A great deal of energy has been devoted to defining, describing and analyzing the ever-increasing globalization of commerce. Aided and abetted by powerful advances in communications technology and international financing, many corporations are growing into transnational giants with far-ranging influence on national and international economies. Much less analyzed is the fact that critics, in the form of non-governmental organizations (NGOs), are also globalizing and using the same communications technology to organize and coordinate their activities. The purpose of these NGOs is to call attention to corporate behaviour in the most remote corners of the world. NGOs are also growing more sophisticated, persuading consumers to support their causes by avoiding products sold by corporations with questionable practices. In addition, public interest groups are expressing concern that corporations have grown too powerful. This concern has been exacerbated by recent trends in government downsizing, privatization and self-regulation. As a consequence, public awareness of the social and environmental impacts of large corporations is rising, leading to demands for greater transparency and disclosure.
A NEW DEFINITION OF CORPORATE SOCIAL RESPONSIBILITY
Increasingly, the public is subscribing to a broader definition of corporate accountability, one that expects corporations to go beyond being profitable, to demonstrate positive and sustainable economic, environmental and social performance over the long term. According to the 1999 Millennium Poll on Corporate Social Responsibility, which surveyed 25,000 consumers and was sponsored by PricewaterhouseCoopers, “Two in three citizens want companies to go beyond their historical role of making a profit, paying taxes, employing people and obeying laws; they want companies to contribute to broader societal goals as well.”
In practical terms, corporate social responsibility translates into the belief that corporations owe stakeholders—customers, employees, suppliers, activist groups and the general public—an annual accounting of their environmental, social and economic performance, just like the financial data they must provide their shareholders. As the old maxim “What gets measured, gets managed” suggests, measurement is crucial, not only to monitor and report on the company’s progress, but also to provide reliable, credible metrics that show how sustainable business practices improve a company’s performance. Companies that have adopted the new approach refer to it as the “triple bottom line” of economic, environmental and social performance.
Many corporations—recent estimates suggest almost half of the Fortune 500—are now compiling and issuing annual reports that provide details about their environmental and social behaviour. But in order to be useful, standardized, consistent measurement and reporting methods are required. Moreover, verification of the information by independent third parties is also needed to avoid criticism that the reports are “green wash”—public-relations ploys without substance.
Numerous public interest groups are working to develop standards for triple-bottom-line reporting, although no one international standard has yet emerged. One of the leaders in this endeavour is the Global Reporting Initiative (GRI). It was established in 1997 by a coalition of international groups to design guidelines for preparing corporate sustainability reports. The GRI’s Sustainability Reporting Guidelines are firmly grounded in the standard accounting principles such as relevance, reliability, comparability, timeliness and materiality that GRI participants felt were the fundamental principles of accountability for a wide range of stakeholders. The GRI gained significant momentum in 1999 when its guidelines were implemented as a pilot program in 20 major companies, including BristolMyers Squibb, British Telecommunications, Procter & Gamble, and Shell.
British Telecommunications (BT) produced its first triple-bottom-line report in 1999. Chris Tuppen, program manager of social and environmental measurement at BT, noted that some shareholders and stakeholders did not initially understand the rationale. For example, a customer commented that customer care should be the be-all and end-all of BT’s efforts. However, when Tuppen explained the link between employee satisfaction and customer service, and the process designed to improve them, the customer appreciated BT’s efforts. Another shareholder described the initiative as a waste of shareholders’ money. This shareholder too changed his position when Tuppen explained the link between stakeholder satisfaction and financial performance.
Traditionalists often argue that a corporation should focus only on satisfying shareholders’ desire for a return on their investment. However, it is important to note that many shareholders themselves also share these new attitudes about broader business responsibility. The meteoric rise of Internet stock trading and mutual funds has widened the investor universe to include more smaller and personal investors, as well as institutional and professional investors. Shareholder activism is on the rise as a consequence. At annual meetings, concerned shareholders are increasingly calling on directors to account for the social and environmental impact of their corporation’s operations.
