Corporate social responsibility: many of today's corporate stakeholders are calling for increased sustainable development. More and more companies are heeding that call, while simultaneously realizing performance gains

Internal Auditor, Feb, 2005 by Bruce W. Fraser

IN THE POST-ENRON ERA, THE NUMBER of companies reporting their social and environmental impact on society has increased immeasurably. Indeed, to its many advocates, the emergence of corporate social responsibility (CSR) is not only a blueprint for the future, but a new highway to follow for conducting business in an uncertain world that has witnessed the evisceration of many long-accepted norms of conduct.

Broadly speaking, CSR--also known as sustainable development--involves the increased recognition by publicly held companies that they need to address and heed not only shareholders, but all the multiple stakeholders impacted by the company's behavior. These include employees, customers, suppliers, governments, and nongovernmental organizations. In the new paradigm of social responsibility, stakeholders also could include socially responsible investor organizations, consisting of investors who make investment decisions using various social and ethical screens.

What follows are the major factors behind the emergence of CSR and an outline of key global and U.S. standards that have been put in place, as well as a review of current corporate and social audit reporting and support activities at numerous multinational companies. Several audit practitioners also offer their suggestions on best practices for evaluating, developing, supporting, and reporting on social and audit compliance standards.

EMERGENCE OF CSR

The theory behind CSR is that companies can be profitable while at the same time minimizing their negative impact on stakeholders. As evidence, a recent study by Oekom Research, a German agency that rates environmental and social performance, and securities firm Morgan Stanley indicates that companies with higher sustainability ratings outperform their counterparts who score lower on sustainability practices. The study examined the 602 companies in the Morgan Stanley Capital International World Index that have received Oekom's Corporate Responsibility Ratings and found that, between January 2000 and October 2003, the 186 highest-ranked companies in terms of sustainability outperformed the remaining 416 companies by 23.4 percent. Further, Lynn Sharpe Pains, a Harvard Business School professor, looked at all academic studies conducted on the subject of whether ethics pays (85 studies, total) and found a positive correlation between better financial performance and better social performance in 55--or 65 percent--of the studies.

As recently as five years ago, CSR was seen as an either-or proposition. If a company attempted to address stakeholder concerns, it might be perceived as impacting the company's profitability. More recently, studies and actual practice have shown that critical stakeholders--including customers, employees, and socially responsible investors--are actively looking to do business with socially responsible companies.

The 2004 Cone Corporate Citizenship Study, conducted by strategic marketing and public relations firm Cone Communications, shows that eight in 10 Americans say corporate support of causes wins their trust in that company, a 21 percent increase since 1997. Moreover, the study reveals that Americans stand ready to act against companies that behave illegally or unethically: more than three-fourths of respondents indicated they would respond to a company's negative practices by taking actions such as switching to another firm or speaking out against the company among family and friends. Increasingly, the value of companies long term is seen as dependent upon their ability to meet their expectations of social responsibility.

Furthermore, a significant percentage of many companies' value today is made up of "good will," or benevolence--an asset easy to lose and difficult to regain. In consequence, companies that recognize this fact are increasingly seeing the need to take appropriate steps to minimize their negative impacts on stakeholders and thereby protect their valuable reputations and good will.

PROMOTING RESPONSIBILITY

Failure to pay heed to CSR can dramatically impact a company's reputation and even its value. Multinationals such as Royal Dutch/Shell Group, Dow Corning Corp., Coca-Cola Co., and Nike Inc. have taken hits to their reputations for failing to stay ahead of their stakeholders' expectations. At Wal-Mart Stores Inc., Chief Executive Officer Lee Scott recently apologized publicly for letting the reputation of the company be sullied by questionable hiring practices. "For a bottom-line company like Wal-Mart, that was a significant step," observes Bruce K. Packard, a corporate attorney at Dallas-based law firm Davis Munck P.C. who has advised several boards and audit committees concerning their codes of social responsibility.

As the profile of CSR has increased globally, numerous governmental, nongovernmental, and advocacy groups have joined the dialogue. Several European governments are looking at regulatory approaches to CSR issues. France, for example, has enacted a law requiring listed companies to report annually, not merely on their financial performance, but on their social and environmental performance as well. In addition, the United Kingdom requires pension funds to identify social and environmental criteria relied upon in making investment decisions. Moreover, the IIA-UK and Ireland recently issued a "Professional Issues Bulletin" on the growing importance of CSR in organizations. The bulletin discusses issues and challenges associated with CSR and how internal auditors can help their organization address them.