*{The Business Case for Corporate Citizenship (2001) [http://www.weforum.org/pdf/GCCI/ADL.pdf]

By Sarah Roberts, Justin Keeble and David Brown

Introduction}

Corporate citizenship is about companies taking into account their complete impact on
society and the environment, not just their impact on the economy. It is about business
assuming responsibilities that go well beyond the scope of simple commercial
relationships.

One major company states in its annual report that corporate citizenship is both “a moral
responsibility and an economic necessity.” This paper examines the latter part of this
statement: To what extent is there a business case for increased corporate citizenship?

*partie=titre The Business Case *partie=nil

Good corporate citizenship can provide business benefits in eight areas:
Reputation management;
Risk profile and risk management;
Employee recruitment, motivation, and retention;
Investor relations and access to capital;
Learning and innovation;
Competitiveness and market positioning;
Operational efficiency;
Licence to operate.

This paper discusses each of these areas, identifying ways that increased corporate
citizenship can improve business performance and providing real-life examples of the
consequences for companies that have invested in or ignored key aspects of corporate
citizenship.

*partie=titre Reputation Management *partie=nil

Reputation is critical to corporate success, topping the intangible asset list of most
CEOs. *{1} Research by a major consultancy found that the proportion of a company’s value
derived from intangible assets rose from 17 percent in 1981 to 71 percent in 1998. *{2}

Reputations are built and maintained by a firm’s relative success in fulfilling the
expectations of multiple stakeholders. *{3} Companies have a range of stakeholders (Exhibit
1) and understanding their expectations is crucial to managing risks to the business and
maintaining a positive reputation.

Various studies have demonstrated a link between reputation and financial performance.
A study of companies over an 11-year period by two Harvard professors concluded that
“stakeholder-balanced” companies show four times the sales growth and eight times the
employment growth of companies that focus solely on shareholders. An analysis of
“America’s Most Admired Companies,” as listed in Fortune magazine, found that a
good corporate reputation increases the length of time that a firm spends earning aboveaverage
financial returns and decreases the length of time that a firm spends earning
below-average financial returns. *{4}

The higher the profile of a company or brand, the greater the scrutiny of its activities
and the higher the potential for it to become a target for pressure group action. A
number of big-name clothing brands have suffered considerable reputational damage
from allegations about exploitative labour practices in their subcontractor factories.
When the CEO of one of the world’s best-known brands realised that his company name
had become synonymous with slave wages, overtime and arbitrary abuse*{5}, he took
concerted action to improve conditions in the supplier factories and now has 70 staff
members working on corporate responsibility issues.

Likewise, some well-known wood-product retailers found themselves pilloried as
rainforest destroyers when they admitted not knowing the source of their timber. By
comparison, those wood-product retailers that have taken the impact of their purchasing
power seriously and instigated systems to ensure that their timber comes from
sustainable forests have gained considerable kudos. *{6}

*partie=titre Risk Profile and Management *partie=nil

Increasingly, companies have to be aware of, and respond to, a widening range of risks.
For instance, the London Stock Exchange recently informed its listed companies that
they must implement the Turnbull Committee’s recommendation to address
“environmental, reputation and business probity issues” when considering internal
controls.

Many companies already have robust environmental management systems and evidence
shows that these systems can lead to direct benefits in terms of risk profile. For example,
a survey of 300 large publicly listed companies in the United States found that
investment in environmental management leads to a substantial reduction in the firm’s
perceived risk and an accompanying increase in its stock price of about five percent. *{7}
Another study concluded that companies with stringent environmental standards are
more likely to be profitable than those with lower standards. *{8}

Systematic management of social issues is much less widespread in the corporate world.
To avoid risks to their reputation, businesses need to understand stakeholder concerns
both about issues under their direct control, such as employment policies, and about
issues that companies influence rather than control, such as the environmental and social
impact of their supply chains.

*partie=titre Employee Recruitment, Motivation, and Retention *partie=nil

The reputation of a company as a corporate citizen affects its attractiveness as a
prospective employer. For example, a 1997 Walker Information Survey revealed that 42
percent of respondents took into account a company’s ethics when deciding whether to
accept a job. *{9} In contrast, companies with tarnished reputations as corporate citizens can
face significant recruitment problems. When a major oil company suffered damage to its
reputation on environmental and social grounds, the CEO said repeatedly that the most
negative impact—and the one that made him fear for the future of his company—was
the fact that bright young graduates were no longer attracted to the company.

*partie=titre Investor Relations and Access to Capital *partie=nil

Traditionally, investors have been portrayed as having little interest in the non-financial
aspects of business management. But as evidence of the link between good corporate
citizenship and good financial performance mounts, few investors can afford to ignore
this aspect of business behaviour.

