RAAS Consulting Ltd

Academic studies have demonstrated a clear relationship between Corporate Social Responsibility and Sustainability and improved economic performance.

"As findings about the positive relationships between CSP (corporate social/environmental performance) and CFP (corporate financial performance) become more widely known, managers may be more likely to pursue CSP as part of their strategy for attaining high CFP." So say Marc Orlitzky, Frank L. Schmidt, and Sara L. Rynes in their 2003 study Corporate Social and Financial Performance: A Meta-analysis (Copyright © 2003, SAGE Publications). This landmark study reviewed the results of 52 prior studies, resulting in an observation pool of almost 34,000 observations.

So accepting that there is a positive relationship, we'll now look in more detail at the reasons that a company should embark on a CSR/Sustainability program. We'll survey nine areas / reasons for formalizing the CSR/Sustainability program, keeping in mind that the cumulative rationale remains and should remain to achieve definable benefit for the company and its shareholders within the acceptable planning horizon for that company. The nine specific areas to consider include:

1. Shareholders
2. Improved relationships with banking and investors
3. Improve stakeholder perceptions
4. Reach target customers
5. Improve employee relations
6. Improve financial performance
7. Improved efficiency
8. Reduced waste
9. Minimize negative public relations

Sometimes a single program or activity could be considered under more than one of the eight areas. Be that as it may be, each of these areas could be presented as a separate definable set of benefits (and associated costs).

1 Shareholders

The company's primary responsibility is to deliver a return to the shareholders in line with their expectations, and to protect their investment. Companies appoint Boards of Directors to shape and set strategy, hire and evaluate the Chief Executive and key officers, and to monitor for achievement of the strategic plan.

Shareholders can expect the company to consistently deliver increased wealth, through share price appreciation and a steady dividend stream.

Any CSR/Sustainability program should therefore be designed with a goal of meeting those objectives, and to be able to demonstrate how the program will contribute to the achievement of the strategic plan. A CSR/Sustainability program that is unable to do so risks losing credibility with the shareholders, and to have such loss of credibility reflect poorly on the Board and senior management.

2 Improved relationships with banking and investors

Through improved relationships with bankers and investors, a company can expect to reduce both it cost of capital and access to capital.

An effective, and effectively communicated CSR/Sustainability program can demonstrate improved quality of process and organizational management, identification of risk and implementation of risk mitigation strategies, and can improve the quality of use of corporate resources. The development of additional corporate competencies can also support positioning of the company to take advantage of unseen opportunities, or to more effectively respond to unforeseen events.

With the very high probability that the regulatory environment is also going to undergo significant change over the coming years, the pro-active introduction of a CSR/Sustainability program will also help position the company for that changing regulatory environment. Such pro-activity can be part of communication with bankers and investors, reinforcing the messages that support improving those relationships.

3 Improve stakeholder perceptions

We've mentions Stakeholders earlier, and will only quickly review the role of stakeholder in the CSR and Sustainability area.
Improved stakeholder relationships can reduce risk, improve availability of recourses (labor and materials) at lower costs, and reduce impediments to implementation of corporate initiatives.

Stakeholders come in many sizes and flavors. There is the Powerful-Stakeholder - regulators, major shareholders, institutional investors. Then there are the little- stakeholders - local and community organizations, customers, competitors, suppliers. Then there are those stakeholders that could, depending on international, national or local conditions, be either "powerful" or "little"-stakeholders - labor unions, NGOs, the press.

While not an exhaustive list of stakeholders, it does serve to give an idea of the wide range of groups and individuals that can be considered stakeholders. The level of participation and influence granted to, or requested from any individual or group of stakeholders is completely subject to the objectives of the company as it sets out to engage stakeholders.

Some see stakeholder engagement as a cynical form of public relations, while others view stakeholder engagement as a critical success factor.

4 Reach target customers

Clearly customers are becoming far more aware of CSR and Sustainability issues, and are beginning to include these factors (or each individual's subset of factors) in their purchasing decision making. This ranges from individual customers and large scale and corporate customers.

5 Improve employee relations

There are multiple Human Resources reasons to embark on a CSR/Sustainability program, but at their core they include retention and attraction of the best talent.

People like to work for companies that share their values, and that they respect. In addition, employees and potential employees reflect the values of the wider community and are influenced by those issues and concerns that are readily communicated in their communities and in their society. It is reasonable then to expect employees and potential employees to place a premium on the communications and actualization of the company's values.

CSR/Sustainability programs, when appropriately communicated, demonstrate the actualization of values that are becoming more prominent in society. The emphasis here needs to be on appropriate communication. People tend to know when they are being "played" or when actions simply do not match the messages from to top. It is important then that the messaging around CSR/Sustainability focus on realistic activities and objectives, while celebrating actual successes and activities.
So, an effective CSR/Sustainability program will help a company:

•    Attract the best candidates and potential employees
•    Improve retention of employees

6 Improve financial performance

The common adage "What gets measured gets managed" reminds us of the importance of both monitoring and objective setting. With CSR/Sustainability this is equally important. There are a range of enterprise operational costs that are managed and optimized, but frequently through a set of non-CSR/Sustainability lenses. Using a new set of lenses can provide a completely different view of the situation.

