ACCT4007

Corporate Governance

Topic 7
Corporate Social Responsibility
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 Agenda

 Increasing awareness of CSR

 Dimensions of corporate sustainability
 Importance of CSR
 Arguments against CSR
 CSR reporting
 Best practices of CSR
 CSR rating

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 Increasing Awareness of CSR

 Traditionally:
 Focus on achieving economic objective of making profits and
enhancing shareholder wealth.
 Criticism:
 The narrow focus on achieving economic performance is criticized fo
r ignoring environmental, social, and ethical responsibilities.

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 Increasing Awareness of CSR
 Now:
 CSR Performance and reporting based on Multiple Bottom Lines (M
BL) have received considerable attention from global business, regulator
s, policy makers, and investment community.
 MBL objectives:
◇ Primary objective is to achieve economic performance of creating sha
reholder value.
◇ At the same time, consider environmental, social, and ethical perform
ance for the interests of stakeholders.
 E.g., total assets managed by funds following socially responsible investi
ng (SRI) strategies have increased substantially.

ABP, located in Netherlands, is one of the biggest pension fund around the world.
ABP has taken into consideration corporate social responsibility (CSR) among the
companies it invests in, by treating the CSR factor as a risk element in the
sense that a poor CSR company is at a greater risk.
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Dimensions of Corporate Sustainability

Economic Profits

Governance Traditional CG

Ethical

Environmental CSR

Social

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Dimensions of Corporate Sustainability

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 Ethical Dimension
 Ethics is driven by:
 Personal believes
 Societal norms
 Moral principles and values
 How these values are translated into behaviors and actions
◇ Knowing ethics is not sufficient.
◇ How ethics guide people in doing the right things and how the use
of ethics consistently in ever-changing situations is critical.

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 Ethical Dimension
 Ethical requirement after CG reforms
 The financial scandals (in early 2000s) and the financial crisis (in 2007
-2008) and related regulatory responses and best practices have attra
cted the attention to corporate code of ethics, professional ethics, com
pliance training programs, and ethical judgment.
 After CG reforms (SOX and Dodd-Frank), most of public companies:
◇ Adopt the code of ethical conducts for key financial officers.
◇ Offer employee training programs in ethics.
◇ Often appoint chief ethics officers to oversee the establishment
and maintenance of the codes of ethics and ethics programs.

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 Ethical Dimension
 Code of ethical conducts
 Primary means for companies to communicate the commitm
ent to ethical conducts to both internal and external stake
holders (e.g., shareholders, employees, suppliers, customer
s).

Example: Apple’s Proxy Statement

 Does Apple adopt a code of ethics? Is it publicly available?
 Does Apple provide ethical training to its employees?
 Who oversees the compliance of the code of ethics?

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 Ethical Dimension
 Benefits of commitment to ethics
 Adherence to professional ethics by corporate gatekeepers (the board
of directors, management, and auditors) can significantly improve cor
porate performance and promote reliability of financial reports.
 Companies with the emphasis on ethics and trust attract more talent
ed employees and have higher employee retention rates.

A multinational financial services company, headquartered in U.S.,

provided ethical training for employees encouraging them to report any
managers’ misconducts and not to set up fake accounts.
However, at the same time, the company fired employees for failing to
meet the aggressive sales metrics.

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 Environmental Dimension

 More and more companies seek to increase their profits by focusi

ng on the risks and opportunities of environmental issues and offe
ring environmentally friendlier products and services.

Example: Apple’s Proxy Statement

 How does Apple consider environmental issues in its business?

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 Environmental Dimension

 SRI (Socially Responsible Investing) community values companie

s’ environmental initiatives and responses when developing “gree
n” investment products.

Goldman Sachs, a leading global financial institution, regards a healthy

environment as a necessary factor for the well-being of society, the
success of business, and a sustainable and strong economy.
Goldman Sachs’ environmental policy framework is designed to address
environmental matters and promote policy measures with a keen focus
on providing real solutions to environmental problems.

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 Social Dimension
 Caring for communities
 Charity and donation
 Education/training resources and support
 Supplier Responsibility
 Whether suppliers follow social criteria
 Any negative social impacts in the supply chain
 Accessibility
 Product accessibility features
 Support service provided to persons with disabilities
 Diversity
 Gender
 Ethnic minorities
 ……

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 Social Dimension

Example: Apple’s Proxy Statement

 What are the key social aspects considered by Apple in its
business?