In Built to Last, James C. Collins and Jerry I. Porras compared 18 companies that had
been operating successfully for at least 50 years with 18 of their direct peers, all of
which had been well known and relatively successful at certain points in their history.
Collins and Porras found that a key characteristic in distinguishing the so-called
“visionary” companies from their peers was having a core purpose beyond making
money.

Being clear about this purpose helped visionary companies achieve far greater long-term
financial performance than their peers. One dollar invested in 1926 in a fund comprised
of visionary companies would have grown to $6,356 by 1990, compared to $955 for a
dollar invested in the comparison group. *{9} Similarly, a two-year study of leading
companies by the Performance Group found that improving environmental compliance
and developing environmentally friendly products can enhance earnings per share,
profitability, and the likelihood of winning contracts.

There is now a range of indices that rate corporate performance on environmental and
social criteria and can be used to benchmark the performance of good corporate citizens
against their peers. The Dow Jones Group Sustainability Index (DJGSI) consists of the
top ten percent of companies in terms of sustainability performance, drawn from the
2,500 biggest companies in the Dow Jones Global Index (DJGI). And the recently
launched FTSE4Good indices include companies that exhibit good policy, management,
and performance with regard to human rights, stakeholder relationships, and
environmental sustainability.

Backcasting the FTSE4Good and the DJGSI indices shows that these companies would
have continually outperformed their conventional counterparts. For example, over a
five-year period the DJGSI performed an average of 36.1 percent better than did the
DJGI and energy companies in the DJGSI performed 45.3 percent better than did those
on the DJGI. *{10} These results reinforce the view that companies that take a strategic
approach to corporate citizenship are likely to be well managed overall.

An increasing number of funds are now managed according to the principles of Socially
Responsible Investment (SRI), with portfolio managers either screening out businesses
that do not meet high environmental or social standards or using their influence to
improve the ethical performance of these companies.

Starting from a small niche, demand for SRI portfolios has grown dramatically. Assets
in professionally managed, socially screened investment portfolios rose by 36 percent
between 1999 and 2001. And, despite the stock market slide that began in 1999, the total
level of socially and environmentally responsible investing in the United States rose by
eight percent from $2.16 trillion in 1999 to $2.34 trillion in 2001. *{11} This means that
about one of every eight dollars under professional management in the United States is
in socially responsible investment. Although still small compared to the market for
traditional investments, SRI is beginning to be seen as significant by key members of
the investment community. A recent survey by “Business in the Community,” found
that as many as one third of analysts now consider that environmental issues affect the
value of their investments.

In 2000, investors adopting a shareholder advocacy approach to SRI targeted many
companies to seek assurances that they would strengthen their corporate citizenship. In
2001, more than 251 resolutions were filed on social responsibility and the amount of
money controlled by investors involved in shareholder advocacy totalled $906 billion.
Examples of the kinds of success that result from this pressure are numerous. In 2001, as
a result of a shareholder resolution, three major U.S. financial organisations were forced
to amend their lending practices to eliminate abuse. In another case, a major global
beverage company was asked to increase the amount of recycled plastic it used to make
plastic beverage bottles.

*partie=titre Learning and Innovation *partie=nil

Corporate citizenship objectives can encourage creativity and innovation that leads to
bottom-line benefits. For example, a major global science- and technology-based
chemicals company teamed with an agricultural and industrial products firm in a joint
venture to produce fibres entirely from renewable resources. The vice president and
chief technology officer of one of the companies explained that his motivation for
exploring this type of innovation was his desire to change the world for the better and in
a way that had realistic and substantial business applications to encourage its
widespread use.

This joint venture has led to the development of a new polymer made entirely from
agricultural crops, with applications for packaging, fabrics, and furniture. The material
uses 20-50 percent less fossil fuel and releases lower amounts of carbon dioxide than
conventional alternatives. The product has been so successful that it has won numerous
awards for environmental innovation and its sales are expected to triple within the next
seven years. *{12}

*partie=titre Competitiveness and Market Positioning *partie=nil

If you were a fly on the wall in the boardroom of any company, one question you would
be sure to hear frequently is “Are we delivering what our customers want?” And
customers clearly want companies to behave as good corporate citizens. In the United
Kingdom, 92 percent of customers think that British companies should have a minimum
standard of labour conditions for their developing-world suppliers and 41 percent say
that corporate social responsibility is important in their purchasing. *{13} These attitudes are
replicated across the globe. The most comprehensive survey of consumer attitudes
toward corporate citizenship, involving 25,000 individuals in 26 countries, found that
more consumers form their impression of a company on the basis of its corporate
citizenship practices than do so on brand reputation or financial factors. Almost 60
percent of those interviewed cited labour practices, business ethics, responsibility to
society at large, or environmental impact as factors that influence their views of
companies. *{14}

