October 2004

Let’s Make CEOs Accountable for CSR

Michael Hopkins

Let’s Make CEOs Accountable for CSR

Statoil‘s value creation is spread over three bottom lines: finance; health, safety, environment; and social conditions and responsibility. It is important to me that all these areas receive a strong focus from management in the future.”
Lund, CEO, Statoil, Aug., 2004

Growing agreement about CSR

CSR has entered the business landscape as the dominant concept for business and society. Over 70% of CEOs surveyed by the World Economic Forum believe that mainstream investors will have an increased interest in corporate citizenship issues (a related, although unclear, concept to CSR) according to a report released in January 2004. Nevertheless, critics of CSR are growing which shows, counterfactually, that it is having an impact. Sometimes, of course, it is difficult to know exactly what sort of impact and what CSR means from company to company. There is increasing agreement that CSR is much more than philanthropy, and that it includes the key stakeholders such as managers, employers, employees, suppliers, the community as well as the environment. And even The Economist (Nov 5th) has come on board when it remarks that ‘non-financial accounting is now too serious to be left to amateurs’, an advance over earlier 2004 when it remarked that ‘CSR is philanthropy with a few bits added on.

The debate on CSR, today, is either about increased legislation for CSR or CSR as a voluntary activity. We have written about this before (see our Monthly Feature on CSR and Legislation) and wont digress here. As CSR matures, it is now time for top management – especially the CEO – to run with the CSR ball and to ensure that it is embedded in the company. And a sure fire way to ensure that CSR is not just a nice add on, is to ensure that the implementation of CSR is embedded in the CEO’s contract.

CEOs only have four years: 2 of them for action

A key component of any CEO’s contract is, of course, the responsibility that his/her company must perform well on profits. We advocate here that the contract should also include clear social and environmental objectives. Given that most CEOs have, on average, four years in their job, such a suggestion will not be popular. The first year is normally spent learning the ropes, the second and third years are when something can actually be done and the fourth year is spent working out a compensation package for his/her untimely removal!

Yet, such a suggestion is not wildly off beam. An important suggestion of the Higgs report, now incorporated into the combined corporate governance code (Financial Times, Oct 13, 2004), was a call for appraisal reforms to make boards more effective. There is a trend to make management of the largest companies more accountable.

Costs and benefits?

If CSR were part of a CEO’s contract there would obviously be costs to the company. But, as I have argued elsewhere (see Business Case for CSR in our ACCA booklet), there are also benefits.

On the former, the costs are obvious. The conservative school sees any attempt to move the eyes of the CEO away from the main bottom line, that of profits and shareholder value, as a hindrance to business. The more forward-looking school see responsibility for social and environmental aspects as key to future profits. The drawback is the word ‘future’ stream since social and environmental schemes tend to have their benefits in the medium rather than the short-term. No business includes in its profit forecasts future discounted returns from increases in, say, the human capital of its employees. Even though a longer term CSR strategy would be beneficial for a business, the short life expectancy of a CEO mitigates against longer term investments since benefits would only accrue to the next in line. Such an argument suggests that legislation may be the answer since then society intervenes in company law for the public good. However, a pro-active CEO on CSR may well better convince the company’s staff to extend his/her contract beyond the usual four years – persuading the dyed-in-the-wool chairman might be a different matter.

The benefits of CSR in a CEO contract, as mentioned above, are more longer term in nature. As described in my ACCA booklet on the business case for CSR, benefits and costs accrue to all main stakeholders – the main benefits being increased investment from socially responsible investors, increased motivation of employees and managers, increased attractiveness to consumers, enhanced reputation, and more confidence and less hassle from Governments and communities.

CSR in CEO contract not ‘pie-in-the-sky’

Statoil, as noted in the introductory quote, have apparently paved the way (although I couldn’t get a look at the CEOs contract to see the details) for including CSR in a CEO’s contract of employment. My research did not offer any other CEO’s with CSR in their contract, but many CEOs do, or did, act as if they did have CSR in their contracts – Lord Browne of BP, Anita Roddick of Body Shop immediately spring to mind.

At the World Economic Forum (WEF) Annual Meeting in New York on 4th February 2002, thirty-six CEOs of companies from around the world called on their peers to lead their companies to place corporate citizenship at the core of business strategy. And, as Robert Davies of the International Business Leaders Foundation (IBLF) said:

“In our experience of engaging business in partnerships for development in over 50 countries, corporate citizenship is even more vital in a world of risk and conflict. The statement makes clear a commitment by CEOs that practical action must start and be led by the CEO and the Board, and not as an afterthought or philanthropic effort. The strategic approach to setting clear management goals is fully aligned with demands of competitiveness and rising expectations of stakeholders.” – Robert Davies, CEO, IBLF

A small step for mankind would be to include the essence of this statement in the contract of CEOs, after all, Robert Davies does use the word ‘must’!

CEOs are not unanimously hostile to such an idea. For instance, Sir Crispin Davis, CEO of Reed Elsevier, one of the world’s leading media companies, stated recently that corporate social responsibility matters. He noted that

‘we have a responsibility to all our stakeholders – employees, customers and the communities and environments – where we live and work’.

What sort of contractual CSR clause?

What could a CSR clause look like in a CEO contract? The lawyers will have to take over here, but elements of what could be included can be found in the CEO Statement on Global Corporate Citizenship of 2002. The WEF CEO Statement presents a template for a leadership process within the company and is intended to be complementary to the various voluntary corporate citizenship principles and guidelines that have been developed in specific issue areas.

It recommends that CEOs and boards exert leadership in four basic areas:

Provide leadership: Set the strategic direction for corporate citizenship in your company and engage in the wider debate on globalization and the role of business in development.

Define what it means for your company: Define the key issues, stakeholders and spheres of influence which are relevant for corporate citizenship in your company and industry.

Make it happen: Establish and implement appropriate policies and procedures, engage in dialogue and partnership with key stakeholders, encourage innovation and creativity in problem-solving, and build the next generation of leaders.

Be transparent about it: Communicate consistently with different stakeholders about the company’s principles, policies and practices in a transparent manner, within the bounds of commercial confidentiality.

Not bad for a start!

[written by Michael Hopkins with comments by Ivor Hopkins, October, 2004]

The Economist, Jan 24th 2004