Ethics, Social Responsibility & Financial Performance
Michael Park, ACIS
Contents1. Introduction
• Two Opposing Views• Goals of Presentation
2. A Brief History*3. What is C.S.R.?4. Ethics*5. Financial Performance6. Comparisons7. Organizing for C.S.P.8. Conclusion* and Readings
Goals1. To describe those criteria by which corporations may
evaluate ethical practice, social responsibility and financial performance.
2. To examine the relative impacts of C.S.P. on C.F.P.3. To recommend additional readings on the topic.
One of the reasons for the current financial crisis.
“We conclude that there had been a systemic breakdown in accountability and ethics”
~ Financial Crisis Inquiry Report 2011
ORMilton Friedman
A corporation’s social responsibility is to make a profit.
Consider this…1. The world population will double itself to 11b in the
next 40 years.2. To accommodate both economy AND population
growths, production and energy consultation will increase 5 to 30x’s the current levels.
3. Corporations are – and will remain – the main engines of development.
4. For sustainable development to succeed, corporations must become ecologically sustainable.
Human Disasters have encouraged a more intense interest in C.S.R.
• Minamata Mercury poisoning in Japan• Love Canal Toxic Waste Crisis• Union Carbide pesticide plant accident in Bhopal• Chernobyl nuclear power plant accident• Exxon Valdez oil spill
A Brief HistoryUS – Menniger Foundation (Harry Levinson) 1950’s
UK – Ackerman 1960’s
US – Milton Friedman 1962
SA – 1960’s; 1970’s
Treadway Commission – 1987’s – Management’s responsibility for financial responsibility and internal controls
US – 1990’s President Clinton - Summit on America’s future
US – 1991 – US Federal Sentencing Guidelines to corporations re: formal ethics program
UK – 1990’s PM Tony Blair’s emphasis on C.S.R.
Specifically the concern of these initiatives revolved around the impact of business on:
its employeesthe environmentevidence of fair dealing with suppliersthe reputation of those who manage and govern the business
By:• Politicians (local, national)• Community (Activists)• Investors• Media• Regulators
3. What is C.S.R.
The overall relationship of the corporation to all its stakeholders.
Elements of C.S.R.1. Fair dealing / Transparency2. Appropriate Compensation3. Respect for the environment4. Respect for Human Rights5. Respect for local laws6. Respect for O.H. & S7. Anti-corruption8. Supports to local community
• local investment in S.S.• local investment in business• local investment in education
C.S.R. has evolved:• Economic responsibilities• Legal responsibilities• Ethical responsibilities• Philanthropic responsibilities
Reasons C.S.R. is linked to Corporate Performance
Consumer demand for C.S.R.Consumer aversion to corporate irresponsibilityReputation effectEffect on employeesGovernment demand for C.S.R.
What reactions we might expect from Corporations to C.S.R.
• Reactive• Defensive• Accommodative• Proactive
Rating Strategy / Posture Performance
Reactive Deny responsibility Doing less than required
Defensive Admit responsibility but fight it
Doing the least required
Accommodative Accept responsibility Doing all required
Proactive Anticipate Do more than required
Consider a range of 5 approaches to C.S.R.
Fundamentalism:• Rejects corporate personhood• Corporations cannot have responsibility• Corporations exist only to provide profits to shareholders• C.S.R. is another form of taxation
Self Interest:• A variant on fundamentalist philosophy• May be a “self-interest” motive where a corporation may benefit from being socially responsible
Social Contract:• Corporation has an implicit agreement with society which evolves as social values change• A “contract” with society places certain constraints on business or it would tend to excess
Stakeholder Management:• A variant on social contract• Identifies specific constituencies with which a corporation interacts and to which it owes a responsibility
Stewardship:• Corporation has a duty to serve social needs and to interact with society in a morally virtuous way
Approaches to Social ResponsibilityCorporation a social actor?
What is Social Responsibility?
Motivation to accommodate Social
ResponsibilityFundamentalism No Doesn’t exist None. The business of
business is profits.
Self-interest No Legal / contractual responsibility
It may contribute to profit.
Social Contract Theory
Yes Corp. response to social values & rules of behaviour.
Corp. needs to accommodate societal demands.
Stakeholder Management
Yes Management of relationships with stakeholders.
Corporation needs to accommodate stakeholder demands.
Stewardship Yes Corporation’s contribution to a better world.
It’s the right thing to do.
