The responsible company

When Errol Mendes first tried to rally corporate Canada to the cause of social responsibility back in 1993, the response wasn’t exactly overwhelming.

The University of Ottawa constitutional law professor mailed out about 500 invitations to a conference that would explore the ways in which companies should interact with local communities, and whether they should go beyond existing laws in areas including health and safety, labor standards and the environment. Only 30 people bothered to respond.

‘Even my colleagues at that time thought that I was wasting my time focusing on this area,’ Mendes recalls, reflecting on his efforts to instigate interest in the conference centered on social issues. ‘They thought that there was no interest on the part of both the academic and corporate world. And at that time they were right.’

Much has changed since then. Increasingly, investors, employees and the public are coming to expect – and even demand – socially responsible corporate behavior; and a growing number of executives and board members are coming to realize it’s just good business sense. Action extends far beyond simply signing contracts and paying lip service. Many companies are integrating corporate social responsibility (CSR) into core business strategies and disclosing their activities to investors.

The numbers weren’t always as impressive as they are now. Fifteen years ago, less than 1 percent of large Canadian corporations were committed to public environmental reporting. Today CSR is a ‘core element of business strategy at 47 of the 265 companies listed on the TSX Composite Index,’ according to a 2008 best practices report issued by Stratos, an Ottawa-based consulting firm.

Since 2001, the overall number of companies reporting on corporate sustainability has risen from 57 to 108. At least 80 percent of TSX companies included some modicum of sustainability information in their annual report in 2007. Aboriginal relations, meanwhile, were mentioned in 51 percent of reports.

What’s driving the trend? The largest factor might be the realization by corporate leaders that failure to take CSR seriously is bad business, Mendes argues.

A checkered history

For decades, economist Milton Friedman’s maxims espoused in a 1970 essay, ‘The Social Responsibility of Business is to Increase its Profits’, held sway. The responsibility of corporate executives was not social, but rather, ‘to make as much money as possible while conforming to the basic rules of society,’ wrote Friedman.

But a series of global corporate catastrophes in the decades that followed demonstrated that bad corporate citizenship carried reputational risk that could affect the ability of companies to make a lot of money, Mendes continues.

In 1984 the Union Carbide plant in Bhopal, India blew up, reportedly killing about 8,000 people within the first week and 20,000 to date. In 1989 the Exxon Valdez disaster loosed approximately 11 million gallons of oil into one of the world’s most fragile and beautiful ecosystems, the waters of Alaska’s Prince William Sound. In 1995 human rights activists accused Royal Dutch Shell of complicity in the execution of Nigerian environmental activists who demanded changes in the way the company operated. (Shell denied the allegations.)

All of these incidents generated significant public embarrassment for the companies involved and helped feed the realization that CSR might be good business. As such, ‘Corporate social responsibility is now a global industry, with thousands of experts both inside and outside companies,’ Mendes says.

Money talks

Outside stakeholders including investors also are drawing attention to sustainability issues. Last year the Social Investment Forum identified $2.71 trillion in total assets under management using one of three socially responsible investing (SRI) strategies – screening, shareholder advocacy or community investing. That’s up 18 percent from $2.29 trillion in 2005. There are also 260 socially screened mutual funds in the US (a number of which invest in Canada) with assets of $208.1 billion, up from just 55 SRI funds in 1995 with $12 billion in assets.

‘More and more institutional investors are starting to look at environmental, social and governance factors,’ says Coro Strandberg, principal at Strandberg Consulting in British Columbia. ‘If you think of it on the environmental side, there are more sophisticated NGO activists turning their sights away from governments and targeting companies. So firms increasingly have reputation as well as brand risks for not managing [their CSR policies].’

But Canadian companies aren’t facing just reputational costs anymore. In the environmental arena at least, government regulation and global warming could take a big chunk out of the profits of companies that fail to adjust.

Federal regulations expected to take effect in 2010 will require emission reductions in some industries, while a number of provincial governments have attempted to enact environmental policies of their own. Alberta instituted caps on emissions in 2007. Quebec has enacted a carbon tax on companies selling hydrocarbon products.

It remains unclear how these new and proposed regulations will coexist, making the future business costs uncertain. But that has only fueled a debate over how much publicly traded issuers should have to disclose to investors.

Canada’s security laws require that management’s discussion and analysis (MD&A) in the annual report disclose any known trends, demands, commitments, events, risks or other uncertainties that are reasonably likely to have an impact on the company’s business and materially affect performance.

