Governing Well: Is Social Engagement a Governance Responsibility?

Article excerpt

IN today's environment, companies practising good governance are expected by the public to demonstrate good corporate citizenship, being accountable not only to shareholders, but also to other stakeholders and to the wider community.

As part of the fabric of society, businesses are required to be more widely responsible for their use of scarce resources and for the associated impact of their activities. This requirement has come into sharper focus with growing acceptance of, and concerns about, the inescapable realities of climate change, carbon footprints, environmental and business sustainability and the moral imperative of avoiding doing harm.

Corporate social responsibility (CSR) is becoming established as a critical element of strategic direction and one of the main drivers of business development as well as an essential component of risk management. A greater recognition of a direct and inescapable relationship between corporate governance, corporate responsibility, and sustainable development is also emerging, with mainstream investors showing increased interest in socially responsible business. For instance, Goldman Sachs finds that oil and gas companies with the best track records on CSR now dominate their market. The global investment banking and securities firm has stated that these companies' attention to CSR issues will have a direct and growing impact on their long-term performance and valuation.

Various international environmental and investment agencies are increasingly reporting a clear link between sound social investment and environmental governance policies and practices, and financial performance, evidence of higher returns, business opportunity and competitive advantage. Clearly businesses can no longer afford to ignore their corporate social responsibilities without also increasing their risk profile in areas such as reputation and market performance.

With the mainstreaming of CSR, the concept of the board's fiduciary duty has been expanding. Thus the real implication of CSR for corporate decision-making is that it is a governance issue, which means it belongs on the board's agenda. The fact that mainstream investors are showing increased interest in socially responsible business and that many of the globe's largest companies are making room at board level for CSR issues is an indication that there is perceived value in doing so.

Today this requires new structures for considering social and environmental questions that some boards may be ill-prepared to oversee and traditionally have not been theirs to answer. As public attention grows, boards are finding that these issues affect reputation and other intangible assets and have a direct bearing on financial performance.

In the New Zealand context it would seem the CSR concept has yet to move from the margins to the mainstream in corporate thinking. According to a recent survey by Grant Thornton, privately owned New Zealand companies rate well when it comes to donating to good causes, actively promoting health and well-being among staff and allowing flexible work time. But when it comes to formalising their charitable and social investment practices in a written CSR policy, they were among the bottom five on the global ladder with Greece, Poland, Taiwan and Vietnam.

Similarly, a recent study by Ingley and van der Walt examined responses by over 400 directors of New Zealand boards to socially related aspects of their governance role and their external orientation and receptiveness toward wider social obligations. They found that while the majority of directors regarded more traditional aspects of the board's role such as involvement in strategy, evaluating CEO performance, determining risk exposure and responsibility for ethical conduct as being very important, the task of reviewing social responsibilities was rated as being important or very important by significantly fewer respondents and was ranked low overall amongst other board tasks. …