Reflections
The issue of corporate social responsibility presents corporations with many challenges. This is because, in part, CSR encompasses a focus by company management not only on the economic bottom line, but also on the company’s impact on communities, the environment and society at large. Possibly the greatest challenge for any enterprise is to identify which CSR-related issues have the most resonance for it, based on in-depth consideration of relevant regulation and thinking.
For example, the definition of CSR used by the World Economic Forum Global Corporate Citizenship Initiative reads: “CSR is the contribution that a company makes in society through its core business activities, its social investment and philanthropy programmes and its engagement in public policy. That contribution is determined by the manner in which a company manages its economic, social and environmental impacts and manages its relationships with different stakeholders, in particular shareholders, employees, customers, business partners, governments, communities and future generations.”
This ‘impact’ is regulated, in many instances, by so-called black-letter law. However, in that respect, I feel that the description of CSR by the European Commission in its basic principles for its Corporate Social Responsibility programme skews the real nature of CSR. The Commission’s description states: “CSR is a concept, whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders in a voluntary way.”
To the extent that there are different definitions of CSR and indeed of ‘corporate governance’, there are different views on the interrelationship of corporate governance and CSR. In the wake of recent corporate scandals, corporate governance has become one of, if not the, main concern of general counsel. A recent survey by the General Counsel Round Table, part of the Washington-based Corporate Executive Board, in which the general counsel of over 350 major corporations participate, shows that corporate governance over the years since the Enron scandal has taken up, on average, over 35 per cent of general counsels’ time.
I am inclined to see CSR as an integrated aspect of corporate governance, because both the Sarbanes-Oxley Act in the US and the various national codes of corporate governance in European countries require listed corporations to establish a code of conduct as part of their control and risk management programmes. This has ensured that not only are the financial aspects of the required conduct regulated, but that a whole range of what are commonly recognised as CSR-related concepts is addressed as well in the context of corporate governance. And this for good reason, since non-observance of CSR standards may heavily impact on the company’s reputation and hence its shareholder value.
The positioning of CSR as one of the aspects of corporate governance raises the question from a legal perspective whether CSR is, in effect, a part of the fiduciary duty of management. In this regard, it is interesting to refer to recommendations from the US Sentencing Commission in its Guidelines for the Sentencing of Corporations which proposed much more detailed requirements for corporate compliance programmes. These guidelines are used by prosecution counsel and judges to establish the amount of fines on corporations and fines and jail sentences of individuals found guilty of various legal violations. The existence of an effective compliance system within the company concerned is proving to be a useful mitigating factor in the face of the imposition of sanctions by courts and regulators. Perhaps the most interesting comment on CSR issues with respect to compliance is the recommendation by the US Sentencing Commision to the effect that the new requirements for compliance systems will also apply to the observance of administrative and civil laws. This might imply that they have to be taken into consideration also when establishing whether boards have adequately responded to their fiduciary duties of care.
Several aspects of CSR-related law are so-called ‘soft’ law, by which I mean that they are ethical concepts and, as such, are not directly legally enforceable. The question then arises as to how we should assess the impact of CSR in a legal context. In his book Where the Law Ends, Christopher D Stone observes: “We know that it is futile to hope that all socially undesirable behaviour can be anticipated by legal rule-makers. We know that attempts to enforce all social desiderata by law would be more costly than it would be worth. We fear too that such attempts would unsatisfactorily enlarge the role of governments while severely diminishing personal freedom. There are thus certain virtues, both to individuals and to society at large, of encouraging people to act in socially appropriate ways because they believe in the ‘right thing’ to do, rather than because (and thus, perhaps only to the extent that) they are ordered to do so.” Contrary to the detailed mandatory approach of the Sarbanes-Oxley Act, this approach is the basis for self-regulation, the norm in European corporate governance practice.
