IV. INTEGRATING GOALS AND OBJECTIVES RELATED TO ENVIRONMENTAL AND SOCIAL PERFORMANCE Learning Objectives Understand the nature of corporate social responsibility See how corporate social responsibility, like other goals and objectives, can be incorporated using the balanced scorecard Understand that corporate social responsibility, like any other goal and objective, does not help the firm unless it is aligned with its strategy, vision, and mission One of the overarching lessons of this chapter is that goals and objectives are only effective to the extent that they reinforce the organization's strategy, and therefore the realization of its vision and mission. This section is some what integrative in that it provides knowledge about the ways that goals and objectives related to social and environmental issues can be tied back into strategy using a balanced scorecard approach.
Corporate Social Responsibility The corporate social responsibility (CSR) movement has been gathering momentum for the past ten years. CSR is about how companies manage the business processes to produce an overall positive impact on society. This growth has raised questions – how to define the concept, and how to integrate it into the larger body of an organization's goals and objectives. The Dow Jones Sustainability Index created a commonly accepted definition of CSR: "a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments." This definition encompasses a broad range of corporate values and concerns, including reputation, transparency, social impact, ethical sourcing, profitability and civil society – the list goes on. As a result of the interdependent nature of CSR, integration of its values remains a challenge for many organizations.
CSR and the Balanced Scorecard One of the fundamental opportunities for the CSR movement is how to effectively align consumer and employee values with strategy to generate long-term cognizant benefits – a better understanding of precisely with whom, what, when, where, how and why an enterprise makes a profit or surplus. CSR requires more holistic strategic thinking and a wider stakeholder perspective. Because the balanced scorecard is a recognized and established management tool, it is well positioned to support a knowledge-building effort to help organizations make their CSR values and visions a reality. The balanced scorecard enables individuals to make daily decisions based upon values and metrics that can be designed to support these long-term cognizant benefits. As you know, the balanced scorecard is a focused set of key financial and non-financial indicators. These indicators include leading, pacing, and lagging measures. The term "balanced" does not mean equivalence among the measures but rather an acknowledgement of other key performance metrics that are not financial. The now classic scorecard, as outlined by Robert Kaplan and David Norton, has four quadrants or perspectives: (1) learning and growth, (2) internal, (3) customer and (4) financial. Moreover, the idea is that each of these perspectives should be linked. For example, increased training for employees (learning and growth) can lead to enhanced operations or processes, (internal) which leads to more satisfied customers through either improved delivery time and/or lower prices (customers), which finally leads to higher financial performance for the organization (financial). A number of academic authors as well as global management consulting firms like McKinsey and KPMG have written about the pressures facing firms with regard to social and environmental issues. The Next Sustainability Wave, by Bob Willard for instance, outlines a starter set of ten major market forces that are driving the need for organizations to address CSR in a credible manner. Willard's ten major forces are divided between mega-issues and the stakeholders who are demanding change. These forces are motivating companies to change their behavior and use CSR as a strategic instrument. The ten major forces are summarized in Exhibit 0604, Ten Major Forces:
Ten Major Forces Five Mega-Issues Five Demanding Stakeholders Climate change Pollution / health Globalization backlash The energy crunch Erosion of trust Green consumers Activist shareholders Civil society / NGOs Governments and regulators Financial sector
Willard goes on to explain how these forces create increased exposure and awareness to business challenges and opportunities. The actual effect of these challenges and opportunities was recently identified in KPMG's International Survey of Corporate (Social) Responsibility Reporting. http://www.kpmg.nl/Docs/Corporate_Site/Publicaties/International_Survey_Corporate_Responsibility_2005.pdf This report surveyed more than 1,600 companies worldwide and documented the top ten motivators driving corporations to engage in CSR for competitive reasons, which are: Economic considerations Ethical considerations Innovation and learning Employee motivation Risk management or risk reduction Access to capital or increased shareholder value Reputation or brand Market position or share Strengthened supplier relationships Cost savings By creatively responding to these market forces, and others generated by the CSR movement, organizations can reap considerable benefits. There are many examples of how companies are being affected by CSR drivers and motivators. The following three examples are just a brief sample of the myriad CSR performance motivators that are top-of-mind for managers. Working with stakeholders Driver number six in KPMG's list access to capital or increased shareholder value, acknowledges that organizations able to identify, understand, mitigate and report their business risks have a competitive advantage when raising capital. A good example of this is the Carbon Disclosure Project (CDP), which was developed, implemented and is monitored by a group of institutional investors representing in excess