science

The 4CR strategic approach to corporate responsibility

.

Comparison with the Aupperle, Hatfield & Carroll’s (1985) findings also showed that in the intervening

ten years the gap in the relative importance between economic and legal responsibilities had decreased,

while the importance of ethical responsibilities appeared to be increasing and that of philanthropic

responsibilities to be decreasing (Pinkston & Carroll, 1996).

The societal dimension of strategic management

In 1979, around the time Carroll published his CSR model, the societal dimension of strategic

management was explored by Igor Ansoff in “The Changing Shape of the Strategic Problem”1. He

proposed that an “enterprise strategy”, describing the interaction of a firm with its environment, should

be added to the corporate, business and functional levels of strategic management. According to Ansoff,

an enterprise strategy was needed in order to enhance a company’s societal legitimacy and to address

new variables in strategic management such as “new consumer attitudes, new dimensions of social

control and above all, a questioning of the firm’s role in society”. These ideas are today at the heart of

stakeholder approaches to strategic management.

The stakeholder theory, emphasising a broad set of social responsibilities for business was established

by R Freeman in 1984 through the ground breaking work published in his book “Strategic management:

A stakeholder approach”2 which effectively established the field of Business & Society. Freeman defined

stakeholders as “any group or individual who is affected by or can affect the achievement of an

organisation’s objectives”.

According to Freeman, the use of the term stakeholder grew out of the pioneering ideas at Stanford

Research Institute (now SRI International) in the 1960’s which were further developed through the work

of Igor Ansoff and others. The basic SRI concept was that “managers needed to understand the concerns

of shareholders, employees, customers, suppliers, lenders and society, in order to develop objectives

that stakeholders would support. This support was deemed necessary for long term success and

therefore management should actively explore its relationships with all stakeholders in order to develop

business strategies.”

Stakeholder approaches to strategic management provide the foundations for the 4CR methodology and

are described in some detail in section 7.3

Overview of theoretical perspectives

A summary of the theoretical streams described above is presented in the following diagram.

1 H. Igor Ansoff, 1979 "The Changing Shape of the Strategic Problem." in Schendel and Hofer, Strategic Management.2 Freeman, E. R., 1984, Strategic management: A stakeholder approach, Pitman, Boston.

©P. & Y. Katsoulakos 1 12th July 2006

http://www.csrquest.net/


We can distinguish two main theoretical streams associated with corporate responsibility. The first

stream represents the CSR perspective emphasising ethical issues and social audit. The second stream

represents the social dimension of strategic management based on stakeholder approaches. It should be

noted that sustainability related responsibilities do not feature in the described theoretical framework.

However corporate sustainability issues are related to environmental economics established also in the

70s-80s to address environment as a scarce resource and to ensure that the costs and the benefits of

environmental measures are well balanced.

1.3 Corporate responsibility goals and principles

CR related initiatives

The influential initiatives that are shaping the goals and principles underpinning the field of corporate

responsibility are:

the Global Compact initiated by the UN Secretary -General in 1999 as a network involving

“governments, who defined the principles on which the initiative is based; hundreds of companies

from all regions of the world, whose actions it seeks to influence; labour, in whose hands the

concrete process of global production takes place; civil society organisations representing the wider

community of stakeholders and the United Nations”.

the Millennium Development Goals representing a road map for Millennium Declaration unanimously

adopted in September 2000 by the member states of the United Nations.

the 'United Nations Norms on the Responsibilities of Transnational Corporations and other business

enterprises with Regard to Human Rights' providing the baseline for human rights principles. The

Business Leaders Initiative on Human Rights (BLIHR) extends this baseline by mapping issues from

the UN Norms to essential, expected and desirable business actions;

the World Commission on the Social Dimension of Globalization was established by the International

Labour Organization (ILO) in February 2002 and provided a final report in February 2004

complementing the Millennium Development Goals and creating a major contribution "to

international dialogue towards a fully inclusive and equitable globalization".

A historic review of milestones associated with corporate social responsibility and sustainability is given

in Annex 2.

Corporate responsibility goals and principles summary

The fundamental CSR, sustainability and governance goals and principles are summarised in the

following table based on the initiatives outlined above.



http://www.csrquest.net/default.aspx?articleID=13141&heading=




The areas addressed are:

a) Human Rights

b) Labour Standards

c) Environment

d) Health

e) Anti-Corruption

f) Economic responsibility

g) Corporate Governance




Corporate Responsibility and Sustainability Goals and Principles

Global Compact The Millennium development Goals

The 'United Nations Norms on Human Rights'

HumanRights

Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; Principle 2: Make sure that they are not complicit in human rights abuses.

Goal 1 Eradicate extreme poverty and hunger;Goal 2 Achieve universal primary education;Goal 3 Promote gender equality and empower women.

B. Right to equal opportunity and non-discriminatory treatment; C. Right to security of persons;E. Respect for national sovereignty and human rights.

Labour Standards

Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: The elimination of all forms of forced and compulsory labour; Principle 5: The effective abolition of child labour; Principle 6: The elimination of employment discrimination.

D. Rights of workers.

Environment

Principle 7: Businesses should support a precautionary approach to environmental challenges; Principle 8: Undertake initiatives to promote greater environmental responsibility; Principle 9: Encourage the development and diffusion of environmentally friendly technologies.

Goal 7: Ensure environmental sustainability.

G. Obligations with regard to environmental protection.

Anti-Corruption

Principle 10: Businesses should work against all forms of corruption, including extortion and bribery.

Health

Goal 4 Reduce child mortality;Goal 5 Improve maternal health;Goal 6 Combat HIV/AIDS, malaria, and other diseases.

Economic responsibility

Goal 8 Develop a global partnership for development.

F. Obligations with regard to consumer protection.

OECD Principles of Corporate Governance - 2004

Ensuring the Basis for an Effective Corporate Governance Framework The Rights of Shareholders and Key Ownership FunctionsThe Equitable Treatment of ShareholdersThe Role of Stakeholders in Corporate GovernanceDisclosure and TransparencyThe Responsibilities of the Board




2 Corporate Social Responsibility CSR

2.1 Background

In the 1990s, the Corporate Social Responsibility (CSR) movement gained prominence in the political-

economic debate and in the strategies of leading business organisations. CSR stressed corporate self-

regulation associated with ethical issues, human rights, health and safety, environmental protection and

social and environmental reporting and voluntary initiatives involving support for community projects

and philanthropy.

The underlying principles of the CSR movement are represented by the Global Compact principles for

responsible corporate citizenship.

In march 2000, the European Council meeting in Lisbon placed Corporate Social Responsibility in the

European Social Program. The Commission published the Green Paper entitled 'Promoting a European

Framework for Corporate Social Responsibility' in July 2001. The aims of this document were to launch a

public debate in European, national and international level, about the concept of CSR and to identify how

to build a partnership for the development of a European framework for the promotion of CSR. It was

followed between 2002 and 205 by the Communication 'Corporate the European Social Responsibility: a

business contribution to Sustainable Development' which set up a European Multistakeholder Forum on

CSR, to be used as a platform to promote transparency and convergence of CSR practices and

instruments. In its contribution to the March 2005 Spring Council, the Commission recognised that CSR

“can play a key role in contributing to sustainable development while enhancing Europe’s innovative

potential and competitiveness”3. In the Social Agenda4, the Commission announced that it would, in co-

operation with Member States and stakeholders, present initiatives to further enhance the development

and transparency of CSR. In the revised Sustainable Development Strategy5, the Commission called “on

the business leaders and other key stakeholders of Europe to engage in urgent reflection with political

leaders on the medium- and long-term policies needed for sustainability and propose ambitious business

responses which go beyond existing minimum legal requirements”.

In 2006 the Commission and business representatives have launched a European Alliance for CSR. To

inspire more European enterprises to go beyond their minimum legal obligations in favour of society and

sustainable development and to mobilise the capacities of European enterprises in order to make Europe

a pole of excellence on CSR (Corporate Social Responsibility).

A major force in the CSR movement is CSR Europe established in January 1996 by a group of 57

European companies with the mission to help companies integrate CSR into the way they do business.

CSR Europe reaches out to 1400 companies through 18 National Partner Organisations.

2.2 CSR definitions

CSR is generally understood to be the way a company balances the economic, environmental and social

aspects of its operation, addressing the expectations of its stakeholders.

3 COM(2005) 24.4 COM(2005) 33.5 COM(2005) 658.





CSR definitions have proliferated in the literature particularly since the 1980s. Nevertheless, common

ground between CSR concepts and definitions is widely acknowledged and evident from the

representative definitions given below.

“CSR is a company’s positive impact on society and the environment through its operations, products or

services and through its interaction with key stakeholders such as employees, customers, investors,

communities and suppliers” - Business in the Community.

“CSR means open and transparent business practices that are based on ethical values and respect for

employees, communities and the environment” - CSR Forum.

“CSR is about how companies manage the business processes to produce an overall positive impact on

society”- Mallen Baker.

“Corporate Social Responsibility is the continuing 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” - World Business Council for Sustainable

Development.

“CSR is defined as ‘a concept whereby companies integrate social and environmental concerns in their

business operations and in their interaction with their stakeholders on a voluntary basis’ as they are

increasingly aware that responsible behaviour leads to sustainable business success” - EU Green paper

on CSR.

“CSR is defined as operating a business in a manner that meets or exceeds the ethical, legal,

commercial and public expectations that society has of business. CSR is seen by leadership companies

as more than a collection of discrete practices or occasional gestures, or initiatives motivated by

marketing, public relations or other business benefits. Rather, it is viewed as a comprehensive set of

policies, practices and programs that are integrated throughout business operations, and decision-

making processes and are supported and rewarded by top management” - Business for Social

Responsibility..

“Corporate Social Responsibility involves the conduct of a business so that it is economically profitable,

law abiding, ethical and socially supportive. To be socially responsible then means that profitability and

obedience to the law are foremost conditions when discussing the firm’s ethics and the extent to which

it supports the society in which it exists with contributions of money, time and talent”- Carroll (1983)

To summarise, a CSR practising corporation should strive to obey the law, make a profit, be ethical and

provide societal value and accountability.

2.3 Views for and against CSR

To complete the picture of what CSR s about representative views for and against CSR are given in the

following table.

Social

responsibility is

just a PR tool for

A report from Christian Aid warns that businesses are using corporate social

responsibility as a shield to hide behind to campaign against environmental

and human rights regulations, reports Terry Macalister. The report claims

T Macalister,

The Guardian

21st January




businesses, says

report’

CSR is in some cases counter-productive, worsening relations between

business and local communities. The report is called Behind the Mask: The

Real Face of Corporate Social Responsibility and calls for new international

guidelines to govern company behaviour.

2004

‘Two-faced

capitalism’

Corporate social responsibility is all the rage. Does it, and should it, make

any difference to the way firms behave?

The Economist

22nd January

2004

'A crisis of

legitimacy'

Despite the rallying economy, despite management shake-ups, reforms and

diversity programmes, the idea persists that companies are inherently

selfish entities, intent only on maximising their profits. There is scepticism

about corporate responsibility, and in particular, the flood of self-

promotional material that companies around the world have begun to

produce - the glossy publications, the social and environmental reports, the

declarations of good intentions and best practice. Corporate leaders should

make sure that statements and reports produced are not just pretty words

and phrases but are backed up by real action.

David Varney,

Chairman, mm02

and Business in

the Community

March 2004

‘Business route

to make the

world better’

CSR has to be part of the "DNA" of a company with everyone involved

because they wanted to be. Regulation is an imposition on the free spirit of

business. It is important to have rules, for example on health and safety,

but over-regulation, especially in areas like CSR is counter-productive.

Digby Jones,

Confederation of

British Industry

7th April 2004

‘The misguided

moral code of

corporate

responsibility

The hypocritical behaviour of companies that undertake some high profile

social responsibility projects whilst major business activities have a

negative impact on society or the environment is exposed. The fact that

companies exist to make profit is highlighted.

J Guthrie,

Financial

Times20th April

2004

Why should

business

engage in social

responsibility?

The first thing people need to understand around corporate social

responsibility is that the business case is very strong. If you look at any

survey, all other things being equal (such as price and quality), the

consumer will buy from the company that has a responsible attitude

towards its community. In recruitment, people want to work for a company

with a responsible social attitude.

Michael Rake,

KPMG- DAVOS

World Economic

Forum interview

29th January 2005

Irrespective of positions for or against CSR there are a number of generally accepted positive impacts

that are attributed to the CSR movement. The main one is that CSR is credited with re-humanising a

business world that had become dangerously detached from the physical and cultural environment in

which it operates. Corporations have recognised the importance of CSR practices on ethics of resource

and people management even if the reasons are mainly linked to protecting reputations.

2.4 Business ethics

Business ethics represent the broad principles of integrity and fairness associated with governance,

human rights and ethical trading.

Most companies have well documented standards and ethical codes (90% of FTSE 100 43% of FTSE 250)

proclaiming their commitment to conducting business responsibly thus avoiding corporate scandals that

have dominated the business news in recent years.

Quality varies widely BUT even having an excellent code is no guarantee that it will be followed. To be

effective, a code needs to be rigorously enforced by embedding its principles into the company’s culture

and managing properly its implementation. Research shows that “there is a gap between the existence

of company codes of ethics and the embedding of its substance in the organisation’s ‘blood stream’6”.

6 More, E., & Webley, S. (2003). Does Business Ethics Pay?; London: Institute of Business Ethics




The Sarbanes-Oxley Act in the USA and European Union directives continue to raise the bar for corporate

ethics and compliance programs. However, enforcement is also difficult at the level of government

agencies and is likely to remain so.

Possibly, real solutions can only be achieved by improved transparency systems at company level

coupled with stronger efforts by administrations.

Good business ethics practices include:

publishing a Code of Conduct/Ethics;

providing examples of business ethics dilemmas;

defining ethical tests that can be used by staff to facilitate decision-making;

making the company’s conflict of interest guidelines publicly available to investors and other

stakeholders, as appropriate;

designating an Ethics/Compliance Officer easily accessible by relevant stakeholder groups;

communicating the codes and procedures to all employees, agents and other appropriate

stakeholders;

establishing systems for monitoring and overseeing the actions of the organisation, its employees,

agents and other critical stakeholders and detecting / preventing unethical and/or illegal activities;

gathering relevant data and reporting on a regular basis those charged with ethical oversight;

providing code enforcement mechanisms;

specifying appropriate offence responses;

providing an easy ethics complaint self-disclosing process.

2.5 Corporate citizenship

Corporate citizenship emphasises the contribution a company makes to society through its core business

activities, its social investment and engagement in good causes.

Good corporate citizens are companies behaving according to values that society expects them to hold

or more specifically according to what is expected from a ‘good’ company from its stakeholders. The

emphasis is therefore on stakeholder engagement, accountability, trust and reputation management.

The Center for Corporate Citizenship at Boston College identifies four core principles that define the

essence of corporate citizenship:

Minimize harm: minimize the negative consequences of business activities and decisions on

stakeholders, including employees, customers, communities, ecosystems, shareholders, and suppliers;

Maximize benefit: contribute to societal and economic well-being by investing resources in activities that

benefit shareholders as well as broader stakeholders;

Be accountable and responsive to key stakeholders: build relationships of trust that involve becoming

more transparent and open about the progress and setbacks businesses experience in an effort to

operate ethically;

Support strong financial results: the responsibility of a company to return a profit to shareholders must

always be considered as part of its obligation to society.

2.6 Social accountability




Social accountability is primarily concerned with the management and reporting of quantitative and

qualitative aspects of social, ethical and environmental performance to both internal and external

stakeholders.

