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Corporate Social Responsibility: Hard Choices on Soft Issues

Posted on: Wednesday, 13 July 2005, 03:00 CDT

Pro-environmental announcements from global giants like General Electric and JPMorgan Chase have spotlighted corporate social responsibility. Yet, there's no mandate to promote such issues in the U.S., where some companies are clearly more proactive than others. Meanwhile, Europeans have brought "green" issues to the forefront.

The original Rouge River plant built by Henry Ford, with its gigantic smokestack, at left, and the new plant, featuring the world's largest "living roof."

The original Rouge River plant built by Henry Ford, with its gigantic smokestack, at left, and the new plant, featuring the world's largest "living roof."

Between 1917 and 1925, Henry Ford oversaw creation of the gigantic Rouge River plant in Dearborn, Mich. A marvel of engineering at the time, it was the birthplace of millions of Model As and Model Ts; its "vertical integration" approach, novel for the era, allowed all the raw materials for the cars to be assembled at one place. At its peak in the mid-1930s, it employed a virtual city of 100,000 shift workers.

But Ford's smoke-belching wonder carried a heavy environmental cost. By 1986, The Detroit Free Press called the Rouge River a "sewer for a metropolis, discharge drain for industry, dumping ground for junk and garbage" and went on to declare that "the Rouge River has become so polluted that a cleanup seems unthinkable."

Fast forward to late 2000, when William C. Ford Jr., Ford Motor Co.'s chairman and Henry's great-grandson, watched as reconstruction of the giant plant began under a new mandate: to create the most environmentally friendly facility possible. New features included the world's largest "living roof" of plants, solar and fuel-cell technology, grassy swales below and porous paving to help with wastewater management, trellises and the planting of thousands of trees.

Bill Ford, who has championed environmental causes, has also spoken repeatedly about improving Ford's fuel emissions and wider environmental stewardship. But Ford is struggling financially - its credit ratings were lowered to "junk" this spring by some credit rating agencies, along with General Motors Corp.'s - and its best- sellers are the light trucks and sports utility vehicles (SUVs) that are among the worst environmental offenders.

Simply put, the green face that Bill Ford wants to paint on the family legacy will not be easy to realize. The new Rouge plant is a statement, but the larger mission would require reengineering costs that simply may not be feasible. Yet, the company, through its chairman, clearly wants to tell the world's investors and markets that its commitment to the environment is so important that it is worth pursuing, despite its troubled finances.

"Bill Ford has said, by his own admission, that the company has not met the targets he had set," notes Aron Cramer, CEO of the nonprofit group Business for Social Responsibility. "That's very instructive; it shows where the hardest tradeoffs are."

Other statements and actions by major multinationals have brought new focus on the issue of corporate social responsibility (CSR) and corporate "sustainability," where a skein of questions has emerged. How important is it to investors, and is it worth the cost? Is weak CSR a threat to the company's stock, and its future? Is a proactive position on the environment and issues like workers' rights, diversity and product safety the leading edge or the bleeding edge?

As C-level executives, CFOs will be among the top managers helping to answer those questions, and there are no easy answers. Pressure from institutional investors and shareholder activists has been building, yet it's no simple matter to link more attention and spending on CSR issues to improved financials or a better stock price. A cost-benefit analysis is critical, but much hinges on public perception of policies and actions that may be years in the making and fraught with uncertainty.

It's sometimes difficult to define what CSR is - is it more about the environment, or about doing good in the community? Opinions vary. But social responsibility is really not a subset of corporate governance, which is a function of the company's internal controls, systems and policies - the issues senior managers have been consumed with since the passage of the Sarbanes-Oxley Act in 2002. CSR really is the way the company presents itself to the greater society.

While this is chiefly an issue for public companies, especially multinationals, it can rise up for private companies as well. Stock concerns aren't at play there, of course, but manufacturers, especially, can risk community protests and falling sales if their plants and/or products are seen as environmentally damaging or their stance toward workers' rights is viewed as less than progressive.

