Corporate Social Responsibility: Accountability and SERM

Dr Linda Spedding
Solicitor, London; Member of the New York and Delhi Bars
Director, Women in Law Limited

spedding@easynet.co.uk

Corporate Social Responsibility (CSR) has been defined as 'essentially a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment' (see the European Commission Green Paper, ‘Promoting a European Framework for Corporate Social Responsibility’ [the Green paper] at page 5).

The Commission published the Green Paper in July 2001. This instrument was intended to promote CSR: in addition, the Commission has voted in favour of social and environmental legislation reporting. Indeed there are several initiatives debating and investigating the issue of CSR.

UK response
In the UK the Government attempted to promote CSR by the Prime Minister’s challenge to the top 350 FTSE companies to voluntarily report on social and environmental issues. Since business did not respond positively and since the EU has put pressure in this respect the Government is considering new legislation on CSR and the concept is expected to feature in consultations for any proposed legislation.

Business pressure
Locally businesses do experience more and more pressure from stakeholders including public sector bodies and NGOs. All of the trends in the context of risk management support this and investors have begun to influence significantly the way in which businesses operate to the extent that the image and brand are increasingly vulnerable to external pressure.

Regulatory requirements
In addition, the requirements on listed companies to embed risk management in their corporate policy has meant that the Board must be aware of and evaluate the risks and their management for communication to stakeholders.

While some aspects of corporate responsibility are clearly susceptible to measurement – progress toward environmental management and enhancement is an example – many others are not. Business corporate officers sometimes question, if not actually veto, spending on programmes that cannot be shown to yield a benefit to the ‘bottom line’. On the other hand, many chief executive officers and boards of directors are conscious of areas of business activity not susceptible to measurement, yet if not addressed, leave the organisation vulnerable.

Some companies make explicit their ethical commitment and incorporate it into their marketing or brand strategies. For instance, is the strategy of associating the company and its products with concern for organisations (often in a developing country) which produce the raw materials or finished products? Members of the fair-trade movement, especially in primary products like coffee, emphasise ethical standards in purchasing policies, eg purchasing from renewable sources, paying ‘fair’ wages and not employing child labour. Related to fair trade is the growing popularity of ‘cause related marketing’ (CRM). This is the name given to a strategy that associates branded goods with a ‘good cause’. Adherence to the standards of the UK government-backed Ethical Trading Initiative (ETI), which has 29 corporate members, is an extension of this idea into other ethical procurement policies. These and other similar approaches are worthwhile and in their respective ways they help to promote high standards of business ethics within corporations and among their stakeholders, as well as with a generally sceptical public.

SERM
SERM is a social and ethical risk management rating agency. It is an objective, independent agency that has assessed the top FTSE companies on the basis of public domain information. Its findings to date support the fact that those businesses that perform ethically also do well in terms of their core business performance.

The purpose of SERM’s socio-environmental risk assessments is to make a judgment as to how companies are actively managing the socio-ethical factors associated with the industry sector and type of business in which they operate. The Risk Reduction Factor derived from the ratings is one measure of the effectiveness of a company’s management in identifying and lessening a set of direct and indirect social, ethical and environmental risks.

As indicated above, SERM ratings demonstrate which companies are assessing and acting on their exposure to direct and indirect socio-environmental risk, ie putting into practice a commitment to ethical business. The ratings are calculated in such a way that they take account of industry sector differences and therefore provide a platform for cross-sectoral comparison of corporate performance. Information used to calculate these ratings, unlike other measures in this study, is not all in the public domain. The risks covered in the SERM ratings are shown in Table 1.

Concluding remarks
It is intended to develop the relevant issues relating to corporate governance through case studies and sector analysis.

Table 1