The business case for CSR

Björn Stigson
President, World Business Council for Sustainable Development (WBCSD)

There is a growing 'body of evidence' which suggests that there is a business case for corporate social responsibility.

A fundamental premise is that business is not divorced from the rest of society. Companies are an integral part of the societies and communities in which they operate. And business cannot continue to generate wealth if the society around it fails.

A coherent CSR strategy, based on integrity, sound values and a long-term approach can offer clear business benefits. These cover a better alignment of corporate goals with those of society; maintaining the company's reputation; securing its continued license to operate; and reducing its exposure to liabilities, risks and associated costs.

But more specifically, what is the business case for CSR?

First, inside the company, CSR represents a longer-term motivation, in which business seeks to extract returns for its social spend. There is a growing link between reputation and companies being able to command higher prices for their products and stock offerings, lure more job applicants, raise clout with suppliers, and reduce the risk of crises.

Second, the communities, local or national, in which business operates are essential to a company's license to operate. Building prosperous surrounding communities and a strong social fabric is required for market growth.

Third, on a global level, behaving as a corporate citizen can help society to accept the changes brought by globalisation. In this globalised and transparent world, managing a company's reputation thus becomes a central element in managing a corporation.

The role of the financial markets

Measuring and accounting for what a company does in the arena of social responsibility is becoming increasingly important, for both investors who want to see a bottom-line impact of such activities and other stakeholders who want to see action, not just words.

The fact that leading financial players are starting to come alive to sustainable development is a testimony to the fact that indexes show that socially responsible companies deliver above average financial returns, as a company's ability to deal successfully with environmental and social issues can be a credible measure of management quality.

Financial institutions are indeed making increasing use of social criteria to evaluate the risks of loans to, and investments in companies. Similarly, being recognised as a socially responsible company, through listing in a 'sustainable' stock market index, can support the rating of a company and therefore entails concrete advantages.

The Domini 400 Social Index (DSI) has outperformed the S&P 500 (Standard & Poors) by more than 1% on an annualised total return basis since its inception in May 1990, while the Dow Jones Sustainability Index has grown by 180% since 1993 compared to 125% for the Dow Jones Global Index over the same period.

More recently, another of the world's leading index providers, FTSE, launched the FTSE4Good series. Composed of four benchmark indices for the UK, European, US and global markets, these indices help to measure the performance of companies meeting international CSR standards.

Defining boundaries

A question, which lies at the heart of any discussion on a company's corporate social responsibility, is the extent and boundaries of CSR. Defining what it is that business is responsible for and to whom is not an easy task. The right balance has to be struck between the "minimalism of doing no more than the law requires and the maximalism of picking up responsibilities for which companies have neither the mandate nor the capacity," as Lord Richard Holme, the co-chair of our former working group on CSR, once put it.

Over the years, business has become engaged in areas outside its original sphere of influence and some have taken for granted that companies should do more. As a result of this 'drifting' borderline, society's expectations of companies' social responsibilities have increased.

At the same time, expectations of a company or industry sector's responsibility for addressing a particular issue are likely to vary between different stakeholders depending on their country and culture. Setting the boundaries of a company's role and responsibility vis à vis government and civil society, is therefore often a question of dialogue and negotiation. Fixing such a line depends largely on the cultural context and the rate of development of the societies in which the company operates.

With this background, what are the respective roles of business versus that of government in providing social, educational, and health services? How far along the supply chain does a company's responsibility extend? How should it adapt to local cultures? How far into the future should a company plan?

Supply chain is a case in point and a central element in the debate on boundaries. Prompted by media coverage, supply chains of well-known brands have been the target of intense public pressure and consumer outcry in recent years. This trend is forcing companies to assess their supplier relations under a different light.

Typically, global outsourcing has allowed companies to order products from manufacturers without owning or being involved in the operation of these factories. With many large companies decentralised and continuing to downsize, managers often don't know what subcontractors are doing. In an effort to avoid such unfavourable publicity, in many export sectors the greatest pressure for change in corporate behaviour comes from Northern buyers further down the supply chain seeking to protect their brands and imposing codes of conduct on their suppliers.

