Another interesting poser from Aman Singh Das of vault-com – 3 Challenges for CSR Executives http://bit.ly/hqDjU7 that IBCMⁱ is pleased to place its views. All the 3 challenges stand as of now independent, meaning the connectivity between one and the other is not apparent. Again the interesting comments from the participants give an insight into ‘the holistic concept of CSR versus siloing it to define volunteering, philanthropy or environmental work.‘. If Connie Lindsey spoke candidly about her love for finance, and the misinterpretation that CSR suffers from, Crespin statement “Companies‘ willingness to disclose and be measured makes them more effective managers of business risks”, reflect the unending desire to excel in CSR individually and collectively.

Challenge 1: Rankings:

In the CR’s Best Corporate Citizens of 2010 & 2011, a CSR exclusive, there are 7 issue areas covered under: 1. Environment, 2. Climate Change, 3. Human Rights, 4. Employee Relations, 5. Governance [termed in 2011 as Corporate Governance], 6. Philanthropy and 7. Financial. Weighing % were the same for both the years. Weighted average is taken with the tie-gaps – ‘Key: (T) indicates tie-gap equivalents on data points where several companies are tied for the same rank in a category, e.g., 268 (T-2) means 267 firms tie for 1st in the category and 268 is equivalent to 2nd in the category.’

At the outset the non-inclusion of the 10th Principle of UNGC – i.e. anti-corruption, the very basis of commitment for CSR is too glaring an omission that the entire 100 Best Corporate Citizens fail to impress upon the very purpose of CSR – Public participation. The CR Best Corporate Citizenship Methodology Procedure does use a Research Firm to gather data for the Corporate Citizenship Rankings as well elaborates on the methodology adopted. Most of the information used for the Corporate Citizenship rankings comes from data disclosed publicly by companies. The first 5 issue areas are covered by, Community support/Philanthropy: 96%, Environmental Impact/Sustainability: 74%, Ethics: 56% and Workplace Issues & Diversity: 55%. If Ethics cover the 10th Principle of UNGC, it is not clear.

Of the 7 issue areas Financial and possibly by the CR’s analysis Philanthropy are fiscal, readily available from the public data, whereas the rest fall under ethical responsibility not readily made available by the companies that makes the dependency on the research firm. The 7 issue areas are evaluated by different weighting factors. Assuming there are 100 KPIs Corporate Governance factor stands at 7 KPIs, Philanthropy at 9 KPIs etc. The two issue areas Financial and Philanthropy now considered as fiscal measure need to be compared with the rest that are ethical values. Ethical values are intangible whereas fiscal attributes are tangible. Question of a weighted average between one set of figures that are tangible with another that is intangible would result in disparity of rankings. For example, intel with its heavy investment in philanthropy can outwit the rest even if it has not done well in Human Rights or Employee Relations. If one takes the 10 Principles of UNGC where does Philanthropy fit in? Financial is again a matter of fluctuation between one year and the next, for the same company. Besides the ranking would be lopsided between a small and a big organization. A small organization with efficiency in 10 Principles of UNGC should be in a position to compare itself with the big ones.

6 & 7 issue areas need to be in same line as issue areas 1 to 5. 6 & 7 issue areas will have to be on Relative Efficiency Factor. If Intel had budgeted for $40 m for philanthropy and it had paid out as much then it gets the optimum ranking. So will be the case for a small company that had budgeted for $5k and fulfilled its promise during the year that it would stand shoulder to shoulder with Intel in meeting its commitment. Relative Efficiency brings in the harmonization among all companies for better comparison. Relative Efficiency of Corporate financial results gel with intangible elements of the 10 Principles of UNGC. With the result each KPI is a stand-alone factor that combine first with the set of KPIs, then with the process areas, then with the company as a whole and then with every other company irrespective of industry or organization to combine and create a single ranking of national grid. Take one single KPI say in employee relations then the entire gamut of companies within the national grid is comparable. In CSR it is very essential. All the 10 Principles of UNGC do not differentiate between one company and the other. Rankings by CR 100 Best Corporate Citizens should consider the measurement of intangible and relative efficiency factors for ranking purposes.

