CSR as (Social) Risk Management

Some thoughts on CSR and Risk management

Effective risk management has almost from the start of CSR been part of the reasons for engagement with stakeholders (Bebbington et al, 2007). Many companies have had NGO raise problems which companies did not even know existed or had any plan for how to tackle. In other cases the companies where attacked for business practices, which where part of their core business such as when City bank was under attack for lending money to project that lead to deforestation in Latin-America (Baron et al, 2004). Here stakeholder engagement becomes essential in order to keep the brand name undamaged and most important in keeping the trust that customers has put into the company intact. There are no single success formula on how to communicate effectively with stakeholder or which ones that should be heard or which can be ignored. What is important is that companies and organisations take a stand on how to make this communication work in practice; otherwise the risks can remain unseen for long periods until the day where it becomes unmanageable for the company and turns into a real crisis. As I have described have companies like Nike implemented systems that enable them to get a feeling for what is happening in the world and how there brand is perceived, and hopefully this system will give them some warning on cases soon to emerge.

Adopting a strategy of transparency have over time proven the best assurance for companies to manage their CSR risks and more and more companies are trying to create systems so that their stakeholders can see what they are doing. By looking at the growing number of members of GC it is clear that transnational companies from around the world are using transparency or at least what appears as transparent to manage social risk issues.

CSR as Standards and Reporting

Logo of Global Reporting Initiative

Last week I had a short blog about stakeholder engagement and some of the events leading up to the tendency for businesses and organizations to look beyond clients and suppliers. But in order to be effective a systematic approach is needed that will enable organizations to categorize and absorb the knowledge gained from a more outgoing approach.

Other forms of stakeholder engagement can come through compliance and reporting on the corporations’ ability to conform to certain standards. There are many good reasons why corporations engage on compliance strategies. The main arguments are:

  1. Stamp of approval through accreditation
  2. Attractiveness to social responsible investors, and
  3. Branding the company as a social responsible member of the community (Locke et al, 2006:1f).

Initiatives such as Global Compact (GC), Global Reporting Initiative (GRI) or the supplementary Principles for Responsible Investments (PRI), enables companies to increase their transparency level (United Nations Global Compact, 2008, UNEP Finance Initiatives, 2005, Global Reporting Initiative, 2006). Some of these initiatives are sponsored by the United Nations (UN) and thereby giving companies that abide to the standards, a stamp of approval from a world recognised institution. Other standards organisations are private or semi-governmental institutions that have created systems for governing sustainable behaviour as for example systems issued by the International Organisation for Standardization[1].

Systems can also be grouped by industry or be customized to the individual company where they are called Code of Conduct or similar systems. Common for Codes of Conduct are that they in some form are linked to universal agreed treaties such as the human rights, labour standards or environmental agreements. There are, however, some drawbacks in relying too heavily on these systems. A company like e.g. Nike has adopted a comprehensive Code of Conduct system of standards and control which both rely on internal and external auditing, but has found that this does not safeguard the company from criticism on labour standards in its supply chain (Locke et al, 2006). The lessons learned from Nike is that standards and systems should not stand alone but should be complimented by other forms of stakeholder engagement such as joint training with suppliers and frequent meeting activities both formal and socially to increase cultural exchange between the parties (Locke & Romis, 2006).

The second driver for stakeholder engagement can be the access to social responsible investors. While only a few years ago the Social Responsible Investments (SRI) constituted a fraction of the total investment portfolio it was in 2008 representing investments of over 18 trillion USD (UNEP Finance Initiatives, 2005). For many companies it can be a benefit to be part of a SRI portfolio as it gives access to funds that other companies might not have access to. In addition, the system of control and auditing can enable the company to streamline its processes and get rid of organisational risk that might affect long-term profitability. Investigations into the link between profitability and CSR shows that companies that rate their CSR effort positively also have a significant better financial performance than companies that does not (Economist, 2008:6).

The third reason for adopting a compliance strategy is the potential for positive branding. The GC is now consisting of approximately 5000 companies (United Nations Global Compact, 2008) from around the world. Grouping with other well-branded businesses who subscribe to the GC standard can boost their corporate brand and increase the collective brand value of all. Other companies use CSR actively to differentiate themselves in an otherwise competitive market.