Recent months have seen a wave of announcements from American corporate leviathans about environmentally friendly policies. General Electric Co. has made perhaps the boldest statement. Chairman and CEO Jeffrey Immelt announced in early May a series of new corporate goals, including improving energy efficiency by 30 percent by 2012 and doubling the sales of "eco-friendly" products such as solar energy, wind turbines and water purification technologies by 2010. Immelt publicly urged the U.S. energy industry to seize the initiative for reducing carbon dioxide emissions in "a carbon-constrained world."

GE has since launched a sophisticated print and television campaign playing up its "ecoimagination" combining the new ecology message with its long-standing use of the word "imagination" about its products. "Increasingly for business," Immelt announced, "green is green."

Actually, GE's initiative wouldn't cut more than 1 percent of its emissions over the next few years - hardly a radical change. But the company has claimed that its emissions have been tracking to rise by 40 to 45 percent by 2012, making the cut far more about substance than mere symbol. Environmental groups quickly seized on the importance of the statement. "GE is a potent symbol and sends a powerful message to the private sector and the public-policy sector," said Jonathan Lash, president of the World Resources Institute.

Even financial institutions like JPMorgan Chase & Co. and Citigroup, which don't have manufacturing operations, have started singing from the environmental hymnal. Stung by a continuing assault on its lending policies by the Rainforest Action Network, an environmental group focused on saving equatorial rainforests, Morgan in late April released a 10-page environmental policy statement that includes linking carbon dioxide emissions to loan reviews for power plans. The bank also pledged to lobby the U.S. government to adopt a national policy on greenhouse emissions. Similar announcements had been made earlier by Citigroup and Bank of American Corp.

These public pronouncements come against a backdrop of a presidential administration that has largely ignored many of these issues, paying short shrift to global energy initiatives like the Kyoto Protocol and irking environmentalists. In contrast, social responsibility concerns have gained traction in Europe; in fact, social responsibility is a major consideration in the way many European companies look to portray themselves, to customers and investors.

While some U.S. companies are speaking out now, in general, they have lagged in recognizing or responding to these issues. The intriguing question is: why? If U.S. companies are, collectively, the most powerful and sophisticated on earth, why haven't they been at the forefront of pushing for social responsibility?

Books have been written around lesser questions. The answer probably comes in the form of a complex stew of political and societal issues and attitudes, including the fact that natural resources have historically been abundant in the U.S. - and stewardship didn't really resonate with executives far more concerned with company growth than the survival of old-growth forests. Also, soft, intangible issues like diversity have long taken a back seat to more traditional financial metrics and product marketing.

It's not that environmentalism in the U.S. - which spurted in the 1960s and '70s, especially with the oil shocks of the '70s - had gone into hiding. Far from it. But the roaring stock market of the mid-to-late 1990s, which accelerated household wealth, and the continuation of relatively cheap oil dampened the impact of environmentalism on corporations. Detroit, which had struggled to build small, fuel-efficient cars in the 1970s, got a green light to produce gas-guzzling SUVs with little threat of a consumer backlash.

Likewise, the election and then reelection of George W. Bush in 2000 and 2004 did little to suggest that U.S. companies needed to knuckle under to "green" challenges. President Bush's platform embraced corporate growth but offered little in the way of pro- environment or pro-diversity pronouncements, and executives absorbing that message can't be blamed for thinking that such issues could be kept on a back burner.

Clearly, attitudes in the U.S. do differ from those elsewhere. A study released this spring by Mercer Investment Consulting found that 73 percent of 190 international investment management organizations polled believe that incorporation of social and/or environmental corporate performance indicators will be a mainstream practice within 10 years. But attitu\des were sharply divided: 60 percent of U.S. investment managers said that integrating these factors will never become mainstream, while 85 percent of those in Asia and Australia believe they will be common in the coming decade.

