation’s environmental performance; employees are likely to be more concerned with the corporation’s workplace practices. These diverse weightings also may vary from time to time depending on other contemporary issues impacting upon either society or the corporation. The corporation and its board and decision makers must then be guided in their actions by their perceptions as to which sections of society are its most relevant and influential stakeholders.

Corporations seeking to optimise their performance outcomes will naturally strive to find the right strategic balance between each of their financial and non-financial performance outcomes. They are striving for results that will be most beneficial to the attainment by the corporation of its strategic objectives, consistent with its culture and principles of operation; and best satisfy the sections of society that it perceives are most relevant to it. By doing this, those sections of society are also likely to reward, rather than punish the company through the exercise of the levers and tools available to them.

Consumer power

Consumer spending is a function of both self interested motivations and responses to particular agendas and concerns. The success of the ‘buy Australian’ campaign, for instance, shows the importance of factors unrelated to the intrinsic merits of a particular product in altering consumer spending. The power of the consumer in social and ethical debates has been both hailed and dismissed. However, it seems clear that in many cases the position taken by consumers to a particular issue can have a determinative effect. For instance the contemporary pro-organic and anti-GM food campaigns, or the consumer influence in the boycott of fur products or products manufactured utilising ‘sweat shop’ labour. Suppliers, through their preparedness to do, or not do, business with a corporation also exert market power.

Investor power

Investors respond to a wide range of factors which may or may not be directly relevant to a corporation’s financial bottom line. The correlation is not as simple as adverse actions or publicity having an immediate effect on share prices. This is sometimes the case, such as the news concerning the nature of AWB’s involvement in the Iraq ‘oil for food’ scandal. In other cases, allegations of questionable corporate conduct may be overshadowed by other events affecting the corporation. For example, in 1995 when the British media accused Shell of complicity in human rights abuses in Nigeria, although it had a negative impact upon Shell’s brand, it had minimal effect on Shell’s share price – in fact the share price rose following the announcement of a $1.2 billion LNG project.

The real impact investors have on corporate social responsibility stems from the interaction between responsible corporate action and sustainable long term activity which potentially leads to positive investor returns. For example, the growing investment in sustainable energy, or the diversification of business lines away from ‘risky’ businesses eg those associated with the potentially adverse health outcomes of cigarettes or asbestos exposure, is a reaction to investor views about the future profitability of these activities. The rapid growth of ‘green’ investment funds is another classic example of investor influence and corporate response to that influence.

Employee power

Corporations can only act through the services of their officers and employees. Employees exert influence not only in the manner and effectiveness of their service delivery, or through the withdrawal of their services, but also at executive level in the formulation of corporate policy.

Regulator power

The impact of regulatory action is multifaceted. For those corporations that fall foul of regulatory controls, there is both a direct and measurable cost, and ongoing damage to a company’s reputation. The tarnish to corporations named by the ACCC for anti-competitive trade practices prosecution, or by ASIC for continuous disclosure breaches, can be significant.

The powers of the regulators are self explanatory – typically fines, remediation orders, withdrawal of licence to operate a particular business, or even incarceration of its officers and directors. The effects are on not only those companies targeted directly, but also on all those who may find themselves in a similar position. This results in greater internal rigour amongst all corporations, and their boards, at each public exposé of failing by others, or at each fresh round of regulatory changes.

Societal norm influencer power

These are people in society that draw the attention of the consumers, suppliers, investors, employees and regulators to a particular cause. The power of this sector has grown significantly with contemporary information technology inter connectivity, and the growing influence of the media. Third world ‘sweat shop’ factories, inhumane testing of new products on animals, the destruction of the world’s rainforests, and discriminatory work practices have been brought to the attention through the voice of varied groups founded on their own particular view of good and evil. In turn, consumers, suppliers, investors, employees and regulators have responded based on their own agendas.

The model in action

History, and logic, tells us that there is no perfect corporate performance outcome which is likely to satisfy everyone – although equally history tells us that some performance outcomes are either more or less favoured than others by various sections of society.

However, as the principles and philosophies of each sector of society are not necessarily consistent with one another, the actions of different sections of society can deliver contrary messages of approbation and sanction to the corporation and its performance outcomes.

So it’s back to the ‘corporate crucible’ for the corporation, through its board and senior executives, to assess and weigh these messages from society, and as applicable, to modify corporate behaviour and performance outcomes. In this manner, the self-adjusting cycle of this corporate performance model continues.

Directors’ duties

Both at common law and under sections 180 and 181 of the Corporations Act 2001, directors are obliged to act and discharge their duties:

• with care and diligence;
• in good faith in the best interests of the corporation;
• for a proper purpose.

Accordingly, any director who acts in disregard of considerations that materially impact on either the corporation’s financial or non-financial performance, not only does so in breach of those duties, but does so at his/her own, and the corporation’s, peril. No further legislative mandate, or imposed duty, is necessary for directors to consider and have regard to CSR in the proper discharge of their duties.

Any ASX listed corporate board which keeps as a closely-held secret share price sensitive information concerning either the corporation’s financial or non-financial performance, is likely to be in breach of its continuous disclosure obligations under ASX Listing Rule 3.1 and s.674 of the Corporations Act.

Even if the information is not share price sensitive, contemporary shareholder and prospective investor expectations demand reasonably open communication flows of such matters. These expectations are largely met by the great majority of public listed companies and good corporate governance practice demands no less. No further regulated prescriptive reporting regime of CSR information by corporations is necessary or warranted.

Conclusion

It would indeed be regrettable if the self-fulfilling power of this virtuous corporate performance model were to be subverted by an overindulgence of exercise of power and authority by regulators to prescribe legislative or regulatory obligations of CSR, and thus tilt unduly the balance of the model.

There is a self-adjusting cycle which consistently works to balance the dynamic tensions between:

• unbridled corporate wealth generation (to the detriment of other sectors of society);
• sustainable economic development and financial returns;
• the interests of a corporation’s general stakeholders; and
• the broader values of our society.

That cycle is currently working to restrict corporate extravagance with the demands of broader community and stakeholder interests, and sustainable social and economic development requirements.

It is strongly submitted that it would be inappropriate for our regulatory masters, through further legislative intervention, to exert the power available to them for short term political expediency. If they do, they risk creating an imbalance in the self-adjusting virtuous cycle of the corporate performance model – perhaps to the detriment of society as a whole which has benefited from this social and economic miracle for many decades.