29 May 2013

Is CSR the investor’s safety net?

By Selina Sui

In 2006, Bursa Malaysia Securities Berhad released the Corporate Social Responsibility (CSR) Framework as a guideline for companies to extend their accountability to stakeholders alongside those of their shareholders’.

Traditionally, the interest of shareholders has always been of paramount importance for any company. A company was deemed investment-worthy as long as it was able to maximise profit for its investors. In this respect, directors of a company were afforded almost unfeterred discretion in exercising their powers, provided they establish that their utmost priorities were the interests of shareholders.

In recent years, however, this longstanding approach has come under much scrutiny (or lost its grip in boardroom practices). Today, the interests of shareholders are no longer the primary concern at the top of the corporate pyramid. This has become more evident following the recent collapse of a number of multinational corporations such as Enron. The fall of the notorious American energy provider is a classic example of irresponsible corporate practices where misleading financial statements inflated the assets and profits of the company to boost the interest of its shareholders. This eventually backfired and triggered the liquidation of the company. Its collapse not only affected its shareholders but stakeholders such as its employees were made redundant, and its business partners were left destitute. Post Enron, a more accountable level of CSR is expected of companies.

To put it simply, CSR is a form of self-regulation implemented into the management system of a company so that, besides the interests of its shareholders, those of its stakeholders are also looked into in the decision-making process. Although the list of a company’s stakeholders may not be exhaustive, they normally include its employees, consumers and society as a whole.

CSR is typically carried out in a number of ways. These may range from “external CSR” where a company carries out charitable deeds, for example, which contribute to the wellbeing of the community, to “internal CSR” such as human resource measures which promote the welfare of the company’s employees. Other forms of CSR may include developing business strategies which support the long-term growth of the company, and endorsing the essence of corporate accountability through what is commonly called “social accounting”. Social accounting is where a company reports on the impact its operations will have on its stakeholders by analysing the costs and benefits. This is normally published in its annual report.

The core objective of CSR is to ensure that companies embrace the interests of all stakeholders to minimise or avoid any negative impact. But despite much hype about CSR being made as one of the major objectives of many multinational companies, many remain hesitant about incorporating it into their business structure. Cynics argue that CSR is but an act of philanthropy and that it is unlikely to benefit companies which practice it in any way. Yet, there are many good examples, and The Bodyshop is one such company. The late Anita Roddick, a human rights activist and an environmental campaigner who founded the cosmetics company, had commented that her philosophy of “profits with principles” had a positive effect on her business. She encouraged and shaped ethical consumerism where one practices “positive buying” – purchasing goods and services from companies with a corporate conscience. The strategy created the brand differentiation for her company without incurring hefty advertising and publicity costs.

Apart from the increase in sales following the differentiation of products, companies which pursue the welfare of employees actively through constructive human resource measures, stand a better chance in attracting more promising employees. It will also intensify the commitment and enhance the morale of existing employees which ultimately leads to improved customer service and thus, satisfied customers. Certainly, this will reflect optimistically in the sales figures of companies. As American business author and former management professor at the University of New Orleans, Michael LeBoeuf says, “A satisfied customer is the best business strategy of all.”

Investors themselves are encouraging their companies to get involved in more CSR work. Their willingness to pursue better corporate responsibility speaks volumes. According to a press release from CSR Europe, investors deem active participants of CSR to be exercising competent risk management strategies in their business frameworks and consider their investments safe in such potentially long-term sustainable companies. Likewise, a study by Investor Relations Society in Europe showed that there has been an impressive surge in investors who are exceptionally enthusiastic about investing in companies with distinguished CSR portfolios.

Although the future of CSR remains uncertain, its track record has been impressive so far. Is this, therefore, an indication that there is a positive correlation between the financial performances of companies and their level of CSR accomplishments?

Selina Sui is a lecturer with the Faculty of Business and Design at Swinburne University of Technology Sarawak Campus. She is contactable at slssui@swinburne.edu.my