Chapter 10 - Corporate social responsibility and stakeholders

Question 1

Explain the difference between CSR, corporate citizenship and sustainability

Answer 1

Corporate social responsibility

The commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.

Corporate citizenship

The term corporate citizenship has a wider definition than CSR. Corporate citizenship describes how companies should act in the same way as the citizens of the countries in which they operate, that is, to meet the countries’ legal, social, ethical and economic responsibilities expected of its citizens.

This requires companies to balance the financial needs of its shareholders with the societal need of the countries within which it operates.

Sustainability

The term sustainability refers to an organisation focusing on its long-term survival. It requires organisations to balance their current requirements for operating their businesses, without compromising the needs of future generations. In doing this, CSR obviously plays a part in ensuring the long-term survival of the organisation – this is often why the two terms are linked.

Question 2

Why did companies give up responsibility for the welfare of their employees?

Answer 2

Some believe that following World War II, the advent of free education and the National Health Service in the UK saw the state take over from companies the responsibility for the well-being of the workforce. This in turn led to companies focusing more on making profits and achieving growth to help economic recovery after the war than on acting in the interests of society at large.

Question 3

What changed to create an interest in the social responsibility of companies?

Answer 3

By the late 1980s, society was becoming more and more concerned with the behaviour of corporations and their lack
of concern for the communities within which they operated. There was a belief by some that short-term profits were being focused on to the detriment of long-term profitability and sustainability, not just of the organisations but also of
society as a whole.

In 1991, a theoretical debate on ‘doing well by doing good’ was started by the Porter hypothesis that the financial benefits from innovation induced by CSR more than offset the engagement and compliance costs.

There has also been a growing recognition since the early 1990s that the reputational impact of a good CSR rating is positive as the outside world sees the organisation as decent, trustworthy, and good to its employees, the community and the environment. Evidence shows that this increases the financial returns for an organisation’s investors.

Question 4

Give three reasons why companies initiate CSR activities.

Answer 4

Organisations have realised that they can use CSR activities for the following:

• To obtain competitive advantage.
• To reduce risk, especially reputational risk.
• To attract human capital.
• For innovation.
• For sustainability

Question 5

Describe what is required for a win-win CSR partnership.

Answer 5

There can be many factors which aid a win-win partnership, including:

having clear reasons to collaborate, having core people entirely committed to the partnership, having simple and credible goals, having a facilitator, incentivising workers, flexibility and having a clear exit strategy planned.

Question 6

Why is it important for companies to think in an integrated way?

Answer 6

Integrated thinking considers things in a balanced way to allow the effective and efficient utilisation of the capital
resources available to an organisation when developing strategy or decision making.

These capitals are growing rare and therefore costs to the organisation are growing. It is important for an organisation to manage resources in the most effective way.

Question 7

INTEGRATED THINKING: What are the six capitals that companies need to manage effectively and in an integrated way?

Answer 7

Six capital resources available to an organisation:

1. Financial capital – money, equity, bonds, monetary value of assets, etc. that an organisation needs to operate.
2. Human capital – the collective skills and experience of the people that work for the organisation.
3. Manufactured capital – physical means and infrastructure needed for an organisation to provide its products and services, e.g. fixed assets.
4. Intellectual capital – patents, copyright, designs, goodwill, brand value and knowledge accumulated, i.e. intangible assets.
5. Natural capital – natural resources and energy that the organisation depends on to produce its products/services.
6. Social capital – value added to an organisation by the social relationships with individuals and institutions that an organisation has developed through its stakeholder engagement.

Question 8

What are the challenges with determining a company’s sustainability?

Answer 8

Sustainability requires the balance of current needs against future needs. The challenge with this is determining:

1.The current and future needs.

2. The time period to be considered when looking at future generations.
3. Who the sustainability should be for (e.g. the company, the country or the world)

Question 9

Why is there a greater focus on the longer-term in organisations?

