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Corporate Social Responsibility & Ethics


FREE E-BOOK:
CORPORATE SOCIAL RESPONSIBILITY (CSR) THE FUNDAMENTALS
by Jeff Buckstein, CGA

In this free e-book , you will learn what Corporate Social
Responsibility (CSR) entails and why it has grown in
prominence in the business world. You will also see how CSR
has evolved over the years to become an integral part of
corporate strategy, and need not be considered as something
separate from the pursuit of profit.


What is Corporate Social Responsibility (CSR)?

There is no exact definition of Corporate Social Responsibility (CSR), nor is there an
accepted single method or approach that all companies need to follow. There are multiple
variables that can be incorporated into an action plan. Firms must, therefore, develop their
own definition of what CSR entails, and formulate an action plan to execute their
operations in a socially responsible manner towards their vast network of internal and
external stakeholders, including employees, shareholders, creditors, analysts, and the local
community.

There are, however, some widely-accepted tenets associated with CSR in the contemporary
business world. One is that a firms CSR practices closely mirror its sense of ethics in
dealing with any number of complex issues and situations. A properly structured
organization, according to financier Henry Kravis, consists of a business foundation, as well
as an ethical and moral foundation, all supported by actual experience.

CSR incorporates many factors. For instance, its advocates treat the environment with
respect, and they adhere to strong corporate governance practices. Policies with respect to
human rights, internal health and safety, careful selection of a supply chain, avoiding
corruption, and committing time and money to community events or charities are typically
important components of a CSR strategy.

Alternative terms

Various terms are often substituted for CSR. They include corporate responsibility;
corporate citizenship; corporate ethics; environmental, social, and governance (ESG);
among others.

The concept of a triple bottom line, with a business model that takes into account the






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inter-connectedness of financial, environmental, and social factors, has also gained much
traction over the past 20 years. The triple bottom line is also sometimes referred to under
the caption, people, planet, profit.

CSR is, therefore, a serious responsibility, often necessitating the use of significant
human and financial resources in an endeavour in which both financial profit and a
commitment to social responsibility are laudable goals.

















Brief history

The origins of CSR trace back to the 1960s, when issues such as the civil rights movement
and environmental activism became part of the public debate. During this time, some
businesses began to question their responsibilities in areas such as hiring individuals
from minority groups and protecting the environment.

In 1972, at the United Nations Conference on the Human Environment in Stockholm,
Sweden, representatives pondered questions about striking a balance between business
activities and their impact on the community. One of the principles adopted from that
conference was that in order to achieve a more rational management of resources and thus
to improve the environment, countries should adopt an integrated and coordinated
approach to their development planning so as to ensure that development is compatible
with the need to protect and improve the environment for the benefit of their population.

Maurice Strong, a Canadian business entrepreneur and environmentalist, was one of the key
UN organizers in Stockholm.

New measurements and definitions evolved from this conference and other similar
initiatives, including the concept of sustainable development, which was introduced in



HIP Investor Inc., a San Francisco-based investment firm, identifies five basic
categories of results-oriented CSR measures involving customers, employees, and
suppliers:

1. Health (physical and mental)

2. Wealth (net assets and income)

3. Earth (carbon and the environment)

4. Equality (gender and ethnic balance)

5. Trust (lawfulness and transparency)





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1987 by the UN-appointed Brundtland Commissions report entitled Report of the world
commission on environment and development: Our common future.

Canadas National Round Table on the Environment and the Economy (NRTEE) was
established in 1988 with a mandate to bring leadership in the new way we must think of
the relationship between the environment and the economy and the new way we must
act. Parliament legislated the NRTEE mandate in 1993.

The Canadian-based International Institute for Sustainable Development, an
international public policy research institute advocating for sustainable development, was
launched in 1990.

These organizations incorporated many of the ideas involved in sustainable
development and the triple bottom line concepts that have become deeply entrenched
components of the overall business approach towards CSR in the twenty-first century, and
are often incorporated into strategic planning. Todays firms cannot operate in figurative
silos with respect to an issue like environmental protection, because the risk faced by the
entire company when something goes wrong, such as contaminating a river, is very palpable
and has broad ramifications.












