Responsible Or Irresponsible: That is the Question?

Over the last few days I have been thinking about what was said to me at a dinner I attended last week. The companion seat on my left and I started talking about Corporate Social Responsibility, and he made a very interesting observation. ‘It is not that companies want to be responsible, it is more that they do not want be irresponsible.’ This started me thinking, was it that Corporations currently do not want to be responsible due to a perceived impact that this can have on the productivity of a business or is it because they do not have the innovation skills to conduct business in a responsible manner and are unaware of the benefits of being responsible, which is a pro active approach. Where as not wanting to be irresponsible is passive approach, taking into account important issues such as health and safety, human rights and environmental issues, but it does not seek out innovation and new methods to conduct business.

My companion sat on the left who made this remark, had spent many years in the real estate industry followed by 20 years working for a large investment bank, doing real estate finance on both sides of the pond. So he had a good understanding of the corporate psyche and well placed to comment on it.  At the centre of his argument was that Corporations are businesses. Their ‘raison d’etre’ is the production of goods and services, and the generation of profits for their shareholders, who, in the majority of cases, invest in a company for profits and long- term growth of their capital investment. This in turn places pressure on the executives running the corporation to run the business in the most efficient manner or risk losing their jobs. So, this is the main priority, and within these parameters they conduct business in the best way so that they are not ‘irresponsible’. But, if they could conduct business in an ethical and sustainable way that would not affect their two main obligations they would. After all the executives of companies live in the same global environment as their customers and are equally affected, after all they are also customers to many companies.

So the questions that follows is. How do you enable a Corporation to shift from not wanting to be irresponsible to wanting to be responsible? The shift to not wanting to be irresponsible was driven by external factors, the consumer, media and society at large and these will go some way to help the drive towards wanting to be responsible. Investors are starting to have an impact; they want to invest in companies that they feel are acting responsibly and conducting in what I like to call ‘Sustainable Business.’  They have the potential to enable the shift, but currently they are in the minority.

The real game changer will come internally within the company, which I alluded to in the introduction. Innovation in sustainability from within will enable a business to become responsible because when it is applied correctly sustainability has the potential to improve productivity, increase revenues and reduce overheads, only if it is implemented properly. Thus, not only making their products more appealing to consumer, but also making the company more attractive to investors.

 

To enable this shift to responsible to take place, a company will need to be fully open to innovation and new approaches to doing things. They will need to have a team of in house consultants or Sustainability Department, who have an understanding of technology, politics and economics, operations, finance, project management and communications. This is a very broad skill set, but for sustainability to be embedded in a company, and particularly if it is going to be responsible sustainability, it has to cover not only the supply chain and operations, but also how the company expands, may that be in one country or across the globe in multiple locations. How it communicates with stakeholders, both internally and externally and how technology can play a part not only in communication and energy saving, but also in how to drive down costs in the supply chain. It is an holistic approach that cannot be completed without all parts being involved, to use a cliché “it is greater than the sum of its parts.”

Corporate Governance and The Short Falls of Current CSR

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This paper looks Corporate Governance Structures and Corporate Social Responsibility (CSR).  BP will be used as a a case study, using the Deep Water Horizon Blow out in the Gulf of Mexico in April 2010 as an example of the shortcoming of CSR in this ever changing relationship between multinationals and their internal and external stakeholders and is by no means a direct criticism of BP. The paper will be broken into three parts, the first part will explain what Corporate Governance aims to achieve and describe the two predominant models used. The second part will look at which structure BP has in place and the third part will look at the wider responsibilities of CSR. 

Corporate Governance is the systems put in place to control and direct a Corporation.  (Cadbury Committee, 1992) It is concerned with managing the relationships between the management team, the board, shareholders and stakeholders. Its aim is to prevent any conflict of interest between the stakeholders in the company, with the focus being on the relationship between the shareholders, the principle, and the management team, the agent. Ensuring that people within the business can be held accountable. (Cadbury Committee, 1992) Corporate Governance tries to ensure that a company is controlled in a responsible and transparent way. With the aim of ensuring the future success of the organisation and instilling confidence in shareholders and capital market investors.