Social Auditing• Employee welfare• Working conditions• Job design• Environmental issues• Markets and marketing• Suppliers• Community Activity
Which leads to: C.S.R. & G.R.I.• Environment• Equity of Opportunity• Human Rights – Working Conditions• Community Involvement• Products• Transparency• Legality
Environment• Pollution control• Product improvement• Repair of the environment• Recycling• Disclosures (e.g. I.S.O. involvement)• Expectations of suppliers
Equity of Opportunity• Minority employment (and within hierarchy)• Local employment opportunities• Employment of women (and within hierarchy)• Pay equity• Training• Human Rights legislation
Health & Safety• O.H. & S.• Training• Displacement• Benefits• Regulations
Community Involvement• Support for public health• Support for Education and the Arts• Community Activities
Products• Use of suppliers and expectations for fair dealing• Quality Improvement (I.S.O.)• Contracting out• Safety regulations prior to bringing product to market
Transparency• Boards E.D. vs. N.E.D.• Minorities / Women within the hierarchy• Role of N.E.D.s
• Compensation• Risk Management• Audit Committee• Nominations
• Shareholder activism and Corporate response• Consultation with stakeholders on matters of material
interest• Whistleblower policies
Legal• O.H. & S. Regulations• Shareholder Rights• Environmental• Anti-corruption• Financial disclosure
Issues in Canada• Voluntary disclosure• Inconsistent categories• No index for reporting C.S.R. performance• Reporting through A.G.M. / Annual Report
4. Ethics may be defined as:a) A set of principles of right conductb) A theory or a system of moral
values
Guided by:• Values of individuals• Corporate culture• Codes of Conduct• Whistleblower provisions• Social norms and expectations
Like C.S.R., ethical constraints are determined by:• Shareholder activism• Role of Institutional Shareholders• Stakeholder Involvement in Governance through
Independent Committees• Stakeholder Involvement in such Q.I./Risk
Management provisions such as ISO
Scope of Business Ethics – N.Am. Perspective
U.S.• Glass – Stegall• Sarbanes Oxley (Whistleblower provisions)• Dodd-Frank (Whistleblower provisions)• Schumer’s Shareholder Bill of Rights
Canada• NP 58-201 (3.8) – Code of Conduct• NI 58-101F (5) – Written code and statement of compliance• TSX Guidelines (1) – The integrity of internal control &
management information system• ICSA Whistleblower Guidelines
A tool which has been promoted (based on the Fortune magazine reputational survey) is:
Social and Ethical Accounting, Auditing and Reporting
(SEAAR)
Use of SEAAR has prompted:• A rapid expansion of the social and environmentally
resp. investment movement (resp. invested assets increased from $639b in 1995 to 1.185 trillion in 1997)
5. Financial Performance Considers:
1. Profitability2. Growth3. Risk Management Measures4. Ownership5. Diversification6. Leverage
Profitabilityreturn on equityreturn on salesreturn on assets (net income / sales)
Growthsize liquidity
Risk/Management Measuresshare pricemarket sharedividends / share
Ownership% local% institutional
Executive: employee compensation
Diversificationacquisition expenditures / revenuesR & D Expenditures / sales
LeverageLT debt / equity
debt / net income debt / assets assets / equity
Consider also:
Excess market valuation (E.V.) (the difference between total firm market value and the book value of assets, normalized by sales)
E.V. = Market Value of Equity and Book Value of Debt – Total Assets
____________________________________________________________________________________________________________
Sales
6. Comparisons
Fortune Magazine’s IndicatorsOverall index of Corporate Reputation
• Quality of management• Quality of product/service• Ability to keep and attract talent• Financial soundness• Asset use• Long term investment value• Innovation• Responsibility to the community or environment
KLD measure of CS Performance(Kinder, Lyenberg, Domini)
• Year to year assessments of S & Ps’ 500 firms.• KLD is an independent rating firm that is in the
business of developing social performance ratings for interested businesses and investor communities.
KLD Ratings• Community impact• Diversity• Employee relationships• Product safety• Ecological (environment) performance
Compared to investor decisions to invest in the companies
Conclusion of both rating schemes for 893 firms between 1990 and 1993
1. Direct correlation between quality management and financial performance.(Where quality management demonstrates concern for employees, respect for diversity in the workplace, safe products, respect for environment.)