On the whole, business has accepted responsibility for the environmental impact of its operations and the environmentally sustainable management of resources. However, the social impact of business is a far more nebulous, and risky, terrain. While environmental, health and safety reports are now increasingly common, reports that tackle social issues such as human rights and child labour are not. Says Mary Robinson, the UN High Commissioner for Human Rights: “In the last few years, perceived corporate complicity in human rights abuses has damaged corporate reputations and, in some cases, share price. Twenty years ago, few companies had environmental policies. Compare that with today’s picture, where the environment is unquestionably a mainstream business issue. So it should be with human rights.”
FIRST PRINCIPLES OF THE CORPORATION
Critics of the trend to greater accountability insist that a corporation’s sole purpose, by definition, is to generate returns for its investors, and that non-financial factors should not enter the equation. But the foundations and historical evolution of the corporation should be examined more closely. Triple-bottom-line reporting is in many ways a return to first principles.
The Anglo-American model of the limited-liability corporation, as originally conceived in the 17th century, included consideration of the public interest. Corporations were sanctioned to operate by the Crown or state. For example, the Hudson’s Bay Company was granted a royal charter in 1670 to pursue trade in Canada, but it was also charged with exploring and charting the new territory. Many early corporate charters included an implicit social contract: The corporation was granted the licence to operate in exchange for providing some social benefit.
This definition changed dramatically in the U.S. after the Civil War. Major corporate interests successfully pressed the U.S. government to enact legislation that essentially permitted the uncontrolled accumulation of wealth with little liability for workers’ injuries or the public interest. Moreover, there were no government requirements for public disclosure of a corporation’s financial status or activities generally. Whatever accounting systems were in place only tracked performance for investors. This disconnect between the corporate purpose, broadly defined, and corporations’ balance sheets is at the root of the debate over “accountability” to this day.
The collapse of the U.S. stock market in 1929 caused another dramatic shift. Policymakers were concerned with enacting accountability legislation and standards to ensure an economic depression of such magnitude would not happen again. New securities laws were passed to ensure public disclosure and the verification of finances. The underlying intent was to broaden the mandate beyond the protection of investors, to reinstate some kind of social control over corporate behaviour through disclosure.
Until recently, debate has centred on how to achieve disclosure rather than the more fundamental question of what information should be disclosed. The accounting profession became responsible for certifying that corporate disclosure adhered to common accounting principles embodied in GAAP. But until recently, other stakeholders have not had as much access to relevant corporate information as investors. To address the increasing need for disclosure in non-financial areas, major public accounting firms are currently working with public interest groups to develop standards to extend GAAP principles to triple-bottom-line reporting. Says Allen White, vice-chairman of the GRI: “In the absence of enforcement capability, information disclosure is essentially the only viable tool for moving corporate behaviour in the desired direction.”
The concept of corporate social responsibility is not new; it has been around for many decades. For example, the Triangle Shirtwaist Company fire of 1911 in New York City was a defining event that galvanized the nascent labour movement in the United States. The factory had fake fire exits, mounds of flammable material, no sprinklers or other fire safety features, and doors that were locked all day to keep workers in and union organizers out. When the fire broke out, it spread swiftly through the factory, trapping the workers, most of whom were immigrant girls in their teens. Horrified witnesses reported seeing scores of women leaping out of the windows to escape the engulfing flames, falling 10 storeys down to certain death. Public outrage led to a raft of commissions and far-ranging reforms that changed practices and attitudes about corporate responsibility for worker safety and conditions.
The concept of corporate social responsibility is constantly changing as public concern evolves. In the 1990s, responsibility became closely linked with public concern about globalization and the rise of transnational corporations. Anti-globalization sentiment can be traced back to at least 1995, which was the ground-zero year, in many ways, for the birth of a movement. It is, not coincidentally, the year that Internet usage around the world exploded. Report after report about the alleged environmental and human rights misdeeds of corporations appeared in mainstream media, as advocacy groups used the Internet to organize and publicize their causes. Retailers came under fire for labour practices in countries such as El Salvador, Pakistan and Indonesia. Revelations about the presence of many transnational corporations in countries housing some of the world’s most violent and repressive regimes, in Nigeria, Burma and Colombia, also racked the media.