There are two dominant models, which are currently in use, both aim to provide the necessary mechanism, but vary slightly from one another, the first is the Rhineland model, which is a two-tier system. Consisting of a Supervisory Board that is made up of non- executive directors who represent the shareholders and employees and an Executive Board that is responsible for the day-to-day running of the company. The Supervisory Board is also responsible for hiring the members of the Executive Board and signing off any key decisions made by them.  (Hopt, 1997)

The second model is the Anglo American Model, which has one tier structure, consisting of one Board, which comprises of Executive from the company and Non- Executive Directors, who are nominated by the shareholders. There are more Non- Exec Directors on the Board and they chair key committees such as audit and compensation. The Chief Executive of the Company also holds the position of Chair of the Board, although, this is much more common in the United States than in the UK, where the Chair of the Board is a separate individual.  (Bowen, 2008)

The BP has adopted the Anglo- American Governance structure, as they are a UK registered company. They have single Board on which four members of the executive team including the CEO sit along with nine non- executive directors and the Chairman. As mentioned previously it is common in the UK for the CEO and Chairman to be separate individuals, as is the case with BP.  Along side the board the company has six committees, the Remuneration, Audit, the Safety, Ethics and Environmental Assurance Committee and finally the Chairman and the Nomination and Results Committees. There is a sixteen page document on the website, entitled ‘The Board Governance Principles’ that explains exactly what is expected from the Board and the Non-Executive Directors and since the Deep Water Horizon Disaster they now have the Gulf of Mexico Committee, which is tasked with managing the companies social responsibilities vis a vis the Oil leak in 2010. (BP, 2012)

As BP is one of the largest companies in the world it is expected that they would have a very robust Governance structure in place but prior to the oil spill in the Gulf of Mexico the companies record, particularly on health and safety was very disappointing and the question has to be asked. Did the Board properly oversee the management’s effort to embed a culture of safety? Driving the safety policies deep into the culture of the company. Even before the Gulf of Mexico, BP had serious high profile incidences, such as the Texas Refinery explosion in 2005, killing 13 workers, and the failures in Alaska. The inquiries that followed pointed to serious breaches in the health and safety management within the company. 

In the immediate aftermath of the Gulf of Mexico disaster it was becoming clear that those in charge of the rig had cut corners in health and safety to get the rig operational. This illustrates that the management team within the business had not learned lessons from the previous incidents and had not implemented the correct safety policies within the organisation.  Following on from this, what was the Executive Board doing, where was the oversight from the non-executive directors, ensuring correct procedures where followed and implemented into the organisation.  All of this points to systemic issues within company, from the top right through to the operational management. The Governance was clearly inadequate and not providing the correct oversight, the Board were not doing their duty to the rights and interests of the shareholders and stakeholders and the value of the stock reduced by over 50%, dividend payments were stopped and the company has had to pay out on the region of $20 billion in compensation (Heineman, 2010) 

The Gulf of Mexico disaster also raises interesting questions about what is CSR and who are the stakeholders? It was not only the employees and shareholders who were affected by the disaster, more importantly the local communities in the immediate Gulf area were far more affected. So where does a company’s CSR end and what responsibilities does BP have to these stakeholders? Clearly the US authorities decided that they had a large responsibility. The disaster has had an impact on the area that will last for years to come, both environmentally and socially.  

This illustrates that CSR must now cast its net wider to take into account their social responsibility to the wider stakeholders affected by the decisions that the companies make.  Clearly, the current Anglo- American model, as can be seen in the case of BP, has been inadequate in Governing the company to ensure that it runs its business interests in the correct manner, both to its shareholders and all stakeholders. But, by adopting the supervisory board from the Rhineland model, would this add the necessary oversight and new perspective needed? This would certainly go some way to correctly the problem, as it would take the employees views into account more and give shareholders more influence. Although, it still leaves out the external stakeholders (wider society) whose interests will need to be taken into account. How this role would be implemented would need to be considered by the company and the Government, although there would be a serious risk of over legislating Corporations in this area, which is not something that should happen, as interference from the State can slow down a company.