of $20 trillion in capital. For the past three years, the CDP has polled the FT500, which represents the world's 500 largest companies, requesting a response to a climate change questionnaire. According to the CDP, its institutional investors use the questionnaire results to assess company plans and performance for addressing the potential risks and opportunities of climate change. Cultivating green consumers Ethical considerations, KPMG's second driver, is directly linked to the Lifestyles of Health and Sustainability (LOHAS) market. LOHAS describes a $226.8 billion marketplace for goods and services focused on health, the environment, social justice, personal development and sustainable living. The consumers attracted to this market have been collectively referred to as "cultural creatives" and represent a sizable group in the U.S. Richard Florida, The Flight of the Creative Class: The Global Competion for Talent, Collins. (2005) Approximately 30% of the adults in the U.S., or 63 million people, are currently considered LOHAS consumers. These consumers represent a substantial amount of buying power since they tend to have higher disposable income and are willing to seek out products and services that meet their CSR values and corresponding ethical concerns. Examples of products in this marketplace include organic foods, hybrid vehicles and fair trade coffee. KPMG also suggests these numbers are important because LOHAS consumers are likely to bring their CSR values to their workplaces. A strategic shift of organizations from a niche market (focused differentiation strategy) for green consumers to a broader appeal is occurring. LOHAS Consumers reward enterprises that demonstrate the values they seek (buy products and speak positively) and punish organizations that do not (refuse to buy products and speak critically about). In essence, these consumers/employees pay close attention to how their values align with producers of goods and services, their employers and even the charities they support. Banking on the bottom line The first and last of KPMG's drivers, economic considerations and cost savings, reinforce the old adage you can't take the top line and put it in the bank; you can only put the bottom line in. An added benefit of a CSR reporting focus is the ability, through it, to understand, measure and improve the use of resources. For example, reduction in use of energy and materials will provide an enterprise with improved bottom line performance and a competitive advantage through a lower cost structure. The first two of the three Rs (reduce and reuse) can lead to substantial savings for organizations that implement an effective performance measurement system. The Scottish Environmental Protection Agency recently estimated that businesses in Scotland could increase their annual profits by as much as $2,000 per employee through the introduction of aggressive waste reduction, energy efficiency and recycling programs. The three R's - reduce, reuse and recycle - all help to cut down on the amount of waste we throw away. They conserve natural resources, landfill space and energy.
Measures and CSR One of the organizational challenges with CSR is that it requires firms to measure and report on aspects of their operations that were either previously unmonitored or don't clearly map into the firm's strategy. Thus goals and objectives related to growing revenues through green consumers in the LOHAS marketplace comes with the price of increased transparency – this customer group demands the necessary data to make informed decisions. Interested stakeholders, such as employees, regulators, investors, and non-governmental organizations (NGOs) are pressuring organizations to disclose more and more CSR information. Companies in particular are increasingly expected to generate annual CSR reports in addition to their annual financial reports. CSR reporting measures an organization's economic, social and environmental performance and impacts. The measurement of CSR's three dimensions is commonly called the triple bottom line (TBL). The Global Reporting Initiative (GRI) is the internationally accepted standard for TBL reporting. The GRI was created in 1997 to bring consistency to the TBL reporting process by enhancing the quality, rigor and utility of sustainability reporting. GRI issued its first comprehensive reporting guidelines in 2002 and its G3 Reporting Framework in October 2006. Since GRI was established, more than 1,000 international companies had registered with the GRI and issued corporate sustainability reports using its standards. http://www.globalreporting.org/Home Representatives from business, accounting societies, organized labor, investors and other stakeholders all participated in the development of what is now known as the GRI Sustainability Guidelines. The guidelines are composed of both qualitative and quantitative indicators. The guidelines and indicators were not designed, nor intended, to replace GAAP or other mandatory financial reporting requirements. Rather, the Guidelines are intended to complement GAAP by providing the basis for credibility and precision in non-financial reporting. Some firms develop and apply their own sets of metrics. Royal Dutch Shell spent in excess of $1 million to develop its environmental and social responsibility metrics. Instead of picking numbers from established sources, such as the Global Reporting Initiative (GRI) template, Shell held 33 meetings with stakeholders and shareholders. The Shell metrics effort was widely reported in a number of newsletters and articles. See for example, http://www.juergendaum.com/news/05_12_2001.htm The derived metrics became a much more accurate reflection of what its customers and other stakeholders wanted, and thus, a true reflection of its strategy, mission, and vision. One of the key benefits for an organization using a balanced scorecard is improved