A number of initiatives/organisations are promoting social accountability including:

a) The Institute of Social and Ethical AccountAbility established in 1995 to promote accountability for

sustainable development by providing tools and standards (AA1000 Series);

b) The Social Accountability International (SAI) dedicated to promoting human rights for workers

around the world and best known for the SA8000 standards for managing ethical workplace

conditions throughout global supply chains;

c) The Business Social Compliance Initiative BSCI is the European approach to improve social

performance in supplier countries through a common monitoring system simplifying and

standardising the requirements and individual monitoring procedures.




3 Corporate Sustainability

3.1 Background

Corporate Sustainability is related to the broader concept of sustainable development which originated

with the 1987 report ‘Our Common Future’ by the World Commission on Environment and Development

(known as the Brundland Commission). Sustainable development refers to “meeting the needs of the

present without compromising the ability of future generations to meet their own needs".

Sustainable development emphasise intergenerational responsibilities and the need for multi-

stakeholder coalitions to create the conditions for better quality of life for everyone, now and for future

generations

The first conference on sustainable development was held in Stockholm in 1972 where 113 nations and

500 non governmental organisations attended. It was the first time that “attention was drawn to the

need to preserve natural habitats to produce a sustained improvement in living conditions for all, and

the need for international cooperation to achieve this”. The emphasis was on solving environmental

problems but without ignoring social, economic and development factors.

The World Conservation Strategy of 1980 clarified the ideas of sustainable development defined as

“development improving the quality of human life while living within the carrying capacity of supporting

eco-systems” "This is the kind of development that provides real improvements in the quality of human

life and at the same time conserves the vitality and diversity of the Earth. The goal is development that

will be sustainable. Today it may seem visionary but it is attainable. To more and more people it also

appears our only rational option". (The World Conservation Strategy, IUCN, UNEP, WWF 1980).

The Brundland Report in 1987 provided a detailed analysis of sustainable development and alerted the

world to the urgency of making progress toward economic development that could be sustained without

the destruction of natural resources or the harming of the environment. The report highlighted three

main components to sustainable development:

environmental protection;

economic growth;

social equity.

In 1992 The 'Earth Summit' (UN Conference on Environment and Development) in Rio de Janeiro agreed

the Rio Declaration setting out 27 principles supporting sustainable development, a plan of action

(Agenda 21) and a recommendation that all countries should produce national sustainable development

strategies .

Closely linked with the sustainability movement is the Millennium Development Goals promoting human

development as the key to sustaining social and economic progress in all countries and recognising the

importance of creating a global partnership for development.

The Global Reporting Initiative (GRI) that grew out of the Coalition for Environmentally Responsible

Economies (CERES) and the United Nations Environment Programme (UNEP) produced, in June 2000, the



http://www.un.org/esa/sustdev/documents/agenda21/index.htm



GRI Sustainability Reporting Guidelines with reporting principles and specific content indicators to guide

the preparation of organisation-level sustainability reports.

3.2 The need for sustainable development

The requirements for sustainable development come from the realisation that development, centred

only on economic growth paradigms is unsustainable and there is a need for a more pro-active role by

states, companies and communities in the development process. Creating a sustainable future,

economically, socially and environmentally requires governments, society, corporations and individuals

to rethink their expectations, their responsibilities and their interactions.

A central concept in corporate sustainability is participation in the establishment and expansion of

international institutions for co-operation to confront common concerns for sustainable development

such as climate change, energy and poverty issues.

“By 2050, 85% of the world’s population of some nine billion people will be in developing countries. If

these people are not by then engaged in the market place, business cannot prosper and the benefits of

a global market will not exist. Clearly it is in our mutual interest to help societies shift to a more

sustainable path.” WBCSD’s -Sustainable Livelihoods Project

There is increasing recognition that we are all part of a complex dynamic system whose sustainable

development is dependant on establishing a responsible global partnership between people, companies

and governments. Such a global partnership should strive towards growth with equity whilst preserving

the integrity of the environment and natural resources for future generations. This mandates a

collaboration process in which the use of natural resources, the directing of investments at national and

corporate levels, the orientation of technological developments and international co-operation must

converge to create conditions for better satisfying human needs and aspirations now and in the future.

Sustainable development is possibly, in the first place, a priority for governments that need to set

policies and strategies to mobilise the required actions. However it is recognised that sustainable

development poses a challenge to the balance of responsibilities between companies, governments, non

government organisations and individuals. In the new order of global governance it is not unreasonable

to assume that companies will have to play a more proactive role to get things moving.

3.3 Corporate Sustainability definition

Corporate Sustainability can be regarded as the corporate response to sustainable development

represented by strategies and practices that address the key issues for the world’s sustainable

development. Sustainable development is about creating the conditions for better quality of life for

everyone, now and in the future, based on eco-efficiency and innovative solutions for engaging everyone

and particularly the developing countries in the global economy.

“Corporate sustainability means that your service or product does not compete in the marketplace only

in terms of its superior image, power, speed, packaging, etc. Additionally, your business must deliver

products or services to the customer in a way that reduces consumption, energy use, distribution costs,

economic concentration, soil erosion, atmospheric pollution, and other forms of environmental damage.”

The Ecology of Commerce (1993)





PricewaterhouseCoopers now define corporate sustainability as aligning an organisation's products and

services with stakeholder expectations, thereby adding economic, environmental and social value.

According to Dow Jones Sustainability Index., “Corporate Sustainability is a business approach that

creates long-term shareholder value by embracing opportunities and managing risks deriving from

economic, environmental and social developments”.

The corporate sustainability movement is about companies contributing effectively to a global

partnership for sustainable development. It is about companies delivering wide societal value including

support for health and human rights improvements, regional development and fair globalisation and

respecting the environment by promoting technologies to reduce the emission of greenhouse gases and

by implementing effective environmental risk management systems. It is also about companies that

make long term performance stability a top priority in corporate strategy.

3.4 Corporate sustainability challenges

“Sustainability is about living and working in ways that meet and integrate existing environmental,

economic and social needs without compromising the well-being of future generations”. Related aspects

are the Environmental Justice and contemporary international law dealing with Intergenerational Equity

under environmental protection, human rights and economic development.

The World Economic Forum7 has repeatedly emphasised that poverty, climate change, education,

equitable globalisation and good global governance is the responsibility of all society. In the 2005

closing session, business, government, academic and civil society leaders urged adoption of technology

to reduce the emission of greenhouse gases, the creation of a fund to accelerate financial aid to the

poorest nations and the removal of trade barriers that deprive developing countries of the dividends of

global economic growth. In 1996 the call is very similar, even though disaster relief takes prominence,

and using the "creative imperative" is suggested as a way of making progress.

According to Hawken 19938, creating a restorative economy means rethinking the fundamental purpose

of business and “creating a very different kind of economy, one that can restore ecosystems and protect

the environment while bringing forth innovation, prosperity, meaningful work and true security”. For this,

companies must minimise harmful exploitation of natural resources, generation of excessive amounts of

toxins, pollutants and waste.

We could summarise that the main corporate challenges in supporting sustainable development lie

along two interrelated dimensions:

accelerating the pace of improving corporate sustainability performance;

participating actively in partnerships and networks that can create the capacity for sustainable

development.

7 http://www.weforum.org/8 Paul Hawken, 1993. The Ecology of Commerce a Declaration of Sustainability; HarperCollins







Companies need to accept a new proactive role in shaping the future of the world by supporting and

developing the social dimension of globalisation and taking when necessary a leading role in:

organising responsible supply chains;

investing in innovative health, energy and environmental products;

establishing business models that will work in poorer countries;

transferring knowledge and improving conditions and infrastructure in developing countries.

partnerships and dynamic coalitions to strengthen the world’s sustainability capacity.

Specific issues associated with health, environment and human rights are outlined in the following

subsections.

Health related challenges

Unprecedented economic change and increased global instabilities over the last decade have created

acute new challenges for health. Persistent poverty, accelerated by population growth and large scale

migration, has a large impact on health issues. Nearly half of the world’s population have inadequate

access to medicine and health care, diseases assumed to have been conquered are re-emerging and

obesity and stress related problems are becoming new health challenges. Additionally, the HIV/AIDS

problems are far from contained.

Recent statistics indicate that:

three million children die every year due to lack of clean water;

12 million children die every year due to disease;

18 million people worldwide have been infected with HIV and 2.5 million have died of AIDS. 90% of

new infections are in developing countries;

AIDS is now the leading cause of death for adults under the age of 45 in Europe and North America.

A crucial factor in successfully addressing the health challenges is the effective development of

partnerships between business organisations, the World Health Organisation (WHO) and health

authorities. Corporate participation in health promotion is important either through core business

activities, management expertise, training, health and safety policies or through social investments and

engagement in health promoting initiatives.

Environment related challenges

Management of environmental issues has reached relative maturity compared to other corporate

responsibility and sustainability issues as many organisations have been reporting on environmental

performance for some 10 years and in some sectors compliance to environmental standards is

mandatory. This has been helped by the ISO 14000 environmental management standard.

Companies are nowadays expected to integrate environmental responsibility at all levels of their

operations; to find sustainable solutions for natural resources use in order to reduce company’s impact

on the environment; to manage environmental risks ensuring reduction in waste, pollution and

emissions; to maximise the efficiency and productivity of all assets and resources including

improvements in the management of water, energy and materials.






Corporate environmental performance should be measured against evolving environmental priorities

and targets formulated collectively by stakeholders including governments, environment support

organisations, sector associations and businesses. Companies themselves should be aiming at improving

elements of their environmental programs including broader participation in combating critical

environmental problems, working with local authorities to build capacity and enhance their

organisational ability to develop integrated approaches to environmental management.

Global efforts to reduce the greenhouse gas emissions from human activities that threaten the world’s

climate are beginning to make an impact. The Kyoto Protocol is now legally binding, and the European

Union has introduced its pioneering Emissions Trading Scheme. Discussions have started on the global

framework beyond Kyoto.

Despite the success in understanding the environmental issues and addressing environmental risks in

business processes there is certainly substantial room for improvement. The main challenge is to create

a global participative network that raises the standards and monitors and responds to environmental

challenges. The crucial goal is the development of responsiveness capabilities and adaptive capacity to

reduce vulnerability from climate change and other environmental risks particularly in the high risk

industrial sectors and vulnerable regions.

The Global Environment Outlook (GEO), published periodically by the United Nations Environment

Programme (UNEP)9, provides an assessment on the state and trends of environmental parameters

across the world. The assessment tries to answer the following questions:

What is happening to the world's environment?

Why is it happening?

What are we doing to address the problems?

How would alternative decisions affect the future?

Human rights related challenges

Amidst an increasing climate of mistrust around the world fuelled by terrorism threat and conflict,

balancing human rights issues and security concerns is a major Human Rights challenge.

The role of business organisations on human rights is complex. The United Nations Global Compact first

two principles are that: "Businesses should support and respect the protection of internationally

proclaimed human rights within their sphere of influence; and make sure that they are not complicit in

human rights abuses."

The basic corporate obligation of ensuring equal opportunities for all employees and taking adequate

measures to assure that suppliers also have proper policies and processes on human rights is a matter

reaching relative maturity. However, given the increasing influence of corporations in the global

economy a more proactive role in the guardianship of human rights is possibly the new challenge.

9 http://www.unep.org/geo/yearbook/yb2006/






Former UN High Commissioner for Human Rights, Mary Robinson, has stressed the need to find common

ground about the role of the private sector in contributing to the realisation of human rights10. “This

means businesses avoiding policies and practices that lead to rights violations. But it also means

fulfilling appropriate responsibilities for positive actions which promote greater respect for fundamental

rights around the world as extreme poverty is the single biggest human rights challenge facing the

world today.” Quoting statistics such as the 6.3 million children that die each year of hunger and the

more than 30,000 children that die every day from preventable diseases, Mary Robinson argued that

poverty on this scale translates into a denial of fundamental rights to life, to adequate food, healthcare

and education on a massive scale.

A way forward

The outlined corporate sustainability challenge represents a tall order for the business world that is

accustomed to worry about the next contract and the annual financial performance rather than climate

change, ecosystem capacity and poverty issues. The emerging requirements for corporate support to

sustainable development probably represent a cultural shock that will take time to sink in the business

way of thinking and working. Practically and realistically only the very successful companies could take

up the challenge and hopefully will establish the required new sustainability bound business models that

can be followed more widely in the future.

10 The Human Rights and the Private Sector Symposium, Novartis; Basel, Switzerland, 27 November 2003




3.5 An integrated perspective between global sustainable development and

corporate sustainability

Despite the obvious interrelationship between sustainability issues at global/national/sector level and

corporate level, as yet, there are no serious attempts to link the two together. This effectively

undermines both the national sustainability policies and strategies and reduces the potential impact of

the corporate sustainability movement.

An integrated perspective between sustainable development and corporate sustainability is shown in the

following diagram.

The approach highlights the following aspects:

harmonisation of corporate strategies with national sustainability strategies;

harmonisation of sustainability indicators measuring the impact of national and international policies

with corporate sustainability criteria;

establishing feedback loops from corporate sustainability performance and best practices to

corporate strategy and to the broader sustainable development goals and action plans at national

and international levels.

3.6 The role of Governments in Corporate Sustainability

Chapter 8 of the Agenda 21 (Rio declaration) calls on countries to adopt national strategies for

sustainable development that “should build upon and harmonize the various sectoral economic, social

and environmental policies and plans that are operating in the country.”

In 2002, the World Summit for Sustainable Development (WSSD) urged States not only to “take

immediate steps to make progress in the formulation and elaboration of national strategies for

sustainable development” but also to “begin their implementation by 2005.”

In addition, integrating the principles of sustainable development into country policies and programmes

is one of the targets contained in the United Nations Millennium Declaration to reach the goal of

environmental sustainability.




Governments are expected to formulate fiscal, energy, transport, urban development and other policies

supporting sustainable development, to invest in infrastructure that stimulates sustainable growth and

to create awareness and transparency on sustainability issues, promoting knowledge sharing and

innovation.

Governmental commitment to sustainable development is reflected in the ratification of the Kyoto

Protocol and the European Environmental Liability Directive 2004/35/EC and Emissions Trading Scheme

(EU ETS). The Environmental Liability Directive 2004/35/EC11 relating to EU policy on the environment is

"based on the precautionary principle and on the principles that preventive action should be taken, that

environmental damage should as a priority be rectified at source and that the polluter should pay".

Government sustainability strategies have been formulated in many countries to address sustainability

issues including climate change focusing on high impact sectors such as power generation and

transport.

The EU overall sustainable development strategy includes economic policy and production changes that

influence demand for transport, urban policies and energy policies.

Of particular interest are the transport policies that emphasise "Putting Users at the Heart of Transport

Policy” by providing a system that meets their needs and expectations. Proposed actions include:

improve road safety;

reform legislation on charging for the use of transport infrastructure;

develop proposals on fuel taxation;

provide easier intermodal travel for people;

enhance cohesion.

An example of a governmental response to sustainable developments is the UK Government’s strategy,

which is based on the following four objectives:

a) social progress which recognises the needs of everyone;

b) effective protection of the environment;

c) prudent use of natural resources;

d) maintaining high and stable levels of economic growth and employment.

Business should align their strategies with national strategies as outlined in the previous section and

activate sustainable solutions applying when necessary innovative business models in collaboration with

NGOs and other stakeholders.

11 Directive 2004/35/EC of the European Parliament on environmental liability with regard to the prevention and

remedying of environmental damage has been published in the Official Journal L 143 of 30 April 2004.