Answer 9

By focusing on the long-term sustainable success of the company, organisations should generate value for shareholders
and contribute to wider society.

Question 10

What are the categories of CSR activities?

Answer 10

1. Philanthropy - High benefits to society but low benefits to the organisation
2. Pet Projects - Low benefits to society, but high benefits to the organisation.
3. Partnerships - High benefits to the Society and the organisation
4. Propaganda - Low benefits to society but high benefits to the organisation

Question 11

Approaches to CSR?

Answer 11

1. Environmental – The impact of the business on the environment, including its carbon footprint and energy efficiency
2. Community – Developing relationships with, and supporting, local community groups.
3. Employees – Considering its approach to employee well-being and employee protection, and its approach to diversity and inclusivity.
4. Ethics – Considering whether it should adopt a code of ethics and whether it has the right ethical approach to business practices.
5. Suppliers –Ensuring that they are aligned with the company’s own ethics and that they do not engage in bad business practices.

Question 12

Creating CSR partnerships

Answer 12

1. Identify clear reasons to collaborate
2. Find a ‘fairy godmother’
3. Set simple, credible goals
4. Get professional help
5. Dedicate good people to the cause
6. Be flexible in defining success
7. Prepare to let go

Question 13

Measuring CSR initiatives?

Answer 13

An organisation, when deciding what targets and measurement to use, should consider the following:

1. Focus on outcomes - how the initiative changed the lives of the beneficiaries of the initiatives and/or helped create a better planet
2. Measuring the outcome using both quantitative and qualitative measurements
3. Listen to stakeholders
4. Do not undervalue stories. Stories can be incredibly powerful, for instance how an individual’s life has been changed by the organisation’s initiative
5. Learn from others
6. Identify and measure the risks
7. Measure, refine, modify, measure again

Question 14

The Co Secs role in CSR?

Answer 14

DAM-C

DEVELOPING:

1. Ensuring that KPIs for non-financial matters are developed and approved by the board.
2. Working with the board to agree:

• the reporting framework to be adopted, for example the GRI standards or the UN Global Compact.
• how the non-financial information is to be presented
• how the reporting will meet the differing needs of the different audiences for the reporting

MONITORING:

3. Ensuring that a review of the annual process is conducted and presented to the board highlighting areas for improvement
4. Ensuring that the principle risks associated with CSR activities are known and are being managed
5. Liaising with internal audit to ensure that the management information systems has the appropriate assurances
6. What other companies are doing, the KPIs they are using, the type of future-orientated information they are including in their reports and how they are responding to stakeholder issues.

ADVISING:

7. Ensuring directors understand their duties

COMMUNMICATION:

8. Views and interests of key stakeholders and their perceptions of how the company is performing from a non- financial perspective.
9. What other companies are doing, the KPIs they are using, the type of future-orientated information they are including in their reports and how they are responding to stakeholder issues.
10. Reporting progress against the approved non-financial KPI

Question 15

Ways to engage with stakeholders?

Answer 15

1. Reactively - Engages defensively, when forced to in response to a crisis
2. Proactively – Tries to understand its stakeholders’ concerns and issues and engages with them
3. Interactively - Has ongoing relationships of mutual respect, openness, and trust

Question 16

Engagement with the workforce

Answer 16

Principle E, UKCG Code

The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern.’

Provision 5, UKCG Code

The board should understand the views of the company’s other key stakeholders and describe in the annual report how their interests and the matters set out in section 172 of the Companies Act 2006 have been considered in board discussions and decision-making. The board should keep engagement mechanisms under review so that they remain effective. For engagement with the workforce, one or a combination of the following methods should be used:

• a director appointed from the workforce;
• a formal workforce advisory panel;
• a designated non-executive director.

If the board has not chosen one or more of these methods, it should explain what alternative arrangements are in place and why it considers that they are effective.

