Bridging the divide
Thomas Higgins; J Kay Smith; Carl Gustin
January 1, 2003
page 58-67
Volume 28, Issue 1; ISSN: 0364-474X
Copyright (c) 2003 ProQuest Information and Learning. All rights reserved.
MORE AND MORE, CONSUMERS AND INVESTORS JUDGE CORPORATIONS BASED ON THEIR SOCIAL BEHAVIOR, SAYS THE PRESIDENT OF BUSINESS FOR SOCIAL RESPONSIBILITY COMPANIES IGNORE THIS FINDING AT THEIR PERIL. BY THOMAS HIGGINS
There is a crisis in the reputation of corporate America today. By virtually all survey results, the integrity of American business is held in lower repute than at any time since 1930s. At the height of last summer's disclosures, a June 2002 Golin/Harris trust survey found 82 percent of Americans believe the crisis of turst in American Business will either get worse or stay the same.
The consequences of this slide in reputation are severe found corrosive. Real shareholder value have been lost. The confidence necessary for an economic recovery has eroded. America's strength as a trading power and an architect of global economic arrangements has been undermined. The or security of millions of retirees who rely on the strength of capital markets is in jeopardy.
This state of affairs has particular meaning for the electric power industry, which more than most sectors has always relied on strong brands and good stakeholder relations to achieve its business objectives.
What is so striking about this situation is the tremendous gulf in perception that exists between corporate leadership and the general public.
For most corporate leaders-who, in my experience, are people of integrity-the recent revelations of accounting fraud and abuse of discretion are both painful and embarrassing, but not evidence of endemic behavior. On the contrary, they view the incidents and perpetrators as proverbial "bad apples," and their exposure is seen as proof that the system works, that eventually there is a cleansing of such excesses, and that sweeping reform is unnecessary-just some tweaking around the edges. (See "The Role of the Board," p. 6.)
But that misses the point, really. If all that comes of the current clamor is some improved rulemaking by the Securities and Exchange Commission (SEC), then we are certain to live with the crisis for some time to come.
This isn't just a controversy over accounting principles. Rather, it is a fundamental matter of governance and accountability in a global economy with many legitimate stakeholders. How well or how poorly the private sector recognizes and deals with these stakeholders will determine what kind of business environment we have over the next decade, at least.
One of the fastest-growing movements in the world is the demand by consumers for responsible corporate behavior. At this relatively early stage, their demands are often incoherent, but the chorus is growing more sophisticated and at an accelerating rate. According to a recent survey by Environics International (a marketing research firm), 49 percent of citizens across 20 countries selected ethical, environmental, and social responsibility concerns as the most important factors when forming an impression of a company. The same survey reported that 29 percent of consumers punished companies because of poor social performance, up from 20 percent in the previous year's survey. In addition, a majority of shareholders say that they would sell their shares in a company if it behaved in a socially irresponsible manner-even if the share earnings were significant.
Companies that ignore this movement, therefore, do so at the peril of commercial success, as some businesses are already finding. Sooner or later, every company of real consequence has to find a language and a means to engage its constituencies in ways that honor the corporation's own core values and safeguard its need for solid financial performance. How best to do that in this brave new world of protest, demand, and economic hazard is the challenge.
Change from Within
I am a businessman. For almost 20 years I was a senior corporate officer in industry sectors as diverse as insurance, publishing, and energy. I was privileged to have many colleagues who are among the finest people I have ever known. I also spent some years in public service and the nonprofit sector. I can say with assurance that none of these elements of civil society has a monopoly on virtue. Each has a role to play in helping the world advance economically and socially so that all may share in the benefits of progress, so that poverty, disease, and ignorance can be ameliorated and some day marginalized altogether.
That's why we have to get it right with the corporate community. Capitalism is still the most efficient means of creating wealth that mankind has ever devised, and if it stalls because the legitimacy of its enterprise is rejected, we can never hope to meet the needs of society.
So what kind of reform is necessary? It begins, as always, at the top. Boards of directors have to assume wider and deeper accountability for corporate social responsibility than they have done previously, and they must report honestly and fully on their performance against the standards they adopt. This level of accountability is still far more honored in the breach than in the observance by most boards. Indeed, there is still a long way to go even in the transparency of basic financial reporting, let alone the social reporting which many advocacy groups call for today.
Although notwithstanding some scandalous exceptions, I do believe most SEC filings, which contain management's discussion and analysis of financial results, are truthful. But it is naive not to recognize that they are often written artfully to avoid drawing attention to unpleasant issues.