Why is CSR a key corporate issue?

There are many reasons why CSR has grown into an important facet of the contemporary
business environment. A key factor is that society has become increasingly more
demanding in its expectations that businesses need to incorporate CSR into their daily
practices; moreover, they want to see evidence this is happening.

There is also a much more acute awareness of what CSR entails. Consumers and investors
often base financial decisions on a companys commitment to social responsibility. And they
do not necessarily confine their scrutiny to the operations of the company itself. Many want
Managing CSR-related issues requires a strong sense of ethics and the ability to take
the necessary steps to do the right thing as new situations arise, even when what
constitutes the right course of action might not be clearly defined. Many experts will
attest that corporate leaders who develop a reputation for taking an ethical stance on
issues are more likely to possess a good moral grounding and sense of direction for
troubled times when difficult decisions have to be made.
Such decisions often involve more than having pre-ordained ideas of what is right or
wrong. Rather, CSR-related ethics can involve handling complex situations and
dilemmas, often during times of crisis or uncertainty, with no clear-cut rules,
regulations, or even guidelines to follow. Thats what makes them so challenging!





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to ensure its suppliers are also adhering to strong ethical practices, and firms are more and
more obliging in providing that information, as you will discover later in this course.

Moreover, the world has become a smaller place because of an increasingly global
economy, fuelled by information technology and the instantaneous communication it
enables. News about a corporate disaster in one part of the world today quickly travels all
around the globe, perpetuated by a 24-hour news cycle. With social media being so
pervasive, there is also greater awareness and faster scrutiny of a firms actions by various
environmental and socially-themed groups than ever before.

This can quickly create mayhem for a firm, as witnessed by the experience of British
Petroleum in April 2010 when a fire and explosion on its offshore oil rig Deepwater
Horizon killed 11 workers and leaked an estimated 205 million barrels of crude oil into the
Gulf of Mexico. Several coastal U.S. states, especially Louisiana, but also Mississippi,
Alabama, Florida, and Texas suffered adverse commercial and ecological effects over the
ensuing months and the ongoing damage was constantly visible via television and the
Internet.

Global warming and climate change have accelerated the CSR process as many scientists
believe man-made activities are at the heart of destructive changes to the environment,
which can affect everything from personal health to corporate welfare. For instance, earlier,
systematic destruction of the coastal wetlands in the Gulf of Mexicos Mississippi River Delta
was considered by many to have been a key contributing factor as to why Hurricane Katrina,
which devastated New Orleans in 2005, was able to cause as much inland destruction as it
did.

Greenhouse gas emissions a source of scrutiny

While political and scientific debate still exists about the degree to which man-made
activities are contributing to global warming, science has proven there is an
unquestionable link between certain activities undertaken by humans and
environmental damage. One such area involves greenhouse gas emissions.

Oil and gas, along with mining, are clear examples of resource extractive industries
whose activities most directly impact the environment, and are causing concern both
locally and globally in areas such as northern Albertas oil sands.

An ethical and conscientious approach to dealing with specific environmental problems has
proven effective in the past. For example, collective international measures were undertaken
in 1987, under The Montreal Protocol on Substances that Deplete the Ozone Layer, to

reduce the emission of chlorofluorocarbons (CFCs) emitted by appliances such as air
conditioners and refrigerators, and which were proven to be damaging to the ozone layer.
The collective measures that emerged from this agreement have proven successful.





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Its not just the large multinational firms, which tend to attract most of the scrutiny, that
need to be concerned with CSR practices. According to Industry Canada, 98% of Canadian
businesses in 2012 were small businesses. The actions these businesses decide to take, and
the policies they decide to follow with respect to CSR practices, have an enormous collective
impact on society.


