Chapter 8

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					CHAPTER 8

The New Business Imperatives?
An International Comparison

4 The overwhelming movement presently driving towards
  corporate social responsibility
4 Why bridging the great divide between corporate governance
  and corporate social and environmental responsibility (CSR)
  is the next great challenge for business
4 The responsibilities of business corporations to shareholders,
  stakeholders and government
4 The legitimacy of corporate social responsibility
4 The increasing sophistication of corporate reporting of social
  and environmental matters
The Economics of Climate Change

                     Source: Stern Review: The Economics of Climate Change (2006:8)
Defining Social and Environmental

4 Definitions of CSR and sustainability range from the basic
  to the most demanding

4 from a specific reference to a number of necessary
  activities to demonstrate responsibility

4 to a general call for a comprehensive, integrated and
  committed pursuit of social and environmental
The Significance and Impact of CSR

4 The narrow focus of corporate governance exclusively upon the
  internal control of the firm and simply complying with regulation is no
  longer tenable

4 Corporate objectives described as ‘wealth generating’ too frequently
  have resulted in the loss of well being to communities and the

4 Trend towards monitoring not just the financial health of the
  company, but the social and environmental impact of the company

4 CSR is becoming established in many corporations as a critical
  element of strategic direction, one of the main drivers of business
  development, as well as an essential component of risk
CSR Responses: Investors

4 Capital Report 2006, a guide to the investment community on how to
  incorporate environmental, social and governance issues into their
  investment decision-making and ownership processes

4 The third Carbon Disclosure Project meeting, (investors
  representing 21 trillion dollars in assets) collectively requesting the
  world’s largest corporations to disclose information on greenhouse
  gas emissions and their approach to the management of carbon risks
   (UNEP FI 2005).

4 Banks representing more than 80% of the global project finance
  market, have adopted the Equator Principles, a set of voluntary
  principles outlining environmental, social and human rights disciplines
  associated with project finance above $50 million (Freshfields Bruckhaus
   Deringer 2005a).
 CSR Responses: International Organizations by
 encouraging CSR

4 The International Finance Corporation (IFC), the private sector
  investment arm of the World Bank originally developed the CSR

4 The OECD Guidelines for the operations of multinational
  corporations (OECD 2000)

4 The European Union Guidelines for the business contribution to
  sustainable development (European Commission 2003;2004)

4 Global Reporting Initiative (GRI) 2002 Sustainability Reporting Guidelines
CSR Responses: Corporations by incorporating
CSR in their business

4 The World Business Council for Sustainable Development, and
  the World Economic Forum Global Corporate Citizenship
  Initiative has projected corporate responsibility in the minds of the
  international business elite (WBCSD 2002;2004 ; WEF 2005)

4 Leading corporations signed up for the Global Reporting Initiative
  and more than 2,000 international corporations now publish reports
  on their CSR performance

4   Business Leaders Initiative on Human Rights
4   The Conference Board
4   Business in the Community
4   Business for Social Responsibility
4   The new indices including the Dow Jones Sustainability Index and
    FTSE4Good, are seeking to reinforce the commitment to CSR
The Integrity of CSR

4 Questions are often addressed to the sincerity of corporate social and
  environmental initiatives; the legality of company directors engaging
  in these concerns; equally, the legality of the trustees of investment
  institutions attending to these interests; and the verifiability of CSR
  activities and outcomes

4 There is a place in the market economy for responsible firms. But
  there is also a large place for their less responsible competitors.
  ..Precisely because CSR is voluntary and market-driven, companies
  will engage in CSR only to the extent that it makes business sense
  for them to do

4 Civil regulation has proven capable of forcing some companies to
  internalize some of the negative externalities associated with some of
  their economic activities.
Tomorrow’s Markets

   4 People
   4 Innovation
   4 Natural Capital
   4 Connection
   4 Roles and Responsibilities ( Democracy,
     accountability, privatisation)
    The Range of Environmental Costs

Tier                                                                        Description
1      Conventional Costs
                               Includes the costs of direct raw materials, utilities, labour, supplies, capital equipment and related

2      Hidden Costs
                               Includes the up front environmental costs, such as search costs relating to environmentally conscious
                               suppliers, initial design costs of environmentally preferable products, regulatory costs which are often
                               obscured in overhead costs, future decommissioning or remediation costs

3      Contingent
                               Defined in probabilistic terms and includes fines for breaching environmental requirements, clean up
                               costs, law suits relating to unsound products

4       Relationship and Image Costs
                               These costs are difficult to determine and would seldom be separately identified within an accounting
                               system. However they could be expected to have some influence on the value of some intangible
                               assets, such as goodwill, brand-names and so forth. The sum of the costs in Tiers 1 to 4 can be referred
                               to as private costs and they can directly impact on an organization’s reported profit

5       Societal Costs
                               These costs are often referred to as externalities and represent costs that an organization imposes
                               upon others as a result of their operations but which are typically ignored by the organization. They
                               could include environmental damage caused by the organization for which they are not held
                               accountable or adverse health effects caused by organization-generated emissions for which the
                               organization is not held responsible. It is difficult and sometimes controversial to put a cost on these
                               Effects and with the exception of a few organizations worldwide, most entities ignore these costs
                               when calculating profits. However, physical measures can be developed, and related KPIs can be
                               used to assess performance.

