Corporate Social Responsability: listen up

Corporate social responsibility is replacing price cutting as the new
customer battleground. Looking across the management team, those heading the
finance function are best placed to design and manage CSR reporting. But few
have so far grasped the opportunity. Why is this? And what must senior finance
executives do to ensure that CSR reporting is used to enhance and improve
business performance?

CSR is the adoption of practices that integrate social and environmental
issues into business practices, and it is growing in importance. Environmental
and corporate responsibility is the number one investment priority for UK
businesses over the coming year, according to research issued earlier this month
by Grant Thornton.

Monitoring and reporting environmental and social performance is becoming as
routine as, and comparable to, financial reporting. And managing CSR is an
important component of enterprise risk management, contributing directly to
shareholder value.

An established idea

The idea is certainly not new. As far back as 1999, Dow Jones established its
sustainability indexes, looking beyond traditional measures of financial

It is already well documented that leading sustainability companies
demonstrate a stronger ability to deal with global and industry challenges in
areas that include strategic development, financial performance, customer
loyalty and product innovation, governance and stakeholder engagement, employee
satisfaction and capability.

Given the impact of CSR on the value of their investments, what is surprising
is that it has taken until relatively recently for private and institutional
investors to take a keen interest in the CSR endeavours of business.

Legislative uncertainly could be blamed for a certain amount of stalling on
the part of UK business. Proposals for a mandatory Operating and Financial
Review, as an addition to the annual report, set the scene for more detailed
analysis of qualitative and forward-looking information, were introduced by the
government’s 2001 Company Law Review, only to be withdrawn late in 2005 and
replaced by the Business Review (Enhanced Business Review for quoted companies)
as part of the UK Companies Act 2006.

This broadly aligns UK law with the relevant EU law, namely the 2005 Accounts
Modernisation Directive. The Companies Act 2006 became law on 8 November 2006
but implementation of the changes is phased, the business review only being
introduced from October 2007.

The Enhanced Business Review significantly extends the content requirement to
include environmental, employment, social and community issues, as well as the
metrics and KPIs that the company uses to monitor performance, with an emphasis
on forward-looking considerations.

Much of this information will draw on what is already best practice in CSR
monitoring and reporting. Ultimately, standards will evolve through peer
pressure rather than the limited detail set out within the legislation. The
Accounting Standards Board’s 2005 Reporting Standard on the OFR remains an
excellent starting point.

Legal obligations aside, there are real business drivers and obvious
opportunities that should be encouraging companies to invest time and effort to
embed CSR in their corporate strategies.

Missed opportunities

• Sustainability – Many companies have identified non-financial key
indicators offering genuine advantage and opportunity, combining to support and
deliver the long term strategic goals.

• Good citizenship – Industries that come under close scrutiny from
lobbyists, activists and interest groups strengthen their position by
monitoring, reporting and addressing the key indicators that relate to
environmental, health and safety and, increasingly, social issues.

• Investors – pension funds, investment funds and other major investors as we
ll as private investors, are taking an active role in issues that go beyond the
financial aspects of corporate governance, such as health and safety issues that
may affect long term value.

• Extending disclosure and transparency – Managed and delivered in the right
way, fuller disclosure and transparency increases stakeholder confidence in the
organisation and reinforces the embedding of best practices.

Embracing CSR is certainly not without its challenges. Compared with
financial reporting, CSR draws on wider sources of data and information.
Controls and disciplines that are the norm for financial data may not exist for
CSR data.

Typical questions that FDs will need to ask themselves include, is the
information complete? Is it accurate? Is it being measured consistently from
year to year? Are CSR targets and goals aligned to and supporting strategic

Good CSR is not just an annual reporting exercise, or a glossy brochure put
together by the corporate communications team. Good CSR forms part of the risk
management policy and processes of the organisation and should be seen as a tool
to enhance and improve the business and its performance, embedded within the
corporate governance and ethos. There is a vital link between what is being said
and what is being done.

The challenges typically faced in embedding an integrated approach to CSR
start with ensuring the right level of management commitment and the vision to
see the benefits that can accrue, as well as the practical issue of collecting
data from multiple sources, many of which lack the integrity and controls that
surround financial data.

Once the core reporting has been established, the next step is to develop and
communicate objectives and align targets.

To succeed in getting the full benefits available from CSR, the finance
function must ensure that the information provided and used has all the rigour
and discipline of financial information – accurate, timely, complete and
consistent from period to period.

Reporting capabilities should be considered, particularly whether existing
business performance management systems can be extended to capture and report
non-financial data. Regular management and board reviews should consider the
results and trends and also ensure that the right metrics are in place to
reflect the evolving status of the organisation.

With the increasing focus of investors and other stakeholders on CSR issues,
management must have a clear view of where their competitors are positioned and
how they measure up.

Nine lives of CSR

• Make CSR an integral part of corporate strategy

• Use CSR to drive improved performance

• Include key CSR metrics in scorecard performance reports

• Ensure that the board regularly reviews CSR reports

• Compare your CSR performance with your peers

• Reflect CSR goals in compensation

• Promote your CSR successes with investors and ratings agencies

• Monitor and ensure the consistency of CSR data from period to period

• Incorporate CSR in your risk management processes

Geoff Booth is practice director for financial
management consultancy Parson Consulting

For more information see
Parson Consulting

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