Managing Beyond the Bottom Line

Friday, September 23, 2005

“It’s a business, not a moral, rating. It looks at the world’s biggest corporations and asks, Do they understand how to create and exploit effective business opportunities by addressing the needs of the poor? Do they understand how to make money by investing in environmentally sound business practices? Are they, in short, prepared to maximize the opportunities for our changing world?

Corporate social responsibility used to be simple: Present an oversized check to charity, get photographed with some sick kids, and call it a day. Now the world’s largest corporations are expected not only to make money for their shareholders but also to do good by their stakeholders?a much broader group that includes anyone and anything affected by their business, from employees to emus.

Making environmental, social, and ethical considerations part of doing business is a tough assignment. Even defining what “responsibility” means is challenging, much less quantifying it. “The difficulty is plain,” says Charlotte Grezo, director of social responsibility at Vodafone, the giant British telecom company. “It’s like the good old management adage says: You need to measure to manage.”

That’s why a movement to define and standardize what corporate responsibility means and how to achieve it has gained steam over the past decade. One of the leaders of the effort is the London think tank AccountAbility, which, along with consultancy csrnetwork, has devised a method to score companies. That method has been used to compile their second annual rating of the world’s 100 largest companies, published on the following pages.

Other groups have tallied corporate sins and sent out press releases about the worst of the bunch. It’s good to know who the worst offenders are, but not all billion-dollar businesses are in the same line of work: Big retail doesn’t do deep-water drilling; big oil doesn’t open sweatshops. By contrast, the Accountability Rating doesn’t look at the social, environmental, or ethical impact but at whether a company’s management is accountable for its actions. That means knowing who your stakeholders are, making sure management listens to them, and providing public disclosure. “The goal is to create a GAAP for nonfinancial reporting,” says Jonathan Cohen, executive director of the William James Foundation, a Washington, D.C., advocacy group for corporate social responsibility.

There are disadvantages to that approach. Some might find it surprising that oil and chemical companies have the highest average rating of all the industry groups. But the ratings shouldn’t be read as an index of how much good the company does or of how loud its critics might be. They’re meant as a measure of how seriously the company’s future decisions will consider nonfinancial factors. And by that indication, the future of Big Oil might be much brighter than its past.

That’s certainly the opinion of BP spokesman David Bickerton, whose company came out on top of the ratings for the second year in a row. “Responsibility is about how embedded ethical issues are in decision-making within the organization,” he says. “We believe that’s what you really need to explain.” While BP’s chief executive John Browne is known as a believer in green energy and corporate citizenship, it’s the company’s in-depth, candid reporting that wins points in the Accountability Rating.

To get to the point where sustainability reports like BP’s are taken seriously requires a lot of infrastructure. For the FORTUNE Global 100, saying that nonfinancial goals are a top business priority comes relatively easily: Nearly two-thirds of them identify some nonfinancial goal as part of their long-term business mission. But only half the companies use an external set of standards to evaluate their nonfinancial performance, and a quarter employ an outside auditor.

One success story is HSBC (No. 4), which gained the most on this year’s rankings. “Three years ago we talked a lot about philanthropy,” says Francis Sullivan, the bank’s advisor on the environment. “Now we’re talking more about corporate governance.” In the past two years HSBC has named a subcommittee of its board to oversee corporate responsibility and made that its No. 1 strategic goal. That was good enough to rank the company 45th last year. But this year HSBC committed to using the World Bank’s Equator Principles in deciding whether to lend to dam and forestry projects. And it started using an outside standard, AccountAbility’s own Assurance Standard, known as the AA1000, to help verify that the new governance structures were a good response to stakeholder needs. “HSBC wants to be seen as a csr brand,” Sullivan says.

As useful as the new csr tools and vocabulary have been for companies like HSBC, their adoption remains uneven. European companies outrank Asian and North American companies. Of the top 20, only three are American and only one is Asian. (That’s partly because many European countries, including France, require responsibility reporting.) By industry, oil and chemical companies rate the highest, and retailers and health-care companies the lowest.

Low scores, however damning they might seem, require a bit of context. The rankings rely heavily on public disclosure. For a company that doesn’t report thoroughly on its social and environmental performance, few aspects of the scoring system will come into play. Without the relevant information, there is no way for the Accountability Rating to assess criteria such as governance reforms, performance incentives, or nonfinancial auditing. So for a company like Time Warner (parent of FORTUNE’s publisher), which includes diversity and the well-being of its employees in its mission statement but does not publicly commit to environmental or broader social goals, or to any international responsibility standards, most of the Accountability Rating’s criteria cannot be applied.

That’s not to say that firms without environmental concerns don’t find csr standards useful. Vodafone (No. 3) says the approach has led it to take social projects more seriously. “We don’t have a lot of the big pollution issues,” says Grezo. “What we do have is the potential to deliver lots of social benefits.” Among stakeholder concerns that Vodafone has responded to, she says: cellphones for the blind and limiting children’s access to adult content on web-enabled phones.

Many companies credit csr principles with changing the way they do business. Niel Golightly, director of corporate responsibility at Ford Motor (No. 6), says that without the principles CEO Bill Ford has instituted, Ford never would have entered the hybrid market. Nor, he says, would it have been able to negotiate with the Sierra Club to help promote the new Mercury Mariner hybrid to the club’s membership. Ford’s assurance program (it subscribes to the AA1000) helped convince the Sierra Club that it was serious about environmentalism. “Without some tangible commitment, whether it be in the form of our reporting or of putting these products into the marketplace,” Golightly says, “the dialogue would not have worked.”

To be sure, the techniques identified by AccountAbility and csrnetwork as central to responsible decision-making are not guaranteed to result in better outcomes. Perhaps it will take a decade or two before corporate observers and critics will be able to decide whether talking to stakeholders and telling managers to listen actually changed anything. And the experience of the top companies on the list?whether they become favorites of activists or exploit huge new green businesses or do nothing different at all?will probably determine the movement’s future.

Source: FORTUNE (link opens in a new window)