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.