Thought Leadership
Corporate and Social Responsibility
- Introduction
- Reputation Management
- Risk Management
- Employee Relations
- Investor Relations
- Community Relations
- Suppliers
- Customers
- The Board of Directors and CSR
Introduction
The UK Government has had the theme of sustainability as a common thread of many of its policies since the 1997 General Election. The Universities, The London Business School and many trade and employer groups have taken many elements of the sustainability ethos and absorbed it into the wider Corporate and Social Responsibility proposition. CSR is more widespread in application as it includes social investment, Health and Safety and ethical initiatives like free trade.
Stakeholders are increasingly aware of the risks to the balance sheet and the longer term financial health of their companies caused by poor awareness of, and lack of management skills applied to, the softer aspects of company operation. These concerns especially as voiced by institutional investors like the pension funds are adding significant impetus to development of the CSR project.
We believe that the key themes of corporate and social responsibilities divide into three strongly related areas.
These are Social, Environmental and Economic. The social concerns obviously relate to staff and the wider communities in which companies operate. Economic issues reflect the interests of shareholders and the banking and insurance industries and environmental aspects, largely technical and highly specific to different ways that the individual industries impact the world around them.
The sub-headings, which define the issues are, reputation management, risk management, and relations with employees, suppliers, customers, investors, and the wider community. Several issues will appear in more than one area.
Reputation Management
Reputation management is a Social issue in that it impacts positively or negatively on staff, investors and the wider community. As such it is also an economic issue as staff morale and motivation, or investor indifference or hostility can bear directly on a companies performance and share price. Reputation management should be a continuing well-managed communication process with all a companies stakeholders. It is not fire-fighting PR. There are compelling marketing issues here. A company which is perceived as dependent on child labour in its supply chain or that uses non-renewable sources of raw materials will progressively lose reputation, investor confidence and market share. Environmental issues are now front of mind for almost all customer groups.
Risk Management
In a similar way risk management does not start with a crisis. It should be a comprehensive strategy based on continuing risk assessment. Processes should be modified to remove or ameliorate the perceived dangers, particularly with Health and Safety issues. In an environment where the "polluter pays" it is common sense for a business to find ways of eliminating waste or modifying the process such that the waste becomes an attractive input to another business. Where the risks are integral to profitable operations then the communication strategy should be used to minimize the risk in the first place and keep all concerned informed within a balanced agenda.
Employee Relations
The company - employee relationship begins before recruitment. It is obvious that a "most-admired" business will have little difficulty attracting and retaining high quality staff. Equally an efficient two-way internal communication system will identify and often address issues before they begin to affect performance. Shell learned to its cost that being seen as uncaring about environmental issues badly impacted all aspects of staff relations. Staff terms and conditions are both economic and social issues and well documented and communicated economic constraints on pay will be better accepted by employees by being seen in the context of a more secure business plan. There is a UK task force organized by the DTI which is looking at the Human Capital management issue. Their initial thinking includes the valuation of employee skills, knowledge and experience ie the assessment of Human Capital. It also encompasses the debate on performance management and assessment of opinion and morale. Their current conclusion is that there are no common metrics available in this area although they can see the virtue of inviting companies to formally report on these matters.
Investor Relations
The dependence of any listed company on good shareholder relations is a given. What is seldom fully understood is the potential benefits to be found in different lower cost sources of funds that can be available to the better corporate citizens. A company jointly venturing with a social investor in a community-enhancing project is in a win-win situation. Low cost funds, enhanced reputation, better motivated staff working in a supportive community results in improved company performance. This could be the provision of low cost housing, social or medical facilities as an adjunct to a corporate development for which planning consents were more readily forthcoming.
Community Relations
As we commented above there are considerable environmental, social and economic benefits attached to a sustainable community relations strategy. Joint projects with rural housing or training schemes, collaboration in technology projects with a University or a hospital, or computers for schools are recent valid examples. They can be linked to employee benefits, marketing projects or new research projects. In addition to enhancing corporate reputation they may also result in innovation in production or marketing and improvements in work force skills.
Suppliers
In these days of highly integrated operations like the chilled food chain, when Outsourcing has become an industry in its own right it is impossible for companies to divorce their interests from the impact they are having on and through their suppliers. The supermarkets exert such influence that they must share the responsibility for the consequences of the constraints that they place on their suppliers. This can include child labour in the third world, the use of pesticides in Norfolk and living standards in East Africa from whence much fresh produce is sourced.
Customers
The value chain of most modern business extends through distribution to end customers and users. Consumers will be exerting more and more pressure on companies to produce their products ethically. They will demand conformance to animal welfare standards and they are increasingly sophisticated in their choice of safe or even health enhancing products. Equally produce that of itself minimises waste and reduces packaging to a re-usable minimum will find favour with most consumers. A successful business must therefore be taking a view across the entirety of its value chain and taking decisions that are sustainable in the eyes of educated consumers and Government watchdogs.
