Does it pay to be good?

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THIS WEEK'S HIGHLIGHTS

Large public companies are facing growing pressure to be good citizens, reports the cover story in Across The Board, The Conference Board's bimonthly magazine of ideas and opinion.

According to the article, "Does It Pay To Be Good?" corporate citizenship -- a term that embraces corporate social responsibility and sustainability -- is no longer a concept fostered by idealists on the fringe, but one that has entered the mainstream. Corporate social responsibility has become a growth industry.

"Current sentiment against big business has given new weight to the cause of corporate citizenship," says A.J. Vogl, author of the cover story and editor of Across The Board. "Virtually every opinion survey shows that people think corporations have too much power, and that they will do anything in the pursuit of profits. And now, to add to public distrust, we have a flagging economy, a shambolic stock market, and what some have termed 'pornographic' CEO salaries."

Citizenship's champions now have new planks to build their platforms, such as taking on corporate accounting and compensation practices. At the same time, attacks on the very nature of business have sent corporate leaders searching for a bright spot that may very well be the concept of corporate citizenship.

But corporate citizenship is being altered by deeper social changes that make it necessary for large companies to do good. Some of these changes are:

Tightening regulatory pressures -- France, for instance, requires all companies listed on the Paris Stock Exchange to include information about their social and environmental performance within their financial statements.
Changing demographics -- A socially engaged and better-educated population demands that the companies with which they do business conform to higher standards.
More opportunities for investors to back their convictions with money -- Socially aware investors can choose among some 230 mutual funds, and more than 800 independent asset managers identify themselves as managers of socially responsible portfolios for institutional investors and high-net-worth individuals. Indexes of social and environmental performance --like the Dow Jones Sustainability World Indexes and FTSE4Good -- are becoming significant market factors in screening for good citizenship. These indexes drop companies that fail to meet social responsibility standards.
Pressure from nongovernmental organizations -- International nongovernmental organizations are growing in number, visibility, and credibility.
Greater transparency -- According to a survey by BearingPoint, formerly KPMG Consulting, 45% of 250 global Fortune 250 companies issue environmental, social, and/or sustainability reports, up from 35% in 1998, and the number of U.S. companies that issues such reports increased 14% over the same period.

Corporate citizenship programs still face challenges from both inside and outside the corner office. One of the most discouraging hurdles is that the most prominent corporate citizens rarely receive rewards commensurate with their prominence. For instance, last year McDonald's published its first social responsibility report summarizing its efforts in community, environment, people, and marketplace. While these efforts have been rewarded in some courts of public opinion -- in 2000 and 2001, Financial Times/PricewaterhouseCoopers surveys of media and NGOs, McDonald's placed 14th among the world's most respected companies for environmental performance - few corporations have been attacked as savagely as McDonald's for its citizenship. The company has been portrayed as an omnivorous monster that destroys local businesses and culture, promotes obesity, treats its employees badly, and despoils the environment.

Critics of corporate citizenship, when accused of being overly suspicious of companies' motives, point to Enron's numerous awards over the last six years for its environmental, human rights, anti-corruption, anti-bribery, and climate-change policies. Though Enron's situation is atypical, its debacle has tainted other companies and raises the question: What is the link between how a company is managed (corporate governance) and corporate citizenship?

Also, do employees of companies claiming to be good corporate citizens see their employer's citizenship activities as a diversion or cover-up to charges of bad leadership and poor management practices?

Another uncertainty surrounding corporate citizenship is the "business case": Does corporate citizenship contribute to making an honest profit?

Unfortunately, it's difficult to quantify in cost-benefit terms what its contribution is to a company's bottom line. Simon Zadek, CEO of AccountAbility, a London-based institute that has established corporate social responsibility verification standards, says that in strictly quantifiable terms, one cannot make a cost-benefit case for corporate citizenship. "Although the question 'Does corporate citizenship pay?' is technically right, it is misleading in practice. Rephrasing the core question as 'In what ways does corporate citizenship contribute to achieving the core business strategy?' is far preferable," says Zadek.

Zadek argues the case for what he calls "third-generation corporate citizenship." The first generation is defined by cause-related marketing and short-term reputation management. The second occurs when social and environmental objectives become a core part of long-term business strategy. As an example, he points to automakers competing in the arena of emission controls. The third generation is based on collective action, where corporations join with competitors, non-governmental organizations, and government to change the underlying rules of the game to ensure that business delivers adequate social and environmental results.

Source: “Does It Pay to Be Good?”, Across The Board, Jan/Feb 2003.