Inside the Boardroom
Finding Value in Corporate Social Responsibility:
Is it time for CSR to come out of the closet?
By David W. Anderson, PhD, ICD.D
The Anderson Governance Group
Brave is the Director who first says the
words “corporate social responsibility”
in a boardroom. Brave, but perhaps
also in the vanguard of a new take
on entrepreneurialism and business
advantage.
Until recently, I found most Directors embarrassed to
raise the concept of corporate social responsibility
(CSR) among colleagues in board meetings. A sense
of awkwardness attaches itself to this language. In a
boardroom, business ought to be the order of the day,
not something that calls forth “social burden”. Reflecting
socialist resonance and European flavour (where the
“triple bottom line” and the Global Reporting Initiative
are much more ingrained in the business lexicon),
talking CSR is not the fastest route to credibility with
colleagues in North American boardrooms.
In North America, CSR is widely perceived among
business people as most relevant to Not-For-Profit
organizations, academics, and companies with a public
relations problem (e.g., in petrochemicals, offshore
manufacturing, mining, and food (human and pet)). The
issues associated with CSR – typically environmental,
social and governance – are expected to be addressed
directly or indirectly by government. Directors who are
already frustrated by non-business related compliance
demands are not keen to take up more time on matters
seemingly unrelated to business growth.
Consistent with this view, I found little-to-no emphasis
on CSR in a review of major speeches in 2008 to
Directors by prominent governance thinkers.
Yet, slowly the concepts of CSR are being introduced
into boardroom discussion, despite the suspicion it
raises. Directors who do so are in better company than
they might think; executives are generally well ahead of
Directors in recognizing the value of CSR to the business
(though they often use less provocative language to
describe it).
26 | Institute of Corporate Directors
In this article, I provide a perspective on why CSR is
not widely addressed by boards, reasons for Directors
to think about CSR in a business context and what
Directors can do to help their companies realize
unexpected value in CSR. My purpose is to help boards
deliver greater value by encouraging proactive thinking
as a means of finding strategically-relevant approaches
to stakeholder engagement.
CSR in a business context
Investors work hard to understand market value.
Current corporate reporting is not always of much
help. A generation ago, the ratio of book-to-market
value was 1:1. Now, it is closer to 4:1. What explains
market valuation if not the financial value reflected in
financial statements? The answer lies in a host of non-
financial variables – which is a key reason the Global
Reporting Initiative is attempting to bring a new level of
transparency to markets through more robust reporting
(including reporting of many CSR variables, recognizing
they affect valuations). Anything affecting a company’s
valuation to this degree ought rightly to be of interest to
directors as they oversee their company. How else can
they properly manage the enterprise value?
The market has spoken; addressing CSR is no longer a
matter of foresight but of investor interest, customer
demand and broad-based stakeholder advocacy.
Directors should learn the language of CSR and
understand not just how such matters affect their
strategic choices, but how those choices are themselves
shaped by forces outside their control.
Directors cannot understand the true risks and
opportunities facing the business without studying
these issues. This goes to the heart of business; it is
not a good-hearted distraction or socialist diversion
(although, as in any decision-making process, invalid
data that are poorly analyzed and ill-considered are not
likely to return value). Directors cannot choose to ignore
factors affecting their business – either upside potential
or, more damagingly, downside risk – without risking
for themselves the damning judgement of investors. As
investors seek to understand valuations as a function
of a corporation’s CSR approach and stakeholder
perceptions, Directors better keep pace (if not lead).
Companies, like countries, do not exist in isolation. Both
engage with and affect interdependent participants
– some on a voluntary basis and others who are affected
even when not a party to the transactions. Division
of labour and trade (on the micro and macro levels),
when based on comparative advantage and in open
markets, yields aggregate benefits. However, there are
externalities not baked into price signals that allow
companies to reap greater profit than would otherwise
accrue. Companies may benefit by implicit subsidies
upfront when using a publicly provided resource
(positive inputs ranging from water to educated
employees) and be spared costs downstream (negative
outcomes ranging from habitat loss and human health
impacts to financial market instability). Thus, members
of society other than those willingly engaged in the risks
and benefits of commercial transactions experience
public consequences arising from the actions and
inactions of organizations.