What companies need to do is to find a way whereby they can incorporate the needs the of external stakeholders into there Governance structure and thus provide a more holistic CSR. In the case of BP this would not have only given them a wide perspective, but it would have also saved their shareholders $20 billion. This case illustrates why companies need to develop a better CSR, or as I said in the introduction a sustainable business strategy, which highlights the elements that need to be understood, who are the stakeholders both internal and external, how important are they to the business? The Government and policy, health and safety, and what role technology can play. It is worth mentioning at this point that these factors do not apply to every sector of  industry, the commodities sector, i.e. Oil and Gas and mining are probably the sectors that need the most robust and holisitc CSR policies, this does not mean that other sectors should not follow suit.

Appendix

BP.com Governance Principles 2011

((Hopt, Klaus J., "The German Two-Tier Board (Aufsichtsrat), A German View on Corporate Governance" in Hopt, Klaus J. and Wymeersch, Eddy (eds), Comparative Corporate Governance: Essays and Materials, de Gruyter, Berlin & New York, 1997,

Bowen, William G, The Board Book: An Insider's Guide for Directors and Trustees, W.W. Norton & Company, New York & London, 2008

Heineman, B. 2010 http://www.businessweek.com/managing/content/jul2010/ca20100727_717276.htm
 

The Cadbury Committee, 1992

Introduction To Sustainability Inc.

This blog will survey the Corporation's sustainability role in modern society. Looking at where Corporations Social Responsibility (CSR) came from and how it is evolving to stay in touch with a more complex and inter- connected society. Where the consumer is now interested not only in the price and quality of a product, but how the Corporation operates both ethically and environmentally, as a type of corporate citizen. 

CSR was born out of Corporate Governance in the 1960's and 70's, where companies implemented policies and structures to ensure that they operated in compliance with the law, ethically and within international norms. Originally, it was concerned with keeping in check how executive managers operated, looking after the interests of "stakeholders", i.e. employees and investors (shareholders). Then, in 1984 with the publishing of an influential book Strategic management: a stakeholder approach, by R. Edward Freeman, 'stakeholders also included the external, i.e. customers, the environment and communities and any other in the public sphere that come into contact with the Corporation, thus giving rise to modern understanding of Corporate Social Responsibility.  It is a guide that Corporations can follow, to illustrate to their customers what they are willing to uphold. 

CSR certainly has its critics, with some stating that it can have a detrimental effect on the profits of the Corporation and detracts from the economics role of business. Others state that it is simply window dressing to pre-empt any government regulation that may come in and finally, that it is simply PR to make a company seem 'in-touch'. 

This is a very simplified overview of history and development of Corporate Social Responsibility and it is not my aim to look backwards adn diver into this further. My aim with this blog is to unpack with the aid of examples of best practise from corporations and academics how CSR will evolve in the future, what it will encompass and illustrating this with examples of what some forward thinking companies are doing now. Also, I will be looking at incidences that have occurred that highlight why CSR  is now good business.  But, first a little about myself, I have spent a number of years working for the UK Government on Sustainability and I have an Undergraduate Degree in Planning with a specialisation in Environmental Planning, I also have a Master’s Degree in International Politics and I have recently completed an MBA, which saw me studying across 3 continents, the UK, China and the USA where my specialisation was Development Economics, Innovation and Strategy. 

My previous work experience and qualification should help to clarify that I am not looking at CSR from the perspective of an 'Eco Warrior or Tree Hugger', no offense intended. But, rather I intend to explain how CSR is evolving into what I would call 'Sustainable Business Practice'. That encompasses the innovation of the Corporations business model to generate more revenues; it views assets such as buildings and computers to name but two, from a new perspective that can also impact the bottom line. It should also include an understanding of, and incorporation of government policy, politics and culture, particularly in light of the emerging markets cross the the globe. Finally an understanding of technology and the advancements being made in sustainable technologies will be essential in this new business structure. 

Effectively, it will become a new holistic and strategic way of doing business in the 21st Century, where Business will measure their performance across the 'Triple Bottom line': People, Profit, Planet, which is something that is now coming into existence. What is needed though is an education that this is a viable and revenue generating way to do business and not some crazy marketeers branding project, but that is another story!