TABLED: Governing Well: Is Social Engagement a Governance Responsibility?

In today’s environment, companies practising good governance are expected by the public to demonstrate good corporate citizenship, being accountable not only to shareholders, but also to other stakeholders and to the wider community.
As part of the fabric of society, businesses are required to be more widely responsible for their use of scarce resources and for the associated impact of their activities. This requirement has come into sharper focus with growing acceptance of, and concerns about, the inescapable realities of climate change, carbon footprints, environmental and business sustainability and the moral imperative of avoiding doing harm.
Corporate social responsibility (CSR) is becoming established as critical element of strategic direction and one of the main drivers of business development as well as an essential component of risk management. greater recognition of direct and inescapable relationship between corporate governance, corporate responsibility, and sustainable development is also emerging, with mainstream investors showing increased interest in socially responsible business. For instance, Goldman Sachs finds that oil and gas companies with the best track records on CSR now dominate their market. The global investment banking and securities firm has stated that these companies’ attention to CSR issues will have direct and growing impact on their long-term performance and valuation.
Various international environmental and investment agencies are increasingly reporting clear link between sound social investment and environmental governance policies and practices, and financial performance, evidence of higher returns, business opportunity and competitive advantage. Clearly businesses can no longer afford to ignore their corporate social responsibilities without also increasing their risk profile in areas such as reputation and market performance.
With the mainstreaming of CSR, the concept of the board’s fiduciary duty has been expanding. Thus the real implication of CSR for corporate decision-making is that it is governance issue, which means it belongs on the board’s agenda. The fact that mainstream investors are showing increased interest in socially responsible business and that many of the globe’s largest companies are making room at board level for CSR issues is an indication that there is perceived value in doing so.
Today this requires new structures for considering social and environmental questions that some boards may be ill-prepared to oversee and traditionally have not been theirs to answer. As public attention grows, boards are finding that these issues affect reputation and other intangible assets and have direct bearing on financial performance.
In the New Zealand context it would seem the CSR concept has yet to move from the margins to the mainstream in corporate thinking. According to recent survey by Grant Thornton, privately owned New Zealand companies rate well when it comes to donating to good causes, actively promoting health and well-being among staff and allowing flexible work time. But when it comes to formalising their charitable and social investment practices in written CSR policy, they were among the bottom five on the global ladder with Greece, Poland, Taiwan and Vietnam.
Similarly, recent study by Ingley and van der Walt examined responses by over 400 directors of New Zealand boards to socially related aspects of their governance role and their external orientation and receptiveness toward wider social obligations. They found that while the majority of directors regarded more traditional aspects of the board’s role such as involvement in strategy, evaluating CEO performance, determining risk exposure and responsibility for ethical conduct as being very important, the task of reviewing social responsibilities was rated as being important or very important by significantly fewer respondents and was ranked low overall amongst other board tasks.
The relatively lower importance assigned by New Zealand boards to reviewing social responsibilities is of concern, especially given the strategic implications and potential risk consequences associated with CSR. With regard to their external relationships, in particular, most directors in Ingley and van der Walt’s study believed their board had strong influence in their company’s relationships with shareholders, yet fewer than 10 percent rated non-executive directors on their boards as highly effective in representing shareholders’ interests and in their understanding of stakeholders’ issues.
This result was consistent with the relatively lower emphasis placed by many of these boards on reviewing social responsibilities and linking with external networks, suggesting that these boards hold narrow view of their fiduciary duty. With an almost exclusively internal orientation these boards are putting their organisations at risk from ignoring the interests, concerns and claims of their key stakeholders, to whom they are ultimately accountable. Insofar as these boards are indicative of the current level of commitment to CSR as part of their governance role, New Zealand companies (with notable exceptions) are clearly not aligned with leading thought and best practice as demonstrated by those rated by increasingly influential organisations such as the Global Reporting Index (GRI) and the Dow Jones Sustainability Group Index (DJSGI).
According to 2007 national survey of directors and top executives by Senate Communication Counsel and TNS Global, New Zealand organisations are lagging behind their international counterparts in recognising the importance of governance issues such as reputation management. Six out of 10 chief executives in their survey thought reputational risk management was not understood well enough in the country’s board rooms while four out of five senior managers thought directors should do more to understand the management of reputation.
The emerging pattern from these New Zealand studies shows companies whose boards have neither fully acknowledged the importance of, nor cultivated the competences required to engage with their external stakeholders. Not only do these organisations appear vulnerable to risk, generally, by not fully appreciating their governing role in risk management as strategic requirement, they are also putting their reputational assets at risk through ignoring the power of stakeholders to affect substantially the welfare of the firm.
Given that these organisations have shared concern about the increase of risks to their reputation and the potential damage, it is alarming that they continue to sit back and are seemingly complacent compared with their overseas counterparts.
It would be rare today to hear companies saying they don’t care about stakeholders and expect to get away with such disregard. Businesses recognise that they live in an increasingly interconnected, globalised world where the internet facilitates vast global communication so that corporate interactions are under close and immediate scrutiny. This has caused companies to pay closer attention to all of their stakeholders and become more sensitive to their employees, customers, suppliers, community groups, corporate governance, and shareholders.
The interrelatedness of these factors means that creating shareholder wealth requires thinking how company impacts society and how society’s various stakeholders are going to react to that company’s decisions. How do they react? Employees can either decide to work for that company or go elsewhere. Customers can decide to buy that company’s products or the products of its competition. Regulators can decide to impose greater or lesser levels of regulation. All of this is happening continuously and means that improving shareholder wealth requires thinking broadly about future impacts of today’s products.
It also means that in an interconnected, globalised world, well-run company that will be good invest