Corporate responsibility and corporate governance

The over-riding goal in every case has been to restore investor confidence, and that goal has been largely met. However, these changes have also brought with them the realisation that good governance is a key topic not only for shareholders but also for a much broader set of stakeholders, including customers, employees, suppliers and the wider community.

That in turn has made the term corporate responsibility (CR) much more familiar than ever before in boardrooms across the globe. The line is far from solid, but CR can be seen as the extension of governance beyond simple compliance to embrace broader social values.

A recent survey from the Economist Intelligence Unit, produced in cooperation with Oracle Corporation, reveals that more business executives and corporate investors are factoring corporate responsibility into their decision-making.

The survey polled 136 executives and 65 investors in October 2004. A total of 84% of executives and investors surveyed considered CR to be a 'central' or 'important' consideration in investment decisions. This figure is almost double the 44% who expressed that same view five years ago.

The three most important aspects of CR for the executives surveyed were ethical staff behaviour (67%), good corporate governance (58%) and transparency (51%). For institutional investors, transparency was the top concern (68%), followed by high standards of corporate governance (62%) and ethical staff behaviour (46%). Labour practices received a much lower score among investors (23%) than among executives (44%).

Although 84% of survey respondents felt CR practices could help a company's bottom line, finding a direct link between CR and profits has proved elusive. While both executives and investors believed that CR delivered the intangible benefits of brand enhancement and better staff morale, the biggest obstacles to CR were said to be its unproven business benefits and the cost of CR programmes.

That may now be changing. Writing in the Winter 2004 issue of Business Ethics, Marjorie Kelly referred to two major new studies that claim to provide proof positive that CR has a positive impact in the bottom line.

The first was conducted by Marc Orlitzky of the University of Sydney and by Frank Schmidt and Sara Rynes from the University of Iowa. Their meta-analysis, 'Corporate Social and Financial Performance,' was a study of 52 studies over 30 years. They found that a statistically significant association between corporate social performance and financial performance exists, varying 'from highly positive to modestly positive.'

In November 2004, a second study, 'Corporate Environmental Governance,' commissioned by the UK Environment Agency, looked at 60 research studies over the last six years. It found that 51 of them (85%) showed a positive correlation between environmental management and financial performance. Its resounding conclusion was that companies with sound environmental policies and practices are highly likely to see improved financial performance.

It can be argued that CSR helps companies develop new competencies because it engages employees organisation-wide, calls for a forward-thinking managerial style and leaves responsible firms better prepared for external changes, turbulence and crises. It may help firms attract better employees and increase employee goodwill. It may also enhance relations with bankers and investors. Above all, it builds reputations.

Nike is famous for its athletic clothing and footwear and its trademark 'swoosh' is one of the most recognisable corporate logos in the world. Turn the clock back 10 years, however, and Nike was in the news for all the wrong reasons. A journalist investigating child labour in Asia found three under-age workers stitching footballs in one of the factories sub-contracted to produce goods for Nike.

It transpired that all three 15-year-olds had forged papers showing them to be 16. Should this become Nike's problem, which didn't even run the factory in question? Public opinion dictated that it should, and Nike quickly became a front-runner in advocating strong corporate responsibility. Today, it employs more than 80 people around the world focusing on compliance issues within the supply chain.

It's no easy task. Nike's supply chain includes more than 660,000 contract manufacturing workers in some 900 factories in over 50 countries. The workers are predominantly women, ages 19-25. The geographic dispersion is driven by many factors including pricing, quality, factory capacity and quota allocation.

Nike's stated goal is to do business with contract factories that consistently demonstrate compliance with Nike standards and that operate in an ethical and lawful manner. Currently, there are no industry-accepted indicators for measuring performance, nor are there generally accepted standards for reporting on conditions in contract factories. So Nike has created its own standards, programmes and activities to identify, address and report issues of compliance in contract factories to help gauge progress.

Whether or not a court would find that a vendor such as Nike is legally responsible for the compliance of its suppliers with local labour laws, if that thought is imprinted on the minds of consumers then it's every bit as real as the latest international accounting standards. Nike's success, like that of so many modern companies, is all about maintaining brand values and the value of the brand.

Fortunately, technology is at hand to help companies manage this difficult task. Clearly, unless staff have the necessary training and skill not simply to perform their duties competently but also in accordance with the company's ethical and business standards, good governance and compliance will not be achieved. That applies just as much to suppliers as it does to the primary brand owner - and it goes right to the heart of good corporate governance.

While financial software like Oracle Internal Controls Manager helps companies comply with the letter and the spirit of the law in an accounting sense, there is an important role for electronic learning in ethics and compliance training. Companies and public sector organisations alike can mitigate risk of regulatory non-compliance by simply reminding employees of the industry rules and regulations to which they are bound.

This seems obvious, but an Internet search quickly reveals that many breaches of compliance across a wide variety of industries are due to insufficient staff training. To give just one example, the 2001 Julius Report about Banking Code compliance found that 53% of the UK banks assessed had weak training and competence in this area.

Perhaps even more at risk of neglect is ethical training. Most companies have a code of ethics written down somewhere, but whether that code is communicated or enforced is an entirely different matter. Writing in the Kansas City Journal, corporate compliance expert Arthur Chaykin observed that even 'Enron…had a perfectly good code of ethics. However, no one was responsible for enforcing it, advocating it or serving as a clearing house for issues arising under it.'

The problem, of course, is that companies do not have unlimited funds for employee training, and when training is not directly related to increasing profitability, it is often regarded as 'nice-to-have' rather than essential.

E-learning software such as Oracle Learning Management is a highly suitable solution to this dilemma. According to the Advanced Distributed Learning (ADL) initiative, when compared to traditional instructor-led courses, e-learning can reduce training costs by 30-60 per cent and cut the time needed for instruction by 20-40 per cent.

Using this kind of solution, companies are now in a position to ensure that their stated commitment to good governance and corporate responsibility has real-world applicability.