Interrelationship of environmental, social responsibility,
and corporate governance policies/practices

Environmental, social, and governance (ESG) practices are often symbiotic in nature. For
example, managing risks to the environment (such as controlling noxious emissions), and
maintaining strong environmental standards; along with practicing conscientious social
policies, such as ensuring that people from all ethnic backgrounds are given an equal chance
at employment, are also good corporate governance practices.

This can quickly create mayhem for a firm, as witnessed by the experience of British
Petroleum in April 2010 when a fire and explosion on its offshore oil rig Deepwater Horizon
killed 11 workers and leaked an estimated 205 million barrels of crude oil into the Gulf of
Mexico. Several coastal U.S. states, especially Louisiana, but also Mississippi, Alabama,
Florida, and Texas suffered adverse commercial and ecological effects over the ensuing
months and the ongoing damage was constantly visible via television and the Internet.

Global warming and climate change have accelerated the CSR process as many scientists
believe man-made activities are at the heart of destructive changes to the environment,
which can affect everything from personal health to corporate welfare. For instance, earlier,
systematic destruction of the coastal wetlands in the Gulf of Mexicos Mississippi River Delta
was considered by many to have been a key contributing factor as to why Hurricane Katrina,
which devastated New Orleans in 2005, was able to cause as much inland destruction as it
did.

Greenhouse gas emissions a source of scrutiny

While political and scientific debate still exists about the degree to which man-made
activities are contributing to global warming, science has proven there is an
unquestionable link between certain activities undertaken by humans and
environmental damage. One such area involves greenhouse gas emissions.

Oil and gas, along with mining, are clear examples of resource extractive industries
whose activities most directly impact the environment, and are causing concern both
locally and globally in areas such as northern Albertas oil sands.








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An ethical and conscientious approach to dealing with specific environmental problems has
proven effective in the past. For example, collective international measures were undertaken
in 1987, under The Montreal Protocol on Substances that Deplete the Ozone Layer, to
reduce the emission of chlorofluorocarbons (CFCs) emitted by appliances such as air
conditioners and refrigerators, and which were proven to be damaging to the ozone layer.
The collective measures that emerged from this agreement have proven successful.

Its not just the large multinational firms, which tend to attract most of the scrutiny, that
need to be concerned with CSR practices. According to Industry Canada, 98% of Canadian
businesses in 2012 were small businesses. The actions these businesses decide to take, and
the policies they decide to follow with respect to CSR practices, have an enormous collective
impact on society.


Interrelationship of environmental, social responsibility,
and corporate governance policies/practices

Environmental, social, and governance (ESG) practices are often symbiotic in nature. For
example, managing risks to the environment (such as controlling noxious emissions), and
maintaining strong environmental standards; along with practicing conscientious social
policies, such as ensuring that people from all ethnic backgrounds are given an equal chance
at employment, are also good corporate governance practices.

Corporate governance is also about managing risk, and CSR is a huge component of risk at
the operational level. For example, environmental damage can result in the threat of
lawsuits, damage to ones brand, and other corporate disruptions. Therefore, adherence to
strong corporate governance policies and practices not only represents good social policy,
but also has a direct impact on the bottom line, as an upcoming section of this course will
outline in greater detail.

A companys actions cannot be viewed in isolation. If other firms in its corporate supply
chain, or to whom work is outsourced, have lax CSR standards (for example, they might
employ child labour, pollute the environment at will, or engage in bribery), that is going to
reflect poorly on the corporate governance practices of the company choosing to do
business with them.

Thus, modern corporate governance practices prominently incorporate social and
environmental factors as important elements in a firms relationship with both its
internal and external stakeholders. The tone for establishing, practicing, and
maintaining strong CSR standards needs to be set from the top with the board of
directors and senior management setting an example for the rest of the organization.

Accounting professionals, as we shall go into detail later in this module and in other
modules, also have a key corporate leadership role to fulfill when it comes to





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implementing best practices and policies.


The need for consistency in global reporting standards

A firms commitment to strong CSR practices needs to be supplemented by a concerted
communications effort.

