Strategic Approach to Corporate Responsibility.

Michal Dzoga

Sofia, 30th October 2008

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Agenda

Global trends in Corporate Responsibility 2

CR development evaluation 8

Deloitte’s approach to CR strategy building process 14

Benefits for a company 19

Global trends in Corporate Responsibility

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Triple Bottom Line

Environmental Obligations

– Develop processes and technologies to protect natural resources

– Develop innovations to reduce environmental harm

– Develop, improve, or sustain infrastructures in local communities

– Engage in waste management/ recycling

Social & Ethical Obligations

– Serve the best interests of the human assets

– Develop innovations to improve standards of living

– Provide resources and support to local communities

– Engage in global events

– Provide resources and support to global stakeholders

Regulatory Obligations

– Abide by the law and industry regulations

– Provide full disclosure of financial information

– Comply with stock exchange regulations

Financial Obligations

– Maximize shareholder wealth

– Ensure long-term profitability

– Communicate strategy, vision, and financial performance to shareholders

– Provide tax revenue for state and federal government

– Support the economies of local communities

Basic reporting extended with CR issues

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Business approach to Social Responsibility

Stronger influence of intellectual capital on company’s real value

Increasing requirements of financial markets, stakeholder groups and global trends

Increasing number and international reporting standardization of extra financial business performance

Integration of Social Responsibility with business strategy

Evolution of Social Responsibility in the direction of Corporate Responsibility and Sustainability

Number of sustainability reports

Number of reports by type

Source: www.corporateregister.com

Source: www.corporateregister.com

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Corporate Responsibility standards

International standards and guidelines Global Reporting Initiative

– Rules for determining report content

Materiality

Shareholders interest

Sustainability

Completeness

– Rules for ensuring high report quality

Balance

Comparability

Accuracy

Timeliness

Transparency

Reliability

Standards used in CR audits

– ISO 14064

– AA 1000

– ISO 14001

– OHSAS 18001

– ISO 9001

– ISO 26000 (in preparation)

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Global trends concerning stock exchange investments

More and more companies are being measured by more than just financial performance – leading to the creation of a number of indices focused on environmental, social and economical performance.

Dow Jones Sustainability Index (DJSI, Nowy York – World index)

FTSE4Good (Londyn – World index)

Johannesburg Stock Exchange Socially Responsible Investment Index

Sao Paulo Stock Exchange Corporate Responsibility Index

Ethibel Sustainability Index (ESI – European index)

Business in the Community (Great Britain)

2005 Environmental Sustainability Index (Yale Univeristy and Columbia University)

Jantzi Social Index (JSI - Canada)

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Investments in environment friendly companies International organization Carbon Disclosure Project (CDP)

In 2003, Institutional investors issued GHG emissions disclosure requests to FT500 largest companies

CDP provides a coordinating secretariat for institutional investors with a combined $57 trillion of assets under management. On their behalf it seeks information on the business risks and opportunities presented by climate change and greenhouse gas emissions data from the world's largest companies: 3,000 in 2008.

35

95

155

284

315

385

0 50 100 150 200 250 300 350 400

2003

2004

2005

2006

2007

2008

Number of institutional investors

47%

60%

71%

72%

77%

82%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

2003

2004

2005

2006

2007

2008

Percentage of responces

Estimation

CR development evaluation

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The trust building Framework

Trust is achieved through behavior and transparency and is a key success factor for the business to operate, innovate and grow.

Stakeholders needs and

expectations

Stakeholders needs and

expectations

StandardsAnd

Guidelines

StandardsAnd

GuidelinesBenchmark

to othersBenchmark

to others

Own needs – what’s good for Business

Own needs – what’s good for Business

Clear value & principles,objectives, governance

structure and “walk the talk”

Transparent reportingon values,

management practices and performance

Get Independent Assurancethrough a phased approach

with external reporting and assurance

Licence to operate, innovate and grow

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General companies’ approach to CR – level of engagement

Non-engagement

Companies at this stage view corporate responsibility at a

distraction or impediment to their primary goals value creation. Beyond legal

requirements they do not engage in environmental,

health, safety, community or governance issues.

Philanthropic approach

Companies approach corporate responsibility as an

exercise in establishing goodwill by making charitable

contributions. The underlying assumption is that

goodwill or reputational enhancement is the only return in investment to be

derived from such actions.

Responsive approach

Businesses act as corporate citizens and

work to actively mitigate risks and reduce

negative impacts arising from their activities. The

goal for these companies is value protection.

Strategic approach

Organizations at this level focus not only on value protection, but also on

innovation that will benefit both society and the

company’s own competitiveness. At this

level of engagement, corporate responsibility is a

business imperative that informs the overall corporate

strategy and is seen as a value creation

mechanism.

Company’s CR partners - stakeholders grouping

Company

Business Strategy

Risk Management

Brand & Reputation

Corporate culture

Customers

Employees

Build reputation and brand of the organization. If loyal to the company, create stable grounds for increasing income.