CSR as Stakeholder engagement a short intro

Redesigned logo used from 2011-present.

Redesigned logo used from 2011-present. (Photo credit: Wikipedia)

Stakeholder engagement is central to the evolution of CSR. The debate is centred around: how or if stakeholders need to be managed? and if so, how or when you choose to communicate with them? (Reich, 1998, Vogel, 2005). For most companies a broad approach to stakeholder engagement introduces a high degree of complexity that most would rather do without, but there are ways of formulating and engaging in meaningful relationships that can create long lasting value for the company.

One way of engaging is to invite stakeholders to participate in the development of the business in key areas of mutual interest. Starbucks’ relationship with Conservation International to promote sustainable coffee production and fair-trade practices (Austin & Reavis, 2004) is one such example. For the NGO it gives needed exposure to the organisations key mission and for the company, in this case Starbucks, it gives positive exposure and a confirmation on the image as being committed to sustainability. In addition, it can create large saving for the company. E.g. the normal employee turnover rate is around 200% in retail while at Starbucks is it only 65%-70%. In monetary terms it costs the company 500$ to train a new recruit (Austin & Reavis, 2004:3), so huge savings can be made. While there is no direct link between the corporate sustainability and fair-trade practices and its ability to create a nourishing working environment, the active CSR strategy by Starbucks does differentiate the company from others and make it more attractive also to its employees.

IMC and CSR in social media – a potent cocktail

As promised last week I have been looking into how Integrated Marketing Communication (IMC) and social media can be combined in order to create the optimal conditions for CSR communication. If one looks at CSR as the ability and willingness of an organisation to engage with its stakeholders in an effort to understand and possible meet their needs the Social media can play a central role. On the other hand if the organisation only looks upon social media as a way to get the “message across” then they will only venture down the path of failure and possible ridicule at least among the people who use the media in a professional manor.

In short is IMC is the integration of all the communication of the organisation into one single message. The definition might seem very simple but it is the application of this basic principle, which most companies struggle. The main issue is that when organisation tries to coordinate their communication into one single voice they often do so by limiting the number of channels. This has the apparent advantage of maintaining control but at the same time it reduces and to some extent eliminates the advantages to an IMC approach.

To add to this complexity we have seen a raise of new media, which put even more demands on organisations and their ability to communicate. Social media means just that that they at their core are social they demand that organisation communicate with and not only inform their stakeholders.

Social media comes in all sizes and shapes and if you are a person under 50 there is a overwhelming chance that you are part of the social media sphere on one of the platforms like LinkedIn, Facebook, Myspace, Twitter or one of the many private platforms which are provided on state or corporate level. While you might not have signed up for one of these platforms you there is a high probability that you have been watching videos on YouTube, looked for information on Wikipedia or made a call using Skype, either way you are connected. For the very same reason companies and organisations are very anxious to get access to these media in order to sell products or improve their brand. Most of these companies, however, look at the media in much the same way as advertising and while this approach is “easy” it is at the same time ineffective. Again…Social media means Social so you need to take that serious.

So what do you do with this media if you can’t use the traditional tools to effectively communicate? Well for one you need to comprehend the scope of the media not only in terms of potential clients but also all the other people who will be listening in. This also means that you need to think about suppliers, employees and their families, friends, critical voices, management, the corporate board, the local community, politics and politicians, the list is long.

Even the most effective and well-staffed organisation can’t nurture all their stakeholders all the time and the good thing is that they do not have to if they are able to understand and use IMC to their ends. Ones you have found out the What, Why, How and When your next step in the process is to understand the media its possibilities and limits. I have compiled a list of subjects that your organisation needs to consider.

Listen and Learn – As much as social media is a possibility to get in contact with your most important stakeholders it is also a place from where you can listen and learn to their advice. This does not mean that you have to do everything that they suggests but it gives you the possibility to find out what is the hot topics around your organisation. Make sure that you do not only have one channel to listen from but be active in groups which are discussing some of the same issues and concerns that you are also dealing with. So for example if you are in the freight forwarder business you might be interested in alternatives to fossil fuels, cargo space optimisation, Supply chain management issues, politics around airports, Human resources and management development, etc. All these subjects have hundreds of interest groups and offer a great possibility to learn what is going on and maybe get a few ideas along the way.

