Markets are slow to reward CSR

Written by YRK Reddy | Updated: Dec 22 2007, 03:58am hrs
ITCs chairman, YC Deveshwar, has displayed good leadership in not merely triple bottomline reporting but also in raising the pitch in his call for initiatives that will reward corporate social responsibility (CSR) appropriately. It is under his leadership that the company has eminently managed its image makeover. ITC undertook measures to de-risk some of its business segments and conceived a unique space for the integration of its agri-business-related core competencies with its diversification plan and CSR initiative. It has probably synergised CSR with its strategy as no other company in its class anywhere in the world has. It is a black swan indeed.

It is no wonder that the company has become conscious of various parameters implicit in triple bottom performancein economic value, social capital and environmental sustainability. It has been a water positive organisation, a carbon positive operation, and is marching towards zero solid waste discharge status. Its business operations support the livelihoods of nearly five million people, mostly in rural areas. It has won loads of awards for these achievements. It is probably from its acute CSR sensitivity that ITC has wondered if the stock market provides appropriate incentives for sustaining it in the country.

Unfortunately, markets worldwide are unlikely to offer a premium for the stock of companies that perform well on CSR. First, financiers look upon CSR solely from compliance, social license and risk management perspectives. Compliance with environmental norms, protection of human rights, rehabilitation and resettlement initiatives, afforestation and so on have become necessary, and there is hardly much freedom on these. For instance, all large projects that draw upon international finance are required to comply with the processes implicit in the Equator Principlesall leading banks subscribe to these. In India, even the Supreme Court recently took steps to bring a mining project in line with CSR requirements, insulating it from potential whims of ownership and their own interpretations of responsibility. Second, while international guidelines and best practices uphold the importance of stakeholders, it is with the caveat that their engagement must result in value addition to shareholders either directly or indirectly in the long-term. This is evident even in the OECD framework. If any company appears to have crossed the delicate line of optimal engagement of prioritised stakeholders, the markets may punish the company one way or another.

Third, the profile of investors now is rather mixed. There is both hot money and patient capital, and their regard for CSR varies widely. Surveys make it clear that short-term investors would not pay any premium for corporate governance. Long-term investors would, but their influence is on the decline. That brings us to the fourth pointthe growing clout of hedge funds and some types of private equity and institutional investors whose accountability to ultimate beneficiaries is solely in terms of financial returns. They have a strong influence on corporate behaviour. Recent guidelines brought out for private equity and hedge funds in the UK focus on disclosures, transparency and accountability, but there is no mention of stakeholder engagement or CSR.

Does all this mean that CSR is all-pain-no-gain Of course not. CSR gets its reward in many other ways than directly from finance providers. These are the real marketsthe markets for human resources, consumers, supply chains and logistics. Companies that adopt CSR and internalise the attendant values attract more talent and professionalism. They create unique trust capital through new internal processes, language and culture, and discover a new value paradigm. They emerge as great places to work and compete on the basis of such talent. They seek out customer segments that are more conscientious and price-indifferent. They attract reliable supply-chains and distribution networks that do not walk away. Such trust must be capitalised on and driven by the company uniquely, through its market system, supplier and logistic chains and employees. Such companies need rely on no labels for their competitive edge. Remember Jonathan Livingston Seagull