Public outcry and backlashes resulted, as more and more people called for boycotts and sanctions. Consumers used their wallets to express dissatisfaction by avoiding brands with tainted reputations.
Many corporations were blindsided by the public’s reaction, in large part because the activities for which they were condemned were not new. In the past, oil companies had collaborated with local governments to extract resources, without considering the particular regime’s politics or human rights record. These corporate operations and practices did not suddenly change in 1995. Rather, it was the broadened perception of business responsibility that changed, fuelled by the rise of a global communications medium that enables more scrutiny and reporting of allegations of misconduct.
THE BEST-PRACTICE EXAMPLE OF SHELL
The oil giant Shell was particularly hard hit. Its reputation was affected by two events in 1995, when it had the misfortune of becoming the primary target for both environmental and human rights activists. Shell was confronted with opposition from environmental groups after the company announced plans to sink the Brent Spar oil-storage rig in the North Sea. The public outcry became more intense until Shell halted its plans for the rig. It was later found that Shell’s original disposal plans were in fact environmentally sound. The company had inadvertently contributed to the debacle because of insufficient prior communication and consultation with the NGOs.
A big blow to Shell’s reputation was struck when its operations in Nigeria were severely condemned. For 30 years, Shell had been drilling in Ogoni, Nigeria, and had made some significant investments in the area. However, the Ogoni community felt Shell had been neglecting its environmental and humanitarian responsibilities, so it mounted demonstrations against the company. Shell withdrew from Ogoni land, a move that had the unintended consequence of pressuring the military to remove the Ogoni threat. Violent clashes with protestors ended in the tragic execution of author Ken Saro-Wiwa, which sparked international outrage and boycotts.
Shell set about dealing with the double blow to its reputation. It denounced Saro-Wiwa’s execution and launched a $2-million (U.S.) venture in Nigeria to build hospitals and schools. Shell also published “Profits and Principles: Does there have to be a choice?” In it, Shell makes a move unusual in the corporate world—admitting responsibility: “We believe we acted honourably in both cases. But that is not enough. Clearly the conviction that you are doing things right is not the same as getting them right. For us, at least, this has been a salutary lesson.” Shell’s display of remorse helped restore its reputation.
Shell has gone on to produce two more triple-bottom-line reports that detail its social, environmental and economic performance. Shell won the U.K.’s Social Reporting Award, jointly with the Co-operative Bank, for its 1999 report. Among other things, the judges praised Shell for its good coverage of stakeholder engagement processes, coverage of its global operations and linkage of triple-bottom-line issues with Shell’s own General Business Principles. In the “Shell Report 2000,” the company set out a framework of Key Performance Indicators (KPIs) that it is developing with stakeholders. The KPIs cover the triple bottom line, and include indicators for innovation, customer satisfaction, acceptability of environmental performance and human rights. They also address issues relating to governance and values such as reputation and stakeholder perception of quality of engagement. This framework will form the basis for the company’s future measurement and reporting of progress on its commitments to sustainable development.
Social and environmental issues figured prominently in the anti-corporate protests staged in Seattle and Quebec City. Critics inclined to dismiss the activists should recall that a previous generation’s activism resulted in the environmental legislation that was enacted in the 1970s. Calls for greater transparency and disclosure are now being issued from many quarters, to rein in transnational corporations. The belief that corporations should have broader social responsibilities and be more accountable for the use of their power is rapidly gaining many adherents, many of them in the corporate sector. Human rights issues in particular are seeping through the bricks that protect corporate reputation. Organizations mindful of their good names need to recognize that they are being closely scrutinized by their critics—and that they will be judged by a public that increasingly expects a higher standard of corporate behaviour.