So, why the recent rash of proactive statements in the U.S.? Some believe that a generational leadership change is at work. Bill Ford took over his namesake company in the wake of the rollover debacle involving Ford Explorers and Goodyear tires, and Immelt is sounding a far different note than famed predecessor Jack Welch, on whose watch GE steadfastly fought pressure to clean up a polluted stretch of New York's Hudson River. A pair of GE plants dumped huge amounts of PCBs (polychlorinated biphenyls) into the river many years ago, before the chemicals were linked to cancer.

"It's up to us to use our platform to be a good citizen, because not only is it a nice thing to do, it's a business imperative," Immelt has said.

"I think Immelt sees a lot of opportunity,'" says Joseph Keefe, president of Pax World Management Corp., a socially responsible mutual fund family. "Leaders like him see where the world is headed, where there are increased business opportunities and market opportunities. The Welch approach and the Immelt strategy strike me as very different. One is an old world, defensive posture. The other is a more opportunistic strategy."

Matthew Patsky, comanager of the Winslow Green Growth Fund, says the GE announcement is tantamount to "big business coming in and saying that this makes sense, and saying 'Yes, Washington, and yes, Mr. President, global warming is for real.'"

While it's easy to overhype the impact of socially responsible investors, there's no question that the CSR idea has become more mainstream. In part, that's because activist investors themselves have become sawier about how to sell the concept, taking it beyond the simple issue of morality.

"The clear change here is that the proponents have figured out that if they want to get support from mainstream investors, they really have to tie these issues to potential market risk and to investments," says Patrick McGurn, executive vice president at Institutional Shareholder Services, a major governance and advocacy group. Activists have successfully made market-based appeals on global warming and employment discrimination, he adds.

Meanwhile, activists continue to go directly to companies with the time-honored tactic of seeking to file and then negotiate - proposed proxy resolutions. Meg Vorhees, director of Social Issues Services with the Investor Responsibility Research Center (IRRC), says that more than 350 CSR-related resolutions were filed with U.S. companies this year - and that the past four years have seen by far the highest number of resolutions than any period in the past 30 years.

The climate change topic, she says, has morphed somewhat from a debate about science and morality into one companies can more easily digest: risks involving physical elements, policy (especially in terms of compliance) and litigation.

The market-based argument has clearly carried some weight, since there is mounting evidence that socially responsible companies can produce better returns. In its first five years ending this past March, the Winslow Green Index (WGI) of Boston-based Winslow Management Co. - a ranking of 100 "green-screened" stocks - had a cumulative increase in value of 97.0 percent. In comparison, the Russell 2000 had a cumulative gain of 23.2 percent and the S&P 500 has had a cumulative loss in value of -16.9 percent.

Similarly, a study by Oekom Research of Germany with Morgan Stanley found a strong correlation between companies with higher "sustainability" ratings and good returns. In fact, the 186 highest- ranked firms among 602 studied from 2000-2003 outperformed the rest of the group by 23.4 percent.

Attitude Shift

According to a study released this winter by Oracle Corp. and the Economist Intelligence Unit, 85 percent of executives and investors polled rank corporate responsibility as a central consideration in investment decisions - almost double the level of five years ago. The increase was greatest in Europe. About the same number said such practices could improve a company's bottom line.

Moreover, a quarter of all Global Fortune 500 companies now produce a report that charts their environmental, social or sustainability efforts, according to the survey.

"The increased presence of corporate responsibility in daily business operations is being driven by a variety of factors, such as the erosion of trust in large corporations, the globalization of business, the corporate-governance movement, the rise of socially responsible funds and sheer competitive pressures," the survey concluded.

The biggest obstacles to implementing CR programs, the survey found, were cost implications (42 percent) and unproven benefits (40 percent). Indeed, the survey found that "a full-fledged" CR program at a large multinational could cost tens of millions of dollars, or as much as 2 percent of revenues.

"Some people will do CR to motivate staff, others to get a higher stock price," Sunny Verghese, CEO of Olam, a commodity sourcing company based in Singapore, told the Economist researchers. "A third reason could be regulatory. Sometimes you have to look very hard for a company that's just wanting [to do] CR for its own sake."