strategic alignment. The balanced scorecard can be an effective format for reporting TBL indicators, as it illustrates the cause-and-effect relationship between being a good corporate citizen and being a successful business. Enterprises can use the combination of the balanced scorecard and CSR to help create a competitive advantage by letting decision makers know if they are truly entering into a CSR virtuous cycle – a cycle in which economic and environmental performance, coupled with social impacts, combines to improve organizational performance exponentially. What do we mean by virtuous cycle? A company could begin to compete on cost leadership as a result of improved technology and effective and efficient processes, which leads to improved ecological protection, which results in better risk management and a lower cost of capital. Alternatively, a company could differentiate itself from its competitors' values and performance as a result of its community building activities, which can improve corporate reputation, result in improved brand equity, creating customer satisfaction, which increases sales. The move to a broad differentiation strategy can also be achieved through extensive knowledge of green consumers and leveraging their information needs through appropriate CSR reporting to improve brand equity and reputation. These examples are designed to illustrate the interrelationship in an organization's triple bottom line. Several organizations have already recognized this powerful combination and have adapted or introduced a balanced scorecard that includes CSR elements to successfully implement strategy reflective of evolving societal values. Many managers are familiar with the balanced scorecard, and thus have a tool at their disposal to help them navigate the sometimes foggy worlds of strategy and CSR. The balanced scorecard can help organizations strategically manage the alignment of cause-and-effect relationships of external market forces and impacts with internal CSR drivers, values and behavior. It is this alignment combined with CSR reporting that can enable enterprises to implement either broad differentiation or cost leadership strategies. If managers believe there will be resistance to stand-alone CSR initiatives, they can use the balanced scorecard to address CSR opportunities and challenges. If you are so motivated, the managerial skills and tools you gain through and understanding of P-O-L-C will help you to lead your organization towards a CSR virtuous cycle of cognizant benefits, understanding precisely how and why their company's profits are made.
An Example: Dow's CSR-Balanced Scorecard Dow Chemical's management made the decision in the early 1990s that they could and should improve Dow's social, environmental and financial performance, and that financial improvements could be achieved through social and environmental performance. The company's early focus (over an initial ten-year period) was on opportunities and challenges most commonly associated with environment, health, and safety (EH&S). In 2003, the company began to create another series of initiatives to address opportunities and challenges over another ten-year period. These initiatives were created and refined after the company made a significant effort to consult with stakeholders to better understand internal and external expectations, with a specific emphasis on CSR. How to accomplish and measure their success was a major question the company aimed to answer. Dow's answer to this challenge is communicated in its 2003 Public Report: http://www.globalreporting.org/Home
To bring more balance into how we measure our success and progress on the integration of the Triple Bottom Line, Dow will launch a Balanced Scorecard.... The scorecard is published for employees, is updated quarterly and is the basic internal measurement tool for our progress on the Triple Bottom Line.
Whereas Shell created its own set of metrics, Dow uses the GRI methodology to create, monitor and measure its broad progress towards sustainability and specific corporate social responsibility commitments. Why is this important? If Dow really believed that sustainable development is a business priority in the 21st century, then it had to translate strategy into action, which means that such aspects of its strategy needed to cascade down into goals, objectives, and measures. Dow chose to use balanced scorecard and CSR reporting to help accomplish this aim. Its version of a balanced scorecard for CSR is shown in Exhibit 0605, Dow's CSR Scorecard. http://www.dow.com/publicreport/2003/
Dow's CSR Scorecard
Key Takeaways This section explored the challenges and opportunities of incorporating social and environmental goals and objectives into the P-O-L-C process. Many organizations refer to social and environmental activities as corporate social responsibility (CSR). For many firms, general operating goals and objectives have not been well integrated with strategy, vision, and mission, so it may not be surprising that social and environmental goals, in particular, have not gained much traction. However, when an organization uses tools such as the balanced scorecard to manage goals and objectives, then there is a coherent vehicle for incorporating social and environmental objectives in the mix as well. Exercises What is meant by corporate social responsibility? Why might it be challenging for organizations to effectively set and achieve social and environmental goals and objectives, in addition to their operating goals and objectives? Why might an organization pay greater attention to adding social and environmental goals and objectives today? What is meant by 'virtuous cycle' with respect to CSR? How does a balanced scorecard help managers develop social and environmental goals and objectives? In what ways does achievement of CSR goals and objectives strategically differentiate and organization?