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 Dimensions of Corporate Sustainability

Question: Which dimension of corporate sustainability

does each of the following items belong to?
 Transparent business practices
 Preservation natural resources
 Workplace diversity
 Ethical workplace
 Customer satisfaction

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 Importance of CSR

 Mitigating conflict of interests

 Avoiding conflicts between corporate goals and societal goals
 Creating social value through corporate activities

 “Doing well by doing good”

 Improving corporate financial performance
 Helping attract and retain high quality employees
 Improving the effectiveness of the marketing of products and services
 Increasing demand for products and services
 Attracting investors for easier fund raising and low cost of capital
 Promoting brand and reputation

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 Arguments against CSR

 Counter-argument 1: CSR expenditures may be actually related t

o corporate executives’ misuse of corporate resources (cash
or other assets) for seemly CSR activities to build personal repu
tation or to seek other personal benefits.
 Effectiveness of a company’s CSR performance is influenced significa
ntly by the commitments from its board of directors and senior ex
ecutives, and their strong support for CSR activities.

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 Arguments against CSR

 Counter-argument 2: CSR activities could be waste of corporate

resources, and therefore, may not create or even harm shareh
olders’ value.

Business Week (2005):

“It's 8:30 am on a Friday in July, and Carol B. Tomé is starting to sweat.
The chief financial officer of Home Depot Inc. isn't getting ready to face
a firing squad of investors or unveil troubled accounting at the home
improvement giant. Instead, she and 200 other Home Depot employees
are helping to build a playground replete with swings, slides, and a
jungle gym at a local girls’ club in hardscrabble Marietta, Ga. ... Is this
any way to build shareholder value at Home Depot, where the stock
has been stuck near $43, down 35% from its all-time high?”

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 CSR Reporting
 Demands for CSR reporting
 With the globalization and economic, social, and technological dev
elopments, stakeholders have increasingly demanded information on
both financial and nonfinancial KPIs based on MBLs in the reporti
ng of corporate sustainability.

 Needs for CSR reporting

 Companies should strive to maintain good CSR in their practices to mi
nimize information asymmetry to all of their stakeholders.
◇ If a company withholds information about its practices, it may result
in an increased perceived risk of the business, decreased shar
e price, concerns regarding management’s ability to lead the co
mpany, or even in so-called Black swan events (i.e., unforeseen e
vents that have a major, and usually negative, impact on the co
mpany). 19
 CSR Reporting
 An effective sustainability reporting model reflecting all aspects
of business (e.g., economic, governance, ethical, environment
al, and social) in addressing the interests of all stakeholders.
 Status of sustainability reporting
 Over 14,000 public companies worldwide are issuing sustainability repo
rts on some or all five dimensions of sustainability performance.
 More than 6,000 European companies are required to disclose sustaina
bility (including diversity information) for their 2017 financial reporting a
nd onward.
 Hong Kong listed companies are required to disclose environmental, so
cial, governance, and diversity sustainability for their 2005 annual repor
ts and onward.

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 CSR Reporting
 GRI (Global Reporting Initiatives) guidelines
 GRI framework is a comprehensive structure that enables greater tran
sparency on environmental and social performance.
 More than 8,000 companies worldwide (including Fortune 500) have ad
opted GRI standards for sustainable reporting.

Example: Apple’s 2021 CSR report

 What are the guidelines followed by Apple to prepare its CSR
report?

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 Best Practices of CSR
 Tone at the top in engaging in sustainability initiatives
 The board of directors should consider the opportunities and challe
nges/risks offered by the global move toward sustainability and make s
ustainability issues at the top of board agenda.
 This can be achieved in the following ways:
◇ The proxy proposals include the election of at least one director wi
th sustainability interests and skills.
◇ Create a board sustainability committee consisting of directors wit
h adequate sustainability expertise.
◇ The entire board of directors should be required to engage in sustai
nability issues and initiatives, being held accountable for achiev
ing sustainability performance, and to provide the needed sustai
nability leadership.
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 Best Practices of CSR
 Executives’ commitment for promoting sustainability
 Top executives (particularly CEOs and CFOs) should have full commit
ment in achieving all the five dimensions of sustainability perform
ance, by moving away from greenwashing sustainability and movin
g toward a sustainability strategic imperative.
 This can be achieved in the following ways:
◇ Active oversight function of the board of directors demanding su
stainability performance from executives.
◇ Including a sustainability performance target in the executive co
mpensation contract or for the labor market to reward sustainabilit
y executive leadership and punish managerial short-termism.

