MHCi MONTHLY FEATURE:

April 2004

Measurement of Corporate Social Responsibility

By

Michael Hopkins

Introduction

‘Lies, damned lies and statistics’ stated Benjamin Disraeli.

In fact, the measurement of CSR has improved since we wrote the first article on the subject some years ago.

It is even possible to use some of the available data that companies now make available to hazard a guess at whether CSR is getting better or worse. Yet, see the power of the ‘average’ hides a variety of sins. But first, let’s have a look at the evidence.

Are companies taking CSR seriously?

After the surge in CSR watching activities since the 1990s and the increase in socially responsible investment, can it be said that the social responsibility of companies has improved? Or, is Christian Aid in their report Behind the Mask correct in saying that companies just use CSR as a smokescreen for continuing as usual? In fact, as we shall see below, the evidence is mixed. Some companies have improved, some have continued as usual and some have got worse.

Data are certainly in better shape than they were a few years ago. And, the Global Reporting Initiative has a recommendation on the sorts of indicators that can be used to measure corporate sustainability (possibly CSR too). But the latter list of indicators does not follow a simple conceptual framework such as the one we suggest on our website (see above), and companies tend to simply pick and chose the indicators that make most sense to them, leaving behind some of the more difficult ones.

So, I approached some of the people behind the ranking of company social responsibilities in the UK, USA and Europe to see what they have come up with to date. I asked these leaders in measuring business in society whether there were any overall studies that could tease out whether CSR, or something similar, was getting better or not. I was surprised with the rapid (and very helpful) responses.

BiTC

Caroline Cook, Director of UK based Business in the Community’s (BiTC) Corporate Responsibility Index told me that it is early days for her group’s index since BiTC were only in the 2nd year of the Index and therefore difficult to evaluate the trend – not least because they had also made make some changes to the Index this year, and so the two are not directly comparable. Also the Index was completed by 139 companies – many of whom are leaders in this field, so it is not necessarily a cross section of business in society. Nevertheless, they did see the overall index average scores rise from 68% to 81% and one thing that could be deduced was that companies were getting to grips with the development of high level strategy on corporate responsibility as reflected in a rise in average scores from 81 to 91% this year. So, she concluded, corporate responsibility was now part of a companies thinking but not fully operationalised within the business – a task which was going to take much longer.

FTSE4good

David Harris of the FTSE Group who produce the FTSE4Good index series, that gives investors an opportunity to invest in companies meeting globally recognised corporate social responsibility standards, had also put together an enormous amount of data. He told me that even though they had significantly raised the bar for human rights and the environmental requirements, the majority of companies managed to meet the new selection criteria. Moreover, the number of companies in the index series had risen from just over 700 at launch in 2001 to 857 at the March 2004 review (out of an eligible universe of over 2,200 companies globally).

SAM

Moving to 2,500 of the world’s largest companies by market capitalisation, Alexander Barkawi, the Managing Director of the SAM indices based in Zurich, told me that their index measures the financial performance of companies that are selected based on sustainability criteria. Ten per cent of the 2500 top companies are selected for the main index. Alexander kindly provided me with data that showed the development of the average of the best five scores in each market sector over the last four years. As the figures were based on a methodology which has been constantly evolving to capture best-in-class performance, they need to be interpreted cautiously. Nevertheless, he said, they can offer some insights into the different speed and levels of development.

Results are given in charts provided by SAM research. For each economic sector the best five companies on sustainability criteria were chosen. Companies are assessed with regard to general as well as industry-specific sustainability criteria based on sustainability trends. The criteria cover economic, environmental and social issues with a clear focus on long-term shareholder value creation. Examples include criteria on corporate governance, knowledge management, environmental performance, human rights policies etc. In total, the assessment comprises around 50 different criteria in each industry. It is striking that, on average, corporate sustainability improved in every economic sector considered. Since corporate sustainability is closely correlated with CSR, the results show that responsibility, on average, has increased right across the board for the best companies over 2000 to 2003. This doesn’t mean that all companies, on average have done better, there are still many renegades as we shall discuss.

Business Ethics Magazine

Another person I asked was Sandra Waddock, Professor of Management at the Carroll School of Management in Boston, USA. She is the brain, along with Sam Graves, behind the Business Ethics widely quoted ranking of US companies. It has been produced since 1999. She told me that she didn’t know of any published research on whether companies are becoming more responsible over time and, she remarked, the scandals in the US of late would certainly imply the opposite. There are a lot of new policies and practices in place, and some faddism that, she suspects, drives companies to adopt the same policies that other companies have adopted. A couple of years ago, Sam Graves ran some of their data over ten years and it did indeed look that there was an upward trend in many of categories. But, she frankly admitted, we didn’t do anything with that information, as it was simply descriptive, and she doesn’t have access to it any more, so wouldn’t rely too much on her memory of that.

Corporate Irresponsibility and Averages

So, today, I think it is possible to conclude that companies are a little more socially responsible than before. This doesn’t mean that all is well with the corporate world but might just suggest that all the actions, protests, analysis etc. of disparate groups all over the world might just be having a positive effect.

We have seen so far that, on balance, companies are becoming more and more responsible on average. In fact the word average is the key to unlock what is going on.

Now, it is always easy to start to get better CSR rankings in the beginning than as time goes on. For instance, cleaning up a leaking pipeline, producing a code of ethics that nobody reads, producing a glossy CSR report, making extra sure that your product doesn’t kill your customers, closing down that supplier in Bangladesh that uses child labour etc. So, on average it is relatively easy to make progress on CSR. But how to embed the ideas throughout the organisation? That is the problem and that is why scandals will erupt in supposedly ‘clean’ organisations such as Shell, Enron or World Com.