Cost reduction:

For example, use of energy (electricity). Frequently this represents a either a facilities line item, or could be included in the lease costs for office facilities. This is not the "efficient light bulb" argument, but a suggestion that looking at energy usage from a different perspective can result in direct reductions in energy use. Where these costs are built into lease costs, the motivation for reduction of energy use is then seen through the CSR/Sustainability lens, and while cost reductions many not be immediately achieved, they certainly will be achieved at lease renewal or as a credit through negotiation with the facility owner.

Staying at a hotel in Amsterdam I was surprised to see that the escalator was not working. As I looked around for the elevator, I saw a hotel employee walk to the escalator, step on the pressure plate in front of the escalator, which started the escalator immediately. When the last person stepped off the escalator, it stopped.

How many times have you seen an office building in which the escalators seem to either run 24 hours, or on the weekend just in case people are arriving or leaving the building. Imagine the energy usage reductions simply from optimization of the use of something like an escalator.

Certainly at a minimum companies should be considering the use of motion sensors in offices and office areas, mandatory power shutoff of peripherals out of hours, etc.

For companies with large scale energy requirements, and the potential to need to demonstrate (for government contracts or to hedge future energy costs), some companies are considering long term supply contracts for renewables. While this may have an up front higher cost of energy, it does provide a hedge against potentially higher costs for renewables as state mandated total percentages kick in, and limited supply of renewables pushes the price higher.

This is only the beginnings of a sample of potential energy usage management, planning and reductions, which should be seen in this context as a combines CSR/Sustainability cost management and reduction strategy. And certainly the "efficient light bulb" should not be overlooked.

Increase Revenue:

On the other side of financial performance equation is improving quality and quantity of revenue. Breaking out revenue flows in a non-traditional manner can help identify revenue potential that is being impacted from a lack of a CSR/Sustainability perspective.

Once again, a different set of lenses applied to classic analysis of product lines, market segments and geographies, industries, etc, can result in the identification of new opportunities.

GE for example, reviewed their entire product line, identifying those products that are either sigificantly more efficient that competitors products or that are consistent with Sustainability principles. These products were then grouped together under the "Ecomagination" branding. In following the growth in sales of products, GE has found that sales of the portfolio of products grouped in the "Ecomagination" range is growing at a rate almost 50% higher than those products not included in this category.

Such findings can lead to a virtuous cycle of increased investment in these types of products, further improving the quality of the products and therefore further increasing sales and profitability of these products against those not included in a sustainability type portfolio of products.

7 Improved efficiency

It can be difficult to come to the right balance between the cost of production in one locations, shipping and other transportation costs, total inventories, or availability of the right resources (people or material) in the right place at the right time. This is supply chain management at it heart. It also judges efficiency on purely cost vs return metrics, based on those elements of cost that can be calculated and managed. There exist a range of costs that currently are not carried by the company known as extra-financial costs, or externalities.

Today carbon is not included, for most companies, as a cost item to be measured and managed. There are other externalities that are not included in the cost calcuation, ranging from good will at the local community level, to erossion of brand equity due to negative press coverage.

Identifying, measuring and putting a potential cost on the widest range of externalities as possible can help a company determine how and where the introduction of process or production changes can result in efficiency improvements. In addition, the identification a cost to each of as wide a range of externalities as possible will alter planning behavior in such a way as to ensure that if or when such externalities do carry a direct cost, they company will either have implemented efficiency processes to mitigate the cost, or will be able to implement such changes within minimal impact.

Companies applying a cost per ton of carbon emissions to their internal carbon emissions creating processes are able to prepare themselves to be able to measure and ultimately reduce such emissions.

8 Reduced waste

Waste costs. It represents the inefficient use a inputs, and resulting in costs for disposal and increased regulatory compliance costs. The reduction of waste, first through the careful inventory of waste producing activities and total waste produced, will reap direct cost benefits, and will improve external perceptions of the company.

9 Minimize negative public relations

Contracts with supply chain participants should be reviewed to ensure that current contracts include a requirement that the supplier complies with the company’s policies covering all product quality, working conditions including health and safety, and that all suppliers comply with the company’s environmental policies. Such policies may include a requirement that working conditions and environmental standards meet those of the home country of the company.

All participants in the supply chain should also be required to mandate similar standard for their suppliers. CNN, the Washington Post, the Guardian or Le Monde will not disconnect the treatment of workers or the environment by a supplier two or three contracts removed. Furthermore, NGOs will “connect the dots” and would probably quite enjoy showing a company’s brand on a product created in sweatshop or environmentally degredated or poluting facilities.