Ranking the companies chronologically as done by CR 100 Best is not sufficient. Each company must be given a set of KPIs for the 10 Principles of UNGC and the companies could do the self-evaluation that shall be submitted for analysis before certifying for their ranking by each KPI. The participation should be open to all companies and the results by deploying the relative efficiency factors for financial results and IBCM ranking for intangible could elevate companies to the top, unknown otherwise.

The purpose of IBCM is to institute International Ethical Standards Board [IESB] with professionals certifying the ranking for each individual, public official, Corporate as well Governments. The sustainability factor is related to sustainability of ethical values that Corporate needs to absorb and the studies should show how the sustainability factor leads the company to maintain profits. For which, identifying the factors that are currently followed as unsustainable in the long run by study of the past unethical practices and be factored into Corporate Sustainability Leadership. Ranking should reflect the change as to how they are today and how they are proceeding tomorrow. The CR 100 Best Corporate Citizens show rankings 1 to 100, but if one compares with 2010, the 2011 rankings are topsy turvy. By Relative Efficiency and IBCM Intangible Ranking the ones that have a ranking say 3 between 0 to 5 with 5 as optimum now, will never have a lower ranking in the next year, ever increasing its optimum level of achievement, so long financial relative efficiency factors are not clubbed with the 10 Principles of UNGC for CSR purposes.

Challenge 2: RoI – How do you measure RoI in CSR?

A comparative study is that of ERP. ERP has not changed its structure since its usage from 1966 of IBM 1401 IT capability. The volume has increased but not the structure. When a major ERP package is introduced the pay-back period or RoI was not a consideration as the results were indeed negative, because of matching the revenue in terms of cost savings could never equal the investment. However ERP became a necessity on account of efficiency, a factor that could not be converted into cash for working out a RoI, for lack of a measuring device for intangible. By cash-flow the RoI was negative, by efficiency RoI is positive – i.e. RoI – Return on Intangible.

CSR is intangible, the 10 Principles of UNGC are merely a policy statement that may or may not involve any investment as such. Eliminating left-hand turns by UPS is an operational efficiency initiatives that have been in vogue since time immemorial. Illustratively, after yam kippur war downsizing programs involving billions of dollars in re-engineering efforts ever undertaken in auto industry were a necessity, both in terms of the sustainability of profits on account of escalating fuel prices as well the public outcry for better fuel efficient vehicles. Investment on account of such changes effected is not to be added to CSR initiatives of UNGC. However there remains the question of Return on Intangible of CSR.

The 10 Principles of UNGC need to be broken to several hundred KPIs in order to scale up to the expectation of the public, ensuring the company in question follows the ethical values stated therein. By successful adherence to these KPIs a company can make itself known to the public of its status by reporting as to where they stand as on the day of reporting. IBCM defines intangible, first time indeed, ranks 0 to 5 and fits in each KPI before proceeding to value the status. There are any number of brought forward unsustainable factors that a company would surely strive to drop the negative values and imbibe ethical ones. This process would gradually move the company, by each KPI, to a rank of 0 to 5. Today by measuring a single KPI, if found say 2 and the next year it is found to be 3 or 4 or 5 then each incremental value of the rank is the efficiency factor which is the basis for calculation of Ro-Intangible of CSR. Article 13 of UNCAC Participation of Society is an absolute must for the company to take along with it, to reflect the RoI of CSR. The next comment could throw more light on RoI, Where does (should) the CSR function sit?

Challenge 3: Where does (should) the CSR function sit?

The subject matter is social responsibility whereas CSR is coined to undertake responsibility by Corporate. So is the case with the terms Business Ethics, Corporate Governance and Corporate Sustainability Leadership. These terms have isolated Corporate to a Responsibility grid quietly washed off by the Governments. Governments represent themselves in United Nations Climate Change Conferences and other such fora but Corporate undertake the responsibility to initiate the process of implementation. The 10 Principles of UN Global Compact primarily are the responsibility of the governments. When ‘Crespin emphasized that the companies who consistently ranked high were the ones that understood the holistic concept of CSR versus siloing it to define volunteering, philanthropy or environmental work.’ the holistic approach would be to inculcate the discipline first at the Government level. This shall result in a mandatory reporting system by Corporate, by all.