2. Direct correlation between sound community relations and financial performance.
The Corporation’s Social Performance / Corporation’s Financial Performance Debate
from Jennifer Griffin & John Mahon, 1997
They compared the performance for 7 major corporations comparing Social Performance and Financial
Performance between 1990 and 1992
Companies were:
• Dow Chemical• Dupont• Monsanto• PPG• Occidental Petroleum• WR Grace• Union Carbide
Consider also:
Reputation• Perception by community, stakeholders
Corporate Philanthropy• Giving
Toxic Release Inventory• Release of materials into the environment:
• Air• Landfills• Chemical release
Consider - 1990 Corporate Financial and Social Performance Matrix
High Low
Social Performance
HighDow ChemicalDupontMonsanto
LowPPGOccidnetal Petroleum
Union CarbideW.R. Grace
Financial Performance
Consider - 1992 Corporate Financial & Social Performance Matrix
Corporate Social
Performance
High Low
HighDow ChemicalMonsanto
Dupont
MidPPG W.R. Grace
LowOccidentalPetroleum
Union Carbide
Corporate Financial Performance
This shift:• suggests corporate leadership has recognized the
importance of C.S.R. and environmentally friendly policies
• And that Corporate leadership is concerned about the opinion of its key (institutional) investors
7. Organizing for Ethics, C.S.R. and Financial Performance
• Use of Independent Directors• Reporting directly to A.G.M.• Meet Independent of Management• Ensure internal controls, risk and quality audits• Clear reporting separate from Annual Report• Use outside consultants as needed, paid by the
Corporation
C.S.P. Report CardEmployee Support• Performance Appraisal• Job Description• Training and development• Retirement and termination
counseling• Redundancies and program
closings• Stress management• Mental health status• Absenteeism and turnover
• Health and safety• Employment equity and
discrimination• Executive compensation• Employee compensation• Gender equity in leadership• Occupational Health and
Safety record
Ethical Practice• Code of conduct• Privacy code• Conflict of Interest Policy• Policy guiding stakeholder
involvement in:• Decision-making• Planning• Policy development
• Shareholder Bill of Rights• Non-compliance disclosure
Transparency/Community Relations• Reporting on quality
benchmarks• Reporting on risk
management• Community relations• Stewardship practices
• Environment• Community engagement• Development of Social
Capital
Environmental Impact• Energy conservation
practices• Supplier certification for 150
14000• Waste management
practices• Re-investment in landscape
Governance• Board evaluation• Board development• Interaction with
shareholders• Recruitment practices• Definition of “independence”• Independence of
management
8. To Conclude
1. Political correctness and feel-good management fads are no substitute for honesty, fairness and respect for the law.
2. Commitment to C.S.P. goes well beyond the shareholder value concept.
As Fürstenberg (a Berlin banker of the 1920’s) said: Shareholders are stupid because
they give money and arrogantbecause they want dividends.
3. Companies do not act independently from the societies in which they operate… Attending to legitimate social concerns should, in the long run, benefit all parties including investors.
Readings
Alexander & Buchholz 1978 “CSR & Stock Market Performance”Academy of Management Journal22(3):501-15
Arlow & Gannon 1982 “Social Responsiveness, Corporate Structure & Economic Performance”Academy of Management Review7(2):235-41
Brown & Perry 1994 “Removing the Financial Performance Halo ` for Fortune’s Most Admired Companies”
Academy Management Journal37(4):1349-59
“Profit Whatever the Cost? The Debate Intensifies on Making Money Against Making Employees”
Boston Globe, April 21, 1996
Clarkson, M.B.E. “A Stakeholder Framework for Analyzing and Evaluating C.S.R.” Academy of Management Review, 1995, 26(1) pp 92-
117
Griffin, J.J. & Mahon, J.F. “The Corporate Social Performance and Corporate Financial Performance Debate” Business &
Society, 36(1), March 1997 pp 5-31
Klonoski, R.J. “Foundational Considerations in the C.S.R. Debate”Business Horizons, Jul/Aug 1991, pp 9-18
Roman, R.M. & Agle, B.R. “The Relationship between Society and Financial Performance” Business & Society, March
1999, 38(1), pp 109-125
Schacter, M. “Altruism, Opportunism and Points in between: Trends and Practices in C.S.R.” Institute on Governance,
May 2000http://www.iog.ca pp 1-45
Shrivastava, P. “Industrial/Environmental Crises and C.S.R.”J. Socio-Economics, 1995, 24(1), 1211