Lead – Do not be to humble around your business or organisation you have to lead the way. You might thin that there are others who in many was have more resources and have bigger organisational structures but on the Internet none of this matters. Here you can lead even though you are representing just a few people. Leading means that you take up subjects which interest you and that you engage in discussions when they arise. You come up for suggestions for positive change (meaning constructive criticism) and take new parameter into the debate when it halts. You keep you “corporate” image at a safe distance, as you otherwise might come across as a corporate “lap-dog”. People will know who you are and the place you work at from goggling or other means of investigation based on what you say and if they think you are interesting to listen too. It is not that you should keep it a secret where your come from as this might be interpreted as being dishonest just do not overplay your cards.

Innovate – If you think that you have a good idea or you find somebody out there who comes up with something do not hesitate to communicate it. You might be surprised how many people who are willing to help out if you give them the possibility. Be part of the process and do not be afraid to contribute it is very few ideas that can be used as part of your product line but you will find that the creative process will make you start to think how you can improve your own products to sooth your clients even better. Look at social media as a place were you can test your ideas out and might get them to the first or second step of development but that you need to fine-tune them in your own workshop.

Invest – If you do not contribute to the social media scene you will eventually be ignored by your peers. You need to invest your time and intellectual resources in the social media if you are going to come across as having any credibility. It is not unlike when you have friends if you are always the person getting help and asking if people can nurture your needs they will eventually disappear. Show that you are willing and able to contribute to community then other will be more willing to give you something back.

Get people involved – Get people participating from all levels of your organisation not just senior management (who we all know let their aid do the blogging) and the communication (that have to) or marketing (who just wants to sell) department. Encourage you colleagues to contribute about the things that they care about and trust that they will have judgment enough to be able to distinguish between what to say (f.ex. I ad had a really bad day at work) and what not to say (f.ex. my boss is the biggest a.. in the world), if necessary teach them the basic ins- and outs of communicating though social media. Remember that your organisation have hired these people and trust them well enough to handle your resources so as a point of departure you should also trust them to communicate about it.

Yes, getting the “message across” – If you want to get the message across in the traditional sense you should not use social media in order to do so. If you are just using the media as a new type of add you will not be able to harvest the benefits that the media potentially can spawn for your organisation. Getting the message across in social media means that you are willing and able to negotiate the message it self. You put some idea or piece of information out there and then it does no longer belong to you but rather it becomes part of the collective discussion. People might think it is really good other might not some will ignore you message others wants to engage and discuss. You have to be able to respond to your stakeholder’s attitude to your piece of communication and remember that silence is also a way to give feedback and should prompt a response from you.

Communicate – Last but not least is social media a place where you communicate not for one-way information dissemination. When people want to listen to you, you might as well have the kindness to listen back when they try to give you good advice. You might not think much of the advice you are getting but that does not mean that you bring people down or tall them of see it as a genuine interest.

ROI – The return-on-investment for your social media efforts can come from many directions. One thing is of cause your ability to communicate with your stakeholders, but it also enables you to build a reputation that will serve you well if you get in trouble. Just think if people had rallied around some of the companies that get in trouble if they had had a follower group who were willing to stand up for the organisations. Were would the BP brand be today if stakeholders in the Mexican gulf had said that “mistakes happens but we continue to trust that they have our best interest in mind” even after the disaster. Today the BP brand is at an all time low because they made the choice to keep their stakeholders from communicating with them when things went from bad to worse. Had they had a different strategy, which took into account all the organisations communication, they would properly be able to claim a much different outcome.

My last comment will be that social media is not the universal communicative tool that will solve all your issues management cases. Rather it is a supplement to all the other activities that your organisation engage in from direct sales, advertising, shareholder meetings, CSR, direct marketing, conferences, etc. everywhere members of your organisation communicate they are part of the co-creation of the corporate image.

Combating Corruption, Bribery and Fraud

For the past few months I have been working on a project that should end up in a management system that would support the 10th principle of the Global Compact.

While we in many ways have embraced the potential that these changes have brought with them, there are also worries that the face of corruption and fraud will change in much the same way. Just as new possibilities for wealth creation have emerged, so have new avenues and possibilities for Bribery, Fraud and corruption.