That has to change. These filings are the bedrock for the credibility of any corporation that is publicly traded, and far too many of them raise obfuscation to an art form. Countless lawyers labor over footnotes that only a mind-reader could interpret correctly, and that is considered a good day's work. No premium is attached to full and effective communication of embarrassing news, unless it has already been on the front page of The Wall Street Journal. Independent directors rarely pass judgment on the quality of such reporting, although it is they who represent shareholders in the first instance.
Becoming Integral to Business
This is only part of the responsibilities that are now incumbent on directors if they are to be responsive to this new era. Beginning in the European Union, a growing expectation is now emerging for reporting of corporate social behaviors. Plainly put, it means that companies are expected to publicize the audited results of their adherence to widely accepted norms of practicethe way in which they treat their workers, the environment, and the communities where they do business.
This is not an easy endeavor. Business for Social Responsibility (BSR) has done it for 10 years for companies seeking to improve their performance in those areas, and I will be quick to say that it is hard work, especially for companies that are the most conscientious in fulfilling their obligations. (See the sidebar, "Advancing Corporate Responsibility")
Some companies might believe with justification that no good deed goes unpunished. Yet upward of 2,000 companies around the world voluntarily report information on their economic, environmental, and social policies, practices, and performance using various standards and guidelines. Without this auditing, the consequences can be fatal for the legitimacy of business activity, especially when it goes beyond national borders. Moreover, if companies can't demonstrate their ability to operate within accepted norms of decent behavior and be held accountable, then they invite a regulatory scheme potentially threatening to a global market.
For many business executives, "corporate responsibility" still conjures up a notion of corporate citizenship that doesn't extend much beyond philanthropy and volunteerism. Those are well and good, of course, but not sufficient. Stakeholders now want to know, for example, what targets the company has set for the reduction of greenhouse gas emissions and what progress is being made against them. They want transparency throughout a supply chain on how workers are compensated in the developing world and what their work conditions are. And they want to know how a plant's operations are engaging the local community, so as to improve its basic standard of living.
Picking through these issues is painstaking and complicated. There are often conflicting standards to take into account. Working in groups that range across industry sectors requires attention to antitrust and other marketing concerns. And finding the right economic balance with domestic competitors in the developing world can be very challenging. Nevertheless, it is increasingly a cost of doing business. And done right, it is good for business.
Realizing a Return
There is mounting evidence of both a quantitative and qualitative nature that socially responsible business practices can benefit business as well as society. Numerous studies point to the enhancement of brand image and customer loyalty:
* A 2002 Echo Research international survey showed that more than 80 percent of corporate social responsibility decisionmakers were very confident in the ability of socially responsible business practices to build corporate image and reputation and to support the recruitment, retention, and motivation of employees.
* A 2002 PricewaterhouseCoopers' survey revealed that nearly 70 percent of CEOs worldwide agree that corporate social responsibility is vital to the profitability of any company.
* An Environics International CSR Monitor survey revealed that 68 percent of its 25,000 respondents-and 90 percent of its U.S. respondents-want a company to focus on more than profitability.
* The Conference Board's 1999 "Study of Consumer Expectations" found that 46 percent of interviewed consumers had carried out a purchase decision or decided to speak out in favor of a company because of a positive perception of its social responsibility. Forty-nine percent of respondents said they had decided not to purchase a product or service from a company or had spoken critically of it because it did not meet their standard for being socially responsible.
*The 2001 Cone/Roper Corporate Citizenship Study found that 76 percent of Americans say a company's commitment to social issues is important when they decide where to workup from 48 percent in the previous survey.
* A 2000 Hudson Institute multi-sector survey found a positive correlation between high ethical standards, work commitment, and loyalty, and concluded that "employees who believe they work in an ethical environment are six times more likely to be loyal than workers who believe their organization is unethical."
There are hundreds of case studies of companies that have dramatically reduced costs and improved productivity through environmentally-oriented and workplace initiatives. (BSR has encapsulated many of these studies and reports at www.bsr.org.) Social and environmental auditing and reporting can identify the effectiveness of programs and policies, often improving operating efficiencies and reducing costs. Some reporting can highlight a responsible company's ability to attract and retain a quality workforce. Other reporting can reveal reduced long-term costs, better risk management capabilities, and improved decisionmaking on critical issues.
Social investing is no longer a boutique enterprise: The growing number of investment dollars managed in socially and environmentally screened funds links directly to new access to capital for responsible corporations. According to measures from the Social Investment Forum, screened investment funds under management in the United States represent as much as $2 trillion and are growing rapidly in Europe, Japan, and other countries. It is a fundamental matter of risk management. Companies with brands that are associated with social responsibility are usually rewarded with a premium in the market. Those with bad reputations suffer.
First Steps
In any event, the current climate argues that only socially responsible business practices are truly sustainable-and taking a position that doesn't go beyond simple compliance with the law can prove to be the most expensive strategy of all.