Provision 6, UKCG code

There should be a means for the workforce to raise concerns in confidence and – if they wish – anonymously. The board should routinely review this and the reports arising from its operation. It should ensure that arrangements are in place for the proportionate and independent investigation of such matters and for follow-up action.

Question 17

To promote the success of the company?

Answer 17

Factors to be considered:

1. The likely consequences of any decision in the long term
2. The interests of the company’s employees
3. The need to foster the company’s business relationships with suppliers, customers and others
4. The impact of the company’s operations on the community and the environment
5. The desirability of the company maintaining a reputation for high standards of business conduct
6. The need to act fairly as between members of the company

s172, CA2006

Question 18

1. Role of the Co Sec in stakeholder engagement? DAM-C

Answer 18

DEVELOPING

1. Identifying stakeholders, their expectations and interests.
2. Mapping the power and interest of stakeholders or stakeholder groups, so that they can develop a strategy for engaging with them.
3. Discussing and approving key performance indicators for social, environmental and financial performance.
4. Approving a policy for external, financial, nonfinancial (sustainability) or integrated reporting.

5.Looking to integrate stakeholder issues into annual shareholder meetings. This can be done through resolutions, presentations at meetings, and/or displays at the entrance or in the meeting room.

6. Discussing the risks and impacts (positive and negative) of projects and operations and providing transparent disclosure information to stakeholders (including shareholders).

Question 19

2. Role of the Co Sec in stakeholder engagement? DAM-C

Answer 19

ADVISING:

7. Advising the board on reporting – and ensuring that management make recommendations for reporting – to specific stakeholder groups, and where appropriate, develops reports to specific stakeholder groups.
8. Alerting the board and/or management to opportunities and risks associated with stakeholder engagements
9. Advising the board on the setting up of a committee responsible for stakeholder

10 Advising the remuneration committee regarding linking management’s rewards, remuneration and other benefits, to the achievement of CSR targets.

Question 20

3. Role of the Co Sec in stakeholder engagement? DAM-C

Answer 20

DEVELOPING
1. Identifying stakeholders, their expectations and interests.

2. Mapping the power and interest of stakeholders or stakeholder groups, so that they can develop a strategy for engaging with them.
3. Determining the board’s financial and nonfinancial needs for decision making, management oversight, and monitoring with regard to key stakeholder relationships associated with creating value and long-term sustainability.
4. Discussing and approving key performance indicators for social, environmental and financial performance.
5. Approving a policy for external, financial, nonfinancial (sustainability) or integrated reporting.

ADVISING

10. Advising the board on reporting – and ensuring that management make recommendations for reporting – to specific stakeholder groups, and where appropriate, develops reports to specific stakeholder groups..
11. Alerting the board and/or management to opportunities and risks associated with stakeholder engagements
12. Advising the board on the setting up of a committee responsible for stakeholder
13. Advising the remuneration committee regarding linking management’s rewards, remuneration and other benefits, to the achievement of CSR targets.

MONITORING

11. Carry out an analysis as to where there are gaps between the organisation’s current position and its strategic plan.
12. Receiving regular reports back to the board which should be included on agendas so that progress against targets can be monitored.

COMMUNICATING

8. Views and interests of key stakeholders and their perceptions of how the company is performing from a non- financial perspective.
9. What other companies are doing, the KPIs they are using, the type of future-orientated information they are including in their reports and how they are responding to stakeholder issues.
10. Reporting progress against the approved non-financial KPI

Question 21

Problems with traditional corporate reporting

Answer 21

1. Too heavy for the postman – annual reports, due to ever-increasing regulation and reporting requirements, have become so detailed and extensive that many are totally inaccessible to the average reader.
2. Yesterday’s story – annual reports present activities of the company over the previous financial year.
3. The financial picture only
4. Some intangibles are excluded e.g. corporate governance, brand recognition, good reputation and sound risk management
5. Non financial costs costs are excluded – the environmental costs of using up natural resources that can never be regenerated and of the impact of carbon emissions on climate change are excluded from financial accounting.
6. Different reports are prepared for different users e.g the sustainability report and the corporate governance report meet the demands of a particular stakeholder group.
7. Financial reporting only pushes company into short-termism

Question 22

Narrative reporting?