                                                                                                                  Source: Van Berkel R. (2003)
KPMG CSR Surveys 1993-2005 (KPMG)

        Source: KPMG CSR Surveys 1993-2005. KPMG International Surveys of Corporate Responsibility Reporting 2005, KPMG International
Drivers for Corporate Social Responsibility (KPMG)
Key Stakeholders According to Corporate

                                      Source: Adapted EIU (2001)
CSR Stakeholder Model
Driving Enlightened
Shareholder Value

Source: Mays S. (2003). Corporate Sustainability _ An Investor Perspective.
The Mays Report. Department of Environment and Heritage
Commonwealth of Australia. p11-16.
CSR Stakeholder Model Driving Enlightened
Shareholder Value

Source: Mays S. (2003). Corporate Sustainability _ An Investor Perspective.
The Mays Report. Department of Environment and Heritage
Commonwealth of Australia. p 11-16.
Legal and Moral Liability are Converging
The Legitimacy of CSR from a Governance

4 Corporations enlightened shareholder value?
  The duty to promote success of the company

4 Investment Institutions Effective Portfolio management:
  The duty to address ESG issues?
Fund Trustees Fiduciary Duties
                                 Source: Freshfields Bruckhaus Deringer (2005:15);
                                   “Duties Diagram 1-Pensions” Geneva: UNEPFI.
  Institutional Investor Voting 2000-2003

Full Source: Monks, R.; Miller, A. and Cook, J.(2004).
     The Impact of Socially Responsible Investment
     Upon CSR
4 UK
  Socially responsible investment (SRI) according to the UK Social Investment
  Forum (2001) “combines investors’ financial objectives with their
  commitment to social concerns such as social justice, economic
  development, peace or a healthy environment.”
4 France
  AFG-ASFFI the association of professional fund managers, requests that
  corporate boards consider the concept of sustainable development, social
  responsibility and the environment. Also, French corporate law was
  amended to require listed companies to disclose in their annual reports how
  they take the social and environmental consequences of their activities into
  account in May 2001.
4 Australia
  The Ethical Investment Association’s (EIA 2002) figures SRI in Australia has
  grown dramatically rising to A$13.9 billion in 2002, an increase of 31% over
  the previous year while managed funds as a whole declined by 0.1%
      Proportion of UK Funds Taking SRI Concerns Into
      Account to Differing Degrees

Source: Mathieu, E. (2000),UKSIF .
 Growth of SRI Investment Assets in Australia 2000
- 2006

                           Source: Ethical Investment Association (EIA) 2006 SRI Benchmarking Survey
   The Impact of Socially Responsible Investment
   Upon CSR

4 US
 US Socially Responsible Investing (SRI), according to the biennial report of The
 Social Investment Forum, of the overall investment through professional managers
 amounting to US$19.9 trillion in December 2000, over 11% or $2.3 trillion dollars is
 invested in a socially responsible manner.

 The Social Investment Forum (SIF) breaks down these figures into $1.4 trillion
 employing screening only on social or environmental criteria; $601 billion in
 screening and shareholder advocacy funds; $305 billion in shareholder advocacy
 only funds; and $8 billion in community investment funds
   Growth of SRI Investments in the United States

Source: SIF (2006) “2005 Report on Socially Responsible Investing Trends in United States,10 year Review. Washington DC: Social Investment Forum. Fig 1.2 p. 2.
Screens most commonly used in Screened
Portfolios in the US (2005)
   US Shareholder Actions Planned for 2003-2004
  Including Key Resolutions
                                                        Proposed           Withdrawn                 Voted On           Average Vote %
                 Type of Proposal                    2003      2004       2003      2004       2003        2004          2003          2004
Independent board chair                               42        59         9          8         30          36          26.10          28.30
Limit consulting by auditors                          29        35         7         16         19          12          16.10          14.20
Increase board independence                            8        14         1          0         5           13          27.50        26.10
Majority vote to elect directors                       -        14          -         2                     12             -           11.80
Cumulative voting                                     21        24         1          1         20          21          34.10          34.90
Restrict executive compensation                       64        158        2         28         36          79          15.40          11.50
Expense option value at time of grant                 115       50         27        11         69          34          47.40          53.30
Vote on golden parachutes                             21        36         2          8         18          26          57.00          51.80
Cap executive pay                                      -        15          -         3          -              7          -           7.70
Award performance-based stock options                 92         8         24         1         59              5       16.10          40.20
Poison pill                                           107       100        1          3         84          51          60.00          61.10
Declassify board                                      63        59         9         11         48          39          63.40          71.60
Eliminate supermajority vote                          10        11         1          1         9               7       60.50          75.80
Sell the company/maximise value                        4        13         0          1         2               4        3.20          25.10
Other                                                 215       251        38        84         75          99             -             -
                                          TOTAL       791       847       122       178        474          445

               Source: SIF (2006). “2005 Report on Socially Responsible Investing Trends in the United States- 10 Year Review”, Washington DC: SIF.
Social and Environmental Investment

4 The Calvert Social Index
4 The KLD Broad Market Social Index (BMS Index)
4 The Domino 400 Social Index (DSI)
4 The Nasdaq Social Index
4 The Large Cap Social Index (LCSI)
4 FTSE4Good
4 Dow Jones Sustainability Indexes (DJSI)
4 The Ethibel Sustainability Index (ESI)
4 ECP Ethical Global Return
    Corporate Reporting of CSR

The Global Reporting Initiative (GRI) Principles aim to:
4 Provide a balanced and reasonable representation of an organization's
   sustainability performance
4 Facilitate comparability
4 Address issues of concern to stakeholders

The GRI reporting principles :

4   Transparency
4   Inclusiveness
4   Auditability
4   Completeness
4   Relevance
4   Sustainability Context
4   Accuracy
4   Neutrality
4   Comparability
4   Clarity
Future Developments: The Redesign of the

4 The effective integration of corporate social and
  environmental responsibilities could potentially release
  greater value for both shareholders and wider
Corporate Strategies to Deliver Value to Society

                                          Source: Nelson J. (2004).

4 Only a fundamental redesign of corporate forms,
  objectives and value measures can fully meet the realities
  of responsibility.

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