Timberland Co., the $1.5 billion global footwear and apparel firm, touts its commitment to "community-led sustainable transformation" and a global network of "value-aligned partners." During a presentation at the Companies for Socially Responsible Investor Conference in May, CFO Brian P. McKeon said, "At the center of our brand strength is a commitment to community... We're also committed to serving as a model for how companies can successfully engage consumers in communities while delivering strong returns to shareholders."

Consider the CSR evidence from a number of other major corporations:

* Unilever has developed the Marine Stewardship Council to help sustain fish stocks.

* Toyota, whose hybrid car, the Prius, is selling like hotcakes, has "done a wonderful job on hybrid technologies," says Business for Social Responsibility.

* Novartis has pledged to improve energy efficiency by 2 percent a year from 2004-6; pledged to cut emissions by 4 percent in 2004 alone, and says it is below industry emission averages in relation to sales. It is also committed to offering community access to needed medicines at reduced costs.

* Three utilities, American Electric Power, Cinergy and TXU, issued climate risk evaluation reports earlier this year, after shareholder requests to do so.

* Nucor, the steel company famed for its "minimills," uses the tagline "it's our nature" with a photo of an oak leaf. The company touts its commitment to global warming issues and the use of innovative technologies like sustainable pig iron and a casting process that dramatically reduces carbon emissions.

* Home Depot Inc. used its purchasing power to persuade two of Chile's largest loggers to stop buying land that was being deforested.

The Picture in Europe

Eurosif, the European Social Investment Forum, concluded in an October 2003 study that "SRI has already entered the mainstream financial markets in some countries, and is increasingly being accepted and adopted by the greater financial community." In nations like the United Kingdom, it's routine for investors and activists to query companies about their corporate responsibility. Officials in Norway, Denmark, Sweden, the Netherlands, France and the U.K. have either adopted or are considering adopting requirements that local companies produce some kind of CSR reporting.

Europe has also produced the mostly widely accepted reporting guidelines, drafted by the Global Reporting Initiative (GRI), based in Amsterdam. Among its organizers were the Association of Chartered Certified Accountants, the United Nations Environmental Programme and the World Business Council for Sustainable Development.

These advocacy efforts appear to be bearing fruit. In a recent Oekom study of 37 utilities around the world, rating them on 200 social and environmental factors, six of the seven leading companies have their headquarters in Europe, while five of the six laggards were from the U.S. The report noted that U.S. firms scored higher on their social ratings than the environmental ones.

Why is CSR more aggressive in Europe, which had lagged the U.S. a generation ago? "That's a very good question," says Winslow's Patsky. "I suspect the EU is part of it, with the need [it created] for community and rules of law." When confronted by rules issues, "They have moved to the higher standards in each case."

The Rest of the World

Asia, as a whole, presents a continuing challenge for SRI advocates. "Because opportunities and entrepreneurs are there in droves, the potential is immense," wrote Melissa Brown in the Spring 2005 issue of GreenMoneyJournal.com.

"The risk of failure is daunting, however. Although pollution is choking Asia and more sustainable production processes are desperately needed, market structures are developing slowly and unevenly," she wrote. "As a result, SRI funds are a near-term driver for change only in Japan and Australia, while in Korea, Singapore, Malaysia and China, public concern about sustainability issues and growing political risk underpin the sustainability debate."

Some Asian companies are clearly determined to be pacesetters. Lawson, the second largest convenience store chain in Japan, has produced a sustainability report subtitled "A Gentle Approach to Our Earth and Its People." The company's program includes: the use of recycled plastic to make store uniforms, saving 2.3 million plastic bottles; development of over 1,500 Lawson brand foods without preservatives or artificial colors; and the planning of 20,000 trees in locations across Japan.

The Japanese \are far more willing to disclose environmental records than employee or diversity issues, says the IRRC's Vorhees; two years ago, she notes, a third of public Japanese companies published environmental reports. But statistics show that Japanese firms are far behind the U.S. in terms of workplace or board diversity.