Firms might voluntarily publish their results in supplementary reports, or make significant
disclosures in the managements discussion and analysis accompanying annual or quarterly
financial reports. But unless there is a consistent basis for measurement upon which
multiple firms can rely when preparing their reports much like generally accepted
accounting principles (GAAP) do for the reliability of financial statements corporate
stakeholders are likely to have a lesser degree of confidence in the information theyre
receiving.

A number of emerging guidelines have been developed to help quantify CSR
measurements in an effort to provide greater consistency in reporting. These include
indices such as:

Dow Jones Sustainability World Index. This was the first global sustainability index
when it was launched in 1999. It measures various economic, environmental, and social
criteria of publicly listed companies.

FTSE4Good Index Series. This series of indices, which is focused on responsible
investment, is designed to assist investors with their research and to make judgements
about companies perceived to be behaving in an environmentally and socially
responsible manner.

Sustainalytics. This is a global research firm with a substantive presence in Canada (one
of the founding companies was Canadian) designed to assist investors with corporate and
industry sector research and analysis with respect to various environmental, social, and
governance factors.

The Carbon Disclosure Project (CDP). The CDP is an independent, not-for-profit
organization that allows companies and municipalities to share measurable
environmental information. The CDP was established in 2003 by institutional investors
who wanted to see more disclosure from publicly traded companies about the risks they
were facing as a result of climate change. More than 3,000 companies from over 60
countries work with the CDP as of 2012.

Todays approach tends to be far more nuanced than when some of these indices were
initially launched. Early techniques merely attempted to screen out companies engaged in
or associated with certain activities, such as producing tobacco or gambling.






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How CSR can enhance corporate strategy and vision

Devoting time and resources to address CSR-related issues need not distract from other
essential strategies the company needs to pursue to remain profitable or a going concern. In
fact, an increasing number of businesses have discovered over the course of the twenty-first
century that CSR can actually enhance corporate strategy and vision.

A strong corporate governance regime that addresses CSR-related issues in a responsible
fashion can be a key element in enabling companies to grow in new, innovative ways, and in
providing opportunities to break into new markets. Progressive companies can develop
strategies for socially responsible production that utilize efficiencies, along with new
technologies and resources that promote sustainable practices.

Understanding what stakeholders want in terms of a socially responsible approach, and
being able to deliver on those expectations in an organized fashion, might also assist
companies capture a larger market share and provide them with a distinct competitive
advantage in the global economy. Improved branding can also enhance the share valuation
of publicly listed firms.













The Global Reporting Initiative (GRI), founded in 1997, is a not-for- profit
organization that provides firms with sustainability reporting guidance in measuring
and reporting economic, environmental, social, and governance performance
indicators.
The GRIs Sustainability Reporting Framework includes both Sustainability
Reporting Guidelines for individual organizations and for sectors. The GRI provides
examples of the types of specific sector issues that may be covered. These include
noise measurement for airports, the resettlement of people for mining and metals
companies, animal welfare for the food processing industry, and program
effectiveness for non- governmental organizations.

Firms that incorporate CSR into their long-term strategic planning, and are able to
successfully communicate those factors and strategies to investors, will be able to
provide investors with a fuller picture of the companys prospective value, according to
the CFA Institutes Standards and Financial Market Integrity division.
The CFA Institute asserts that Strategically incorporating [CSR] analysis may also
position Companies to better anticipate future operating environments, including
potential costs or burdens to their existing business model.





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Another potential long-term competitive advantage is an internal one. Employees, who
stay longer at a company because they are happy with such factors as how people are
treated within the firm, its labour hiring practices, and the availability of promotion
opportunities, are likely to be more productive.

The strength of a companys CSR-related practices might also enhance its chances of
hiring a bright young employee perhaps one of tomorrows leaders who will be needed
to propel and sustain the firms growth in the next generation.


CSR is not mutually exclusive of financial profit

Famed economist Milton Friedman wrote in a 1970 essay for The New York Times Magazine that the
social responsibility of business is to increase its profits.

However, this traditional one-dimensional definition of a corporation of only looking out
for its financial bottom line is now widely regarded by many key corporate players as
being out of date. A more holistic approach incorporating both financial and social values
has gradually seeped into the corporate consciousness.

