Corporate social responsibility and the role of the board of directors
Corporate stakeholders, including shareholders, employees, communities and public officials, expect companies to manage, mitigate or prevent the adverse social and environmental impacts that may be associated with a company’s operations. CSR programs help companies ensure that they are responsive to these concerns. An effective CSR program is implemented through corporate-level policies and standards and supported by oversight mechanisms, training programs and accountability measures.
Failure to address stakeholder concerns effectively can expose companies to a range of financial and non-financial risks, including loss of access to finance, poor employee morale, community opposition and heightened exposure to regulatory fines and lawsuits. Adverse impacts, even those that result from a single incident, expose companies to lasting reputational damage. This reputational harm can impair a company’s capacity to leverage relationships with key public and private stakeholders and to implement short- and long-term business strategies. It is no surprise, therefore, that 54 percent of the directors surveyed in a 2009 study by accounting firm Eisner identified reputational risk as a key risk area for their companies.
Lack of oversight
While directors may recognize these concerns and the strategic value of CSR initiatives, recent studies have found that board oversight of social and environmental practices is lacking. A 2010 report, Board oversight of environmental and social issues: an analysis of current North American practice by Calvert Asset Management and The Corporate Library, analyzed committee charters at S&P 100 firms.
The report found that only 65 percent of S&P 100 companies have board committees with some level of responsibility for oversight of corporate responsibility concerns. Of those 65 boards, only 27 percent (18 of 65) monitor and oversee risk management plans and review the effectiveness of corporate issue identification and management processes, and only 8 percent (5 of 65) review and make recommendations on the social and environmental impacts of major operational decisions. The report observed that ‘while a substantial number of large-cap North American firms have adopted some form of board oversight … board responsibility for corporate responsibility does not extend to true strategic planning and risk management.’
One of the most notable statistics from the study was the finding that less than 50 percent of the boards surveyed (30 of 65) monitor and provide recommendations on CSR trends and developments. For the most part, board oversight of CSR issues is focused on corporate compliance. Boards are exercising an oversight role with regard to compliance with existing standards, but are not looking to evaluate the capacity of corporate management systems to respond to shifting stakeholder expectations.
This lack of focus on trends is especially troubling in the area of CSR. Understanding key developments and trends is an integral component of effective long-term strategy development and can help ensure that companies have the capacity to respond to concerns when they arise. Companies regularly seek to identify trends in consumer preferences and regulatory environments, and they should exercise the same diligence in identifying future stakeholder expectations with regard to social and environmental performance. CSR-focused stakeholders frequently expect companies to go ‘beyond compliance’ with existing legal and regulatory standards. At the same time, their expectations are often predictive of the future content of such standards.
When thinking about emerging expectations in the area of CSR, one significant trend that should be considered by boards is the increasing societal expectation that companies should respect human rights in their operations. In just the last few years, there has been a pronounced and fundamental shift in stakeholder expectations with regard to managing, mitigating and preventing adverse human rights impacts. In March 2011, the UN Special Representative on business and human rights, John Ruggie, released his Guiding principles on business and human rights in which he provides guidance to companies seeking to implement respect for human rights in the management of their business operations. These principles, based on a business and human rights framework first announced by the Special Representative in 2008, reflect the emerging expectations of many key stakeholders, including governments and international financial institutions.
Boards looking to understand the potential impact of changing stakeholder expectations with regard to companies and human rights should take note of one of the core elements of the guiding principles: human rights due diligence.his involves the implementation of policies, assessment mechanisms and internal oversight and control systems to identify, prevent and address the actual and potential adverse human rights impacts associated with a company’s operations. Notably, recently enacted federal and state statutes in the United States require companies to demonstrate the extent to which they have due diligence procedures in place to assess and respond to human rights concerns in their supply chains and operating areas. These developments include Section 1502 of the Dodd-Frank financial reform legislation, which asks certain companies to report on their due diligence measures regarding the source and chain of custody of specific ‘conflict minerals’, and the California Transparency in Supply Chains Act, which asks certain retailers and manufacturers to disclose publicly their efforts, if any, to evaluate and address the risks of human trafficking and slavery in their product supply chains.
What is the role of boards of directors in responding to these developments? Boards have an important oversight role to play in ensuring that companies have systems in place to effectively manage key risks, including the potential for reputational harm and legal liability associated with adverse social and environmental impacts. As appropriate to the nature, context and relative risk profile of a company’s operations, boards should ensure that they have the information they need to evaluate the effectiveness of a company’s existing management systems with regard to social and environmental concerns. Boards are in a position to raise questions regarding the processes and criteria by which management personnel evaluate the social and environmental risks that may be associated with particular operating environments or business relationships, including those with host governments and joint venture partners.
Finally, board members should emphasize the importance of ensuring that management personnel have the resources they need to respond to shifting stakeholder concerns and expectations in a manner consistent with the company’s values and strategic priorities. Through an oversight approach that monitors compliance with established standards while also evaluating the potential impact of future expectations, boards have a significant role to play in establishing and reinforcing an overarching set of expectations with regard to the short- and long-term management of social and environmental risks.