So how do you get started? An engaged board and its senior management team should start with a comprehensive inventory of current practices-an internal and external assessment of both the reality and perception of how their company conducts business in a socially responsible manner. Identifying areas where there is a gap between professed values and actual implementation is the beginning of a comprehensive strategy. There are some who will object even to doing this, arguing that it sets up the company for potential lawsuits if, having uncovered areas for improvement, they don't move swiftly enough to make corrections. But that has never proved a persuasive argument. It suggests that ignorance is best and that a head in the sand rests in the proper place. Ask any company forced to deal with an avoidable crisis after it has erupted just how sensible that strategy proves to be.
The next logical step is to set goals, invest the resources to carry out a plan, and monitor performance against the plan. As a matter of process, this isn't different from any other strategic initiative undertaken by a forward-looking corporation. Monitoring, however, is best carried out by an independent organization (one set up for the purpose of conducting social audits) to avoid conflict of interest.
Finally, companies need to report truthfully the performance they make against their plans, with candor and a commitment to continuous improvement. There is a good deal of fear on the part of many business leaders that such candor might be used by advocacy groups against them. That may prove true, but most investors and consumers are able to discern the difference between a company that is stonewalling and one that is making a good-faith effort to live up to its values. They don't expect businesses to be candidates for sainthood, just good citizens. If they can't get over the fear of being criticized, business executives should rethink their choice of professions.
The Governance Question
Perhaps the most difficult governance issue of all is the composition of the board of directors. Most boards in the private sector are not representative of important stakeholder groups. In theory, they are chosen for their ability to contribute to the company's strategies, and they are expected to protect the interests of shareholders. Even those basic duties have been called into question by recent revelations. To many, the compensation schemes that were routinely approved throughout the 1990s have made a mockery of independent oversight and management accountability.
Without governance reforms and greater stakeholder engagement, it will remain a question whether corporations can fulfill their social mission. Up to now, that debate largely has been confined to community or consumer advisory committees carefully constructed by a company's public relations staff. It is an understatement to say that the effectiveness of these groups is often in question.
There is a good argument to be made against stakeholder seats on the board of directors. There are potential conflicts of interest that are real and perhaps impossible to manage. But any company serious about improving its social reputation has to look at how legitimate stakeholder interests ought to be represented in the decisions that most affect them.
I am optimistic that out of this current crisis will come the reforms necessary for sustainable enterprise. The genius of our system is that when it is truly threatened, it responds with new direction and purpose. American electric companies have the intellectual resources to be an example of leadership in social responsibility, a challenge that now presses for action. *
Tom Higgins is president and chief operating officer of Business for Social Responsibility (www.bsr. org), a membership-based, nonprofit organization. He was formerly a senior vice president of Edison International. The opinions expressed are his own.
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ADVANCING CORPORATE RESPONSIBILITY
Since 1992, Business for Social Responsibility (BSR) has helped companies of all sizes and sectors achieve commercial success in ways that respect ethical values, people, communities, and the environment. BSR provides information, tools, and advisory ser
vices to integrate corporate social responsibility into business operations and strategies. The organization also promotes cross-sector collaboration and contributes to global efforts to advance the field of corporate social responsibility.
BSR member companies have nearly $2 trillion in combined annual revenues and employ more than six million workers around the world. The group includes several electric companies, such as BC Hydro, Duke Energy, Edison International, InterGen Energy, PacifiCorp, and Sempra Energy. In projects for companies in the electric industry, BSR assesses sustainable development policies and standards and identifies specific program options in community relations, stakeholder communications, and crisis management.
P7.9.Protesting a Nike shareholder meeting. 49 percent of
surveyed consumers closed their wallets or spoke out against a company for not
meeting their social responsibility standards. P32.57.A REPUTATION NEEDS COMMUNICATION
.By J. Kay Smith and Carl Gustin .Corporate reputation today flows to the bottom
line. Fortune magazine and the research firm Yankelovich Partners published a
report in 1998 showing that companies scoring high on reputation had 12 percent
higher profit-to-earnings ratios than low-scoring companies. The So, yes, reputation matters. The electric utility industry,
like virtually every industry, is in an era when a corporation's reputation can
make the difference between success and failure, whether in the stock market,
the hearing room, or the consumer's mind. Industry consolidation, restructuring
of energy markets, and recent accounting scandals raise questions both about how
well companies perform and when, how, and what they communicate to stakeholders
about that performance.
Solid corporate reputations are built around a set of core
values and practices that produce positive operating results, which in turn are
understood by stakeholders. That understanding doesn't just happen, though. It
is the result of focused, continuous, and consistent communications that build
positive relationships.You have to tell the story.