To reiterate IBCM’s main purpose is to establish IESB, in the same line as IASB/IFRS. This would bring about harmonization of Ethical Standards globally with the assessment procedures set for certification. Not only Corporate but Governments will have to be certified. Ratifying UNCAC may give the opportunity to assess the Governments in one area i.e. Principle 10 of UNGC – Anti-corruption. The advantage however remains with UNCAC implementation by Article 10 – Public Reporting. When extended to CSR covering the 10 Principles of UNGC, Corporate will be mandated to adhere to Article 10 of UNCAC Public Reporting, that justifies the punchline by Crespin “Companies’ willingness to disclose and be measured makes them more effective managers of business risks.”

The 10 Principles of UNGC are not transactional but follows ethical values by preventive measures. Unlike an ERP it does not require a heavy investment but needs technology reporting system – ERC – Enterprise Resource Controls in the 4 issue areas of UNGC – Human Rights, labour, Environment and Anti-corruption. Unlike a specialist Finance function being run in an organization, CSR would get integrated in an organization like IT Governance. With an external IESB – assessment procedures set – internally there would be four areas of functions that would be measured as a follow-up, Technology, Managerial, operational and finance. As in Hess case where having a company founder as the head executive ensures there is enough vested interest for him to actively lead issues like CSR, every Corporate will have these four areas having vested interest to adhere to the ethical values. This group of 4 constitute the Fiscal responsibility of the company, not of Ethical Responsibility.

Ethical Responsibility is the domain of the public. Article 13 of UNCAC defines the Participation of Society that Corporate and Government alike must realize the emergence of 10 Principles of UNGC is the result of Public having a say in running the government and corporate in a manner that is ethical for the society they live in. This brings in the position of CSR executives within the Corporate. Once IESB – International Ethical Standards Board is established churning out professionals authorized to certify companies and the government departments on the 10 Principles of UNGC, the qualified professionals be appointed to run CSR function of the company from within, certifying the company’s CSR operations with the same powers as that of an external auditor. This function is the outcome of Ethical responsibility while the certified report fulfills the requirement of Article 10 of UNCAC – Public Reporting, thereby ensuring Article 13 Participation of Society.

Conclusion:

1. The genesis of Corporate is from the People that is inseparable whereas the emergence of Governments is the outcome of a false notion of trusteeship never to see the light of the day. Sitting in ivory towers the Governments have no clue to resource usage that Corporate has better knowledge, training and upbringing. The 3 challenges will cast a solid foundation for CSR to connect the people & the corporate, where governments have failed abdicating their responsibility. CSR executives are the bonding agents between the people and the corporate and will be the most significant change driver to create the Corporate structure to a most formidable force in the 21st Century.

2. Establishing IESB – International Ethical Standards Board is a step towards creating professionals world over, not less than half-a-million force of capable CSR assessors certifying the public servants, Governments, Managers and Corporate in an area of ethical values that need a separate identity and course syllabus entirely different from finance professionals. IASB/IFRS through their affiliates have created an excellent set of professionals by way of external auditors world over that stand as an institution of repute and quality standard far superior to any other profession. IESB will have, on similar platform, CSR professionals of repute that society needs very badly. Corporate is the right starting point with ERC – Enterprise Resource Controls with sustainability of ethics that results in sustainability of profits.

3. “All my life I wanted to avoid a job title with ‘social’ or ‘relations’ in it. I’ve always been in finance, I enjoy it, and I’m good at it!” – Connie Lindsey. UNCAC: Article 9 – Public Procurement and Management of Public Finances – that shall be adopted by Corporate with CSR function as described above will make Connie’s executive position doubly enjoyable as well better at it by preventing such operational fiasco as was seen in Lockheed, Gulf Oil, Enron, Siemens Scandals. The tsunami of Japan reminds one of the previous occasion in 1995 due to an earthquake, when Nick Leeson aged 28 brought down the bank with reckless gambling, speculating on the Tokyo Stock Exchange losing $1.3 billion, making the 220 year old bank Baring plc. insolvent. Connie and CROA have a job to do more exciting than being in finance, for BP type tragedies the society can ill afford to repeat.

4. Corporate America must give the lead and CSR professionals the direction for better world economy with so vast its power and compass that Governments world over follow the 10 Principles of UNGC, keeping in mind what John F Kennedy spoke of missions: “not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win”

Jayaraman Rajah Iyer

Author: Inactivity Based Cost Management [IBCM]: Measurement of Intangible: Governance, Ethical & Fiscal Responsibility and Accountability. IBCM is the first one to define Intangible and its application to the body of management .

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