Corporate Governance

The foundation for corporate citizenship and sustainable businesses

Corporate Citizenship and Sustainable Businesses

Corporate citizenship — a commitment to ethical behavior in business strategy, operations and culture — has been on the periphery of corporate governance and board leadership, linked mainly to corporate reputation. However, in today’s globalized and interconnected world, investors, creditors and other stakeholders have come to recognize that environmental, social, and governance responsibilities of a company are integral to its performance and long-term sustainability.

Today, these concerns help determine profits. For companies to operate successfully and sustain growth, boards must incorporate these new dimensions into their core decision-making processes.

The global financial crisis has heightened the need for corporate boards of directors to provide well-informed strategic direction and engaged oversight that stretches beyond short-term financial performance. Doing so prepares companies to more comprehensively address risks, by anticipating potentially adverse impacts on people and the environment and managing tangible and reputational risks. It can also generate wealth by creating shareholder value through an increase in business opportunities and broader access to markets.

A new vision of business is emerging — one where a set of core values, encompassing human rights, environmental protection and anti-corruption measures, guides the board’s oversight, relationship with management, and accountability to shareowners.

“Good corporate governance practices instill in companies the essential vision, processes, and structures to make decisions that ensure longer-term sustainability. More than ever, we need companies that can be profitable as well as achieving environmental, social, and economic value for society.”

Rachel Kyte

Vice President, Business Advisory Services, IFC

“A well-governed company takes a longer-term view that integrates environmental and social responsibilities in analyzing risks, discovering opportunities and allocating capital in the best interests of shareowners. There can be no better way to restore public confidence in both businesses and markets and build a prosperous future.”

Georg Kell

Executive Director, UN Global Compact

“Good corporate governance is the glue that holds together responsible business practices, which ensures positive workplace management, marketplace responsibility, environmental stewardship, community engagement, and sustained financial performance. This is even more true now as we work worldwide to restore confidence and promote economic growth.”

Thierry Buchs

Head, Private Sector Development Division Of Switzerland’s

State Secretariat For Economic Affairs (SECO)

Boards, collectively and directors individually, are central in accomplishing these objectives, for, as Sir Adrian Cadbury said, “corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals.”

The impetus for this new understanding of board responsibilities can be found in a growing number of global and industry-specific initiatives. Chief among these are the OECD Principles of Corporate Governance and the United Nations Global Compact.

These benchmarks inform the work of the Global Corporate Governance Forum in its efforts to promote good corporate governance practices in emerging markets and low income countries.

Board responsibilities

Today’s corporate citizenship — defined by a clear call to environmental, social and governance responsibility — links directly to three fundamental functions of boards and their directors’ duties to the companies and shareowners they serve:

• Protecting stakeholder rights and interests

• Managing risk

• Creating long-term business value

The following sections explain how these aspects link through the OECD Principles and UN Global Compact. The examples of strategies illustrate the business benefits of proactive leadership.

Protecting stakeholder rights and interests

The OECD Principles call on businesses to recognize and safeguard stakeholders’ rights, including legitimate interests and information needs. These Principles call on boards to be truly accountable to shareowners and to take ultimate responsibility for their firm’s adherence to a high standard of corporate behavior and ethics.

Effective corporate governance requires due diligence in rallying the support and commitment of the broad network of business stakeholders, including shareowners, employees, customers and communities. If stakeholders are adversely affected by a company’s actions, shareowner value will suffer. With the growth in pension and insurance funds and other institutional investors, shareowners are increasingly also company stakeholders, such as employees or customers. Therefore, these groups’ needs are increasingly interconnected.

The UN Global Compact’s ten principles similarly call on boards to address critical dimensions of concern to stakeholders. Boards that recognize the value of a holistic approach to stakeholder engagement, particularly in the environmental, social and governance realms, find that shareowners are similarly committed to such issues. This includes ongoing communication with stakeholders about material concerns, as well as regular disclosure about company performance, ideally linked to periodic financial reporting. Responding to stakeholder concerns can have other direct business benefits:

• Widespread consensus is that the long-term costs of corruption are high for both society and business. Anti-corruption measures can strengthen relationships with stakeholders by building a culture of trust and collaboration.

• When companies enact anti-corruption initiatives that include empowering employees, this in turn can cultivate good reflexes on the part of individuals to address workplace dilemmas.

• Employees who work where their rights and needs are respected tend to be more productive, delivering higher quality work than those who are routinely mistreated.

High standards of integrity, transparency and disclosure can be influential in restoring public and investor trust in the private sector. They are also a starting point for ongoing, constructive dialogue with stakeholders, such as communities, who are affected by and can, in turn, help determine a business’ performance.

Managing risk

New understandings of business risk show that boards have a legal and fiduciary responsibility to manage environmental, social and governance risks. Directors need to be informed and prepared to manage these long-term concerns alongside typical corporate directives. By addressing and managing these risks effectively, boards can position their businesses to perform well financially and secure a long-term license to operate. By failing to do so, boards can undermine their company’s reputation.

More and more companies are extending their internal controls to encompass a range of ethics and integrity issues. Many investment managers examine the rigor and quality of these controls as evidence that companies are undertaking good business practices and are well managed:

• Proactively identifying possible human rights concerns allows a business to more effectively address potential risks.

• Initiatives such as the IFC-led Equator Principles — a financial industry benchmark used by more than 60 financial institutions worldwide to determine, assess and manage social and environmental risk in project financing — and the Dow Jones and FTSE4 Good Sustainability Indexes have made it increasingly apparent that socially responsible practices can improve access to financial markets and reduce capital costs.

• The competitive advantage of risk management gained through anti-corruption includes ensuring alignment with customer expectations, safeguarding reputation, and meeting demands of ethical investment funds, pensions, and other investors.

Creating business value

Core to the role of any board is guiding corporate strategy and creating wealth for shareholders. Many new business opportunities are emerging to address corporate citizenship priorities. Forward-thinking businesses are best placed to benefit. Immediate benefits cited by leading companies include improved reputation, higher employee retention rates, greater productivity, and cost benefits through operational improvements and innovation in products and services.

The most effective corporate citizenship and sustainability strategies are led from the top, incorporate a wide range of stakeholder views and are aligned with the company’s business priorities. This ensures a more efficient and strategic allocation of resources to these initiatives, which may generate new business opportunities:

• Improved labor practices in supplier operations can translate into improved productivity and reduced reputational risks. Better working conditions improve the efficiency of the supply chain.

• Human rights strategies, such as preventing discrimination in the workplace and promoting gender and ethnic equality in business processes, have been shown to secure diversity and increase innovation in products and services. A diverse workforce and wider customer base guide development within new markets and previously untapped customer demographics.

• Environmental programs can provide financial benefits, such as reducing operating costs, leading to new markets and technologies, improving employee morale and increasing employee health.

• Good management of environmental, social and governance performance has been shown to strengthen reputation and brand value, important business assets.

Reproduced with the kind permission of the International

Finance Corporation and UN Global Compact.