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“Corporate Governance in an Age of Corporate Social Responsibility”

Quarles & Brady Middle-Market Legal Toolbox Blog By John P. Vail

A debate over the appropriate role of corporate social responsibility (CSR) in for-profit businesses has been occurring for decades. Despite differences among businesses as to the role, many now believe that CSR, in some shape or form, can benefit the enterprise and should be a focus of their interactions with at least some organizational stakeholders.

The meaning of CSR continues to evolve. One of the broader definitions comes from the Corporate Social Responsibility Initiative at Harvard University’s Kennedy School of Government: “Corporate social responsibility encompasses not only what companies do with their profits, but also how they make them. It goes beyond philanthropy and compliance and addresses how companies manage their economic, social and environmental impacts, as well as their relationships, in all key spheres of influence: the workplace, the marketplace, the supply chain, the community and the public policy realm.”

As evident from the foregoing, CSR for many companies has moved beyond philanthropy and volunteerism and is becoming a component of corporate strategy. In a 2011 Harvard Business Review article, Creating Shared Value (available here), Harvard Professors Michael E. Porter and Mark R. Kramer put forward a concept called “shared value,” which they define as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. They maintain that companies can reconceive their products and services and redefine productivity in their value chains in a way that can enable them to utilize their skills, resources and management capability to benefit society while simultaneously enhancing the profitability of their organizations. Many companies (including GE, Google, Nestle, Unilever and Johnson & Johnson, among others) have embraced this shared value approach.

So what does this mean for corporate governance? Is it truly possible to enhance long term profitability while promoting specific and measurable societal benefits? Or is CSR beneficial in less direct ways, such as through the enhancement of a company’s reputation and brand? In either case, governance best practices strongly suggest that CSR considerations should be on the agenda of the board of directors of every company, of whatever size, in order for the board to act deliberately. Key questions include the following:

What role does/should CSR play in the organization? What societal benefits (if any) should it advance, and how? Is there an opportunity for CSR to be better integrated into the company’s business strategies in a way that will create additional value for the business and simultaneously further the selected societal ends?

Does the company’s approach to CSR assist it in securing revenues, reducing key risks to its business, or both?

What expectations do shareholders, employees, customers and other stakeholders have with respect to the company’s obligations to them or to society at large? What is the company doing to manage or shape those expectations?

Is the company routinely being asked to execute contracts wherein it must agree to comply with customer codes of conduct or international or industry standards? On the other hand, what does the company ask of its suppliers and of its distributors in these respects?

Are the company’s CEO and other senior management providing proper oversight of CSR activities to ensure that they are not “silo-ed” but rather appropriately integrated into all divisions and functions of the organization?

Are compliance and disclosure controls in place that ensure consistency between securities and regulatory discussions of CSR and public advertising and other communications, including any separate corporate social responsibility or sustainability report?

Among the key roles for any board are the development of strategy and the management of risk. The company’s approach to CSR is increasingly important to these roles, and deliberate actions will enable stakeholders to understand clearly the company’s views on CSR.

Originally published in Quarles & Brady Middle-Market Legal Toolbox Blog, May 28, 2014

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