The Corporate Social Responsibility Initiative (CSRI) at Harvard Universitys John F.
Kennedy School of Government states that corporate social responsibility encompasses not
only what companies do with their profits, but also how they make them.

Moreover, the CSRI asserts, it goes beyond philanthropy and compliance and addresses
how companies manage their economic, social, and environmental impacts, as well as
their relationships in all key spheres of influence: the workplace, the marketplace, the
supply chain, the community, and the public policy realm.

In its December 2011 publication, Regulating sustainability reporting Is a mandatory
approach better than a voluntary one?, CGA-Canada reported that a growing body of
research shows a positive correlation between company sustainability and financial
performance, suggesting the presence of a defensible business case for sustainable
development.

Strategies that incorporate sustainability practices can reduce fuel costs, lower heating and
lighting charges, reduce vehicle depreciation, produce less waste, use fewer raw materials,
and require less administrative overhead, while at the same time adding value to
operations.

Increasing dependence on technology can, for instance, result in reduced travel time,
decreasing both a firms costs as well as its environmental footprint. It also indirectly
reduces the risks faced by firms with respect to factors out of their control, such as the







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impact of rising fuel costs. A healthy approach to CSR might also reduce the risk of
business disruptions, should international political tensions affect the production and
supply of fossil fuels.

CSR often a long-term commitment

Investment in practices that promote sustainability may require significant capital, such as
the capital outlay for machinery and equipment. Therefore, any potential savings from, for
example, investing in new equipment to act as a chimney filter that will cut down on
emissions, are more likely to occur over the long run, necessitating that the corporation take
a long-term view of profitability related to sustainability.

The same argument holds true for substantive investments in research and development
designed to improve corporate sustainability. The financial professional can make a
valuable contribution in making sure the company gets its long-term financial priorities
right.

For example, the use of renewable energy sources such as wind and solar power are
gaining traction with some corporations. Accounting professionals can help determine the
short- and long-term economic feasibility of switching to clean energy, and explain those
results to their corporate colleagues. In some jurisdictions, there may also be tax
incentives in place to encourage such behaviour and who better to assess the potential
benefits and communicate those than the accounting or financial professional.

Engaging external stakeholders

Organizations can also engage their customers in socially responsible practices by orienting
their products and services such that they encourage environmentally friendly behaviour.
For example, Proctor & Gamble has developed a Tide Coldwater for customers, so they
dont have to use hot water for their laundry, thus saving them both energy and money.

Firms that are socially responsible in terms of addressing risk issues such as reducing
environmental pollution, or that take a strong ethical approach to social issues such as
ensuring ones supply chain is void of companies that exploit workers in foreign countries,
send positive signals to potential investors and other stakeholders. For a public company,
this can assist in efforts to raise capital.

Thats not to say there arent challenges. While the financial merits of CSR are now
more widely and better understood, executives at some firms still believe there is a
disconnect between being profitable and running a socially responsible business.

The CGA-Canada report, Regulating sustainability reporting Is a mandatory approach
better than a voluntary one?, states that sustainability practices are sometimes
stereotyped as being costly to report, confusing, and highly qualitative with little true






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advantage. For instance, managers indicate that measuring the progress of sustainability
year over year is difficult to report since many programs have little or no empirical
indicators to compare.

There is also fear that when an economy is going through recession and bad times, as the
past several years have been to most industrialized economies, financial pressures might
force companies to put sustainability and CSR measures on the back burner and focus all
efforts on the traditional bottom line.

Example 1.1 describes one companys commitment to incorporating CSR practices while
making a profit.


EXAMPLE 1.1

Ricoh: A three-stage process of combining environmental conservation with
profitability

Masamitsu Sakurai, the chairman of Ricoh Company, Ltd., a well-known provider of office
equipment, wrote in an online article for Ethisphere Institute in 2009 that, since he
became the companys president in 1996, environmental conservation passed through a
three-stage process:

1. Passive merely following regulations and reacting to outside pressure such as
needing to conform to requirements for green procurement.