Answer 22

Describes the additional non-financial information which is included in companies’ annual reports, providing a wider and more meaningful picture of the company’s business, its strategy and future prospects.

Question 23

Strategic report

Answer 23

To help assess how directors have performed their duty, under section 172 of the CA2006, to promote the success of the company’.

The strategic report should:

1. describe the company’s strategy, objectives and business model;
2. provide an explanation of the main trends and factors affecting the company;
3. describe the company’s principal risks and uncertainties;
4. include an analysis of the development and performance of the business, including key performance indicators (KPIs);
5. include information about the environment, social, community, human rights, anti-corruption and anti-bribery matters when material; and

6.include information on gender diversity.

It should:

1. Be fair, balanced and understandable
2. Be concise and only including information that is ‘material’ to shareholders so that key messages are not obscured

3.Include company-specific information

4. Link related information in different parts of the annual report.

Question 24

Benefits of adopting integrated reporting?

Answer 24

1. Greater clarity about relationships and commitments.
2. Better decisions
3. Deeper engagement with all stakeholders
4. Helps eliminate the artificial distinction between shareholders and stakeholders
5. Companies become aware of the interests of their different stakeholders and how those interests are in alignment or conflict with each other
6. Reduces reputational risk

Question 25

Triple bottom line reporting?

Answer 25

1. An accounting framework which includes information about a company’s social and environmental performance as well as the traditional financial performance when evaluating the overall performance of an organisation.
2. The term was first used by John Elkington in 1994 in an article in the California Management Review on win-win business strategies, in which he argued that companies, in addition to disclosing profit and loss, should disclose how socially and environmentally responsible they had been throughout their operations during the year.
3. Elkington argued that it was only by taking into account all three elements of what he called ‘profit, people and planet’ that an organisation could calculate the full cost of doing business.
4. It was further argued that by measuring the social and environmental elements companies, and in particular their boards and management teams, were more likely to pay attention to them and thus create more socially and environmentally responsible organisations.

Question 26

Challenges to triple line reporting?

Answer 26

Challenges to triple line reporting:

1. Cannot add up the three separate disclosures of financial, social and environmental information because it is often very difficult to quantify social and environmental initiatives and impacts in monetary terms.
2. Organisations presenting separate reports for each element: financial statements, social report and environmental report. This defeats the object of having triple bottom line reporting.
3. Historically, no widely accepted set of standards for triple bottom line reporting. In July 2018, the Global Reporting Initiative issued the GRI Sustainability Reporting Standards,
4. No requirements to independently audit social and environmental measures as there are with financial measures.
5. Lack of trust in the image presented by companies through triple bottom line reporting. Many companies present good news whilst withholding the bad news.

Question 27

Q4. Provide 2 benchmarking tools for CSR (2 marks)

Answer 27

1. Dow Jones Sustainability Indexes (DJSI)
2. FTSE4Good Indexes
3. Business in the Community (BITC) Responsible Business Tracker

Question 28

Q5. What are the six capital resources that should be taken into account with Integrated Thinking? (6 marks)

Answer 28

1. Financial capital – money, equity, bonds, monetary value of assets, etc. that an organisation needs to operate.
2. Human capital – the collective skills and experience of the people that work for the organisation.
3. Manufactured capital – physical means and infrastructure needed for an organisation to provide its products and services, e.g. fixed assets.
4. Intellectual capital – patents, copyright, designs, goodwill, brand value and knowledge accumulated, i.e. intangible assets.
5. Natural capital – natural resources and energy that the organisation depends on to produce its products/services.
6. Social capital – value added to an organisation of the social relationships with individuals and institutions that an organisation has developed through its stakeholder engagement.