3.7 Sustainable development milestones

Source: Sustainable Development the UK Approach, UN Commission for Sustainable Development

Since 1987 the progress achieved in "sustainable development" can be traced by the following

landmarks represented by policies and initiative by the UN and various governments

1987 The World Commission on Environment and Development chaired by the Prime Minister of Norway, Mrs Gro

Harlem Bruntland, publishes a report Our Common Future (The Bruntland Report) which brings the concept

of sustainable development onto the international agenda.

1992 Nearly 180 countries meet at the 'Earth Summit' (UN Conference on Environment and Development) in Rio

de Janeiro to discuss how to achieve sustainable development. The Summit agrees the Rio Declaration on

Environment and Development which sets out 27 principles supporting sustainable development. Also

agreed is a plan of action, Agenda 21, and a recommendation that all countries should produce national

sustainable development strategies.

The Earth Summit also establishes the UN Commission on Sustainable Development, which meets every

year, as well as important UN bodies - the Framework Convention on Climate Change and the Convention

on Biological Diversity.

Towards Sustainability, the Fifth Environmental Action Programme of the European Union is adopted

1997 A special UN conference is held to review the implementation of Agenda 21 (Rio+5). This repeats the call

for all countries to have sustainable development strategies in place - in particular by the time of the next

review of Agenda 21 in 2002 (Rio+10).

In Europe, changes to Articles 2 to 6 of the Treaty establishing the European Community are agreed in the

Treaty of Amsterdam, give sustainable development a much greater prominence.

1999 In May, the UK Government launches its new strategy, A better quality of life - A strategy for sustainable

development for the UK. In December, Quality of life counts - Indicators for a strategy for sustainable

development for the United Kingdom: a baseline assessment is published.

2000 The UK Government publishes its first review of progress towards sustainable development, Achieving a

better quality of life, Government annual report 2000.

2002 The World Summit on Sustainable Development – Johannesburg 26 August - 4 September 2002, in the face

of growing poverty and increasing environmental degradation, succeeded in generating a sense of urgency,

commitments for action, and partnerships to achieve measurable results. More than 220 partnerships,

representing $235 million in resources, were identified during the Summit process to complement the

government commitments. Report of the World Summit on Sustainable Development.

2003 The Commission on Sustainable Development, 11th Session, New York, 28 April - 9 May 2003, adopts new

work programme for the Commission on Sustainable Development (CSD), based on two-year cycles with a

clear set of thematic issues, provides the global community with a unique opportunity to focus in-depth

attention on specific issues. Building on the outcomes of the twelfth session of CSD’s (CSD-12) focus on

water, sanitation and human settlements, the thirteenth session of CSD (CSD-13) will strive to be forward

looking and action orient

2006 CSD-14 begins the second cycle of the Commission’s new work programme. Scheduled for 1 to 12 May

2006, the Commission will review progress in the following areas: Energy for Sustainable Development;

Industrial Development; Air pollution/Atmosphere; and Climate Change



http://www.un.org/esa/sustdev/csd/csd11/CSD_mulityear_prog_work.htm

http://www.un.org/esa/sustdev/csd/review.htm


4 Corporate Governance

4.1 Background

Corporate governance denotes the entire range of mechanisms and arrangements that determine the

way key decisions are made in corporations including policies and practices that shareholders and

boards of directors use to manage themselves and to fulfil their responsibilities to investors and other

stakeholders. As corporations are chartered institutions regulated by state corporation law,

fundamentally corporate governance is about accountability of decision making and conformance with

applicable laws.

Following the financial accounting scandals and discontent over stock market losses in recent years,

improved corporate governance practices have become critical to worldwide efforts to protect investors

and to stabilise and strengthen global capital markets.

Corporate governance reforms are occurring in countries around the world and representative outputs

include:

the OECD Principles of Corporate Governance first issued in 1999 (outlined in section 1.4);

the Sarbanes-Oxley Act of 2002 in the USA;

the Action Plan "Modernising Company Law and Enhancing Corporate Governance in the European

Union – A Plan to Move Forward", adopted by the European Commission on 21 May 2003.

In developing countries reforms are aimed at promoting “development” and economic globalisation. In

this context, corporate governance reforms in combination with liberalising reforms, in effect, represent

a new development strategy for third world countries.12

There are many styles of corporate governance, including U.S., European, and Asian styles, or market-

based, stakeholder oriented and state oriented systems.

The market approach followed in the United States, UK, Canada and Australia stress the primacy of

ownership, property rights and maximising shareholder value.

The stakeholder oriented approach followed in Western Europe and specifically Germany, France, the

Netherlands and the Scandinavian countries, emphasise society's expectations of governance systems

and especially the interests of employees and other stakeholders.

Despite the differences between different national styles of corporate governance there is convergence

on the importance of:

transparency

integrity

accountability

Corporate Governance looks at the institutional and policy framework for corporations including

governance structures, company law, privatisation and market exit. Good Corporate Governance

enables corporations to realise their corporate objectives, protect shareholder rights, meet legal

12 Darryl Reed 2002, Corporate Governance Reforms in Developing Countries Journal of Business Ethics 37





requirements and create transparency for all stakeholders and the public on how they are conducting

their business.

Corporate Governance is a key instrument in the achievement of CSR and corporate sustainability

objectives both because it provides the means of enhanced transparency on CSR concerns and because

it highlights through guidelines what is expected from socially responsible businesses. A key question

however is whether there is room for convergence between the markets oriented governance system

and stakeholder-oriented corporate governance.

Will “responsible” corporate governance trigger an increased level of stakeholder orientation?

4.2 Corporate Governance definitions

Corporate governance refers to the way a corporation is directed under applicable laws and norms. It

includes the laws governing the formation of firms, the bylaws established by the firm itself and the

organisational structure of the firm. Issues of fiduciary duty and accountability are within the framework

of corporate governance.

The following definitions clarify the objectives and scope of Corporate Governance.

“Corporate governance ensures that the board of directors is accountable for the pursuit of corporate

objectives and that the corporation itself conforms to the law and regulations.” - The International

Chamber of Commerce.

The following definition highlights the importance of clear responsibilities and rules in making and

monitoring decisions.

"Corporate governance is the system by which business corporations are directed and controlled. The

corporate governance structure specifies the distribution of rights and responsibilities among different

participants in the corporation, such as, the board, managers, shareholders and other stakeholders and

spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also

provides the structure through which the company objectives are set and the means of attaining those

objectives and monitoring performance", OECD April 1999.

The crucial dimension of transparency is emphasised in the following definition.

"Corporate governance is about promoting corporate fairness, transparency and accountability"13.

Corporate Governance systems should ensure that:

accountancy standards are beyond reproach;

audit quality is safeguarded;

the board of directors is effective and properly constituted;

governance structures are fostering efficiency and competitiveness of business;

disclosure and transparency is enhanced to satisfy all key stakeholders;

the interests of shareholders and other key stakeholders are protected;

corporate risks are properly managed.

13 J. Wolfensohn, Word bank, article in Financial Times, June 21, 1999




4.3 Codes and standards on corporate governance

There are hundreds of codes and standards on corporate governance reflecting differing legal traditions

and national practices. Given the variety of ownership structures, cultural differences and the changing

nature of capital markets and legal environments, there is no best governance structure for all.

Information on the different corporate governance codes per country are provided by the International

Chamber of Commerce.

Failure to adhere to the standards of corporate governance can have severe consequences for the

individuals involved as well as for the companies they manage. Bad governance practices damage

investor confidence, whereas the adoption of good corporate governance practices can enhance a

company’s share prices. This has given rise to corporate governance reforms outlined earlier and more

rigorous assessment of companies by market analysts.

Across the world, all codes of corporate governance recognise that the directors of a company must take

responsibility for

understanding and addressing the risks a company faces;

understand business opportunities and take measures to enhance performance;

providing accountability to both the company and the shareholders;

providing broad, timely and accurate disclosure of information about financial and operating

performance;

informing the outside world on matters that impact external stakeholders.

4.4 Corporate Governance Trends

Since the end of 2001 corporate governance reforms in many countries are aimed to improve auditor

independence, corporate responsibility, financial disclosure, and corporate accountability while guarding

against conflicts of interest.

Board related changes

The main changes associated with boards are:

more non-executives directors possibly having the majority to strengthen the independent voice in the

boardroom;

independent chairpersons separating the roles of chairpersons and CEO;

appointing a senior non-executive director to represent the interests of shareholders.

Board committees

A number of board committees are suggested to provide increased transparency on sensitive issues

such as the audit process, nominations and remuneration of directors.

Audit Committee

The primary role is to ensure the integrity of financial reporting and the audit process. The purpose is

not to manage the preparation of financial statements or to conduct the financial audit but to oversee

the financial control system and the audit function. It is important to bear in mind that the directors are

responsible for producing correct financial statements and the auditors have a legal and professional

obligation to ensure the accounts comply with applicable standards prescribed by various governing




bodies. The role and responsibilities of the committee should be available on request and preferably

published on the company’s web site.

Nominations Committee

The role of the Nominations Committee is to review the balance and the effectiveness of the Board and

help ensure that the company has the best possible Board. The Nominations Committee also provides a

formal function for recruitment of directors.

Remunerations Committee

The purpose is to ensure that remuneration of executive directors is properly monitored and is justified.

Companies produce a Directors Remuneration Report to ensure transparency.




5 Corporate responsibility drivers

5.1 An overview of corporate responsibility drivers

The main driving forces for corporate responsibility are investor and consumer demands and

governmental and public pressures as shown in the following diagram.

Governments are tightening corporate governance and sectoral compulsory standards making self-

regulation an appealing option for most businesses.

The loss of public confidence in the corporate word drives the markets down and therefore has a

significant impact on the value and growth potential for many companies. As a consequence, public

expectations on corporate integrity and ethical operations are particularly important drivers for

corporate responsibility.

Consumers are increasingly exercising their green buying power exerting pressure on companies to

address their environment impact and to invest in ‘environmentally friendly products’.

The Code of Practice for Transnational Corporations initiated by the UN in the early 1970’s, in

collaboration with many organisations including Consumer International, defined what consumers expect

from businesses in terms of ethics, product standards, competition, marketing and disclosure of

information.

Finally the growth of a strong Socially Responsible Investment movement gives distinct advantages to

companies performing well on sustainability criteria and therefore provides a key driving force for

improved corporate responsibility practices.

The increasing interest in social responsibilities can be associated with various factors from stabilising

markets to avoiding increased regulation, to taking advantage of ‘green’ consumer preferences and to

doing the ‘right thing’ to strengthen corporate reputation.

However, potentially the strongest driving force is the recognition by an increasing number of people

that it is time for a fundamental change in the role of businesses in a world that has to develop in a





sustainable manner. This strengthens the motivation for companies to join the relatively few companies

that have adopted corporate responsibility and sustainability as a business philosophy.

5.2 The evolution of corporate regulation

Business organisations are established to pursue profit mainly by selling products/services that address

market demand in specific areas. This invariably involves the use of various types of resources in

business processes. In some cases, especially when the objective is short-run profit maximisation, there

are abuses of resources and disregard of the impact of business processes or products in social and

environmental factors. Further, the pursuit of profit maximisation often involves the use of

monopolisation and/or unfair practices at the expense of other firms and consumers.

To restrain business miss-conduct, legislation and regulation has been used by national governments

prescribing rules under which companies are obliged to operate. Governmental agencies have been set

up to manage corporate legislation including registration and reporting obligations and trading, health

and safety, human rights, consumer and environmental protection standards. Further, a number of

international organisations have been established to supervise the implementation of mandatory sector

standards. In this context the financial sector is a good example of the way regulatory standards have

been applied. First, rules and regulations were established to govern how shares and other financial

instruments are traded. Commercial banks then became heavily regulated to raise public confidence.

More recently the Basel global supervisory standards came in force regulating the capital adequacy of

internationally active banks. Another good example is shipping safety regulations supervised by IMO, the

International Maritime Organisation, which mandated since the 90s the ISM code for safety management

and environmental protection.

Socio-legal research in the late 1970s raised many questions regarding the effectiveness of strict

regulation and of the associated command-control approaches. This supported the neo-liberal discourse

of the 1980s, which emphasized deregulation and corporate rights. The corporate world responded

positively by voluntarily adopting management standards which, in the main were developed by the

International Organisation for Standardisation (ISO). ISO 9000 became an international reference for

quality management requirements in business-to-business dealings and ISO 14000 has been widely used

by organisations to meet their environmental challenges.

Since the 1990s, the Corporate Social Responsibility (CSR) is seen as a way for corporate self-regulation

involving, codes of conduct, improvements in occupational health and safety, environmental protection

and social and environmental reporting, According to the UN Research Institute on Social Development,

the CSR approach to regulation is nowadays evolving to public-private partnerships and multi-

stakeholder initiatives for standard setting, reporting, monitoring, auditing and certification.

5.3 Green buying and ‘environmentally friendly products’

Public concern on environmental issues has been translated in consumer preferences for green

products, which are becoming an effective CSR driving force. Governments are further increasing the

impact of this trend through green procurement policies. The net result is that many companies are

committing to green product policies and are using environmental performance indicators as critical

success factors.




The development of ‘environmentally friendly products’ is also supported by governmental policies

exemplified by the European Commission’s Integrated Product Policy (IPP). IPP is aimed at creating

conditions in which environment-friendly products, or those with a reduced impact on the environment,

will gain widespread acceptance among the European Union's member states and consumers. The

development of IPP goes back to 1997, culminating in the February 2001 Green Paper on the rationale

for developing product-related environmental policies and its implementation in 200314.

Generally, environmentally friendly products will need to use fewer resources, have lower impacts and

risks in the environment and prevent waste generation. To support such products, IPP suggested the

following three strategies:

pricing;

promoting green consumer demand;

stimulating the supply of greener products through eco-design guidelines, standardisation,

regulation and problem solving product panels.

5.4 Socially Responsible Investment (SRI)

Socially responsible investing (SRI) is an investment process that considers the social and environmental

consequences of investments, both positive and negative, in addition to the normal financial analysis. In

other words, investment managers often “overlay a qualitative analysis of corporate policies, practices,

and impacts onto the traditional quantitative analysis of profit potential”. This leads to the identification

of companies that meet certain standards of corporate social responsibility and sustainability for

investment purposes.

SRI was originally promoted by church related and pension funds. The Christian church from 1970

adopted policies for financial investment promoting corporate responsibility: "Investors should seek the

best investment opportunities on financial grounds and then work from within to alter corporate

practices that are at variance with social concerns of the church”.

SRI funds today have a significant position in the capital markets having grown during the last decade to

represent close to 10% of available resources. SRI has established a number of sustainability indexes

assessing and ranking companies according to sustainability criteria which provides valuable

benchmarking data and have created a driving force towards improved sustainability performance.

Socially responsible investment (SRI) assets grew faster than the entire universe of managed assets in

the United States during the last 10 years, according to the Social Investment Forum’s fifth biennial

report on SRI trends (Washington, D.C. 24th January, 2006).

According to Steven D. Lydenberg15, chief investment officer of Domini Social Investments, European

institutional investors are leading the way with National pension funds in Sweden and Denmark using

social and environmental screens; two large pension funds in the Netherlands having pilot investment

programs with environmental screens, and France's state pension reserve fund incorporating social and

environmental issues in some investments.