With this level of public interest, it is no surprise to find that companies with the most
direct relationships to consumers are working hard to ensure that their suppliers
demonstrate high standards of corporate citizenship. As more and more retailers and
brand owners commit themselves to environmental and social standards, their suppliers
face increased pressure to comply with similar standards. For example, wood-product
retailers have been switching away from suppliers that refuse to commit to sustainability
standards. At the same time, chocolate manufacturers are among a long line of
companies facing pressure from retailers to demonstrate that no child labour is used in
their supply chains. *{15}

*partie=titre Operational Efficiency *partie=nil

Focusing on corporate citizenship goals can lead to direct improvements on the bottom
line. Reducing material use and waste can save money, as well as reduce environmental
impact, as those companies that have been taking eco-efficiency seriously can testify.
For example, by increasing its fibre recovery rate, a U.S. recycled paper manufacturer
saved the equivalent of 20,000 tons of waste paper and became the industry’s lowest
cost producer. The company’s focus on eco-efficiency is also leading to new
opportunities. After eliminating all its effluent discharges and becoming a zero-emission
producer, the company is now considering creating a nationwide network of small
recycling plants. The economics for such a plan are suddenly favourable now that
recycling stations no longer need to be located near effluent treatment plants. *{16}

*partie=titre Licence to Operate *partie=nil

The perceptions that stakeholders have of a company’s corporate citizenship
performance can significantly affect the business’s licence to operate. Companies with a
poor reputation in this area can find themselves continually responding to criticism of
their approach to a whole range of environmental and social issues. This was the
situation for the pulp and paper industry at the beginning of the 1990s—lambasted in the
press as a rainforest destroyer and creator of carcinogenic compounds, as well as the
focus of international environmental campaigns against waste and inadequate corporate
social responsibility. Consequently, the industry ended up facing increased restrictions
on its access to timber and land, as well as growing regulatory interest in its bleaching
processes. Company staff members were forced to spend significant amounts of time
and effort responding to their critics.

The industry’s response was to commission an independent study on the economic,
environmental, and social sustainability of the sector and to develop a more systematic
dialogue process with its stakeholders. *{17} Once the industry was seen as taking corporate
citizenship issues seriously, its critics were more willing to engage in a dialogue. As
understanding among different stakeholders grew, campaigners became more focused
on working with the industry to develop solutions. As a result, the reputation of the
sector has gradually improved.

Conversely, those with a good reputation for corporate citizenship are more likely to be
given a second chance in the event of problems. One of the best examples of this
phenomenon was a major pharmaceutical company with a long history as a good
corporate citizen and seen as highly trustworthy by its customers. When several people
died after one of its best-selling products was tampered with, the company responded
immediately by removing every product in that range from the shelves. Although the
company’s share price dipped initially, it recovered quickly and there was no lasting
damage to the company’s reputation or financial performance. *{18}

*partie=titre Dealing with Tragedy *partie=nil

In the summer of 1996, a plane crashed into the Everglades in Florida killing all 110
people on board. The airline was a leading low-cost operator that had experienced huge
growth in the mid-1990s and was a popular stock. The day after the crash, the share
price dropped 20 percent and continued to plummet. The airline insisted that it did not
have a safety problem, despite the crash, and continued to operate its normal flight
schedule. However, the media soon revealed that the airline had a record of aborted
takeoffs and unscheduled landings. A month later, the airline was grounded by the FAA
and trading in its stock was consequently suspended. The event lead to extensive
restructuring of the company, including a reduction in the number of contractors and the
laying off of many staff. *{19}

Conversely, in 1999, a plane run by a major U.S. airline crashed into a steel structure
near the end of the runway and broke apart, killing 11 people and injuring 89. The
company immediately set up a call centre and handled 13,000 calls in the first 90
minutes after the crash. The airline president held a press conference just hours after the
event, giving hard facts about the aircraft and the crew. Members of the public
interviewed at the time appeared nervous about the crash, but were willing to accept that
it was a rare accident. The airline has since pre-empted any potential regulatory changes
by taking quick steps as a result of its own internal investigation. By acting swiftly, the
airline was able to anticipate the actions of regulators and public opinion at every stage.
Its effective crisis management salvaged a situation that could have severely damaged
its reputation. The event had little or no impact on the share price.

*{Conclusions} 

Companies that take corporate citizenship seriously can improve their reputations and
operational efficiency, while reducing their risk exposure and encouraging loyalty and
innovation. Overall, they are more likely to be seen as a good investment and as a
company of choice by investors, employees, customers, regulators, and joint venture
partners.

While there may be a lack of consensus as to the extent of a company’s moral
responsibility for corporate citizenship, the range of business benefits that can result
should be sufficient to make any forward-thinking organisation see increasing corporate
citizenship as an integral part of good business management.

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