Their engagement, satisfaction and loyalty impacts company’s perception and determines its economic success.

Social groups e.g. disabled people, local communities, institutions like schools and hospitals influence public opinion and media approach.

Investors

Suppliers

Environment

others:Government / Regulator

Customer organizations

Competitors

The group most interested in sustainable development and dynamic growth. It includes Corporate Governance issues.

The quality, reliability and solidity of their products and services influence credibility and high standards of the company

Ignorance of natural environment protection issues may result in serious threat for the business from public opinion and legal regulations

Stakeholders engagement is becoming crucial in:

-defining and developing sustainability reporting system

-aligning the performance reports with new business strategy

Communities

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Organizational culture

– Mission, Vision, Key Values,

– Code of Conduct,

– Ethical program

Shareholders

– Corporate Governance

– Improve communication with financial market participants

– Internet transmission from stockholders meeting (ASM)

Employees

– Recruitment and development

– Employee voluntary service

– Social actions

– Restructuring

– Trade Unions

Preliminary recognition of CR activities – issues to be dealt with

Reporting

– Environmental report

– Environmental protect report

– Usage of international standards

Local communities

– Relations with organizations

– Charity cooperation (Ngo)

– Social programs

– National culture patronage

Customers

– Quality management systems

– Health & Safety

Suppliers

– On term delivery

– To keep official secret

Environment

– Environment investments

– Green supply chain

– Green footprint

– Energy consumption

– GHG emissions

Corporate Responsibility fields

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Most important challenges in strategic approach to Corporate Responsibility

Source: a. Michael E. Porter and Mark Kramer, “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility”, ( Harvard Business Review 2006); b. David J. Vidal, “Reward Trumps Risk: How Business Perspectives on Corporate Citizenship and Sustainability Are Changing Corporate Board Survey” (Corporate Board Action Series 2006); c. Leslie Stones, “Forget the Bottom Line, Watch the Managers” (Business Day 2006); d. Robert Eccles and Scptt C. Newquist “Reputation and its Risks” (Harvard Business Review 2007).

Decentralized Strategy Generally, corporations do not have well defined strategies to holistically address CSR as a strategic objective. Many responses have been limited to cosmetic solutions

such as PR and media campaigns

Disconnected Efforts Some corporations perform a number of unrelated CSR activities that address the needs of disparate stakeholder groups and do not focus on a corporate wide

approach to strategic stakeholder groupsa

Resource Constraints: Many organizations have identified financial and staff resource constraints as a major obstacle to the strategic planning and development of CSR activitiesb

Consistent Deployment of CSR Strategy

Balance Corporations have difficulty balancing the primary interests of shareholders and remaining stakeholders to relieve the tension between achieving financial goals versus

social and environmental goals

Short-term focus The primary focus of corporations has been to maximize shareholder profit by addressing easily measurable short-term financial performance goals

Shareholder Interests In the UK, 57% of financial analysts and 41% of investors claim that they do not pay attention to social, ethical and environmental issues when making investment

decisionsc

Stakeholder Interests Communities, employees, and customers express more interest in the long-term strategies such as corporate governance, social responsibility, and sustainability that

do not produce immediate financial results

Balancing Stakeholder Interests

Quantifying Returns Measuring results of CSR programs has been identified as the greatest challenge to corporations

– Although about 50% of companies see more potential business opportunity than risk to their organization they are struggling to find ways to capitalize on programs in the marketplace

– 71% of companies report publicly on citizenship and sustainability performance, but have difficulty communicating value to stakeholdersa

– 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages their reputationd

Measuring Results

Deloitte’s approach to CR strategy building process

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CR must be incorporated into existing strategic planning processes.

Environmental Awareness

Local Outreach

International Outreach

Internal Development

Corporate Governance

Corporate Responsibility (CR) Strategy

• The board’s demonstration of desired behavior is critical to the implementation of the CR strategy

• Communication of CR issues to the board is critical in the development and evolution of the CR strategy

EmployeesThe deployment of CR management practices will drive employee engagement and build a sense of individual and collective ownership of the CR Agenda

Business Strategy

CR Agenda

Communication of Expectations

Rewards and Recognition

Consistent Global/Regional

Deployment

Monitor and Control

Role Model Behavior

CR Management Practices

Management practices need to address differences across regions, lines of business, business units, and geographies. For example, interpretation of CR differs for a business unit located in the US versus Europe and prioritization of CR issues differ for lines of businesses such as financial services or healthcare in the same corporation.

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Methodology of implementing strategic approach to CR

Phase IPreparatory

Phase IIImplementation

Phase IIIOperational

1st Stage

Pre-audit of Corporate Responsibility procedures and

activities

3rd Stage

Determination of communication rules with stakeholders

5th Stage

Support CR system management

6th Stage

Sustainability Report audit4th Stage

Establishment of formal CR function

2nd Stage

Development / adjustment of Corporate Responsibility policy

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Deloitte’s CR tools

Tools used by us were developed on the basis of Deloitte’s experts experience gained over the years as well as international best practices:

The Deloitte Sustainability Scorecard – gives the indications on the way of preparing the report, content of the report and form of the final report. It allows for a overall view and captures all CR areas and issues based on the 6 categories that include 30 indicators.