SRI strategies

14 http://cleantech.jrc.es15 Steven D. Lydenberg, 2005, “Corporations and the Public Interest: Guiding the Invisible Hand2, Berrett-Koehler Publishers ISBN: 1576752917




Three SRI strategies have evolved over the years: Screening, Shareholder Advocacy, and Community

Investing. These are defined as follows:

Screening: the practice of including or excluding publicly traded securities from investment

portfolios or mutual funds based on social and/or environmental criteria. Socially concerned

investors generally seek to invest in profitable companies with respectable employee relations, good

environmental performance, respect for human rights around the world, and safe and useful

products. A special category of screening strategy is the Social Venture Capital supporting

companies creating innovative solutions to social and environmental problems.

Shareholder Advocacy: describes the efforts of socially concerned investors to influence the

behaviour of a company. This strategy gained prominence during the boycotts of companies doing

business in South Africa during apartheid. There are different types of shareholder activism: voting

proxies on social and environmental issues at annual meetings, initiating dialogue with company

management, sponsoring shareowner resolutions and divestment.

Community Investing: represents the flow of capital from investors to communities that are

underserved by traditional financial services. It provides access to credit, equity, capital and basic

banking products. Assets held and invested locally by community development financial institutions

(CDFIs) based in the United States totalled $14 billion in 2003, up from $7.6 billion in 2001.

Comparative performance of SRI funds

The key question is “do socially responsible investments deliver comparable returns to their investors as

non-binding ones?”

It is clear that values and ethics have attained higher priority with some investors than getting best

possible returns. Despite this fact, the performance of SRI funds demonstrates that their investors can

achieve competitive returns.

A report from the Social Investment Forum noted that well over two-thirds (71 percent) of the largest

(over $100 million in assets) socially and environmentally responsible mutual funds in the US earned the

highest possible ratings through the end of 2003 from Morningstar and Lipper.

In general it is accepted that there are good securities to choose from in both socially responsible

companies and those that are not. However, by investing in socially responsible companies, individuals

obtain the added value that they are contributing to a ‘better’ future for generations to come and are

becoming part of a growing force that wants to make a difference in the world’s sustainability

challenges.

SRI indexes

A number of SRI indexes have been established to support socially responsible investing. They include:

Dow Jones Sustainability Indexes (DJSI) established in 1999, including the global, European,

Eurozone, North American and US benchmarks. DJSI World consists of more than 200 companies

that represent the top 10% of the leading sustainability companies in 64 industry groups in the 33

countries covered by the DJGI. DJSI uses the SAM assessment methodology which will be explained

later.

FTSE4Good Index Series encompassing four tradable and four benchmark indices, representing

Global, European, US and UK markets. The Global index consists of over 600 companies. Companies

are assigned a high, medium or low impact weighting according to their industry sector. The higher

the environmental impact of the company’s operations, the more stringent the inclusion criteria.




Ethibel Sustainability Index (ESI) including four regional indexes: ESI Global, ESI Americas, ESI

Europe and ESI Asia Pacific. The ESI screening methodology uses a checklist of “sustainability

criteria”, divided into four areas: internal social policy, environmental policy, external social policy

and the ethical economic policy.

KLD Domini 400 Social Index (DSI) supporting investors who integrate environmental, social and

governance factors into their investment decisions. KLD Social Ratings consist of two categories:

Social Issues and Controversial Business Issues. Social Issue ratings measure corporate social

responsibility across a range of issues that affect the company's various stakeholders. Controversial

Business Issues reflect company involvement in lines of business of interest to social investors.

Innovest EcoValue Index supporting investors interested in companies associated with "eco-

efficiency" or capabilities to maximize shareholder value while minimizing the financial and business

risks from any adverse impacts on the environment. Environmental data compiled for the EcoValue

'21 platform include emissions of harmful substances, hazardous waste disposal, and whether

products can be easily recycled.

The Calvert Social Index providing a broad-based benchmark for measuring the performance of

large, US-based socially responsible companies focusing on products, environment, workplace and

integrity.

5.5 Corporate responsibility and sustainability as business philosophy

A number of companies have adopted corporate responsibility and sustainability as a business

philosophy. In these cases, companies believe that integrating social and sustainability principles in their

operation provides the best possible strategic approach and strive to deliver long-term shareholder

value through practices that are increasingly satisfying to all its stakeholders. Corporate strategy is

developed taking into account, as part of business opportunities, environmental and social opportunities

and strategic capabilities are developed to exploit efficiently such opportunities.

The main principles of a responsibility driven business philosophy are:

serving all the company’s stakeholders is accepted as the best way to produce long term success

and to create a growing, prosperous company;

the company’s products and technologies are directed to contribute (as much as possible) to the

culture, benefits and welfare of people throughout the world;

the company creates long term win-win relationships with stakeholders;

the company grows hand-in-hand with its employees supporting them to reach their full potential

and to improve their standard of living;

company success is directly linked to optimising stakeholder value.

A corporate responsibility driven business philosophy is often about how to resolve conflicting

stakeholder demands. It is therefore about leadership and how a company can shape the expectations of

its marketplace.

6 Corporate responsibility indicators and reporting standards

Sustainable development indicators are being developed by the UN and other international

organisations. Corporate sustainability indicators have been mainly developed by SRI indexes to

evaluate corporate responsibility performance. A number of award schemes also provide useful

corporate responsibility criteria.





A number of reporting standards have been developed, notably GRI and AA1000 which should provide in

the future the definitive set of indicators for benchmarking purposes. Additional contributions are made

by common reporting adopted by membership organisations such the Corporate Impact Reporting

framework from BITC supporting their members with measuring and communicating their key impacts.

6.1 Sustainable development indicators at national and international levels

The United Nations’ Commission on Sustainable Development (CSD) has defined a working list of

sustainability indicators from which countries can choose indicators according to national priorities,

problems and targets.

The Environmental Sustainability Index (ESI)16 also provides a useful source of data. ESI is a measure of

overall progress towards environmental sustainability developed for 122 countries. A high ESI ranking

indicates that a country has achieved a higher level of environmental sustainability than most other

countries and a low ESI ranking signals that a country is facing problems in achieving environmental

sustainability along multiple dimensions. The ESI assessment is based on 22 core indicators (Annex 3).

Two popular methods for organizing sustainability indicators are:

a) The goal-indicator matrix which is the most traditional approach used for measurement analysis

and allows multiple levels of decomposition from primary goals to quantifiable measurements;

b) Driving force-state-response tables, which attempt to balance measures of causes, or driving

forces; measures of the results, or state; and measures of programs and other human activities

designed to alter driving forces to improve the state.

The Driving Force-State-Response framework shows the connections between human activities and

environmental states. It is mainly used by policy-makers or decision-makers and has been adopted by

the UN Commission on Sustainable Development.

The OECD and the European Environmental Agency (EEA) have also developed response indicators to

describe responses by groups in society and enterprises as well as governmental attempts to prevent,

compensate or adapt to changes. Impact level is then differentiated in the following categories:

Global

European

National

Regional

Local

Many organizations in the public and private sector generate information on sustainable development

including:

a) The World Resources Institute provides EarthTrends, an online database on environmental, social

and economic trends (statistical, graphic, and analytical data).

b) The Earth Policy Institute reports on twelve Eco-Economy Indicators including population and

economic growth and status on fish, forests, emissions, water and climate change.

16 established through collaboration among the World Economic Forum, the Yale Center for Environmental Law and Policy (YCELP) and the Columbia University (CIESIN)





c) The Worldwatch Institute produces fact sheets. The Worldwatch Institute provides a number of

publications including Vital Signs on the transition to an environmentally sustainable and socially

just society—and how to achieve it.

d) The European Environmental Agency reports progress in a number of policy areas including:

Agriculture, Air, Air Quality, Climate change, Coasts and seas, Energy, Nature, Transport, Waste,

Water.

The need for harmonisation of indicators and improved co-ordination of assessment methods is

recognised and a number of projects are addressing these issues.

Founded in 1990, the International Institute for Sustainable Development (IISD) is in the business of

promoting change towards sustainable development17. IISD's strategic objective on Measurement and

Assessment is to facilitate the development of robust sets of indicators for public and private-sector

decision-makers wishing to measure progress toward sustainable development and to build an

international consensus to promote their systematic use in assessment, reporting and planning.

6.2 Company level SRI associated indicators

At the company level, corporate sustainability indicators have been produced by various SRI indexes to

assess sustainability performance in order to identify and select leading companies for investment

purposes. In this context corporate sustainability performance is regarded an investable concept which

creates motivation for investments in sustainability performance improvements.

According to the Dow Jones Sustainability Indexes, leading sustainability companies display

competencies in the following areas:

a) Strategy: integrating long-term economic, environmental and social aspects in their business

strategies to support global competitiveness and reputation.

b) Financial: meeting shareholders' demands for sound financial returns, long-term economic growth,

open communication and transparent financial accounting.

c) Customer & Product: fostering loyalty by investing in customer relationships and product and

service innovation taking into account eco-efficiency requirements.

d) Governance and Stakeholder engagement: setting the highest standards of corporate governance

and stakeholder engagement, including corporate codes of conduct and public reporting.

e) Human: Managing human resources to maintain workforce capabilities and employee satisfaction

through best-in-class organisational learning and knowledge management practices and

remuneration and benefit programs.

The Dow Jones Sustainability Index assessment approach

The Dow Jones Sustainability Index approach, summarised in the following table, represents a practical

way to highlight key sustainability performance areas measured through questionnaire-based

techniques and weighted to provide overall sustainability ratings. The criteria reflect organisational

design, processes and outputs.

17 http://www.iisd.org/measure/




The FTSE4Good approach

For inclusion in the FTSE4Good Indexes, eligible companies must meet criteria requirements in three

areas:

working towards environmental sustainability;

developing positive relationships with stakeholders;

up-holding and supporting universal human rights.

Interesting features include:

evolving selection criteria to reflect changes in globally accepted corporate responsibility standards;

higher impact companies have to meet higher standards;

criteria covering policies, management system and reporting.

The FTSE4Good Indexes Sector Classification is given in Annex 4.

KLD ratings

An interesting evaluation approach is the KLD rating method utilising strength and concern criteria for

each responsibility category. To illustrate the approach an example of product strength and concerns

criteria is given below.

Product strengths:

a) Quality: long-term, well-developed, company-wide quality program, or quality program recognised

as exceptional in U.S. industry.

b) R&D/Innovation: leadership for research and development (R&D), particularly by bringing notably

innovative products to market.

c) Benefits to Economically Disadvantaged: provision of products or services for the economically

disadvantaged.

d) Other Strength: products with notable social benefits that are highly unusual or unique for the

company's industry.

Concerns:




a) Product Safety based on fines or civil penalties, or involvement in major recent controversies or

regulatory actions, relating to the safety of products and services.

b) Marketing/Contracting Controversy reflecting major marketing or contracting controversies, fines or

civil penalties relating to advertising practices, consumer fraud, or government contracting.

c) Antitrust: reflecting fines or civil penalties for antitrust violations such as price fixing, collusion, or

predatory pricing, or involvement in recent major controversies or regulatory actions relating to

antitrust allegations.

6.3 Reporting standards and indicators

A number of reporting initiatives were established in the 1990s to develop standards for CSR and

sustainability related reporting. The main ones are GRI, AA1000 and ISO 2600.

The Global Reporting Initiative (GRI)

The Global Reporting Initiative (GRI) is independent institution (started in 1997 by the Coalition for

Environmentally Responsible Economies (CERES) and became independent in 2002) whose mission is to

develop and disseminate globally applicable Sustainability Reporting Guidelines. The GRI incorporates

the active participation of representatives from business, accountancy, investment, environmental,

human rights, research and labour organisations from around the world, and is an official collaborating

centre of the United Nations Environment Programme (UNEP)

The GRI performance indicators are grouped under three sections covering the economic,

environmental, and social dimensions of sustainability and are intended to aid users of the Guidelines.

GRI highlights that advancing sustainable development requires coordinated movement across a set of

performance measurements, rather than random improvement within the full range of measurements

and has introduced a fourth dimension of information integrated performance to address this issue.

It is worth noting that GRI economic indicators in the sustainability reporting context focus more on the

manner in which an organisation affects the stakeholders with whom it has direct and indirect economic

interactions. Therefore, the focus of economic performance measurement is on how the economic status

of the stakeholder changes as a consequence of the organisation’s activities, rather than on changes in

the financial condition of the organisation itself. Further economic indicators address direct impacts

designed to measure the monetary flows between the organisation and its key stakeholders and indirect

impacts stemming from externalities that create impacts on communities.

The environmental dimension of sustainability concerns an organisation’s impacts on living and non-

living natural systems, including ecosystems, land, air and water. With respect to the environmental

measures in the report, organisations are encouraged to relate their individual performance to the

broader ecological systems within which they operate. For example, organisations could seek to report

their pollution output in terms of the ability of the environment (local, regional, or global) to absorb the

pollutants.

The social dimension of sustainability concerns an organisation’s impacts on the social systems within

which it operates. GRI has selected indicators by identifying key performance aspects surrounding

labour practices, human rights, and broader issues affecting consumers, community, and other

stakeholders in society.




The new GRI draft G3 Guideline, to be published on 31st March 2006, has adopted a multi-stakeholder

approach to its development and it is expected that will enable reporting to be both rigorous and

flexible.

A linkage document was developed by GRI to help businesses assess and report how their activities are

contributing to the achievement of the Millennium Development Goals

The AA1000 Standards

The AA1000 Framework is designed to improve accountability and performance by learning through

stakeholder engagement. The building blocks of the process framework are planning, accounting,

auditing and reporting. It does not prescribe what should be reported on but rather 'how' and is designed

to complement the GRI Reporting Guidelines

AA1000 standards include the AA1000AS Assurance Standard and the AA1000SES Stakeholder

Engagement draft Standard

The AA1000 Assurance Standard was launched on March 25th 2003 by AccountAbility, following an

extensive international consultation process with the business, public and civil society sectors.

The Standard addresses the qualitative as well as quantitative data that makes up sustainability

performance plus the systems that underpin the data and performance. It is designed to complement

the GRI Reporting Guidelines and other standardised or company-specific approaches to disclosure.

The AA1000 Assurance Standard is based on assessment of responsibility related reports against three

Assurance Principles:

a) Materiality: does the sustainability report provide an account covering all the areas of performance

that stakeholders need to judge the organisation's sustainability performance?

b) Completeness: is the information complete and accurate enough to assess and understand the

organisation's performance in all these areas?

c) Responsiveness: has the organisation responded coherently and consistently to stakeholders'

concerns and interests?

The AA1000 Stakeholder Engagement draft Standard (AA1000SES) is a generally applicable to the

quality of the design, implementation, assessment, communication and assurance of stakeholder

engagements including:

a) functional engagements (e.g. customer care);

b) issue-based engagements (e.g. human rights);

c) organisation-wide engagements (e.g. reporting and assurance).

Engagements may range from micro-level (organisation-stakeholder specific issues) to macro-level

engagements on major societal concerns.

AccountAbility and csrnetwork have developed the first global index, the Accountability Rating®, which

measures the state of corporate accountability by ranking individual companies against six key areas:

stakeholder engagement, strategy, governance, performance management, public disclosure and

assurance.

ISO 2600




The International Standards Organisation (ISO) is developing the ISO 2600, a "guidance document" on

social responsibility with a 2008 deadline. ISO 2600 is aimed to provide practical guidance to a wide

variety of organisations on a range of methods and options for implementing social responsibility.

Other standards

The accountancy profession has introduced a standard for assurance on non-financial information, the

International Standard for Assurance Engagements (ISAE) 3000.




