Designing a strategic CSR program

Board members and top management are catching on that setting CSR goals can help them connect the dots and complete the picture of where their company is going. Establishing a CSR program and measuring its impact often gives those responsible for the long-term direction of a company a different view of their strategic goals. ‘It puts numbers together you never put together before,’ explains Evan Harvey, director of corporate responsibility at NASDAQ OMX. ‘It puts a different lens on your business.’

This is what Sandra Nessing found as she developed the CSR program at American Electric Power (AEP), one of the largest electric utilities in the US, and started producing an integrated report that blended sustainability and financial data. ‘I had a CFO tell me, We all work in our little worlds, and never think about how things are connected. Now I really see [the bigger picture],’ she recalls.

As more companies adopt CSR programs, boards are having to take a closer look at how these efforts can support them in fulfilling their fiduciary duty to help set the company’s business strategy. Harvey says attitudes have evolved from even just a few years ago, when directors’ typical stance toward CSR programs was disinterest. Despite the evolution of the last five years, however, he notes that when companies start to give it more careful thought, ‘there’s a lot of confusion about the alphabet soup of reporting [frameworks they find].’

Recognizing this, consulting firm BrownFlynn held a webinar in June to help firms gain a better understanding of a handful of the best known frameworks, including the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board, the International Integrated Reporting Council and the Carbon Disclosure Product.

‘CSR means something different to everyone,’ acknowledges Robert Strand, executive director of the Berkeley-Haas Center for Responsible Business. ‘To some, it is about corporate philanthropy. To others, it is a tool used to increase profits, not unlike other management tools. And there are many other interpretations.’ This means the immediate obstacle for many companies is ‘just to get people in the company on something like the same page for what is meant by CSR at that company,’ Strand adds.

For a long time any talk of social responsibility was viewed as ‘expropriation from shareholders’, because of an assumption that it diverted profit away from them, recalls Lloyd Kurtz, chief investment officer at Nelson Capital. That attitude shortchanges the ethical obligations companies have, he adds. As a researcher at KLD Research & Analytics, Kurtz helped develop the Domini Social Index (now known as the MSCI KLD 400). The index, first launched in 1990, helps investors that are seeking a diversified benchmark comprising companies with strong sustainability profiles while avoiding companies incompatible with value screens.

There is some evidence that CSR can, in fact, lead to capital efficiencies within companies, Kurtz notes. ‘But even if that were true, it’s not reason enough to be socially responsible,’ he says. ‘You do it not only because it makes you money but also because the company has a larger obligation’ to a broader group of stakeholders, including the local communities in which it operates.

Material benefits

Other experts, however, emphasize the bottom-line results CSR programs can generate. Board consultant Alice Korngold cites Nike’s realization that its reliance on natural fibers for its sportswear was not sustainable. That led it to research alternative apparel materials that saved money and reduced risk.

Unilever, meanwhile, has earned high marks for CSR by working with suppliers like smallholder farmers to improve efficiency and with cocoa growers to plant trees. Unilever CEO Paul Polman is acknowledged for his leadership in CSR: as chairman of the World Business Council for Sustainable Development, he addressed the UN General Assembly in June on the growing need for sustainable and inclusive business policies. ‘He is trying to decouple the concepts of profit and growth in a world of depleting resources,’ says Kellie McElhaney, a professor at UC Berkeley’s Haas School of Business and co-faculty director of the university’s Center for Responsible Business.

She agrees that boards need to see CSR in terms of a return on investment, but says they also need to see ROI in broader terms than just profit and loss. She’d like companies to give more thought to a broader meaning of creating value than just focusing on dollars. Most tech companies in Silicon Valley share three objectives: profit, beating the competition and retaining their restive workforce, she points out. Beyond these goals, however, they also face social and environmental issues related to their core competencies, such as the energy consumed by their power-hungry servers, cyber-security and privacy issues, and avoiding a community backlash as they expand their facilities in the San Francisco Bay area. ‘A CSR strategy connects all of these’ and constitutes ‘a hard-core business strategy’, which is more likely to endure than a commitment to adopt CSR for philanthropic reasons, McElhaney says.