A number of investors and activists are arguing that environmental factors are also covered under that law. Some are actively lobbying for regulations requiring more disclosure.

In March 2007 the Canadian government announced it was putting forth new regulations requiring any person operating a facility emitting 100,000 tons or more of CO2 during the 2007 calendar year to report the total quantity and the source of the emissions to the government by June 1, 2008.

Many corporations are not only complying with these regulations, but they have gone ahead and enhanced CSR disclosure and policies at their companies  on their own. So how are these trailblazers approaching the issue?

Taking it to the next level

Ron Nielsen, former vice president and director of sustainability and strategic partnerships at Alcan, a Montreal-based aluminum giant that recently merged with Rio Tinto, explains the multi-tiered approach to CSR. Alcan, in the period leading up to the merger, took an aggressive approach to sustainability reporting and other social elements. There is a well-developed code regarding procurement practices and also a policy relating to the employment and treatment of indigenous peoples and cultures, Nielsen says.

This sort of approach is not only part of the ethics program but also imbedded in CSR. Its duality helps to ensure that local managers and workers go beyond simply acknowledging the stated values of the company and actually put it into place out in the field.

As Alcan’s practices were merged into those of Rio Tinto, Alcan took great pains to keep its ethics and CSR program front and center. New employees are introduced to the company’s roughly 20-page ethics code in orientation and led through a number of hypothetical situations. The code is continuously updated and those updates are promoted within the company through internal communication campaigns.

The stated goals and those policies are then reinforced through internal mechanisms that make them easy to follow.

 ‘To a large extent it’s about the culture and the mindset coming down from the leadership in the company,’ Nielsen says. ‘The values [and] the ethics are typically manifested through your code of conduct, but you also embrace them through your human resources function in the form of competences you highlight.’

Alcan also has a corporate ethics ‘ombudsman,’ reachable through an international 1-800 number and billed as a safe and independent source of advice and support. ‘You can have all the trappings and bells and whistles,’ but what really matters are the mechanisms built-in to ensure management takes the issues of ethics and sustainability seriously, Nielsen states.

‘What’s fundamental is the form of accountability attached [to the program] and how visible it is,’ he adds. ’Does it take time on the business agenda? Does it tie into reward for people’s efforts? Are there compensation programs [that are tied to achieving CSR-related targets]?’ 

Nexen, a Calgary-based energy company, has an ‘integrity resource center’ attached to its legal department. Manager Karen Schonfelder explains that the center is staffed by five employees and liaises with 20 other employees holding different positions in Nexen’s international offices.

A process Nexen originated in the late 1990s has each new employee – including board members and executives – undergo a mandatory three-hour ‘integrity workshop’ which explores different ethical dilemmas and potential situations ‘where their values and judgment might be challenged,’ Schonfelder says.

Every year, directors, executives and employees are required to sign a statement acknowledging they have read the ethics code of conduct. That ethical behavior is then practiced in all the company’s locales.

The integrity center provides a memo to the board at each board meeting and regularly posts videos of potential situations on the company intranet, keeping the issue a central focus, Schonfelder says. The company has a whistleblower help line and follows up anonymous calls with investigations.

‘We make it very clear that if an employee is asked to do something they are not comfortable with, there is a whole network of people they can go talk to,’ says Schonfelder, who estimates the company has about 60 such cases each year.

‘Our CEO and our executive team are very supportive of this program – it’s very important that you have support from the top,’ she says. ‘We continue to reinforce the message going forward.’   

‘The most critical duty of boards should be to ensure a corporate culture that goes not only to legal compliance but to the internalization of values which underlay ethical behavior,’ offers Mendes. ‘It starts with the board setting the mandate for an ethical culture and a value foundation of that ethical culture.’

Of course, there’s still plenty of room for growth. Strandberg expects it to come in the boardroom. ‘The business case for corporate responsibility has become increasingly apparent,’ she notes, ‘and once it becomes a business case, it becomes a boardroom responsibility.’

Yet Strandberg’s recent report found that fewer than 10 Canadian firms have written sustainability and/or CSR explicitly into their mandates. She predicts that will change in the coming years.

‘What this is about is a whole trend,’ she says. ‘Firms are starting to manage CSR. They’re not just looking at the bottom line, but a triple-bottom line. They’re starting to manage in these areas where they have not had focus before.’