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 Best Practices of CSR

 Long-term sustainability investment strategies

 Individual and institutional investors should focus on long-term
and sustainable investments rather than short-term market move
ments.

 Integration of sustainability performance reporting and as

surance into corporate reporting

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 Best Practices of CSR

Example: Apple’s 2021 Proxy Statement

Does Apple comply with the following best practices of CSR?
 At least one director with sustainability expertise
 Establish a sustainability committee on the board
 Incorporate sustainability performance target in the executive
compensation contract

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 CSR Rating

 The true measure of success for corporations should be dete

rmined not only by their reported earnings, but also by their g
overnance, ethical behavior, social and environmental initi
atives.
 Financial and nonfinancial sustainability KPIs depends on a va
riety of factors.
 industry
 legal regimes
 cultural diversity
 political infrastructure
 ……
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 CSR Rating

Example: Thomson Reuters’s Datastream ASSET4

 Background
 Founded in 2003 in Switzerland
 Acquired by Thomson Reuters in 2009
 Sample coverage
 More than 4000 companies globally, including major indices
such as S&P 500, NASDAQ 100, FTSE250, MSCI World, etc.
 Starting from 2002

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 CSR Rating
Example: Thomson Reuters’s Datastream ASSET4 [Continued]
 Rating construction process
 Research analysts at ASSET4 collect more than 750 evaluation
points for each company from publicly available information
(sustainability reports, company websites, annual reports, proxy
statements, other filings, and various news sources).
 The raw data points are equal-weighted and combined into 250 key
performance indicators (KPIs).
 The KPIs are organized into 18 categories within four pillars:
economic performance score, environmental performance score,
social performance score, and governance performance score.
 The pillar scores are integrated into an overall ASSET4 rating
(ranging between 0 and 100%) for each company in each year.
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 CSR Rating

Source: Thomson Reuters.

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CSR Rating

Example: Apple’s Asset4 Rating – Overall

ASSET4 Overall Rating

100.00
92.64

90.00
83.17
80.57
80.00
75.37
74.12
70.15
68.08 68.93
70.00

62.32
59.10
60.00

54.70 55.81
54.18 54.32 54.20 54.00 54.60
50.00 52.34
51.49 51.03

40.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Apple-Overall Mean-Overall

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CSR Rating

Example: Apple’s Asset4 Rating – Environmental

Environmental Pillar Score

100.00
95.63 94.51
91.97 92.42 92.06 91.22 91.13
89.69 90.42 89.53
90.00

80.00

70.00

60.00

50.00

44.97 45.43 45.79 45.84

40.00 43.68
41.92 41.12
40.60
38.88 39.16

30.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Apple-Environmental Mean-Environmental

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CSR Rating

Example: Apple’s Asset4 Rating – Social

Social Pillar Score

60.00

56.03
55.00
54.90

50.00 50.46
49.77
47.91 48.48
47.46
46.23 46.22 46.77 46.34
45.44 45.56 45.81
45.00 44.86 44.44
42.86

40.00 39.67 39.33

38.38

35.00

30.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Apple-Social Mean-Social

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CSR Rating

Example: Apple’s Asset4 Rating – Governance

Governance Pillar Score

100.00

94.39
95.00
91.33 91.43

90.00 87.47
86.39
84.15
85.00
81.06
80.00
75.44 74.85 74.98
75.00
75.35
74.32 73.85
73.43 73.16 72.75 73.42
70.00 72.23
70.95 70.61

65.00

60.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Apple-CG Mean-CG

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CSR Rating

Example: Apple’s Asset4 Rating – Economic

Economic Pillar Score

90.00
83.72

80.00

70.00 67.34 66.89

56.93
60.00 55.70 55.24 55.30
54.10 54.57 53.58 54.00
49.85 51.41 50.19
50.00 46.23

40.00

30.00
22.65
20.55
20.00 16.70
10.82 11.80
10.00

0.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Apple-Economic Mean-Economic

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