Connie Lindsey, executive vice president and head of CSR at Northern Trust Corporation in Chicago, agrees it extends beyond ‘checkbook philanthropy’. In its sustainable products and services division, the company has worked to develop responsible investment brand leadership through marketing campaigns and sponsorship of responsible investment conferences. To fulfill its engagement objectives, Northern Trust measures progress on employee engagement through annual surveys, which are evaluated for ideas that might enhance its action plans.

Surprise sources

Sustainability initiatives can yield unexpected dividends, as PepsiCo and Coca-Cola found when each examined water sustainability as part of its CSR program and ended up developing more efficient water technology that saved money and reduced the risk of potential business disruptions, says McElhaney.

Most firms come to CSR ‘from a point of pain’, turning to it out of necessity as they address an urgent problem, McElhaney adds. AEP’s CSR program grew out of environmental reporting that the utility adopted to defend itself against criticism of emissions from its coal-burning plants. It quickly evolved from a report on violations and compliance in the name of transparency to something more. The company saw misperceptions about where it stood on climate change as ‘an opportunity to take control of our story,’ says Nessing.

When she heard from AEP’s investor relations executives that they were bringing only the environmental report to meetings with institutional investors because it contained information on AEP’s energy strategy that they couldn’t find elsewhere, she made the case to top management for an integrated report that ‘allows us to understand the financial ramifications and risks associated with doing something’ or not doing it, she says. As a result, AEP’s 2015 corporate accountability report – titled ‘Powering the future’ – not only includes a page on climate change that sums up the company’s commitment to steadily reducing emissions but also takes issue with various mandates from the Environmental Protection Agency that it considers too ambitious and not sufficiently sensitive to differences in various markets.

But because AEP’s supply chain includes many coal producers, there is ongoing discussion about miner health and safety, which has prompted one-on-one discussions with suppliers that generally led to improvements, says Nessing.

Think big

As a second step in developing their CSR policies, companies should set ‘big hairy audacious goals,’ says Mike Wallace, managing director of BrownFlynn, using a term coined by James Collins and Jerry Porras and later adopted by management literature. This might be something like reducing energy use by 20 percent within five years. It’s also critical that companies make a public commitment to these goals, which may include signing up to the GRI or another reporting framework to ensure the firm will be accountable according to external standards.

Next comes the task of putting in place the management and governance infrastructure to be able to achieve the goals that have been set. McElhaney emphasizes the need to engage employees in this process as they’re dealing with customers and suppliers and ‘will see ways to execute on goals.’ Then comes measuring progress, whether through the external reporting frameworks or according to internal metrics. McElhaney underscores the need to measure returns on any CSR initiatives that have been implemented. ‘Don’t be afraid of mistakes,’ she says. ‘Learn from your failures.’

She cites her experience on Dow Chemical’s sustainability external advisory council, whose eight to 12 members meet twice a year to exchange information, explore issues and discuss practical applications. She emphasizes that Dow provides a financial incentive for participation in those sessions. ‘Ideally, these measures lead to top or bottom-line growth,’ she says. ‘But if not, we bring it back to the sustainability [council] to correct any mistakes.’

Measuring results is essential if companies are serious about improving their processes to reach CSR goals and reduce any adverse environmental and social impacts their operations are having, says Wallace: ‘Collating the proper data may require implementing new tools.’

Harvey believes CSR is most effective when it’s a data-driven process, which can appeal more to managers and directors who often insist on data to drive business decisions. ‘Moneyball is a perfect way to think about it,’ he says, referring to the Michael Lewis book and its subsequent film adaptation, which showed how data collection and analysis transformed management in baseball. At NASDAQ, for instance, collating travel information across all forms of transportation revealed that the stock exchange company’s per-mile costs were often too high. This led to savings when it was corrected.

At AEP, CSR leaders realized they had no idea how much energy was being used at the company’s 400 facilities that weren’t power plants. ‘We weren’t even metering it,’ Nessing says. Once they started measuring use, they developed efficiencies that led to a cumulative $24 million in net equivalent savings between 2007 and 2014.

A final step, too often overlooked by companies, McElhaney says, is to brand the results: ‘Tell people what you’re doing.’ Many of the intangible benefits to reputation, recruitment, retention and investor awareness depend on communicating this information effectively to the public.