It is an act of corporate responsibility to understand such
externalities and acknowledge them. The alternative is
to conduct business and return profit to shareholders
with no accounting of public inputs or publicly borne
consequences. In the current environment, companies
that choose this route are likely to be the subject of
intense scrutiny. Many factors have contributed to
growing stakeholder involvement: awareness of the
large scale of some corporation’s actions (e.g., oil sand
development, major plant investment, global financial
transactions); understanding of corporate culpability
for salient public consequences (environmental
degradation, job losses, financial bailouts); a culture
that no longer extends deference to power; and the
realization on the part of stakeholders of these very
interdependencies (i.e., that as enabling consumers, they
by extension bear some responsibility).
In our democracy, people look to government to
ensure everyone plays fair and to use public policy
to address unacceptable societal outcomes created
by the market. Now, with government seeming less
potent, stakeholders are using their power to get
companies themselves to balance the equation, starting
with listening to their input at the outset, extending
to changes in supplier behaviour along the way, and
1 Anderson, D.W. (2008). Are you listening to your owners? Directors must step up their game, once again. ICD Director, 139 (Aug), 22-25.
In this article, I made the case for why boards need to talk to owners as a function of owners’ desire to exert more control over their
investments and in light of nascent investor-initiated attempts at engagement (and suggested ways in which that dialogue could
happen).
resulting in transparent disclosure throughout to
encourage accountability.
When companies address CSR explicitly, it is often a
response to a crisis (a spill, a disease outbreak, a faulty
product), and/or to advocacy from “direct” stakeholders
(employees, customers) or “indirect” stakeholders
(community groups, individuals) who are motivated by
the experience of unmet expectations or the experience
of values not upheld. In some cases, however, CEOs are
proactive, seeking business advantage.
Some executives on the front lines have recognized a
new reality and are proactively managing the systemic
changes in business and the constant stakeholder
engagement required. In doing so, these executives are
seeking better market positioning that is one part risk
mitigation (e.g., reputation) and one part opportunity
(competitive advantage). From this perspective, the
relevance of both risk mitigation and new business
opportunity to shareholders provides ample business
rationale for a strategic embrace of CSR.
As the rationale and objectives of CSR become clear, the
focus must shift to articulating how the organization is
to implement this understanding in a way that is both
tied to strategy (for relevance) and holistic in scope (for
consistency).
How directors can find value in CSR
For business leaders, embracing CSR may appear to
be a deeply troubling and risky proposition. It may
be seen as complicating decision-making processes
by introducing voices of underdetermined credibility,
thereby diluting decision-making authority. Indeed,
introducing more voices may appear to contradict
disciplined efforts to protect the brand and health of
the organization.
Many boards are not accustomed to this thinking and
strongly resist engaging with stakeholders – witness
their difficulty engaging with their very own owners1.
Directors need not only understand what is going on
within their organizations, but, to be truly effective,
Directors need to understand what is going on outside
their organizations – the context within which business
is conducted and the inputs to and consequences of
organizational decisions.
Issue 140 | October 2008 | 27
I n s i de the Boardroom
This seems new, but it is not. Businesses have always
existed within a societal context – and have always
adapted to changes in that context. The same is
happening now. What is different is the manner in
which that context is changing. People are more
knowledgeable – better connected and more quickly
informed. People are more savvy – less trusting of
elites and more willing to question authority. People
understand that large enterprises marshal vast
resources in pursuit of their corporate goals, with
remarkable efficiency, speed and impact – outside
the democratic mechanisms of control expected of
government, but rightly within the regulatory reach of
government when such reach is judged necessary to
protect or further a social aim.
This is the nature of the social contract. Capitalism
and capitalists – along with society – have benefitted
enormously from this arrangement. This check provides
the legitimacy necessary for people to support
corporate power and sets the expectation that such
power will be used within reasonable parameters to
achieve reasonable aims.
Stakeholder engagement is good business. Firms often
come by this insight the hard way, in reaction to a
negative event.
The question becomes who to engage, how, and for
what strategic purpose. Who from the organization does
the engaging – board or management? Management
more often and most deeply, but boards have to judge
when it makes sense for their involvement to deepen.
