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Trials and tribulations
Sometimes complex issues are more easily understood in the negative-what they are not. Non-profit or non-governmental, for example. When considering the phrase 'corporate social responsibility' (CSR), the inverse, or corporate social irresponsibility, helps illuminate its meaning. This is particularly true in relation to what the history books may call the 9/11 of CSR: Enron. In May 2006, a jury of eight women and four men in Houston, Texas, did what all of the regulators, investors, analysts, banks, boards, legal advisors and market checks and balances could not-concretely convict Enron's leaders of historic failures and human losses. Enron's emblematic emasculation embodied the turn-of-the-century corporation gone bad, and catapulted the field of CSR onto the popular culture radar of North America.
The stark trajectory of Enron stood out as the iconic embodiment and public face of all that CSR seeks to be the antidote to, despite competition from a veritable golden age of recent corporate scandals that have occurred primarily in the US:
Will the conviction of Ken Lay (who died in July 2006 around three months before his sentencing to a likely 30 years in jail)-former chairman and founder, on six counts including conspiracy, wire fraud and securities fraud and four counts in a separate bank-fraud trial-as well as Jeffrey Skilling-former CEO, on 18 counts of conspiracy and fraud and one (of 10) counts of insider trading8-make a difference? Will the convictions be a deterrent?
Ken Lay and Jeffrey Skilling were not the first corporate executives to be convicted, nor will they be the last. On the face of it, the collapse of Enron has not had much of an impact on executive compensation. However, perhaps a belated recognition by boards of their fiduciary responsibilities, and a surge in corporate governance shareholder resolution successes in the 2006 annual meeting proxy season,9 will start to lessen a CEO's ability to run a company into the ground.
Five years after the introduction of the signature US reaction to loss of trust in the market-the Sarbanes-Oxley legislation to strengthen transparency, accountability and improved corporate governance-it remains unpopular with business in terms of its cost and the quality of auditing. Lingering implications of the reaction to Enron encompass potential mergers between stock exchanges in the US and abroad.
So, given the limits of regulatory and legal moves, does CSR have a role to play in avoiding future Enrons? We should remember that Enron had staff in charge of corporate responsibility. It issued a corporate responsibility report. It lied.
Investors in particular have an interest in spotting future Enrons, and as such could be key enforcers of better corporate governance. The new mainstream of CSR, typified by stakeholder dialogues and sustainability reporting, does not appear to be sufficient to empower these investors, given their reliance on self-declarations about corporate intentions and management systems, and audits from firms with a commercial interest in being regarded by their clients as both reasonable and affordable. Consequently, both responsible investors and the wider public face a credibility riddle of whom to believe when they make judgements on the social performance of companies. Three areas are important in solving this riddle: the type of information self-declared by companies, the type of auditors involved, and information gathered from other sources.
The first area where the information flow to investors could be improved is the production of more quantitative indicators of social and environmental performance rather than corporate intentions and management systems. Requirements could include guidelines for the production of basic quantitative indicators such as pollution records, average wages paid to different types of employee (including in the supply chain), non-compliance notices issued by law enforcement agencies, pending court cases, court rulings, out-of-court settlements, admonitions or investigations from intergovernmental bodies, recognised trade unions in the workplace, collective bargaining agreements, multi-enterprise codes endorsed, certifications received, political donations, memberships of trade associations, and payments to lobby groups. With such information, companies might be able to be indexed on the basis of their actual impacts on society rather than on the appearance of their management systems. The limited amount of information provided in this way raises questions not only of companies and their auditors, but of the ability of the stakeholders they engage with to move beyond issue identification for the materiality of non-financial reporting to the type of data required about those issues. Some of these performance indicators would be more difficult to compile and audit than others, with statistics on wage levels being much easier than mapping the often opaque and ad hoc nature of lobbying, or assessing its content. The usefulness of these performance indicators will still depend on the professionalism of the auditors. Initiatives such as the International Standard on Assurance Engagements (ISAE) 3000, developed by the International Auditing and Assurance Standards Board (IAASB), and the AA1000 Assurance Standard (AA1000AS), launched by AccountAbility, help ensure better practice, with the latter including attention to the auditors' capacity to deal with the stakeholder-determined issues in extra-financial reports.10 However, self-disclosure verified by contracted auditors provides a context within which conflicts of interest can undermine effective disclosure. A comprehensive solution to credible information on company performance must include systems for gathering and processing information and opinion from society, unmediated by the companies involved.
The third area for solving the credibility riddle involves generating reliable and relevant data from sources other than the companies themselves. The problem here is how to combine opinions from diverse stakeholders on different public issues into one framework, something that the Swiss investment analyst firm Covalence has been developing since 2001.11 Its director Antoine Mach told JCC that 'the corporate reputation that matters, and is material to value, is not the one in the minds of management but within the web of stakeholders, with some stakeholders connected to more strands than others'. Covalence maps corporate, media and stakeholder views across 45 criteria of business contributions to human development, based on an international legal framework, to create a trackable 'ethicalquote' for each company. Another system of investment analysis that includes this broader view is Total Corporate Responsibility (TCR), developed by Frank Dixon and used by Innovest Strategic Value Advisors. It also focuses on some quantitative indicators of performance, as described above. The notable aspect of TCR is its systems approach, which considers how a company affects the societal systems it exists within, through a range of activities such as lobbying and advertising. This approach is important in three ways. First, if we assume that external performance is an indicator of internal performance, then it helps investors avoid corrupt internal practices such as those that became the norm at Enron. Second, it helps investors determine how well prepared companies are for future social and environmental change. Third, it supports companies in promoting changes in market demand and regulatory frameworks that will sustain value creation over the long term, across the whole economy. The key issue for investors is how to shift investments away from firms with a high likelihood of internal unethical behaviour. TCR seeks to drive system change by rewarding firms that are more proactive than peers in seeking to promote, rather than block, change at a systemic level. Firms working for system changes that hold all companies more responsible receive higher TCR ratings, with a hoped-for rise in stock price as a result in an effort to create a race to the top of the market.12
1 Jennifer Bayot and Roben Farzad, 'Former WorldCom Executive Sentenced to 5 Years in Prison', New York Times, 11 August 2005.
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