All on board

Board involvement, preferably at the earliest stages, is absolutely essential for a successful CSR program. ‘You’re always going to hit a brick wall if the board is not engaged,’ says McElhaney. And any progress you do make won’t last, she adds.

Boards, however, have not been at the forefront when it comes to proactively implementing CSR initiatives. ‘Boards have fallen way behind and they have to catch up,’ says Korngold. Until relatively recently, boards tended to be made up of retired white male executives – ‘not the ideal group to be sitting around the table discussing the potential of the company in the global marketplace,’ she says. There has been progress as boards move to diversify and recruit directors who grew up in other parts of the world, as well as women, members of ethnic minorities and younger people who have grown up with the internet. ‘That’s the kind of board that will be having the right conversations,’ Korngold adds.

In some cases, management may have to educate boards, which tend to treat sustainability as something different from operations, McElhaney says. ‘You have to disabuse them of the notion that CSR does not have implications for ROI,’ she explains. ‘It is important to solicit ideas from board members, starting by targeting the biggest naysayers to get them involved. Many companies take up the issue in board retreats.’ The Gap, for instance, took some board members to cotton fields in South East Asia, so they could see first-hand the backbreaking work, McElhaney says. The result was some board-level recommendations for improving workers’ rights.

It is the active engagement by a CEO or CFO that is most often driving companies’ CSR now, says Harvey. Directors need to get involved, he feels, ‘because it’s right in the wheelhouse for the board’ as a strategic objective for the company. ‘The story is about cost savings,’ he says. ‘Being a good citizen is ancillary.’ He cites NASDAQ-listed companies such as Costco and Google that have examined their supply chains in search of efficiencies, identifying the good suppliers or looking for a code of ethics to reduce their own risk.

Nessing says the engagement and active support of the company’s CEO and several board members have been critical to the success of AEP’s CSR program. CSR oversight is assigned to the board committee on directors and corporate governance, with which members of the CSR staff meet at least twice a year. Nessing says her role as managing director – two levels below the CEO – gives her access to top management as well as accountability.

At Northern Trust, oversight of CSR, along with other strategic objectives, is assigned to the board’s business strategy committee. In this way, says Lindsey, CSR considerations are linked to other strategic goals ‘right at the source’. The committee regularly considers expanding capabilities in the ESG marketplace and continued participation in multiple indices, as well as the company’s integrated diversity and inclusion strategy.

As an investment manager, part of Northern Trust’s commitment to CSR is to promote responsible investment among its customers. So, for instance, specific measures in the latest CSR report, which were reviewed and approved by the board, ranged from a series of institutional investor meetings across Europe about ESG investing strategies to developing products based upon a licensed MSCI suite of socially responsible and customized indices.

Kurtz sees boards moving toward fuller engagement on these issues. ‘Twenty years ago, social issues were seen as a distraction,’ he says. ‘Now boards understand they have real strategic relevance.’

Sound investment

Investors of the caliber of BlackRock and State Street are watching all this very closely, Harvey says. Most of the major asset managers and pension funds have signed up to the UN’s Principles of Responsible Investment, and are monitoring environmental and social conduct, and these are precisely the investors you want for your company. ‘If you’re not part of this, you will get the investors you deserve,’ warns Harvey. ‘They will sell out at the first sign of trouble, as opposed to institutions that will stay with you.’

Companies need to pay attention to CSR because it is society as a whole that stands behind the institutional investors pressing for sustainability goals, Wallace says. ‘There are teachers and firemen standing behind CalPERS and TIAA-CREF,’ he notes. ‘The default mechanism [among board members] is to talk about shareholders as if they were only interested in ROI’ but that is no longer the case.

At Northern Trust, investor interest in CSR is a key factor for the firm’s products as well, because potential clients want to know the company’s CSR policies. In many respects, Lindsey says, the firm’s commitment to CSR is part of a corporate culture of service and integrity that dates back to its founding in 1889. ‘Before it was called ‘social responsibility’, we called it good business,’ she concludes.

Darrell Delamaide is a writer, editor and journalist specializing in business and finance

This article appeared in the fall 2015 print issue of Corporate Secretary Magazine