If management is implicated or if organizational
credibility demands a governance-level voice, then
boards may act. But, in the general case, boards need
to have the mindset and mechanism in place to enable
stakeholder engagement, and only periodically address
stakeholders to satisfy their oversight responsibility of
proper stakeholder relations, giving themselves a means
of gathering information on company performance
independent of management.
Thus, boards should develop a stakeholder engagement
philosophy and strategy. This will aid organizations in
highly practical ways, such as when they run into crises
– risk mitigation – as well as contribute to creative
2 Bielak, D. Bonini, S.M.J. & Oppenheim, J.M. (2007). CEOs on strategy and social issues. The McKinsey Quarterly (Oct). (www.
mckinseyquarterly.com)
3 Ibid.
28 | Institute of Corporate Directors
business thinking on developing new markets and
profit opportunities.
Even those directors and executives who see
the rationale and want to pursue the business
advantage afforded by CSR are hampered by a lack of
commonly understood and agreed upon dimensions
of performance and associated metrics, means of
measurement, reporting standards and assurance. Such
barriers are substantial.
Business leaders have also been slow to embrace
CSR for three additional reasons: (1) a core belief that
government is responsible for things outside the
relatively narrow remit of business; (2) distrust of the
sources of pressure advocating CSR; and (3) a conviction
that CSR is a wealth-destroying distraction from the
proper pursuit of managing a business. The social and
political dimensions are regarded as best and properly
served by politicians and activists (who may have
represented themselves as adversaries of business).
Given a long history of mistrust, it is remarkable
that both sides are experiencing a renaissance and
maturation in thinking, seeing the other as indispensible
to their own goals. Seventy-two per cent of CEOs
in a recent McKinsey survey said they should fully
incorporate CSR into their strategies and operations.2
Yet, if the business logic to act in accordance to CSR is so
compelling to them, why are not more CEOs signing up
by taking action?
As with the board, there is still a pervasive sense that
this is not a legitimate topic or focus for a business-
minded CEO. It does not sound like the hardcore
business model most business leaders grew up in.
The more nuanced reading is that many CEOs in fact
are engaged in CSR (50 percent say they are to some
degree3), but choose to emphasize the hard business
processes and outcomes over the soft stakeholder
engagement and diplomacy.
The risks of action are evident, but there are risks
associated with doing nothing and potential benefits
for doing it right.
For Directors, the question becomes: how does our
business activity engage or affect the world beyond
the boundaries of the organization, and is that impact
consistent with our vision, brand and values?
Directors can change the nature of boardroom
discussions by knowing the business deeply enough
to understand how the company engages with and
affects stakeholders. CEOs can discuss with their boards
market intelligence and high-value areas in which a
stakeholder-based CSR approach aligns with or informs
the business strategy.
As Directors focus on the competencies required of
executives, they can hire business leaders who are
skilled and ethical in being upfront in articulating
competing priorities and deciding with the board the
criteria and means by which decisions and actions will
be taken and implemented. This requires transparency,
diplomacy and business discipline from both directors
and executives, and suggests a clear role for boards
in balancing differing time horizons against which
management performance is judged and rewarded to
meet short and long term objectives.
Summary
Stakeholders are finding their voice and raising it louder
as they realize the consequences they bear of the failure
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of markets and investors to value environmental, social
and governance issues (lately most evident in the
financial markets).
Business leaders fear CSR is a Trojan horse threatening
to turn businesses into extensions of the state serving
social policy goals and to turn corporate leaders into
politicians reacting to demands they are not equipped
to meet by entities they cannot control. They fear the
impacts on corporate accountability and the potential
for creating complexity and thus inefficiency, and
solutions for resource allocation undisciplined by the
market, thereby transforming capitalism – the engine of
our prosperity – into state corporatism.
However, the perspective of some leading CEOs is that
stakeholders can and should be engaged. CSR can and
should be core to business strategy and operations.
Directors need to support CEOs in realizing the value in
CSR by ensuring their companies have the competence
to hear the market and refresh the business outlook and
strategic options accordingly.
David Anderson is the President of The Anderson
Governance Group (www.taggra.com). He can be reached
at (416) 815-1212 and david.anderson@taggra.com
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Issue 140 | October 2008 | 29