Japanese investors have also embraced environmental issues: More than 12 percent of resolutions put before public companies have asked for a phasing-out of nuclear power.

Corporations Embracing CSR

Some major corporations have been seeking to knit CSR into the way they do business. Rather than simply focusing on corporate philanthropy, for instance, Starbucks Corp. contributes $10 to a charity for each hour an employee has volunteered for it. It has also been negotiating contracts with coffee growers who use environmentally friendly harvesting methods, and is helping fund health-care clinics for schools for those growers' workers.

"Only a small proportion of customers buys a company's products because it is socially responsible," Starbucks President and CEO Orrin Smith told The Wall Street Journal, "But if they think for a moment that you're aren't responsible, a much larger percentage will have a negative response."

Pamela Flaherty, senior vice president for global community relations at Citigroup, told a CSR conference in May that "we think of ourselves as being a guest in the countries in which we do business, and as a guest, we have a responsibility to act as a good citizen." Flaherty added that until recently, Citigroup, as a financial institution, didn't feel it had to worry much about environmental issues. But now it looks closely at the projects that it finances and considers the "triple bottom line" of financial, social and environmental results.

Citi was one of the 10 initial signatories to the June 2003 "Equator Principles" governing project finance in developing nations. Flaherty said that the number of signatories has since tripled, to 30, representing 75 percent of overall financing dollars.

She added that Citi has a 40-year history of supporting micro- lending efforts in developing countries, mostly through support to non-governmental organizations, or NGOs. "We have an obligation to help extend banking services to the poor," she said, pointing to ongoing pilot projects organized by the bank itself in India and Mexico.

Where Are We Headed?

Things have changed considerably since the 1970s, when economic guru Milton Friedman pooh-poohed the idea of social responsibility, saying that the only responsibility a business had was to be profitable. "I think we may be at a tipping point" in terms of making CSR a central issue in investment decisions, says Timothy Smith, senior vice president at Walden Asset Management and president of the Social Investment Forum.

"Ignoring the impact of carbon on the environment and on corporate bottom lines would be fiscally irresponsible and a disservice to investors, taxpayers and the environment," says Phil Angelides, California State Treasurer and a board member of California's two largest pension funds.

No less than famed hedge fund manager Julian Robertson has proclaimed global warming "the biggest issue we face." Robertson, who founded Tiger Management, recently committed $15 million to the Environmental Defense Fund to support advocacy for a market-based solution for greenhouse-gas emissions.

But despite the obvious buzz about CSR around the world, the fact remains that in the U.S., financial performance has been king - and "sin" stocks like gambling, tobacco and alcohol companies have been among the best performers during the past five years. Turning U.S. analysts into SRI advocates will be no mean feat.

"In this country, the interpretation of fiduciary obligations historically has been not to look at nonfinancial metrics, because that was restricting performance," says Winslow's Patsky. He sees state pension funds taking the lead on CSR investments, which will become increasingly more mainstream with traditional asset managers; eventually, he sees a boom in jobs for environmental analysts at big investment banks.

But, given the changes in attitudes and practices that will be required, nothing will happen overnight. "The CSR effort is not about absolutes, but about direction," says James McDonald, CEO of Rockefeller & Co. and the chairman of the audit committee at the New York Stock Exchange. In mid2005, the direction appears to be a measured advance in which there's growing recognition - sometimes grudging - that CSR policies can help lure investors and consumers and, yes, put a green sheen on the bottom line.

"If you look to the future, there is going to be a day when we have standards of some kind pertaining to carbon. I think most business people are planning for that implicitly, even without anything that's overt."

- Jeffrey Immelt, CEO, General Electric

"We're committed to serving as a model for how companies can successfully engage consumers in communities while delivering strong returns to shareholders."

- Brian McKeon, CFO, Timberland

Copyright Financial Executives International Jul/Aug 2005

Source: Financial Executive; Morristown

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