Thursday, 27 December 2012

Measuring The Benefits Of Corporate Responsibility

Tuesday 22 January, 2008
Corporate responsibility can no longer be viewed as a discretionary activity. Ethical behaviour goes hand in hand with reputation and to ignore its strategic implications is, at best, short-sighted.
It is not so much whether corporate responsibility should be incorporated into organisational life - but how. Corporate responsibility should be approached like any other area of business decision making, with a systematic approach to priority assessment and benefits analysis.
Corporate responsibility is a key issue for modern businesses; from questions about ethical sourcing, pollution and greenhouse gases, to responsible hiring and marketing practices.
Generically, many arguments have been made for the business benefits that flow from being ‘responsible’. Some of these include:
  • Better reputation with customers,
  • Enhanced employee relations, resulting in improved recruitment and retention of talent,
  • Reduced operating costs, and
  • Lower business risk.
But these arguments don’t necessarily wash with all finance directors. However, if managers think about corporate responsibility as being like any other business activity, then it comes down to a case of prioritising resources, and routine decision-making. There are established ways of making these decisions - so why aren’t they used in the context of corporate responsibility?
To date, much of the research in this field has focused on whether “good” firms make better returns in the stock markets - but stock markets are not actually efficient ways of measuring value.
A far better way of establishing a companies’ value is to look at the impacts on future cash flow - this is, after all, how finance directors evaluate capital projects and how stock market analysts assess the value of firms.
Therefore what managers need to do systematically, is assess the impact of stakeholders on their firms.

Two-way relationships

When managers think about stakeholders it is often about what stakeholders want from the business - often for the business to stop doing something or to give them money.
Managers do not always evaluate what the business wants from stakeholders - this might be a licence to operate or more loyalty from employees or from customers.
Figure 1 shows the basic idea of mapping how stakeholder issues affect company value, by focusing on the drivers of shareholder value - most often sales, costs, time and volatility.
Generic approach
But if it’s all so simple - why are so many problems being reported? We have looked further at the processes involved in making the trade offs, and Figure 2 sets out these steps.
Steps in the process
Two key steps seem to cause problems.
  1. First, the sheer number of stakeholders and their competing issues. This degree of complexity can be reduced by looking at the stakes, rather than the stakeholders.
  2. The other key problem is prioritising stakes and stakeholders. Different firms go about this in different ways, often mixing issues such as ability to work with the stakeholder, degree of impact and the urgency of the issue. But this, in the end, becomes the key step.
Managers need a systematic way to assess priorities and to rank these among competing interests.
An approach is shown in Figure 3 where stakeholders are assessed along two dimensions - stakeholder interest in the firm or issue, and then impact of the stakeholder on the firm. What is different in looking at corporate responsibility is that the managers need to look at the long-term impacts of their behaviours towards stakeholders and thus how those stakeholders might, or might not be, involved with the business in the future.
Stakeholder engagement
So, although stakeholders can be prioritised by more or less subjective measures, in the end the financial case has to be made using traditional financial tools. Many firms and managers might think there is little new in this approach and on many levels they would be correct. However, this doesn’t explain why businesses often fail to take corporate responsibility into account and why so many heads of corporate responsibility in business are looking for metrics to assess the business’s corporate social performance.
The answer is simply that senior managers have too limited a perspective on the strategic implications of corporate responsibility and so they fail to see the many benefits that arise from engaged corporate responsibility.
In general, like all managers, those working in the field of corporate responsibility are short of time and money, so putting some discipline into decision-making will help them and help make a robust business case. We believe that what is now needed is the will at senior levels to implement such an approach.

Author Credits

Dr Lance Moir, Former Senior Lecturer in Finance & Accounting, Cranfield School of Management. CFO of WIN.plc.

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