2. Proactive as volunteers, we became imbued with a sense of mission regarding our
planet.

3. Responsible when we were able to simultaneously achieve environmental
conservation and profit creation.

Sakurai noted that the results of the companys activities during the responsible stage are
published annually in its Sustainability Report and are favourably received by its
stakeholders.

He gave specific examples of how Ricoh achieved a financial advantage through what he
termed environmental conservation, in which the company shifted to a flexible, cell-
based production system as opposed to a line system, thus reducing CO2 emissions and
increasing productivity. We recognized that CO2 emission and waste reduction were the
same as the cost savings and reduction of parts, materials, and wasteful operations in which
we were previously engaged these ideas resulted in increased production, reduced costs
and improvements in the quality of our products.

Sakurai emphasized: I firmly believe, and would like everyone to believe, that






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environmental conservation and sustainable profits are mutually compatible. If, as a
corporate executive, your commitment to the environment is deep, you will achieve both
business and environmental sustainability as well as enjoy greater success as a
business.


What does it mean to be a good corporate citizen?

Many companies today abide by a philosophical saying, Do well by doing good,
meaning that operating in a socially responsible way to improve society and the
environment is also a recipe for improving business.

The saying also encapsulates what being a good corporate citizen means. There is a two-
way relationship between corporations, which are run by individuals, and their
communities. Protection of sustainable renewable resources and the ecosystem as part of a
comprehensive corporate governance strategy is widely considered to be part of a social
contract with the community.

Therefore, the attention paid by corporate executives to their wider surroundings will carry
a lot of weight in terms of how the company is perceived by those in the larger community.
Social responsibility is multi-faceted. It can mean direct community participation, both in
terms of donating money and time to worthwhile causes. Or it can be the reputation earned
through ethical practices in any number of environmental or social areas.












Corporate CSR efforts vary. Some firms only do what they are legally required to; others are
more ambitious and try to ramp up their efforts to a more intensive level and go beyond the
minimum required to be socially responsible. They want to thrive and make the world a
better place by doing so.

As more companies forge a path inclusive of CSR practices, evidence is building that they
are inspiring others within their business circle to follow their example. This can have a
domino effect along the corporate supply chain and set the bar higher for competitors to
also strive to achieve best practices.




The International Institute for Sustainable Development (IISD) asserts in its
publication corporate social responsibility: An implementation guide for business,
that improved citizen and stakeholder understanding of the firm and its objectives
and activities translates into improved stakeholder relations.
This, in turn, provides the company with a more robust social license to operate in
the community.





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About the Author:

This e-book was written by Jeff Buckstein, CGA, an Ottawa based journalist, Jeff has published articles
on a variety of topics, including personal finance, taxation, high tech, banking, and education issues. Jeffs
articles have appeared in The Globe and Mail, the National Post, Ottawa Citizen, The Bottom Line,
Canadian Banker, and Canadian Money Saver, among others.
Prior to becoming a full-time writer in 1995, Jeff worked for 10 years as a professional accountant,
primarily in the financial services sector, after beginning his career at the Bank of Canada in 1978. As a PD
Net Thought Leader, Jeff provides monthly resources on the topics of business law, practice management,
and ethics and trust to name a few.






Want to learn more?
PD Net offers the following courses, both presented and written by CSR expert and Bottom Line
columnist Jeff Buckstein:

Corporate Social Responsibility & Ethics Online Course
The subject of Corporate Social Responsibility (CSR) resonates throughout todays business
community. Discover the topical issues that define CSR environment, social responsibility, and
corporate governance and examine how ethics factors into the accompanying issues affecting
business leaders today.
Corporate Social Responsibility: Enhance Your Bottom Line On Demand
The need to exercise strong leadership in the area of corporate social responsibility (CSR) is
mandatory for contemporary business leaders. Join presenter Jeff Buckstein has he summarizes CSR
best practices and provides a solid base of information for financial professionals at all levels who
are tasked with implementing or managing CSR strategies in their organizations.