Some efforts have been made to combat the increase in corrupt behaviour, which in themselves are good and live up to some of the very principles that we think highly off. But at the same time, there seems to be no decline in world corruption or fraud for that matter.

The 10th principle of the UN Global Compact concerns the subject of Corruption and how organisation deals with the subject. According to UNs own communication, this has been and continues to be the most difficult area to work with. While most signatories of the GC have identified the area as being a major obstacle in their work, very little evidence has been found that companies are effectively combating corruption. For instance only 20% of signatories had an anti-corruption policy that related to their own supply chain.

The OECD Convention on Bribery of Foreign Public Officials in International Business has created a framework from which business, governments and NGO can work together to combat corruption. And while the charter does subscribe a way for business to understand and articulate how corruption affects their operation it does not give any concrete advice on how anti-corruption work should look like in the field.

The aim of the Copenhagen Charter is to remedy this discrepancy and create a real, tangible and systematic approach to anti-corruption work in business and organisation in general. Based on these guidelines I have been part of the process of formulating and creating a working platform from which such work could be undertaken. The process have led us to a point were we now have 13 core principles and a auditing-system from an were BFC effort can be undertaken.

The principles are:

  • Ensure that a Code of Ethics or Code of Conduct is implemented which is inline with international institutional norms and which promote high ethical standards.

Codes of ethics form the backbone of the organisations work against corrupt and fraudulent behaviour. It formulates the practical guidelines that all employees need to follow within the organisation in order to comply with the guidelines set by the board and executive management. Both corruption and fraud can be difficult to identify and employees in the field need to know exactly what the corporate policy is for accepted behaviour for receiving or giving gifts or how to bid for contracts. A Code of Conduct helps the employee take decisions and identify situations, which can lead to issues of concern.

  • Organisations implement a sufficient level of financial and operative independence. Furthermore the organisation needs to implement internal and external audit coverage with the aim of uncovering corruption and possible fraud.

Auditors should be able to operate freely within the organisation. Even though most audits do not uncover corruption or fraud, is the independence of auditors send a powerful message to would-be whistle-blowers that an independent and unbiased system of control exists.

  • Develop a system that encourages both employees and managers to communicate and report, to the relevant independent body all irregularities. Implement a procedure that ensures that these reports will be taken serious by the receiver, who has the power and authority to do investigate the claim.
  • Implement an effective communicative system with local and regional authorities that ensure that the organisation’s work is transparent and auditable by both governmental and organisational auditors.

Working together with local and national governmental agencies will enable one to create a system which is transparent and auditable not only by the organisations own auditors but also from third parties. Third parties will have other ideas and insights into local conditions, which is hard to get insight into as an international corporation.

  • Organisations need to work with government officials and organisations in order to create guidelines and systems for disclosure of governance practices and transactions between the two parties.

It is the obligation of both the company and the governmental agencies that it works with to disclose as much information about their transactions as necessary to prevent dishonest behaviour. However, a system is needed in order to efficiently and effectively spread information to the relevant stakeholders’, in this case governmental agencies, who have a interest.

  • Designated and qualified staffs within the organisation have to play an active role in evaluating the efficiency and effectiveness of financial and internal control systems on a regular basis. On a regular basis they need to follow up on recommendations related to Corruption and Fraud Detection.

Like any other monitoring system, a systematic approach to anti-corruption and fraud monitoring and detection, needs some form of efficient mechanism for updates. The ways in which these types of acts are committed is constantly changing and is being developed mainly because corruption and fraud is a crime in most countries and perpetrators have to develop their techniques in order not to be prosecuted.

  • The organisation needs to focus its control and audit strategies more on areas and operations prone to fraud and corruption by developing effective high-risk indicators, which can be effectively measured and managed.

What gets measured gets managed is a old saying within management, but one needs to know what to measure before an effective system can be put into place. Every company and industry is different and subject to their own dynamics and business culture. Within fraud and corruption there are no universal system that can just be implemented.

In order to effectively combat devious behaviour one must incorporate the dynamics of the business if one is to be successful. It is therefore essential that any system is based on local and industry knowledge and that people with the appropriate competencies are involved in the formulation of the systems indicators.