And It Needs Telling .AmerenuE, the operating subsidiary of
Ameren Corporation in Missouri, faced just such a need to communicate with its
stakeholders. In early 2001, the Missouri public service commission accused the
company of "over earning." The accusations generated a flurry of news
accounts. Confusion over whether credits to customers under the plan were the
result of good performance or the result of the company getting caught with its
hand in the cookie jar seemed destined to attract even wider interest.
Recognizing the potential impact of unfavorable public attitudes
on regulatory outcomes, the company undertook a thorough assessment of its communications
activities and external relationships, said Susan Gallagher, general manager of
corporate communications. "From that assessment, which included public opinion
research, we developed an integrated communications strategy to tell the Ameren
story." .AmerenuE and its customers had benefited from six years of incentive
ratemaking. The company had invested heavily to improve customer service, becoming
the first utility in the nation to read all its electric meters remotely and to
connect its meter network into an outage reporting system. It had invested in
its environmental record while also expanding its support for economic development,
low-income assistance, and energy efficiency programs.
But few customers and public officials were aware of either
the investments the company had made and their results, or the need for billions
of dollars in future infrastructure investments to ensure reliability.
The company did enjoy relatively high favorability and service
ratings. AmerenuE clearly did not want to see those ratings deteriorate as a result
of assertions about overearning. Management decided to bring together company
staff with a group of outside consultants headed by Clarke & Company, a public
relations firm.
What People Don't Know .Working with Ameren employees and
executives from several departments (including legal), this core communications
team began to assemble the Ameren story.
First, the company had to get more information. The public
opinion research it conducted revealed confusion about the corporate name (the
name had changed several times over the company's 100-year history) and a more
favorable attitude toward the company among those who understood its legacy and
knew about its services and activities. Research also showed that only about one
in ten customers had read about the over-earning accusation, despite what appeared
to the company to be extensive media coverage. While it was important for the
company to respond to the accusation, research showed management that an overreaction
would only focus additional attention on an issue that appeared to have little
interest to Missouri customers.
The research also revealed an opportunity. Customers were
not generally aware of the company's traditionally low and stable rates or of
improved service ratings over the past six years. But those who were aware gave
the company higher marks than those who were not. This finding helped guide a
message strategy focused on the overall value of AmerenuE'S services-value based
on low, stable prices and high-quality service became the theme in all communications.
At the same time, the communications staff was completing
a report on the 100year legacy of Ameren's operating companies, and the core team
was developing a comprehensive report, "Investing in a Secure Energy Future
for Missouri," on virtually all aspects of the company's operations. The
two documents were distributed widely in two waves to customers and opinion leaders
throughout Missouri and provided the foundation for print and broadcast advertising,
as well as for a series of presentations to trade and civic groups.
Large commercial and industrial customers were among the most
concerned about rates. The two publications provided opportunities for key account
executives, economic development specialists, and others with customer contact
to expand their outreach activities.
Supporting them was a print and broadcast advertising campaign
produced by Rodgers Townsend, an advertising agency. The ads combined strong graphics
with a message that stressed reliable power, reasonable rates, investing in the
future, and a "Century of Excellence." According to Tim Rodgers, "Our
challenge was to reinforce both the value and legacy messages." .Paying Off
.The result? The company enhanced its visibility in the area of economic development.
Moreover, recent surveys from Research International show that .* customer satisfaction
and overall favorability ratings are at all-time highs; .* those who understand
that Ameren has a legacy of serving their area for 100 years are the most favorable
toward the company; .* the more customers know about Ameren's activities, the
more favorable they are toward the company; and .* the more ads they recall, the
greater the average level of favorability.
"The most compelling finding," according to Research
International's Jeff Banks, "is that there is real ongoing value in being
a credible company. That credibility is the result of doing the right thing and
then telling people about it." .While there is no statistical measurement
to support it, the company probably gained considerable credibility during the
negotiations to settle the rate case. It did so in part when it offered to expand
significantly its energy assistance program for low-income groups and to increase
its economic development and energy efficiency programs. The rate case was finally
settled, and the agreement protects the company's financial interests. The agreement
also addresses many of the concerns and needs of the other parties involved.
Both J.D. Power and Associates and the University of Michigan's
American Customer Satisfaction Index earlier this year placed Ameren near the
top among utilities for customer satisfaction.
It just goes to show that you can't simply do the right things-you
need to tell people you do the right things, and you need to tell them in a multifaceted
way.
Kay Smith is vice president of corporate communications and
public policy at Ameren Corporation, and Carl Gustin is senior counsel at Clarke
& Company. P32.65.From where they sit, board members should consider how the
company is perceived, then work to align corporate values and practices.