7. The 4CR multi-dimensional corporate responsibility perspective

7.1 The 4CR conceptual model

The 4CR multi-dimensional corporate responsibility perspective is aimed at establishing a coherent

approach to addressing the various strands of corporate responsibility and their integration with

strategic management. The approach is based on a revised Carroll model for corporate responsibility, as

shown in the following diagram.

The 4CR model retains four corporate responsibility layers but the discretionary responsibilities in the

Carroll model are replaced by the sustainability responsibilities

The main reason for the revision is that the sustainability aspects which were not included in the Carroll

model represent today a major corporate responsibility which is distinctly different from the other

responsibilities. On the other hand, the relative importance of philanthropy in the context of corporate

responsibility is diminishing as evident from the empirical studies on the Carroll model and the fact that

philanthropy does not feature in the goals and principles for corporate responsibilities as summarised in

section 1.3. Furthermore, philanthropy can be included either within the sustainability layer or the

ethical layer.

Arguably corporate sustainability could be merged with the ethical layer but the separation serves to

highlight two possibly ‘equally’ important areas for corporate attention, namely ethics and sustainability.

In this context it is also useful to clarify the main differences between these two dimensions. Ethical

responsibilities are primarily inward looking, asking companies to put their house in order, particularly

with respect to labour standards, health and safety, environmental impact and anticorruption.

Sustainability responsibilities are distinctly different; outwards looking with a macro perspective

addressing intergenerational responsibilities and the need for multi-stakeholder coalitions to create

capacity for sustainable development.





7.2 The 4CR stakeholder oriented corporate responsibility taxonomy

The 4CR taxonomy described in the following table highlights four corporate responsibility areas:

a) Corporate Competitiveness

b) Corporate Governance

c) CSR

d) Corporate Sustainability

The 4CR taxonomy summary

Responsibility Areas

Focus-Approach

Key Issues Related concepts Measurement

Corporate

Competitiveness

Positioning

Differentiation

Responsiveness

National

competitiveness

Reputation risks

Social innovation

and marketing

Stakeholder

management

Social

capital

Economic

performance

Corporate

Governance

Codes of

conduct

Transparency

National models

Sectoral

regulations

Competitive policy

and regulation

Compliance

Management

accountability

CSR Voluntary

ethical

regulation

Social reporting

Mainstreaming

Social welfare

Business ethics

Corporate

citizenship

Social accountability

Ethical

performance

Social

contribution

Corporate

Sustainability

Support for

sustainable

development

Climate change

Quality of life

Intergenerational

responsibilities

Eco-efficiency

Fair globalisation

Performance

stability

Sustainability

performance

The first area of responsibility in the 4CR taxonomy, representing economic performance, is Corporate

Competitiveness.

Next, Corporate Governance (CG) represents legal responsibilities providing accountability and

conformance with applicable laws. Good Corporate Governance promotes transparency to stakeholders

which creates a crucial link between Corporate Governance with CSR and Corporate Sustainability.

CSR and Corporate Sustainability share the same approach involving the assessment of the company’s

economic, social and environmental impact, taking steps to improve it in line with stakeholder

requirements and reporting on relevant measurements.

CSR is specifically associated with ethical issues – doing what’s right and fair, and avoiding harm.

Related concepts are business ethics, corporate citizenship and social accountability. More specifically,

CSR represents commitments and activities that extend applicable laws and regulations on trading,

health and safety, human rights, consumer and environmental protection and reporting. This creates a

continuation from corporate governance responsibilities and facilitates harmonisation across these two

areas of responsibility.

Corporate Sustainability is specifically associated with support for sustainable development (eco-

efficiency and fair globalisation) and the long term performance stability and survival of the corporation.

It addresses the needs of present stakeholders while seeking to protect, support and enhance the

human and natural resources that will be needed by stakeholders in the future.



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There are a number of related concepts to each area of corporate responsibility with stakeholder

management and social capital being common to all of them. Stakeholder management relates to each

area of responsibility as follows:

stakeholder approaches to strategic management provide credible options for sustainable

competitiveness;

stakeholder oriented governance models are dominant in many countries;

both CSR and corporate sustainability approaches are aimed at dealing with stakeholder concerns

and requirements in a balanced way.

The concept of social capital described by OECD as “…networks, together with shared norms, values and

understandings which facilitate cooperation within or among groups” is closely related to stakeholder

management. Stakeholder oriented governance, CSR and corporate sustainability, all generate social

capital which facilitates business networking, enhanced learning and organisational responsiveness all of

which are directly linked with corporate competitiveness.

Naming convention

Responsibility AreasCorporate competitiveness

Total Corporate ResponsibilityTCRCorporate governance Corporate Responsibility

CRCorporate Responsibility and SustainabilityCRS

CSRCorporate sustainability

7.3 Stakeholder management and social capital

The stakeholder perspective

In market economies, companies normally pursue maximisation of shareholder value (profit, share price,

etc). According to the agency theory of the firm, directors of an organisation are agents of the owners

and are duty bound to act to maximise the interests of those owners.

In contrast, the corporate responsibility and sustainability movement represents companies that

voluntarily recognise and address their responsibilities to all their stakeholders for mutual benefit or

even purely on ethical/moral grounds.

Stakeholder theory emphasising responsibility to stakeholders over profitability and shareholder

interests was established by R Freeman18 in 1984 as indicated earlier.

Stakeholders in the broader sense are everyone and everything affecting or being affected by the

company. Stakeholders normally include investors, customers, employees, business partners, local

communities, the environment and society. However, it should be pointed out that there is an ongoing

debate about who are the key stakeholders and about criteria for shareholder classifications.

J Post et all in Redefining the Corporation 19 states: “The legitimacy of the corporation as an institution,

its ‘license to operate’ within society, depends not only on its success in wealth creation but also on its

18 Freeman, E. R., 1984, Strategic management: A stakeholder approach, Pitman, Boston.

19 James E. Post, Lee E. Preston, and Sybille Sachs, 2002, Redefining the Corporation - Stakeholder Management and Organizational Wealth, Stanford University Press





ability to meet the expectations of diverse constituents who contribute to its existence and success.

These constituencies and interests are the corporation’s stakeholders—resource providers, customers,

suppliers, alliance partners and social and political actors. Consequently, the corporation must be seen

as an institution engaged in mobilizing resources to create wealth and benefits for all its stakeholders.”

Jim Collins and Jerry Porras20, in their landmark book “Built to Last”, show how organisations with a

strong sense of identity and a clearly defined set of enduring values tend to prosper and evolve over

time. In “Good to Great” Collins again shows that greatness in an organisation, defined as sustained top

level performance, is directly related to a clear, compelling sense of purpose that enables an

organisation to gain a positive identity with customers, investors, employees and other stakeholders.

Based on extensive empirical research, Clarkson’s 21 view of corporations is a “system of primary

stakeholder groups, a complex set of relationships between and among interest groups with different

rights, objectives, expectations and responsibilities”. This undoubtedly pragmatic view of the corporation

points to the complexity of stakeholder management.

Ideally the stakeholder approach, as shown in the following diagram, could be interpreted as an

extension of the traditional agency approach as shareholders are also key stakeholders with ultimate

control on strategy and profitability remains a key performance indicator. However, addressing the

requirements of many stakeholders with conflicting objectives and expectations increases corporate

management complexity exponentially and therefore poses difficulties and risks.

Stakeholder management approaches can be very different in practice, spanning from instrumental

approaches which use stakeholder relationships strictly as an instrument to maximise profit to intrinsic

approaches where fundamental principles guide how a company does business particularly with respect

to how stakeholders are treated22. National Corporate Governance approaches, being either market

20 J. Collins and J. Porras, “Built to Last”, New York: Harper Business, 1994; Good to Great, New York: Harper Business, 2001.21 Clarkson, M. B. E., 1995, A stakeholder framework for analyzing and evaluating corporate social performance, Academy of Management Review, 20(1).22 Donaldson, T., & Preston, L. E., 1995, The stakeholder theory of the corporation: Concepts, evidence, and implication, Academy of Management Review, 20.




oriented or stakeholder oriented, will also have a direct bearing on the way stakeholder approaches may

be practised by companies around the world.

Donaldson and Preston suggested that stakeholder theory encompasses descriptive, instrumental and

normative aspects which are in reality intertwined and mutually supportive. However, they argued that

“the fundamental basis” of stakeholder theory is normative on the basis that the justifications for

favouring stakeholder theory over other management theories ultimately rely upon normative

arguments. The instrumental and normative stakeholder concepts have received more attention possibly because

they have a value perspective which provides a basis for creating stakeholder specific management frameworks and

tools.

The descriptive aspect of stakeholder approaches is illustrated by the conclusion drawn by Clarkson from

fifty case studies that corporate social responsibilities, responsiveness and performance are best

understood by analysing and evaluating the way in which corporations actually manage their

relationships with employees, customers, shareholders, suppliers, governments, and the communities in

which they operate. The descriptive power of stakeholder approaches can therefore provide a means to

enhanced understanding of responsiveness and performance issues. As such it is argued here that the

descriptive dimension of stakeholder approaches provides an important tool for strategic management

not just in explaining why a company behaves in certain way but also in reasoning about performance

deviations and in the identification of corrective actions.

Instrumental stakeholder management

Instrumental approaches are aimed at maximising shareholder value paying attention to stakeholder

relationships. The basic assumption in this model is that stakeholders control resources that can

facilitate or slow down the implementation of strategies and therefore must be managed to create

competitive advantage to maximise profits and ultimately returns to shareholders. Clearly, in all cases,

instrumental stakeholder management is a means to an end which may have nothing to do with the

welfare of stakeholders.

An instrumental approach is essentially hypothetical; it is based on causal rules such as “to achieve

(avoid) X, Y, or Z, then adopt (don’t adopt) practices A, B, or C”. In a defensive situation, stakeholder

concerns could be managed to avoid stakeholder action that may undermine the company’s objectives

[e.g. to avoid action X from stakeholder P adopt practice A]. In a proactive situation, stakeholder

concerns could be managed by building trust with stakeholders [e.g. to achieve customer retention build

trust on product dependability]. Such rules in different formats and complexity can be used to represent

organisational knowledge on how to manage stakeholder relations.

Instrumental approaches are often associated with stakeholder analysis used to improve strategic

decision making. Examples include the work by Mason and Mitroff on SAST (Strategic Assumption

Surfacing and Testing), which primarily aims at assisting decision makers in the problem formulation

stage of planning23 and the ‘unbounded systems thinking’ approach of Mitroff and Linstone24 that

recognizes and seeks to manage the complexity and interconnections of business problems, ‘messes’ in

23 Mason, R. O., & Mitroff, I. I. (1981). Challenging Strategic Planning Assumptions; New York: John Wiley & Sons24 I. I Mitroff & H. Linstone, (1993), The unbounded mind: breaking the chains of traditional business thinking, Oxford University Press.




Ackoff’s terms25 or system archetypes in Senge’s terms26. The breadth of stakeholder theory (Phillips,

Freeman, & Wicks, 2003) and its complexity are a potential explanation for the lack of empirical support

to the instrumental power of stakeholders27.

Instrumental stakeholder management is regarded part of corporate strategy but does not drive

strategy. Two variants of the strategic stakeholder management approach are the direct effects model

and the moderation model. In the direct effects model, manager’s attitudes and actions towards

stakeholders are perceived as having a direct effect on the company’s financial performance

independent of the strategy. In the moderation model, managerial orientation towards stakeholders

does impact strategy by moderating the relationship between strategy and financial performance.

Intrinsic or normative stakeholder commitment

Intrinsic stakeholder approaches imply that stakeholder relationships are based on moral commitments

accepted as norms. The company adopts certain fundamental principles on how it treats its stakeholders

which affect strategy and decision making at all levels of the company’s operation.

Stakeholder interests form the foundation of corporate strategy itself representing what the company

stands for. Stakeholders enter into decision making before business considerations and success is

measured by the satisfaction among all stakeholders.

Social norms are not outcome-oriented and usually can be described by prescriptive rules: Do X, or:

Don't do X. Social norms represent informal, decentralized systems of consensus and cooperation and

influence long-term relational exchanges between firms and their stakeholders.

It has been argued that to reap the benefits of an instrumental approach a company must built trust with

its stakeholders which can only be done through commitment to ethical relations with stakeholders

regardless of expected benefits. The counter argument is that the use of ethics for acquiring good

reputation is essentially part of an instrumental approach. Obviously there is a difference between

behaving well so that people like you and behaving well because that’s how you are. In other words,

trustworthiness, honesty and integrity are difficult to fake.

The normative ‘core’ of stakeholder theory has been criticised on the grounds of inconsistencies or

conflictive demands. Typical of criticism is represented by the stakeholder paradox28 describing the

result of contradictory duties of the managers to various stakeholders that can result in “business

without ethics” if the shareholders’ interests are given priority and “ethics without business” if other

stakeholders’ interests are served at the expense of profits.

The second generation of normative theory emphasise the multilateral view of stakeholders’ relations29

with increasing emphasis on co-operation and collaboration30.

Classification of stakeholders

25 R. L. Ackoff, (1974), Redesigning the future, New York: Wiley.26 P. Senge, (1990). The Fifth Discipline: The Art and Practice of the Learning Organization. New York : Doubleday27 R. Phillips, R. E. Freeman, A. Wicks, 2003, What stakeholder theory is not, Bus. Ethics Quart. 13(4)28 K. E. Goodpaster, (1993), Business Ethics and Stakeholder Analysis, In T. L. Beauchamp & N. E. Bowie (Eds.), Ethical Theory and Business, N. J Englewood Cliffs, Prentice Hall.29 E Freeman & J Liedtka, (1997), Stakeholder capitalism and the value chain, European Management Journal, 15 (3)30 Jones, T. M. (1995). Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics. Academy of Management Review, 20 (2)




Review of stakeholder classifications

Stakeholder classification schemes are often based on the level and type of influence a stakeholder

group exerts on the company; what Freeman (1994) called “the principle of who or what really counts”.

Consequently, stakeholder classifications often reflect criteria representing stakeholder’s ability to

influence the company’s direction, behaviour, process or outcome.

Freeman’s definition of stakeholder—‘any group or individual who can affect or who is affected by the

achievement of the company’s objectives’ provides the baseline position of who are stakeholders.

Clarkson (1995) defined stakeholders more narrowly as risk-bearers, arguing that a stakeholder must

have some form of capital at risk (either financial or human) and therefore has something to lose or gain

depending on a company’s behaviour. However it should be pointed out that human capital risks are

more difficult to define and to compare with financial risk.

Mitchell et al. (1997)31 suggested that stakeholders can be classified according to whether they have, or

perceived to have one, two, or all three of the following attributes: power to influence, legitimacy of their

claim and urgency of their claim.

Stakeholder power exists where one stakeholder can get another to do something that would not have

otherwise done. Stakeholder legitimacy represents the belief that the actions of a stakeholder or

stakeholder group are desirable or appropriate within the company’s accepted norms and values.

Stakeholder urgency includes both criticality and time urgency, with a stakeholder claim considered to

be urgent both when it is critical and/or when a response delay is unacceptable.

According to this approach, stakeholders with power can influence or disrupt the company’s core

business operations, so powerful stakeholders are important. However, some stakeholders are not

powerful but still influential because their claims are legitimate and therefore acted upon by the

company. Some powerful and legitimate stakeholders may not have influence when their claims are

recognised but are not actioned due to lack of urgency.

Stakeholder salience represents different combinations of the power, legitimacy and urgency attributes

and provides the basis for the typology of stakeholders described in the following table.