  • Use multiple communications means to distribute your audit reports and invite stakeholders to participate in the investigation and establishment of a transparent organisation.

One of the most effective anti-corruption and fraud systems that can be implemented is to invite everybody to look inside, so that a critical look can be taken on the audit process. An auditor who thinks he knows everything knows nothing and by inviting stakeholders to participate in the continued investigation, one can create a basis of continued evaluation and transparency in the organisation.

  • Communicate in a language that stakeholders of the organisation understands

If you communicate in a way, which alienates your audience, you will never be able to reduce corruption in your organisation. One might argue that using technical language will be more accurate and the from a legal point of view it would be more correct but the fact is that if you want people to read and understand what you are trying to say, then the reporting needs to be understandable.

  • Use a network approach to combating corruption and fraud.

White-collar crime is a cross border discipline and as with the rise of globalisation, there is a need for business to learn, share and exchange knowledge from other parts of the world. No organisation is an island and if the business is divided on the fight on corruption and fraud it will ultimately loose the battle. Using a network approach and gartering resources from all levels of the organisation to be the eyes and ears of the organisation enables a much more effective intelligence on what is going on. While the information gathered might not directly lead to disclosure of crime, it highlights areas where there could be parts of the system which are not transparent and therefore can be subject to covering up wrong doing.

  • Ensure that systems for the effective exchange and proliferation of knowledge are ensured both inside and outside the organisation.

Like the network approach can be used to gather information, it can also be a effective way to communicate with all parts of the organisation. In the information age, organisations need to have a reliable system for communicating with key stakeholders in order to combat rumours and getting a voice in a otherwise overcrowded media scene. If a company is branded as being corrupt or subject to large-scale fraud, it can cost its ability to conduct business and if it needs to establish channels of communication after the event, it will often be too late.

  • Ensure that the systems for evaluation and incentives for management are established which support anti-corruption and fraud efforts in order to motivate employee ethical behaviour.

One of the major issues within corporate incentive plans is that they have often led to or initiated corrupt behaviour because of their design. The way in which companies compensate their managers and executives, have to be designed in a way that reduces the possibility of corrupt or fraudulent behaviour from occurring. This can example is through improved transparency in the incentive governance structure or third part validation of performance indicators. In high-risk regions, a managerial and specialist rotation program can also be in place in order to reduce the chance that top executives becomes too involved in the local business culture.

  • Ensure that the organisation proactively functions as an example to be followed on fraud and corruption through international committees and working groups.

The ability to be innovative and more efficient is not only limited to other areas of business but also just as much within the field of auditing and governance. As knowledge within the organisation about fraud and corruption is increased, so is the ability to find new ways and systems for efficient governance in these areas. Working cross-culturally and tapping into these streams of knowledge allows an organisation as a whole to progress and innovate new ways to manage these areas. A committee function allows for effective management and the development of best practice techniques that eventually can find its way into the Code of Ethics or as part of the audit process system.

You can download TheCharter here.

Transocean the Unethical Company of 2010

The drilling company behind the 2010 BP disaster has issued the agenda for their annual meeting (Transocean_2011)and it is somewhat of a horror to see. The executive committee thinks that they did such a good job in 2010 that they have granted themselves over 43 million USD in compensation. Based on the 9,3 billion USD the company had in revenues in the same year. On top of that they took a substantial amount of money out as part of their long-term incentive plan.

Mr. Newman (President and Chief Executive Officer) . . . . . . . . . . .$5,400,000

Mr. Rosa (Chairman of the board). . . . .  . . . . . . . . . . . . . . . . . . . . . .$1,500,000

Mr. Brown (Executive Vice President, Legal & Administration).  .$1,500,000

Mr. Bobillier (Executive Vice President, Asset and Performance). $1,500,000

Mr. Toma (Executive Vice President, Global Business). . . . . . . . . . $1,200,000

Ms. Richard  (Senior Vice President, Human Resources and Information

Technology)…… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……$1,200,000 

For the compensation of non-employee directors for 2010 was 4,254,066 USD.

A long-standing reputation for safety

So did Transocean learn anything in the past year? Well when investigating the document they issued it could be interesting to look at how they precise themselves in the area of safety. And behold there is a paragraph in the executive summary on the high lights of 2010.

