Corporates with a heart

Updated: Mar 31 2009, 06:16am hrs
In recent years there has been growing interest in the ethical issues faced by boards of directors as they attempt to balance the competing demands of those concerned with the success of a company. Underlying this debate is a change in the way business success is assessed and achieved. Current bottom-line profits are increasingly seen as just one, albeit critical, success factor. Studies on both sides of the Atlantic have shown the weight now being attached to the concept of corporate social responsibility (CSR), which takes in such factors as being a good employer, protecting the environment and being socially responsible. The results of a 1998 survey of the worlds most respected companies, as reported in the

Financial Times, showed that when asked to rank the attributes that would make a company most respected in the future, chief executives placed robust and human corporate culture just below strong and consistent profit performance. Furthermore, a 1998 Institute of Directors report, Sign of the Times, identified honesty and integrity as the most important additional personal qualities required by new appointments to the board. Commitment and loyalty were ranked second. All this has profound implications for corporate governance.

In the UK corporate governance model, with its unitary board structure, directors owe their fiduciary duties to the company. This means that they are required to act in good faith in the best interests of the company, exercise their powers for the proper purposes for which they were conferred and not place themselves in a position where there is conflict (actual or potential) between their duties to the company and their personal interests or duties to third parties. Their duties are owed to the company, not the shareholders or stakeholdersthough they are accountable to the shareholders for the stewardship of the company. The statutory duties of directors towards other parties beside the company are minimal. Indeed there is no explicit duty (in a solvent company) to stakeholders such as employees, customers, suppliers and the wider community.

In Continental Europe, the situation is somewhat different. In Germany, for example, which has a two-tier board structurea supervisory board and a management boardthe duty of directors to the company is more widely expressed than in Britain to include employees and the public interest. In France, split boards with employee participation have been introduced as an optional alternative to the traditional single board.

Is the law out of step with the realities of todays business world of complex interdependent relationships Some will take the view that it is. Others will argue that it is a matter of how the law is interpreted. What is undeniable is that the business world continues to evolve, and, therefore, directors must adapt to its changes and take them into account in their decision-making.

The law may stop short of granting rights to stakeholders, but, in reality, many directors consider their interests because failing to do so would probably damage the interests of the company. Directors must now be concerned with the multiple effects their company has on society, from the way it treats its employees, suppliers and customers, to such issues as the environment, child labour and health and safety. And for global companies that concern must extend to the many different cultures in which they operate.

For example, BPs governance policy, which among other things embraces ethical conduct, employee relationships, and health, safety and environmental (HSE) performance, states that the CEO will not cause or permit anything to be done without taking into account the effect on long-term shareholder value of the health, safety and environmental consequences of the action, and the political consequences.

Conversely, the widespread initial view that corporate social responsibility might confuse existing business objectives has given way to a growing realisation that the implementation of a sound policy can provide real benefits for the shareholdermaking it an important issue for the board.

Arguably, one of the most difficult tasks for directors is to weigh up the shortand long-term interests of the company and then decide on the right course of action to take.

In some situations, the long-term benefits to the company of making a decision that is prompted by the interests of other stakeholders may be difficult to quantify: indeed there may be immediately identifiable short-term disadvantages to the company. In these circumstances, directors may be concerned that, in the absence of any specific duty outside company law to act in a specific way, acting in the interests of stakeholders could give rise to a legal challenge that they had breached their fiduciary duties to the company.

However, a board decides to treat its stakeholders (which will change as circumstances change), the important point is that it recognises it has to take a view and maintains what it regards as proper balance of interests. It is the boards responsibility to lay down principles to follow in relation to stakeholders and to monitor the way those principles are put into effect.

The broad perspective and independent judgment of non-executive directors can be immensely helpful in determining a companys approach towards ethical issues and stakeholder interests. In addition to challenging existing practices, they should be in a position to contribute knowledge and experience of good practice. They should play a central role in setting CSR policy and in ensuring that sufficient rigour is being applied to business processes supporting CSR activities.

For these reasons, some companies, such as Shell and Rio Tinto, have CSR committees that are composed entirely of non-executive directors. An alternative approach is to give a particular independent director specific responsibility for monitoring CSR-related issues, both internally and externally.

CSR issues can be wide ranging and unique to the company in question, so the challenge for non-executive directors is to select the key questions that provide the greatest opportunity for disclosing internal practices. Some suggestions for these questions include:

* Is there accountability for managing CSR issues within a companys governance framework

* Do supporting performance reporting processes exist at both a corporate and regional level

* Does a formal mechanism exist for capturing stakeholder concerns and for providing them with feedback on progress

* How are company expectations of CSR behaviours communicated to suppliers and business partners

* How does a company gain assurance that regional behaviours are aligned with corporate values

According to a recent report from the Ashridge Centre for Business and Society, over one-third of Fortune 500 companies have decided not to proceed with proposed investment projects because of ethical or environmental concerns.

A similar trend is apparent in the UK. Ethics in business, a survey by the UKs Institute of Directors in 1999 of 850 of its members, revealed that many boards of directors are giving greater priority to broader stakeholder interests. The survey shows that respondents have mixed views about the statement: We see shareholders interests as our first priority. Although 42% agreed with the statement to some degree, 27% completely disagreed. There was neither clear agreement nor disagreement about the primary importance of profits and shareholders. Ten years ago a stronger endorsement of these two factors might have been expected. The survey also reveals that boards are now trying to strike a balance between the interests of shareholders and those of other stakeholders.

Reprinted with permission from Viva Books

Book: Business Ethics

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