The Mitchell typology of stakeholders

Stakeholder category Stakeholder

salience

Attributes Stakeholder subcategory

Latent stakeholders

with only one of the three

attributesLow

Legitimacy Discretionary stakeholders

Power Dormant stakeholders

Urgency Demanding stakeholders

Expectant stakeholders moderate power and legitimacy Dominant stakeholders

legitimacy and urgency Dependent stakeholders

31 R Mitchell, B Agle and D Wood, 1997, Towards a theory of stakeholder identification: defining the principle of who and what really counts, Academy of Management Review, 22(4)




with two of the three attributes power and urgency Dangerous stakeholders

Definitive stakeholders

with all the three attributes High

power, legitimacy and

urgency

Stakeholders’ salience could increase/decrease by changes in one or more of their attributes and as a

result stakeholders can shift from one category to another. Agle et al32 confirmed the above typology

empirically in 1999.

Kochan and Rubinstein (2000)33 suggested that all stakeholders should be categorized by the role they

play in the enterprise and list three criteria to identify the saliency of potential stakeholders:

a) the extent to which they contribute valuable resources to the enterprise;

b) the extent to which they put these resources at risk and would incur costs if the enterprise were to

fail or their relationship with the enterprise was terminated;

c) the power they have over the enterprise.

Performance related criteria provide the basis for alternative stakeholder classification approaches,

obviously akin to instrumental approaches. An example of a performance oriented classification is

provided by Atkinson, Waterhouse and Wells (1997)34. Their approach is based on the premise that

companies exist to achieve their primary objectives, which are controlled by the organization’s owners.

What the company expects from and gives to other stakeholder groups relates to their involvement in

achieving the secondary objectives representing the operational targets dictated by the primary

objectives. The contribution and performance of each stakeholder group is evaluated to guide rewards

and other measures to improve or maintain progress. The approach makes use of a classification of

stakeholders into two groups:

a) environmental (customers, owners and the community)

b) process (employees and suppliers).

Who are regarded business stakeholders in practice

There is no clear picture of who companies regard as their business stakeholders, although

shareholders, employees and customers seem almost undisputed.

The role of employees as stakeholders has been explored extensively (Blair, 1995, 1996; Blair and Stout,

1999; Child and Rodriguez, 2004) as that of customers and suppliers (Freeman, 1984; Freeman and

Evan, 1990; Freeman and Liedtka, 1997).

Additional stakeholders highlighted in literature include options and debt holders (Parrino and Weisbach,

1999), local communities (e.g. regional agencies, charities) (Morris et all 1990), environment as “latent”

stakeholders (Driscoll and Starik, 2004; Phillips and Reichart, 2000) and the government (Brouthers and

Bamossy, 1997; Buchholz and Rosenthal, 2004), future generations (Wheeler and Sillanpää, 1997).

32 B. R. Agle, R. K. Mitchell and J. A. Sonnenfield, (1999), “Who matters to CEOs? An investigation into stakeholder attributes and salience, corporate performance and CEO values”, Academy of Management Journal, 42(5) 33 T.A. Kochan and S.A. Rubinstein, 2000, ‘Toward a Stakeholder Theory of the Firm: The Saturn Partnership’, Organization Science, 11:4 (July-Aug 2000).34 Anthony A. Atkinson, John H. Waterhouse and Robert B. Wells, 1997, “A Stakeholder Approach to Strategic Performance Measurement”; MIT/Sloan, Management Review Vol. 38, No. 3




A useful survey of stakeholders included in various academic/professional lists and company reports is

provided in reference35 (Annex 5).

Stakeholder management frameworks

Freeman’s analysis framework

Freeman proposed three levels of stakeholder analysis - rational, process and transactional.

At the rational level, an understanding of ‘who are the stakeholders of the organisation’ and ‘what are

their perceived stakes’ is necessary. Freeman uses a generic stakeholder map as a starting point which

can be also specified for each major strategic issue. The stakes of each specific stakeholder group are

identified and analysed and linked to their ‘power’ characteristics.

At the process level, the organisation either implicitly or explicitly manages its relationships with its

stakeholders, and therefore processes should designed/refined to reflect the rational of the stakeholder

map of the organisation. According to Freeman, existing strategic processes that work reasonably well

could be enriched with requirements for multiple stakeholders. For this purpose, he uses a revised

version of Lorange’s schema for strategic management processes.

At the transactional level the organisation manages stakeholder negotiations in line with the stakeholder

map and the organisational processes. According to Freeman successful transactions with stakeholders

require an understanding of the legitimacy of the various stakeholders and processes enabling

stakeholders to routinely surface their concerns.

Freeman has also established a set of fundamental principles/characteristics for ‘stakeholder firms’

including:

a stakeholder approach emphasizes active management of the business environment, relationships

and the promotion of shared interests to ensure the long-term success of the firm;

the interests of key stakeholders must be integrated into the very purpose of the firm, and

stakeholder relationships must be managed in a coherent and strategic fashion. Good stakeholder

management develops strategies that are viable for stakeholders over the long run so that while

individual stakeholders may lose out on some individual decisions, all stakeholders remain

supporters of the firm;

a stakeholder approach is intended to provide a single strategic framework, flexible enough to deal

with environmental shifts without requiring managers to regularly adopt new strategic paradigms;

a stakeholder approach is a strategic management process actively plotting a new direction for the

firm by considering how the firm can affect the environment as well as how the environment may

35 R Maessen, P van Seters & E van Rijckevorsel, Globus Circles of Stakeholders, Institute for Globalization and Sustainable Development, Tilburg University, the Netherlands




affect the firm. Therefore understanding stakeholder relationships is, at least, a matter of achieving

the organization’s objectives which is in turn a matter of survival;

The stakeholder framework does not rely on a single over-riding management objective for all

decisions. As such it provides no rival to the traditional aim of “maximizing shareholder wealth”.

Stakeholder management is a never-ending task of balancing and integrating multiple relationships

and multiple objectives;

Diverse collections of stakeholders can only cooperate over the long run if, despite their differences,

they share a set of core values. For a stakeholder approach to be successful it must incorporate

values as a key element of the strategic management process.

Quality of stakeholder relationships

At the Centre for Innovation in Management (CIM), Ann Svendsen and her co-workers have developed a

stakeholder oriented management framework based on the quality of stakeholder relationships36 which

are seen to underpin the emerging dominance of network organisations37. The basic premise is that “the

network economy is founded on technology, but it can only be built on relationships. It starts with chips

and ends with trust.” 38

Relationship quality is measured using Nahapiet and Ghoshal’s three dimensions of social capital:

a) The structural quality of a relationship referring to the structure of the social network in which the

relationship is embedded;

b) The relational quality of the relationship associated with the levels of mutual trust and reciprocity;

c) The cognitive quality of the relationship reflecting the levels of shared understanding and goals.

The CIM approach, based on a multilevel model shown in the following diagram, reflects collected

evidence that links the quality of stakeholder relationships to competitive advantage.

36 A. C., Svendsen, R.G. Boutilier, R.M. Abbott & D. Wheeler (2002), Measuring the Business Value of Stakeholder Relationships: Part One, Vancouver: Centre for Innovation in Management37 Manuel Castells, (2000), The Rise of the Network Society, Malden: Blackwell Publishers.38 Kevin Kelly, (1999), New Rules for the New Economy Penguin, USA.




The main goals at each level are described below:

Level 1 Compliant: avoiding harm in the three dimensions of sustainability, for example ensuring

safety of products and workers, avoiding economic losses, corruption and (illegal) environmental

damage.

Level 2 Responsive: meeting reasonable individual stakeholder expectations in the three dimensions

of sustainability, for example, achieving good levels of customer satisfaction, employee morale,

returns to investors and reducing environmental impacts of operations, products and services.

Level 3 Engaged: maximizing economic, social and environmental value, for example, achieving

simultaneous sales and stock value growth, customer and employment growth and eliminating or

offsetting environmental impacts.

We can associate structural quality of social capital with information dissemination/ acquisition

efficiency; relational quality with transactional efficiency and cognitive quality with enhanced learning.

The relational dimension of social capital is based on three interlinked concepts: trust, norms, and

reciprocity. If a member of the network ceases to follow established norms or if trust and reciprocity are

withdrawn, social capital may be depleted or cease to exist.

The cognitive dimension of social capital deals with shared codes, language, and narratives. Tsai and

Ghoshal (1998) extended the cognitive dimension to include shared goals, values, and vision. In a case

study, Boutilier and Svendsen (2001) found the cognitive aspects of a company’s stakeholder

relationship to be more important to the emergence of inter-organizational trust.

Stakeholder value

Freeman (1994)39 advocates that stakeholder theory is based on the assumption that values are a

necessarily part of doing business and management should articulate the shared sense of the value they

39 R. E. Freeman, 1994, The politics of stakeholder theory, Bus. Ethics Quart. 4 (4).




create and what brings ‘core’ stakeholders together. He argues that the firm is in relationship with its

stakeholders supports “the human process of value creation”. In a recent article answering critics of

stakeholder theory Freeman states “that many firms have developed and run their businesses highly

consistent with stakeholder theory” including the companies featured in Built to Last and Good to Great

(Collins 2001, Collins and Porras 1994). It is argued that whereas all these firms value their shareholders

and profitability, none of them make profitability the fundamental driver of what they do. These firms

also see the importance of values and relationships with stakeholders as a critical part of their ongoing

success.”

Donaldson and Preston argue that the interests of all stakeholders are of intrinsic value. “That is, each

group of stakeholders merits consideration for its own sake and not merely because of its ability to

further the interests of some other group, such as the shareowners.”

Kochan and Rubinstein [42] highlight the concept of “value exchange” between the company and their

stakeholders. They suggest that ‘shareholder firms’ should balance value distribution to their

stakeholders according to their value contributions; in other words they should ensure a fair corporate

value distribution addressing the value needs of stakeholders.

In general, stakeholder approaches should be aimed at increasing in the long-run shareholder value

beyond the levels normally achievable with the agency approach by optimising profitability and

intangible assets such as reputation and intellectual capital. This requires the development of strategic

capabilities possibly centred on efficient stakeholder engagement processes and optimised development

of social capital.

It is clear that the concept of stakeholder value is not as yet clearly defined. We can assume that

stakeholder value can be regarded as the sum of value distributions to the company’s stakeholders and

that this may contain instrumental and intrinsic elements. However the difficulty comes in defining value

measurements for each stakeholder group, ranking their value contributions and quantifying the effect

of various elements of stakeholder value on economic performance indicators.





Social capital

Social capital can be broadly defined as the current and potential advantages a person or organisation

or community has from social relations and networking.

According to James Coleman 40 social capital represents:

a) Features of social organisations, such as trust, norms, and networks that can improve the efficiency

of society by facilitating coordinated actions;

b) An attribute of an individual in a social context determined by:

the individual’s connections (i.e. whom he/she knows and group memberships);

the strength of the connections’ ties;

the resources available in connection groups.

Social capital can be acquired partly through purposeful actions and can be transformed into

conventional economic gains.

Gabbay & Leenders (1999) 41 describe social capital as the productive set of resources, tangible or

virtual, that accrues to an actor through the actor’s social relationships and facilitate the attainment of

goals. Such definition views social capital in terms of the competitive or value generating outcomes of

social networks, rather than as the structural appearance of the network itself.

According to Don Cohen and Laurence Prusak42 “Social capital consists of the stock of active

connections among people: the trust, mutual understanding, and shared values and behaviours that

bind the members of human networks and communities and make cooperative action possible”. This

definition which reflects the knowledge management background of the authors can be extended to

clarify the interrelationship between social capital and intellectual capital.

Intellectual capital is knowledge that can be exploited by organisations in pursuit of their objectives.

Intellectual capital include organisational or structural capital (the knowledge that is embedded in its

organisational design, processes and IT applications), human capital (the human resources within the

organisation and its suppliers) and customer capital (company's ongoing relationships with the people or

organisations to which it sells). The later can be extended to social capital representing the company's

knowledge and relationships with its stakeholders.

Nahapiet and Ghoshal (1998)43 identified the following three dimensions of social capital:

a) structural

b) relational

c) cognitive

40 J. S Coleman, (1990), Foundations of Social Theory. Cambridge/London: Bellknap Press of Harvard University Press.41 S M Gabbay and R Th A J Leenders, (1999) ‘CSC: The structure of advantage and disadvantage’ in R Th A.J. Leenders and S M Gabbay (eds), Corporate Social Capital and Liability. Boston/ Dordrecht /London: Kluwer Academic.42 Don Cohen and Laurence Prusak (2000), In Good Company: How Social Capital Makes Organizations Work Harvard Business School Press, Boston, MA43 J Nahapiet & Ghoshal, (1998), Social capital, intellectual capital and the organizational advantage, Academy of Management Review, 23(2),




The structural dimension of social capital facilitates information dissemination and acquisition and

relates to an individual's or organisational ability to make connections to others within a community.

Features include network ties, density, configuration and appropriateness.

The relational dimension of social capital is associated with trust, norms and obligations and the extent

to which such qualities are shared among the parties. It supports efficient transactions between people

and organisations from improved customers and supplier relations to enhanced transfer of best practices

within organizations.

The cognitive dimension of social capital has attracted significant interest as it is linked with the learning

capabilities of organisations specifically organisational knowledge absorptive capacity denoting the

ability of the firm to identify, value, assimilate and exploit information.

Narayan and Pritchett44 suggested that communities with high social capital have frequent interaction,

which in turn cultivates norms of reciprocity through which learners become more willing to help one

another thus facilitating coordination and dissemination of information and knowledge sharing. Features

include shared meanings, language, symbols, etc. across the members of a network.

Finally in the context of corporate sustainability environmental capital is another concept used. Natural

capital represents natural resources and ecological systems which form the basis of life, on which all

organisations (and wider society) depend. However the concept is not as yet well defined and associated

measures such as air, water and soil quality are need further development to be practically useful in

corporate sustainability or stakeholder management.

44 Narayan, D. and Pritchett , L. (1997). Cents and sociability: Household income and social capital in rural Tanzania. Washington, DC: World Bank




7.4 4CR related concepts

Related concepts in the 4CR taxonomy include:

1. reputation risks

2. social innovation and marketing

3. regulation and competitive policy

4. eco-efficiency

5. fair globalisation

6. performance stability

Reputation risks

Boards responsible for risk management under Sarbanes-Oxley and similar legislation face a challenging

time ahead, both in establishing a good understanding of the risks affecting their companies and in

setting policies and controls for their management.

Part of the challenge is dealing with reputation risks that are becoming a critical threat to the

performance and even survival of many companies. As can be seen from the following Reputation Risk

Matrix the sources of reputation risk are all associated with corporate responsibility and sustainability

issues which makes reputation risk management an integral part of corporate responsibility and

sustainability management.

Reputation Risk Matrix

Risk source area Risk type Specific consequences Common Consequence

Products/

services and

supply chain

Customer dissatisfaction

with product value and/or

quality

Human rights abuses

Loss of client trust

Damage to brand value

Cancellation delays of major

contractsLoss of market confidence

Reputation damage

Loss of Key Corporate

knowledge

Litigation

Negative media attention

criticism by NGOs and

review groups

Underachievement of

business objectives

Governance and

legal

compliance

Financial, security,

regulatory, compliance and

governance areas which

result in stakeholder views

of integrity

Critical shareholder

resolutions / actions

Loss of high calibre personnel

Cost of capital

Security cost

Environment

Environmental operational

impact

Industrial accidents

Loss of major asset(s)

Disruption of essential

programs/services

Increased insurance

premiums

Social innovation and marketing

Social innovation refers to new or enhanced products or services that have a positive impact on social or

environmental issues; often termed ‘environmentally friendly or green products’. Examples illustrating

possibilities for social innovation include production of fibres entirely from renewable resources, fuel oils

from vegetation, energy and water savers, chemical free cleaning, recycled materials, organic food and

cosmetic products, natural home furnishings etc.