“We are the world’s largest offshore oil and gas drilling contractor and the leading provider of drilling management services worldwide. We provide drilling services, including the equipment and personnel for operations, to our customers—the oil and gas companies throughout the world. We have a long-standing reputation for safety and for being able to manage and deliver on extraordinarily complex offshore drilling projects in challenging environments. Our vision is to be universally recognized for innovation and excellence in unlocking the world’s offshore resources.”

I think that the people they asked about safety can’t have been the US government, all the residents along the Mexican gulf including the local fishermen nor can they have asked all the scientists, experts or NGOs that have been involved in the clean-up.

This statement just shows displays the complete arrogance of Transocean and its executive board about the people they are affecting. In my mind (and I think in a lot of others) they should be sued until the end of days for what they have done.

Keeping your money safe

But luck-be-hold the board and executive committee have already taken this into account by proposing that shareholders should not be able to sue them for their activities in 2010. Or formulated as an agenda point it look like this:

“Agenda Item 2: Discharge of the Members of the Board of Directors and Executive Management from Liability for Activities during Fiscal Year 2010.

As is customary for Swiss corporations and in accordance with article 698, para. 2, item 5 of the Swiss Code of Obligations, shareholders are requested to discharge the members of the Board of Directors and our executive management from liability for their activities during fiscal year 2010.

The pending shareholder derivative claims allege the breach by our directors of their fiduciary duties based on allegations that our directors failed to monitor safety risks, including risks related to the Company’s blowout preventers, and made misleading statements regarding the Company’s safety risks, the safety of the blowout preventers, and the Company’s financial condition. In addition, other allegations have been made against us in investigations and other contexts that are publicly available and could form the basis of similar claims against our directors and executive management.”

So if any critical shareholder world be out there thinking about sue the company for its mismanagement and poor governance in 2010 then forget about it.

A final insult

These statements just underline the ethical perceptions that the top of the company has on all its stakeholders.

“We will never forget the brave crewmembers of the Deepwater Horizon, nor will we cease in our efforts to ensure such an incident never occurs again. The lingering pain of the Macondo tragedy reinforces our efforts to conduct operations in an incident-free environment, all the time, everywhere.” And “It remains our view that Transocean is contractually indemnified against all claims stemming from the environmental and economic impacts of the hydrocarbons spilled into the Gulf of Mexico from the Macondo well after the sinking of the Deepwater Horizon.”

I hereby nominate Transocean management and its executive board of directors as the unethical company of the year for their outstanding performance in avoiding all decency and totally ignoring, and disregarding their key stakeholders.

AccountAbility in mist of turmoil

The directors of AccountAbility and the practical caretakers of the AA1000 standard have suffered a major setback. In their efforts to turn the previous “open source” standard into a basis for a sustainable business model they are experiencing a crisis of identity.

On the 11th the whole standards board (SB) resigned in an open letter to the directors of the organization. You can find the letter here.

The event that is described shows a couple of issues that I think one can learn from.

  • That culture matters. The AA was established as a multi-stakeholder run organisation with the aim to:
    • Enable open, fair and effective approaches to stakeholder engagement;
    • Develop and recognise responsible competitiveness in companies, sectors, countries and regions;
    • Create effective collaborative governance strategies for partnerships and multilateral organisations that are delivering innovation and value, and
    • Set and influence sustainability standards.    

None of which it has been able to achieve with any great success creating a crisis of the purpose of the organisation was really in sync with the stakeholders it so badly wanted to communicate with. When the AA became professionalised in order to “turn the ship” around the old culture of the NGO had to be put aside this created a identity crisis from which the organisation have been unable to recover.

  • When creating change you also need to change the artefacts. The AA1000 was the artefact of the old organisation it meant something to them that somehow was sacred and untouchable. When the professional management took this icon of what was “right” about CSR reporting they practically tried to sell the cultural soul of all the people that was involved. This cultural sell-out created tension within AA which it was unable to control and resulted in first that the Governing counsel in November 2010 resigned and finally the SB.

I do not offer an opinion (even though I have one) on if it is right or wrong for AccountAbility to change their reison d’etre. I the case of this organisation I find it interesting that that change is a difficult thing even for those that wanted change is their main purpose.