As the Sarbanes-Oxley legislation has shown, very detailed and incident-driven law to discipline corporations as a response to recent corporate scandals has, among other things, resulted in some unintended consequences, including the de-listing of companies from stock exchanges, in particular the North American exchanges. This style of legal enforcement could lead to further unintended consequences, such as too much complacency and undue reliance on ‘box-ticking’ practices by corporations and rating agencies.
The strict mandatory approach embodied in the Sarbanes-Oxley law also leaves corporations little room to respond to Sir Adrian Cadbury’s exhortation in his book Moral Imperative that, “it is important that company law should be updated to reflect the changing pattern of responsibilities accepted by boards, in order to protect those companies who have moved in advance of the law and to raise the standard of company behaviour. Nevertheless the law cannot be expected to give a lead over the responsibilities of boards. The law consolidates changes in business conduct that have already occurred and represents enforceable standards rather than best practice”. And “in carrying out that duty, chairmen and their boards will have to decide on their definition of social responsibility”.
The Akzo Nobel approach to corporate social responsibility
The Akzo Nobel of 2005, headquartered in Arnhem in the Netherlands, resulted from a series of mergers and acquisitions. In 1969, Akzo was formed by the merger of Royal Salt Organon and AKU, a man-made fibre group. After many smaller portfolio changes, two major acquisitions and one divestiture in the 1990s resulted in the current group. In 1994, Nobel Industries was acquired, a Sweden-based multinational group active in chemicals, coatings and pharmaceutical intermediates. In 1998, the British company Courtaulds was acquired, another multinational group with synthetic fibres and coatings divisions. Both companies, like Akzo itself, had a history dating back more than 200 years. In 1999, the company divested Acordis, the combined man-made fibres groups of Akzo Nobel and Courtaulds, with 19,000 employees and a turnover of €5 billion.
Since 1999, Akzo Nobel, a focused hybrid enterprise, has been active in three business sectors: pharmaceuticals, coatings and chemicals. Each business has a different market position. Akzo Nobel is a niche player in human pharmaceuticals with a world ranking in the 20th decile and a strong position in female healthcare and anti-depressants. Akzo is the world’s third largest producer of veterinary drugs and the world leader in a whole range of coatings, from decorative paints for the DIY market to highly specialised marine and aerospace coatings, with an overall market share of 8 per cent. In our chemicals business, we have a diversified portfolio ranging from base chemicals to speciality products, with leading market positions in most of our products. The company had a 2003 turnover of €13 billion and, by 2004, Akzo Nobel had operations in more than 80 countries with 64,000 employees. The Courtaulds acquisition in 1998 increased our presence in the coatings sector in the Far East considerably. Currently, there are approximately 4,000 employees in China.
The company’s history gave rise to a melting pot of different cultures, company-wise, business-wise and geographically. By the end of the 1990s, the need to define a set of core values applying to our community world-wide became pressing. These values, which today guide our daily conduct, are: entrepreneurship, personal integrity and social responsibility.
In 1999, a Corporate Committee, including all relevant staff functions, reformulated the company’s Business Principles, taking the core values as a starting point with reference to the OECD Guidelines for Multinational Enterprises. Acknowledging that the Business Principles should be broadly supported by business unit management, the company’s management board insisted on a clear consultation procedure on the draft with the then 24 business unit managers. After some minor amendments, this process resulted in the unconditional buy-in of all the business unit managers, and in 2000 the management board officially proclaimed the Akzo Nobel Business Principles.
Akzo Nobel’s Business Principles run the gamut of CSR-related topics and cover a broad range of subjects, which embrace the following:
The Principles require conduct of the company’s activities in a socially responsible manner and that we observe the laws of the countries in which we operate, support fundamental human rights and give proper regard to health, safety and the environment, consistent with our commitment to sustainable development. The Principles support fair competition, insisting upon integrity and fairness in our business operations. Bribery is prohibited and conflict of interests are to be avoided. Our employees are encouraged to play an active role in societal matters such as participation in community and educational projects. Akzo Nobel companies do not make payments to political parties and communicate in an open, factual, and timely manner. Lastly, in order to underscore the significance and seriousness of its commitment to its new Business Principles, it was stipulated that Akzo Nobel management would not be held accountable for loss of business resulting from adherence to these Principles.