The Board of Directors and CSR
The requirement for a Board of Directors is that in each area they have a comprehensive, sustainable strategy. The necessary skills already exist in the Board Rooms of our best run businesses. What is required is a re-application of those skills with sustainable objectives in mind.
We believe that CSR is best served by a Michael Porter style analysis of the value chain. The value chain as eventually defined, extending upwards into suppliers and downwards to distribution and end user customers.
In order to do this successfully we need to take a fresh look at the value chain. We must begin by studying the individual value-add steps that constitute the cahin as a whole. We need to add to our model a new concept, the un-desired consequence, the irrelevant or valueless by-product or waste. We also need to look again at the process itself as it may well be that with our sustainability perspective, rather than simply seeking the lowest cost, we may take a different view.
In any process, either man-made or natural there are inputs, raw materials or food, desired outputs and undesired but necessary consequences - waste. The process can be a living organism, plant or animal, a factory, an engine or a production line or element thereof. The inputs may be financial, they may simply be human activity or the products of yet another process.
It is important to realise that all the elements of the system are variables. First the process itself can be re-engineered. Secondly the specification of the desired output can be changed, the nature and quantities of the inputs can be adjusted and the wastes can be altered in their nature by changes of the kind described above.
Very few processes exist in isolation and as in the original picture of the value chain most outputs are themselves inputs to another process. The food chain being the primary example and a car factory production line being another. Of course as in Michaels Porter's final essays the value chain crosses the boundaries of organisations and countries as it works its way forward. Equally as in his original work the existence of a process in the chain should be challenged as the first step in its review. Naturally any adverse consequence will need to be accounted for especially if that step in the chain removed an un-desirable consequence.
As the science of sustainability has become more complex and sophisticated then this rather simplified picture has increasingly become redundant. Wastes and by products have been themselves modified by alterations in process and inputs so that they too stand in the market with a value rather than a cost of disposal. The diagram below illustrates an example of an evolving, sustainable value chain in food production. Here waste heat from the power station, litter from the poultry farm, waste from the consumer, waste from the factory and straw from the farm are all re-cycled into other elements of the complex process and ancillary activities saving cost and adding value.
When Michael Porter wrote his first book the inspection of value add points in the value chain was usually confined to issues of value and cost with decision criteria usually confined to the nett profitability of that stage of the process. Today the sole criterion should be sustainability expressed in commercial terms as the impact on the balance sheet. With rules in place like "polluter pays", with increasingly effective waste disposal legislation and with much more consumer and Government awareness of the quality of our environment all businesses need to focus on waste and its elimination from the process. Of course that is only the beginning. If the inputs to a process are derived from non-renewable sources then this aspect too may need to be addressed. If the desired outputs in the hands of the eventual consumer are potential causes of environmental damage then here too there must be heightened focus of attention. This undoubtedly applies to all forms of packaging and almost all versions of the internal combustion engine. Equally if the demands of a particular process for inputs of a certain specification cause damage upstream in an earlier activity then this also will give cause for concern and action.
At each point of value-add, processing or cost aggregation there must be a re-analysis. In the past the decisions at each point were heavily influenced by their impact on short term profitability. Now, we believe, that the decisions must be influenced by their sustainability. At each transaction the quality and nature of the input, the process itself and the desired outcome must be reviewed to minimise or eliminate the waste products or the un-desired outcomes. The ideal of course is that when waste is unavoidable actions are taken to make it a legitimate economic input to another process. This can apply equally to sewage, heat, light, and woodshavings.
The relevance and applicability of a sustainability review is of course not confined to areas where materials are exchanged or process. The realisation of the ubiquity of the bank in the simplest value chain has in the past given rise to store cards, Cooperative Societies and highly integrated businesses like GUS. In modern times the control of the cost and availability of credit must be a sustainability issue. I am sure that this illustration is over simplified as insolvency often leaves the bank, however temporarily as the owner of last resort. In those circumstances they could occupy every box in a chain! Equally in some sectors credit is extended by suppliers to retailers and by retailers to customers. Waste of course in these circumstances is un-paid debt, excessive interest charges, excessive profits, losses etc These are all just as damaging from a sustainability view as the more obvious and material unwanted consequences in other chains.
This re-assessment of the value chain in terms of sustainability will be the single most powerful weapon for businesses seeking to build and protect their balance sheets and retain their "licence to trade".
The profitability, business practices, HR policies and social responsibility of suppliers need to be accounted for in equations designed for the longer term. Equally in the downstream area the views of end users and the wider community with their longer term interests and interest in continuing viability must be added into the equations.