Social innovation represents social learning and problem solving in areas ranging from improvements in

human health, education, human welfare, environmental protection and energy.

Innovation capabilities are no different than those needed to create new products with novel

functionalities. The difference is on the focus and perhaps on a stronger emphasis on understanding

social problem areas and creating new forms of alliances to create solutions.

Corporate Social Marketing (CSM) is aimed at behaviour changes that improve health, safety or the

environment and the consequent development of new markets. In other words CSM is a strategy that

uses marketing principles and techniques to foster behaviour change in a target population leading to

social improvements while at the same time building markets for products or services45 . A CSM initiative

combines business strategy with a social need and thus provides opportunities for simultaneous social

and business returns.

Recent trends focusing on marketing playing a central role in the enablement and acceleration of

organizational learning can be particularly important in this area.

Key aspects of social innovation and marketing are:

assessing the company’s potential for social innovation;

social innovation networking;

marketing, social understanding and organisational learning;

promoting a culture for social innovation and marketing;

promoting social innovation in R&D activities.

Regulation and competitive policy

Regulation and Competition Policy aims to constrain the behaviour of corporations when the latter are

directed towards strengthening and/or exploiting significant market (or monopoly) power, to the

detriment of competitors and, more significantly, to the detriment of consumers. It has been a

particularly popular microeconomic policy tool in the USA since the late 1800s and in Europe after the

World War II, but especially in the last 20 years or so. Emphasis has been recently placed by the

European Commission on the Regulation of liberalised public utilities and on Competition Policy for

oligopolistic markets.

Eco-efficiency

The World Business Council for Sustainable Development (WBCSD) defines eco-efficiency as being

achieved by the delivery of competitively priced goods and services that satisfy human needs and bring

quality of life, while progressively reducing ecological impacts and resource intensity throughout the life

cycle, to a level at least in line with the Earth’s estimated carrying capacity.

The Council has identified the following four aspects that can make eco-efficiency a strategic element in

today’s knowledge-based economy:

a) de-materialisation: developing ways of substituting material flows with knowledge flows;

b) closing production loops: learning from the biological designs of nature which provide a role model

for sustainability;

45 “Best of breed,” Kotler, P., and Lee, N., Stanford Social Innovation Review, 14-23, 2004.




c) service extension: moving from a supply-driven economy to a demand-driven economy;

d) functional extension: manufacturing smarter products with new and enhanced functionality and

selling services to enhance the products’ functional value.

Fair globalisation

Globalisation has set in motion a process of growing interdependence in economic relations (trade,

investment and global production) and in social and political interactions among Organisations and

individuals across the world.

Despite the potential benefits, it is recognised that the current process of globalisation is generating

unbalanced outcomes both between and within countries.

The World Commission on the Social Dimension of Globalisation (WCSDG) was established by the

International Labour Organisation (ILO) in February 2002 and produced a final report in February 2004.

Recommendations were based on six broad policy themes for detailed reflection:

a) national policies to address globalisation;

b) decent work in global production systems;

c) global policy coherence for growth;

d) investment and employment;

e) constructing a socio-economic floor;

f) the global economy and the cross-border movement of people;

g) strengthening the international labour standards system.

According to WCSD fair globalisation means:

a) A focus on people. The cornerstone of a fairer globalisation lies in meeting the demands of all

people for respect of their rights, cultural identity and autonomy, decent work and empowerment of

the local communities they live in;

b) A democratic and effective State. The State must have the capability to manage integration into the

global economy and to provide social and economic opportunity and security.

c) Sustainable development. The quest for a fair globalisation must be underpinned by the

interdependent and mutually reinforcing pillars of economic development, social development and

environmental protection at the local, national, regional and global levels.

d) Productive and equitable markets. This requires sound institutions to promote opportunity and

enterprise in a well-functioning market economy.

e) Fair rules. The rules of the global economy must offer equitable opportunity and access for all

countries and recognize the diversity in national capacities and developmental needs.

f) Globalisation with solidarity:

there is a shared responsibility to assist countries and people excluded from or disadvantaged by

Globalisation helping to overcome inequality and contribute to the elimination of poverty;

greater accountability to people by public and private actors at all levels with power to influence

the outcomes of Globalisation.

g) Deeper partnerships:

dialogue and partnership among all stakeholders is an essential democratic instrument to create

a better world;

an effective United Nations. A stronger and more efficient multilateral system is the key

instrument to create a democratic, legitimate and coherent framework for Globalisation.




Performance instability

Performance instability is a problem that has affected almost every company during the last two

decades sometimes with devastating effects on local communities; and the situation is deteriorating. In

recent years there rarely passes a day without news of restructuring taking place in major corporations

usually accompanied with employee reductions and a redefinition of the corporation’s relations with its

stakeholders and wider social environment. Down sizing, outsourcing and layoffs are still part of the

traditional response to the unstable economic environment. Patterns of restructuring vary from one

country to another and across sectors.

The European Commission established the European Monitoring Centre on Change in 2001 to help offset

the negative long-term impact of restructuring by examining how best to manage and anticipate social

and economic change in our society. Further, the European Commission's Communication on "The future

of the European Employment Strategy (EES)”, aims to re-design the EES as a key tool to underpin and

better deliver the Lisbon strategy. The Lisbon strategy, by embracing change as a key factor for

economic and social renewal, further verifies the critical importance of finding innovative solutions to

address restructuring and enhance corporate sustainability.

Solutions to performance instability may require a two prong approach emphasising long term

performance optimisation rather than short term profit maximisation and developing responsiveness

capabilities.

The new global economy is distinguished by its emphasis on early recognition of change triggers and

adaptation, in contrast to the traditional emphasis on optimisation strategies based on prediction of

relevant business patterns.

Organisational responsiveness can be defined in terms of alertness, resilience and adaptability as shown

in the following diagram.

Alertness is dependent on the effectiveness of the company’s business intelligence system, and it is

recognised that stakeholder engagement can become an important element of such a system.

Resilience effectively denotes the capacity a company has to absorb adverse events (e.g. economic

down turn, negative publicity, etc) and is dependent on the strength of the company’s social capital.

Adaptability is mainly associated with knowledge based dynamic capabilities enabling companies to

combine knowledge on change processes with knowledge on market changes to adapt their offerings

and maintain competitive advantage.

7.5 The 4CR Corporate Responsibility Map




The 4CR Corporate Responsibility Map shown diagramatically below illustrates the interelationships

between the main areas of corporate responsibility and associated concepts and the potential for a

common management system.

The main driving forces behind each of the main responsibility areas are drawn in the map indicating

potential tensions and balancing actions. A typical tension example is when corporate competitiveness

related activities conflict with environmental sustainability policies or even short term ethical norms. A

typical balancing example is increased compulsory regulation if CSR and sustainability principles are not

properly practiced by the majority of companies.

The key issues in each of the Four Corporate Responsibilities are as follows:

Corporate Competitiveness addressed by strategic management is a subject rarely discussed in the

context of corporate responsibility. However, unless all strands of corporate responsibility are

brought together under a common management framework, CSR and sustainability will remain

peripheral activities and their impact is likely to remain well below required levels to achieve the

Millennium and related goals.

Corporate Governance sets the legal framework to protect a company’s shareholders and

stakeholders; the relative emphasis being dependent on national models.




CSR is aimed at extending the legal requirements promoting ethics, philanthropy and social

reporting to satisfy stakeholder concerns.

Corporate sustainability focuses on long term economic and social stakeholder expectations both by

optimising their sustainability performance and by participating in networks with governments,

NGOs and other stakeholders that can provide the capacity for the world’s sustainable development.

Business ethics and social accountability create important bridges between CSR and corporate

governance. Investor demands and specifically SRI, philanthropy and corporate citizenship provide a

common ground for CSR and corporate sustainability.

Performance stability and fair globalisation are important aspects both in strategic management and

corporate sustainability. Competition policy and regulation affects strategic management and corporate

governance but has also implications for business ethics and CSR. Similarly, risk management is a key

issue for strategic management and governance and specifically in terms of reputation risks it becomes

a common aspect in all the responsibility areas.

At the centre of the 4CR Corporate Responsibilities Map is stakeholder management which provides the

common link between corporate competitiveness and corporate responsibility and sustainability.




7.6 The 4CR principles for stakeholder oriented strategic management

The following principles provide the foundations of the 4CR stakeholder oriented strategic management

approach building on Freeman’s work and developments in the fields of corporate responsibility and

sustainability.

4CR Principles for Stakeholder oriented Strategic Management.

N

o

Principle Explanation

1

Single stakeholder

driven strategic

framework

A single stakeholder driven strategic framework incorporating

stakeholder strategy (classification, relations map, indicators) aligned

with business and corporate responsibly and sustainability strategy.

2

Central concern is

sustainable

competitiveness

Sustainable competitiveness requires strategic dynamic capabilities

relying on the support of those who can affect the company

(stakeholders) and enabling the plotting of the firm’s direction based

on enhanced understanding of how the environment may affect the

firm and how the firm can affect the environment.

3

Core values is a key

element of strategy and

corporate identity

Diverse groups of stakeholders can cooperate effectively only if they

share a set of core values. Thus, for a stakeholder approach to be

successful it must establish and promote shared values and shared

interests as a key element of the strategic management process.

4Company specific

stakeholders

The stakeholder approach is about concrete “names and faces” for

stakeholders and about establishing and analysing company specific

stakeholder roles facilitating stakeholder engagement.

5

The set and number of

stakeholders are

context and time

dependent

Stakeholder management that will ensure long-term success entails

constant monitoring of stakeholder relations and identification and

management of new ones.

6

Integrated approach to

strategic

decision making

Successful strategies integrate the perspectives of all stakeholders

rather than offsetting one against another. Both benefits and harms

are distributed in a way that ensures the long-term support of all the

stakeholders

7 Networking orientation

Stakeholder management provides a tool for examining the external

organizational environment and exploring the strategic options that

can be created through networking.

8Stakeholder supported

innovation

Stakeholder networking and related participation in learning

processes should be designed to optimise social capital development ,

accelerated learning and responsiveness

9

Balancing and

integrating stakeholder

contributions and

satisfaction

Stakeholder management is a continuous process of managing

stakeholder contributions and stakeholder satisfaction levels by

promoting and supporting stakeholder participation on company’s

learning processes.




Annex1 Comparison of CSR studies using Carroll’s pyramid concept

Studies Mean values

Economic orientations

Legal orientations

Ethical orientations

Philanthropic orientations

Aupperle, Carroll

& Hatfield (1985)

3.50 2.54 2.22 1.30

Pinkston & Carroll

(1994)

3.28 3.07 2.45 1.15

England 3.49 3.15 2.29 0.98

France 3.60 3.04 2.35 0.98

Germany 2.86 3.21 2.46 1.42

Japan 3.34 2.76 2.42 1.41

Sweden 3.27 3.30 2.43 1.00

Switzerland 3.11 3.04 2.70 1.10

USA 3.11 2.96 2.48 1.19

Edmondson &

Carroll (1999)

3.16 2.12 2.19 2.04

Burton, Farh &

Hegarty (2000)

Hong Kong 3.11 2.32 2.32 1.84

USA 2.81 2.42 2.51 1.99




Annex 2 Key corporate responsibility and sustainability milestones

Corporate responsibility and sustainability in the 60’s

Date Event

1960

OECD Created Convention signed in Paris 14/12/60 which came into force 30/9/61, the

Organisation for Economic Cooperation and Development was created to promote

policies designed:

to achieve the highest sustainable economic growth and employment and a rising standard of living in

Member countries, while maintaining financial stability, and thus to contribute to the development of the

world economy;

to contribute to sound economic expansion in Member as well as non member countries in the process of

economic development; and

to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance

with international obligations

1960’s

The earliest reference to social auditing is sometime around the early 1960s in a book by George Goyder

called "The Responsible Company". He refers to various activities in the mid and late 1950s and proposes

that a social audit can act as both a useful management too and offer stakeholders a platform for

challenging and influencing companies.

1961The World Wildlife Fund WWF, now the World Wide Fund for Nature, is created at Morges, Switzerland; it

will become a leading non-governmental actor in international conservation

1962

Rachel Carson publishes "Silent Spring bringing together research on toxicology, ecology and

epidemiology to suggest that agricultural pesticides are building to catastrophic levels. New wave of

environmentalism.

1962 Consumer Bill of Rights - USA

1966International Covenant on Economic, Social and Cultural Rights adopted by the UN

International Covenant on Civil and Political Rights adopted by the UN

1967

In the Sixth General Synod (1967), the Action on Poverty and Economic Justice declared that: "Social

value and social justice ought to be given consideration together with security and yield in the

investment of funds held by religious Organisations. Requests the Instrumentalities with substantial

investments to study the social aspects of policies and practices with respect to investments and to

report on such studies to the Executive Council” creating the foundations for SRI.

1968

The Club of Rome, commissions a study of global proportions to model and analyse the dynamic

interactions between industrial production, population, environmental damage, food consumption and

natural resource usage (later published as “The Limits to Growth”).

1968The Intergovernmental (UNESCO) provides a forum Conference for Rational Use and Conservation of

Biosphere for early discussions of the concept of ecologically sustainable development.

1969The US Congress passes the National Environmental Policy Act (NEPA) creating the first national agency

for environmental protection - the EPA.

1969Commonwealth Arbitration Commission adopts the principle of equal pay for equal work regardless of

gender





Date Event

1970The first Earth Day was held as a national awareness campaign on the environment. An estimated

twenty million people participate in peaceful demonstrations all across the USA.

1971The Man and the Biosphere MAB program is founded by Unesco; it will have a major role in

promoting international scientific cooperation on environmental problems

1970s

Henderson Poverty Index developed in Australia.

In France, companies with more than 300 employees required by law to produce an employee

report: the Bilan Social.

Germany engaged in the social model of corporate management.

Council on Economic Priorities and others in USA began to rate companies publicly on

their social and environmental performance

Social Audit Limited was set up in the UK in 1978 undertakes external audits of a small number of

companies

1970sGreenpeace, in the 1970s was the first major NGO to adopt policies which shifted the emphasis

away from governments and more towards direct action on the corporate sector.

1970s

The United Nation’s Code of Practice for Transnational Corporations was an early attempt in the

early 70’s to define CSR businesses principles in terms of ethics, product standards, competition,

marketing and disclosure of information.

1972

The United Nations Conference on the Human Environment in Stockholm considers the need for a

common outlook and for common principles to inspire and guide the peoples of the world in the

preservation and enhancement of the human environment. The concept of sustainable

development is cohesively argued to present a satisfactory resolution to the environmental vs.

development dilemma. The conference leads to the establishment of numerous national

environmental protection agencies and the United Nations Environment Programme (UNEP).

1972

An article in The Ecologist magazine, endorsed by a large number of UK scientists, and entitled ‘The

Blueprint for Survival”, warns of the "breakdown of society and irreversible disruption of life-

supporting systems on this planet" and proposes the concepts of “sustainability” and “sustainable

development” as an alternative to an ethos of ‘expansionism”.

1972The first alternatives to GDP as a measure of economic progress, the Measure of Economic Welfare,

is created by Nordhaus and Tobin; used today for measuring TLB performance.