A steering committee, headed by the CEO, five business unit managers and a corporate director as facilitator, reviewed the options for disseminating and implementing the Principles among 64,000 employees worldwide. They decided that the primary emphasis for the approach should be values-based rather than risk management or legal compliance. They felt that a values-based approach would ensure greater buy-in among the company’s workforce than would a strictly risk management or legal compliance approach.
The decision was taken to adopt a layered system of participatory introduction. With the assistance of an outside consultant, a tailor-made workshop was developed for all corporate staff directors and business unit management team members. Some 250 managers drawn from around the world received one full day’s training in over 20 workshops with representatives drawn from each of the company’s business unit management teams. Each workshop was attended by a member of the management board to emphasise the importance of the project. After an introductory session on the corporate rationale behind the Business Principles, the workshops focused on discussion of the kind of dilemmas encountered by the participants in their business operations.
The attitude was very open and positive and this process resulted in a broad overview of the main problems Akzo Nobel would have to cope with. The workshops demonstrated that different businesses and regions had different dilemmas, and it soon became apparent that there would be no ‘one size fits all’ model for a company as diverse as Akzo Nobel. The next decision was how to implement the Business Principles in the different business units. It was decided that employees would be trained within their respective business units and each unit designated a senior manager reporting directly to the business unit manager as the ‘process owner’, with responsibility for development of a cascading-down process in that business unit. A toolkit for this training was developed with the assistance of the outside consultant.
A Business Principles Academy website was developed with all relevant materials, including codes and legal issues. The ‘process owners’ were trained initially on a three-day course. Arrangements were also made to cover various discipline-specific functions such as finance and purchasing. A significant part of the training programme was dedicated to the legal context of the Business Principles and issues such as bribery and facilitation payments and competition law were addressed. By September 2004, all Akzo Nobel employees were fully trained.
The initial implantation of the Principles has since been transformed into a continuous process, underpinned by new monitoring processes. Business unit managements now confirm adherence to the company’s policies, rules and procedures in their annual letter of representation. As anticipated, this process has achieved transparency on a wide variety of issues and business challenges. New corporate directives have been issued to provide guidance on a range of topics, such as child labour and investment in countries with questionable attitudes towards human rights.
Akzo Nobel’s board and top management were surprised beyond their expectations to observe that the introduction of the Business Principles was warmly welcomed by its employees worldwide. Today, there is a broad consensus that this has added great impetus to the establishment of an authentic Akzo Nobel culture. The link with CSR is clear. When we embarked on the Business Principles project, the company believed that its success would be the key to a structured CSR approach. In late 2003, the management board appointed a corporate director for CSR to act as the focal point in the procedures for total integration of CSR in the company.
The CSR policy of the company is structured by the establishment of a CSR steering committee, chaired by a member of the management board. The steering committee is supported by a CSR advisory group, consisting of the relevant corporate staff directors. All aspects of CSR are monitored in a coherent way in this process, leading to an integrated approach embedded in the business unit operations. The director (CSR) is also the link with the Business Principles process. Finally, the management board has decided also to take the next steps: a CSR rating and the issue of a CSR report.
While the company initially adopted a calculated step-by-step approach to CSR issues, Akzo Nobel has, to date, achieved substantial and demonstrable results in many areas including the environment, energy efficiency and social responsibility. We believe the leadership and commitment provided by the management board to our CSR aspirations have been critical factors in our progress thus far. Indeed, by virtue of this process, an important fourth ‘P’ has been added to the ‘Triple P’ (Planet, People, Profit) approach: that of Pride in our employees!
.jpg)