Another important driver is the recognition that governments cannot address social challenges such as poverty, conflict and human rights alone. In the developing and emerging markets of the world, where institutional settings, i.e. framework conditions, are often preventing companies from conducting business, companies themselves have to develop strong ethical 'codes of conduct'.

Transparency and reporting

One of the most consistent demands that companies are facing from different stakeholders, ranging from institutional investors to social and environmental activists, is to be more transparent about their economic, environmental and social performance.

Legal and normative developments are putting pressure on business to integrate social issues. For instance, the European Union (EU) has invited all publicly quoted companies with at least 500 employees to report on their performance against economic, environmental and social criteria. Also, the EU has asked them to publicise their adherence to the OECD guidelines for multinational enterprises or other comparable guidelines. France already has a legal requirement for companies with over 300 employees to produce financial accounts of social activities and Germany has been requiring the same since the 1980s.

These various demands placed on companies to report on social issues are resulting in a myriad of social reporting formats. In order for these reports to be useful, a global consensus needs to emerge on the type of information to be disclosed, the reporting format to be used, and the reliability of the evaluation and audit procedure.

This is where an institution such as the Global Reporting Initiative (GRI) can be particularly useful in trying to develop an internationally accepted framework for sustainability reporting by business.

In addition, more and more companies are joining international bodies to strengthen their social responsibility and ethical behaviour. An even bigger set of organisations is subscribing to voluntary codes of conduct.

Also, the UN Global Compact, launched by Kofi Annan in 1999, is trying to promote a set of values in the field of labour standards, human rights and environmental issues. The Compact is now supported by some 400 companies around the world, of which 45 are WBCSD members.

While not legally binding, these codes of conduct, principles, and guidelines are raising expectations within the public about socially responsible business.

These various commitments to social responsibility bring rewards, among which the respect of one's peers. In 2000, some 720 business executives from around the world were asked for the first time in the Financial Times survey of The World's Most Respected Companies to rate the importance of social responsibility.

Seventy percent of the executives felt CSR was 'very important'. Interestingly, also 50 percent of fund managers thought social responsibility was 'very important' for companies. This shows that even the mainstream investment community, reluctant to acknowledge the shareholder value of corporate social responsibility, is slowly but surely coming around.

Yet, a company's investment in corporate social responsibility will pay off financially only when the investment is focused and connected to its core business strategy rather than treated as an ad-hoc add on. A long-term commitment to CSR can also pay off in times of crisis when consumers are more willing to give the benefit of the doubt to a company with a long history of exemplary behaviour.

Looking ahead

Both a challenge and an opportunity, corporate social responsibility is clearly emerging as a central issue for business and as a topic of great interest to all people whom business affects.

As the significance of the CSR concept rises, so, too, do the calls for 'proof that it pays' by all stakeholders, be they customers, employees, suppliers, governments, communities, and not the least shareholders, because of its relevance to each of them.

This is what we, in the WBCSD, call the business case for corporate social responsibility. We believe that a coherent CSR strategy based on sound ethics and core values offers clear business benefits. These accrue from the adoption of a broader world view, which enables business to monitor shifts in social expectations and helps control risks and identify market opportunities. Such a strategy helps to align corporate and societal values, thus improving reputation and maintaining public support.

At the same time, companies are experiencing demands for change from within, largely driven by a generational shift, with younger managers more acutely aware of a need to align their personal and corporate value systems with those of the consensus in the broader society.

Consequently, companies find themselves under pressure from both outside and within to be more open, more accountable for a wide range of actions, and to report publicly on their social performance. Pressure for greater transparency has persisted with the continued transfer of power from the state to the business sector, in areas ranging from education to pensions.

All this tells us that companies will increasingly have to manage their social issues in the same way as they manage other strategic business issues. And those that don't, will not stay in business long-term.

For more information, please contact:

The World Business Council for Sustainable Development

info@wbcsd.org

+41 22 839 3100

www.wbcsd.org