1974Rowland and Molina release a seminal work on CFCs in Nature magazine calculating that

if use of CFC gases is to continue at unaltered rate the ozone layer will be depleted by

many percent after few decades.

1979J. Coomer (ed.) publishes the book “Quest for a Sustainable Society”. Emphasising that society

must recognise limits of growth and to look for alternative ways of growing.

1979Chair of Tata Steel (India’s largest integrated private sector steel company) asks audit committee to

report on “whether, and the extent to which the company has fulfilled the objectives…regarding the

social and moral responsibilities”




http://www.unep.org/Documents/Default.asp?DocumentID=97&ArticleID=1503


Date Event

1980

The “World Conservation Strategy” is released by IUCN (World Conservation Union) as "the

modification of the biosphere and the application of human, financial, living and non-living resources

to satisfy human needs and improve the quality of human life". The section “Towards Sustainable

Development” identifies the main agents of habitat destruction as poverty, population pressure,

social inequity and the terms of trade. It calls for a new International Development Strategy with the

aims of redressing inequities, achieving a more dynamic and stable world economy, stimulating

accelerating economic growth and countering the worst impacts of poverty.

1980

“The Global 2000 Report to the President”, is submitted to US President Jimmy Carter

providing comprehensive projection of global environmental impacts and resource supply issues over

the next 20 years. The Report recognises biodiversity for the first time as a critical characteristic in

the proper functioning of the planetary ecosystem.

1982Business in the Community is founded by UK based business organisations focussed on corporate

social responsibility.

1983Australia adopts a National Conservation Strategy to implement the objectives of the World

Conservation Strategy.

1984CSR becomes part of mainstream management theory at least since the publication of Edward

Freeman’s 1984 classic, Strategic Management: A Stakeholder Approach

1985 The Antarctic ozone hole is discovered by British and American scientists

1986The Toxics Release Inventory (TRI) was established under the Emergency Planning and Community

Right-to-Know Act of 1986

1987

The Brundtland Commission, appointed by the United Nations to study the connection between

development and the environment publishes report: “Our Common Future". The report introduces

the term “sustainable development” defining it as: “development that meets the needs of the

present without compromising the ability of future generations to meet their own needs".

1988

An Inter-governmental Panel on Climate Change (IPCC) is established with three working groups to

assess the most up-to-date scientific, technical and socio-economic research in the field of climate

change.

1988

The Co-Operative (UK) publishes its first Social Report.

Ben and Jerry’s (Ice Cream Company) in USA produces first Social Performance Assessments.

Establishment of the Resource Assessment Commission to evaluate best use of resources in

Australia

1989Report published for the UK government – Blueprint for Green Economy by David Pearce et al.

Introduction of the concept of natural capital and definition of sustainable development as non-

declining per capita human well-being over time.


Date Event

1991IUCN/UNEP/WWF publish “Caring for the Earth: 2nd World Conservation Strategy” focusing on

“sustainable society”, “sustainable living” and “sustainability” itself




1992

'Earth Summit' in Rio de Janeiro with 180 country delegations addressed ways to halt the destruction

of irreplaceable natural resources and pollution of the planet twenty years after the first global

environment conference. The Summit agrees the Rio Declaration on Environment and Development

which sets out 27 principles supporting sustainable development. Also agreed is a plan of action,

Agenda 21, and a recommendation that all countries should produce national sustainable

development strategies. The Earth Summit also establishes the UN Commission on Sustainable

Development, which meets every year, as well as important UN bodies - the Framework Convention

on Climate Change and the Convention on Biological Diversity.

The Earth Summit influenced all subsequent UN conferences, which have examined the relationship

between human rights, population, social development, and the need for environmentally

sustainable development.

1992 A USA based business led membership organisation, Business for Social Responsibility BSR is

founded

1992FairTrade is founded with mission to improve the position of the disadvantaged producers in the

developing world, by setting the Fairtrade standards and supporting their interests.

The European Union (EU) announced a framework of environmental policies applicable to the EU and

its member states for the period 1993 – 2000.

1993

The World Conference on Human Rights, held in Vienna, underscored the right of people to a healthy

environment and the right to development, controversial demands that had met with resistance from

some Member States until Rio.

1993US President Bill Clinton announces (Oct 20th) an ambitious plan to combat global warming through

over 50 initiatives affecting all sectors of the economy.

1994

European Universities Charter for Sustainable Development agreed ; promoting university education

for the training of decision-makers and teachers, oriented towards sustainable development and

fostering environmentally aware attitudes, skills and behaviour patterns, as well as a sense of

ethical responsibility.

1995

Caux Round Table Principles for Business adopted – The Caux Round Table (CRT) was established as

an international network of principled business leaders advocating implementation of the CRT

Principles for Business through which principled capitalism can flourish and sustainable and socially

responsible prosperity can become the foundation for a fair, free and transparent global society.

1995

The World Business Council for Sustainable Development (WBCSD) sets a permanent base in Geneva

to provide business leadership as a catalyst for change toward sustainable development, and to

promote the role of eco-efficiency, innovation and corporate social responsibility.

1995Formation of the World Trade Organisation replacing GATT as the Organisation overseeing the

multilateral trading system. Key functions include: handling trade disputes and technical assistance

and training for developing countries.

1995

COP I in Berlin, Germany-Each year, the countries that ratified the Rio Convention held a Conference

of Parties (COP). The first of these happened in 1995 and reviewed the adequacy of the Rio

Convention's goal of stabilizing greenhouse gas emissions.

1996The OECD, introduced the concept of environmentally sustainable transportation (EST); “Pollution

Prevention and Control, Environmental Criteria for Sustainable Transport”

1996

In January 1996 a group of 57 European companies signed the European declaration of businesses

against social exclusion, and established CSR Europe with the support of Jacques Delors President of

the European Commission at that time. CSR Europe mission is to help companies achieve

profitability, sustainable growth and human progress by placing corporate social responsibility in the

mainstream of business practice.

1997 The Kyoto Protocol for the implementation of the Framework Convention on Climate Change is

negotiated. After reviewing the original targets of the Rio Convention and finding them to be too

weak, the countries came up with new targets. Now, 1990 greenhouse gas emissions would be cut

by 5% between 2008 and 2012.Though 5% is a global target, different countries have different

targets. The European Union's target is a 8% cut (Germany committed to a 25% cut and the U.K. to




15%). The United States had a target of 7%, while Canada had a target of 6%.)

1997SA8000 launched by Social Accountability International SAI a U.S.-based, non-profit Organisation

dedicated to the development, implementation and oversight of voluntary verifiable social

accountability standards.

1997

A special UN conference is held to review the implementation of Agenda 21 (Rio+5). This repeats the

call for all countries to have sustainable development strategies in place - in particular by the time of

the next review of Agenda 21 in 2002 (Rio+10).

In Europe, changes to Articles 2 to 6 of the Treaty establishing the European Community are agreed

in the Treaty of Amsterdam, give sustainable development a much greater prominence.

1997 John Elkington publishes Cannibals with Forks in it he coins the term Triple Bottom Line.

1997 The Global Reporting Initiative launched to develop Sustainability reporting guidelines.

1998

November - Around 170 nations gather at the United Nations global warming conference

in Buenos Aires to discuss ways of cutting emissions of greenhouse gases by 2008-

2012. - Specialists from the US and Canada tell the summit that global warming is killing the world's

coral reefs, and with them the swarming sea life they shelter and support. 100

1999The UK Government launches its new strategy (May), A better quality of life - A strategy for

sustainable development for the UK.

In December, Quality of life counts - Indicators for a strategy for sustainable development for the

United Kingdom: a baseline assessment is published.

1999Paul Hawken and Amory and Hunter Lovins publish “Natural Capitalism: The next

industrial revolution”

1999 The Global Sullivan Principles launched

1999

In an address to The World Economic Forum on 31 January 1999, United Nation Secretary-General

Kofi Annan challenged business leaders to join an international initiative – the Global Compact – that

would bring companies together with UN agencies, labour and civil society to support ten principles

in the areas of human rights, labour and the environment..

1999Creation of the Dow Jones Sustainability Indexes as the first global indexes tracking the financial

performance of the leading sustainability-driven companies worldwide

1999

UK Corporations Disclosure Legislation passed. The Turnbull Report on corporate governance added

reputation, probity and other non-financial risks to the necessary criteria for reporting risk to

shareholders ( September 1999)

1999

Environment ministers from 173 countries meeting in Bonn (Nov 4th) to discuss the Kyoto

Agreement, end talks without any breakthroughs and with many difficult issues remaining

unresolved. One involves the penalties payable if nations do not meet their pollution targets. Another

is the extent to which nations will be able to pay others to reduce pollution on their behalf

Corporate responsibility and sustainability in the 2000s

2000UK Pension Act amended to require the trustees of occupational pension schemes to disclose their

policy on socially responsible investment in their Statement of Investment Principles.

In the UK the government appointed the world’s first minister for CSR-Spring 2000

2001Transparency International increases its activities. Anti Bribery Legislation with extra-territoriality

clauses tabled in 8 nations. The 10th IACC Anti-Corruption Conference took place in Prague.

2001The UK Government publishes its first review of progress towards sustainable development,

Achieving a better quality of life, Government annual report 2000.

2001 Launch of the FTSE4Good index.

2001 Japanese Environment Minister Yoriko Kawaguchi says there seems to be no




likelihood of a breakthrough at the next round of talks but suggests the deadline for final

agreement on the rules of the Kyoto pact should be late October when a United Nations

conference on climate change is to start in Marrakech, Morocco

2002

The World Summit on Sustainable Development – Johannesburg 26 August - 4 September 23002, in

the face of growing poverty and increasing environmental degradation, succeeded in generating a

sense of urgency, commitments for action, and partnerships to achieve measurable results. More

than 220 partnerships, representing $235 million in resources, were identified during the Summit

process to complement the government commitments. Report of the World Summit on Sustainable

Development.

2002Business in the Community celebrated its 20th anniversary with a 2 day ‘A Better Way of Doing

Business’ conference on corporate responsibility- July 2002

2002 Business in the Community launches first Corporate Responsibility Index- October 2002

2003

The Commission on Sustainable Development, 11th Session, New York, 28 April - 9 May 2003,

adopts new work programme for the Commission on Sustainable Development (CSD), based on two-

year cycles with a clear set of thematic issues, provides the global community with a unique

opportunity to focus in-depth attention on specific issues. Building on the outcomes of the twelfth

session of CSD’s (CSD-12) focus on water, sanitation and human settlements, the thirteenth session

of CSD (CSD-13) will strive to be forward looking and action oriented

2004

There over 60 UK Government initiatives of relevance for CSR. The UK parliament has two all-party

groups on corporate citizenship: the All-Party Parliamentary Group on Corporate Social Responsibility

and the All-Party Parliamentary Group on Social Responsible Investment-mid 2004




Annex 3 Environmental Sustainability Index

Components of Environmental Sustainability

Environmental sustainability is presented as a function of five phenomena:

(1) the state of the environmental systems, such as air, soil, ecosystems and water;

(2) the stresses on those systems, in the form of pollution and exploitation levels;

(3) the human vulnerability to environmental change in the form of loss of food resources or exposure to

environmental diseases;

(4) the social and institutional capacity to cope with environmental challenges;

(5) the ability to respond to the demands of global stewardship by cooperating in collective efforts to

conserve international environmental resources such as the atmosphere.

Environmental sustainability is defined as the ability to produce high levels of performance on each of

these dimensions in a lasting manner. These five dimensions are referred to as the core “components”

of environmental sustainability defined as follows:

Environmental Systems: a country is environmentally sustainable to the extent that its vital

environmental systems are maintained at healthy levels, and to the extent to which levels are improving

rather than deteriorating.

Reducing Environmental Stresses: a country is environmentally sustainable if the levels of anthropogenic

stress are low enough to engender no demonstrable harm to its environmental systems.

Reducing Human Vulnerability: a country is environmentally sustainable to the extent that people and

social systems are not vulnerable (in the way of basic needs such as health and nutrition) to

environmental disturbances; becoming less vulnerable is a sign that a society is on a track to greater

sustainability.

Social and Institutional Capacity: a country is environmentally sustainable to the extent that it has in

place institutions and underlying social patterns of skills, attitudes and networks that foster effective

responses to environmental challenges.

Global Stewardship: a country is environmentally sustainable if it cooperates with other countries to

manage common environmental problems, and if it reduces negative extra-territorial environmental

impacts on other countries to levels that cause no serious harm.




Environmental Performance Index Framework

Indicators Policy Categories Broad ObjectivesOverall

Performance

Child Mortality

Indoor Air Pollution

Drinking Water

Adequate Sanitation

Urban Particulates

Regional Ozone

Nitrogen Loading

Water Consumption

Wilderness Protection

Eco-region Protection

Timber Harvest Rate

Agricultural Subsidies

Over-fishing

Energy Efficiency

Renewable Energy

CO2 Per GDP

Environmental Health

Environmental Health

Environmental

Performance Index

Air Quality

Water Resources

Ecosystem Vitality

Biodiversity and Habitat

Productive Natural

Resources

Sustainable Energy




Annex 4 FTSE4Good Indexes Sector Classification

FTSE4Good Indexes Sector Classification46

Companies are assigned a high, medium or low impact weighting according to their industry sector. The higher

the environmental impact of the company’s operations, the more stringent the inclusion criteria.

High Impact Sectors Medium Impact Sectors Low Impact Sectors

Agriculture

Air Transport

Airports

Building Materials (includes

Quarrying)

Chemicals and Pharmaceuticals

Construction

Major Systems Engineering

Fast Food Chains

Food, Beverages and Tobacco

Forestry and Paper

Mining & Metals

Oil and Gas

Power Generation

Road Distribution and Shipping

Supermarkets

Vehicle Manufacture

Waste

Water

Pest Control

DIY & Building Supplies

Electronic and Electrical equipment

Energy and Fuel Distribution

Engineering and Machinery

Financials not elsewhere classified

Hotels, Catering and Facilities

Management

Manufacturers not elsewhere

classified

Ports

Printing & Newspaper Publishing

Property Developers

Retailers not elsewhere classified

Vehicle Hire

Public Transport

Information Technology

Media

Consumer / Mortgage Finance

Property Investors

Research & Development

Leisure not elsewhere classified

(Gyms and Gaming)

Support Services

Telecoms

Wholesale Distribution

46 http://www.ftse.com/ftse4good/index




Annex 5 Stakeholder classifications

Different lists of stakeholders arranged according to category

Empel et al.2003

Clarkson 1995

Preston 1990GE Co. early 1930s

Preston 1990 Johnson & Johnson 1947

Preston 1990 Sear’s 1950

Kaptein & Wempe 2002KPN 1998

Graafland & Eijffinger 2003

ADES Management Consulting2002

employees employees employees employees employees employees employees employees

company

managers

shareholders

shareholders

shareholders

shareholders

shareholders

shareholders shareholders shareholders

sponsors

customers customers customers customers customers customers customers

Target groups

suppliers suppliers suppliers

businesspartners

businesspartners

competitors competitors

unions

NGOs NGOs

special interestgroups

interestgroups

communities communities

citizens the generalpublic society society society

The media

CSR organisations

The environment

government government government

Source: Circles of StakeholdersRob Maessen, Paul van Seters & Eleonore van RijckevorselGlobus, Institute for Globalization and Sustainable DevelopmentTilburg University, the Netherlands



science

Documents

book strategic management

strategic problem

cr strategic approach

term stakeholder

stakeholder theory

legal responsibilities

corporate responsibility

philanthropic responsibilities