Deloitte’s Good Practice Model – allows for the analysis and assessment of current CR area’s situation at the same time identifying these activities that require improvement.

ERA (Deloitte Enterprise AssessmentTM) – this is a methodology that allows to identify and assess risk in organizations. It facilitates prioritizing of CR areas in regard to organization's business strategy.

Deloitte Sustainability Assessment Model – enables the organization's quality assessment in regard to social responsibility and sustainability. Allows for identification of the competitive advantage areas as well as those of the poor quality.

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Green Building Retrofit Research Study

Tyler Jones

Sam Milton

Josh Nothwang

Deloitte Consulting

July 27, 2007

Deloitte’s global network of CR&S services

More than 200 practitioners in more than 20 countries world-wide (70 practitioners in Europe), led by Eric Hespenheide, partner US.

– Focus on Assurance lead by Preben J. Soerensen (Partner, DK)

– Focus on GHG services lead by Pat Concessi (Partner, CAN)

– Engineers and auditors, environment and sustainability experts

Yearly international conference of CR&S network

– Firenze 2003, Paris 2004, Toronto 2005, Madrid 2006, Copenhagen 2007

Intense representation internally and externally

Member of World Economic Forum

Member of World Business Council for Sustainable Development

Signatory to the Global Compact

Member of the Global Reporting Initiative (GRI) Board of Directors

Strong collaboration with audit, risk and management consulting, and corporate financial services to offer innovative, multi-disciplinary service

Benefits for a company

Potential companies’ features that influence CSR

Companies with negative brand image

– PKN Orlen, TP, Provident, PZU, Kompania Węglowa, Tesco, Jeronimo Martins (Biedronka), J&S, Prokom, Microsoft

Organizations conducting „sensitive business” exposed to social disapproval

– (tobacco) BAT, Philip Morris, (military) Bumar, International Technologies, (alcohol) Grupa Żywiec, Kompania Piwowarska, Sobieski, Polmos

Companies with the dominant market share e.g. former state owned entities

– PZU, TP, KGHM, PKP, Telewizja Polska

Enterprises conducting mergers, transformation or rebranding

– Bosh-Siemens, Alcatel-Lucent, Nokia-Siemens, PEKAO (BPH part), Polpharma,

Companies with comparable products and services difficult to promote or with advertising limitations

– (energy) RWE Stoen, PSE, Vattenfall, PGE, Tauron, (pharmaceuticals) Bayer, Polpharma, GlaxoSmithKline, Polfa, Novartis, Servier

Companies acting on highy competitive and price sensitive market

– (mobile) Polkomtel, PTK Centertel, PTC, (financial advisory) Expander, Open Finance, (banks) Polbank, PKO BP, PEKAO, Millenium, BRE, Eurobank, Provident

Companies with environment sensitive products or activity

– (fuel) Shell, PKN Orlen, Lotos, BP, Statoil, (energy) Vattenfall, Elektrownia Kozienice, (chemicals) Zakłady Azotowe Puławy, Ciech

International corporations entering foreign market with imported CR strategy – not adjusted to local business environment

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Implementing strategic approach - advantages for companies

Business Risk Reduction

Anticipation and counteraction of legal, personal, environmental, corporate image and operational risks

Well managed CR activity influences customers trust and employees loyality

CR is no longer a single PR activity but perceived as long-term investment became the dynamic developing philosophy of conducting business in modern world

Investors are more likely to invest in companies with long-term strategy based on system of values that secures sustainable development and reduces business risks

Following FTSE4Good and Dow Jones Sustainability, different stocks create new indexes designed to measure the performance of companies that meet globally recognized corporate responsibility standards and to facilitate investment in those companies

Obedience to CR values will definitely transform from company’s competitive advantage today into obligatory standard tomorrow

Long-term stable growth

Increase in company’s value

Obtaining competitive advantage

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Implementing strategic approach - advantages for companies

„Desired” employer

Professional CR strategy increases employee satisfaction, loyalty and motivation in more effective way with non-salary factors

Better reputation positively affects recruitment process (EU open labor market makes it more challenging for employers in CEE countries)

Corporate image advertising campaigns based on and CR policy are being implemented by many companies in order to strengthen brand perception

Growth in the affluence of the Polish society makes the customer choice less price sensitive in favour of brand awareness

External and professional assurance guarantees balanced and reliable assessment as opposed to the „flattery” internal reports

Companies with professional CR strategy and reporting are better perceived by external environment (authorities, media, partners) while acquiring new markets as well as conducting mergers and acquisitions

Better and cost effective

marketing

Fair judgment

Expansion benefit

Meeting industry requirements

Companies with no professional CR regulations are excluded from cooperation with companies that obey CR values at all levels (partnerships, supply chain)

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O Deloitte

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