Corporate boards can and should influence their companies' social and environmental performances finds a new report. Institutional investors are helping push the importance of social and environmental issues on companies' bottom lines.
Corporate boards can and should influence their companies' social and environmental performances finds a new report.
Institutional investors are helping push the importance of social and environmental issues on companies' bottom lines. Corporate boards now need to figure how to respond to investors' and other stakeholders' demands concerning social, environmental, and governance (ESG) issues finds the report "The Role of the Board of Directors in Corporate Social Responsibility." The report was published by the Conference Board of Canada, a non-profit that researches business and economic trends.
"Long term investors are realizing that how the firm manages its
social and environmental impacts and responds to social and
environmental trends can affect long term firm performance," said Coro Strandberg, author of the report and principal of Strandberg Consulting, based in Burnaby, British Columbia.
The report finds that the Canadian companies concentrate more on their
corporate social responsibility (CSR) as it relates to operations than
on CSR from a governance perspective. However, this trend is changing
as more boards are starting to consider CSR issues.
Strandberg told SocialFunds.com, "As I show in my study, increasingly
boards of directors are starting to integrate social and environmental
considerations (CSR) into their strategy and risk management. CSR is
moving into the boardroom with the growing realization of the business
case for CSR. Once CSR moves into the boardroom, it becomes a factor in
board governance."
The report creates a 12-step road map for boards to include social and
environmental considerations in their oversight, reporting, and
planning. The first part of the map focuses on businesses just starting
to add CSR governance as part of their company's mission. The second
stage of the map focuses on companies looking to increase and deepen
their CSR procedures.
In the US, for the year 2005, 11% of the 100 largest publicly traded
companies had committees that focus on social or public policies. In
Canada, 44% of the largest 142 Canadian companies had committees that
focused on CSR issues, although the report notes less than 1% of these
Canadian committees actually had CSR or sustainability in their titles.
The move toward boards adopting CSR mandates is slow but sure:
"Analysts, thought leaders, and board directors themselves perceive a
definite (albeit modest) trend toward greater integration of CSR
considerations into business strategy and boardrooms" the report
states.
Strandberg explained to SocialFunds.com, "Increasingly directors are
coming to understand the CSR business case - there is a growing
awareness that pro-active management of a firm's social and
environmental risks and opportunities can result in sustainable value
creation."
If a corporate board doesn't understand the material case for having
CSR policies or the risks involved in not considering CSR, the board
will play less of a role in CSR matters the report finds. Therefore, it
becomes imperative for a culture of CSR awareness, lead by the CEO and
chair, to be created at the board level.
"The role of the chair is key to setting the tone and creating a
culture of openness amongst the board of directors to facilitate
consideration of CSR issues," said Strandberg. "Group think can often
get in the way of CSR consideration. To overcome this, the business
case for CSR must be made very clear. Director orientation and training
on CSR can help. "
Strandberg continued, "Stakeholders seeking to affect a firm's approach
to CSR increasingly come to understand that boards of directors set the
tone at the top and are responsible for the overall direction of the
firm in that they have oversight over the firm's values and
sustainability performance, the CEO's incentive program, and the firm's
business strategy."
The report predicts that CSR will become an important part of good
corporate governance with two best practice models of CSR board
control. In the embedded CSR model, CSR becomes just another part of
the board's responsibilities, as it looks at the long-term affects of
CSR issues. With the embedded model, CSR is part of the company at a
fundamental level, with no separate CSR committees or officers. With
the second best practice model, focused CSR, boards also adopted CSR
into the companies' foundations and missions. However, with this model
CSR issues are addressed separately.
"For successful management of a firm's sustainability performance the
board needs to demonstrate its commitment and oversight of CSR," said
Strandberg. "These are key to successful CSR integration and embedment.
The board must show its active ownership of this issue and its
awareness of its role, in the absence of which a firm's commitment to
effective social and environmental performance management could be
suspect."
There are still gaps the report concludes between what many boards
think about CSR issues and what they actually do to act on their
theories. Unless CSR is actively considered during board selection and
training, and during long-term strategic planning, then the gaps will
continue. The gaps will start to close as CEOs and directors lead their
companies to seeing social, environmental, and governance issues as
impacting profits.
