Corporate  Responsibility  Module  

Lecture  Two:  The  Business  Case        

January  21st  2015  Lecturer:  Tobias  Webb  

Tobiaswebb.blogspot.com    

The  business  case  for  corporate  responsibility    

The  business  case  for  sustainability      •  Sounds  a  bit  crazy  doesn't  it?  • Why  should  you  need  a  business  case  to  be  sustainable  or  responsible?    •  Surely  everyone  would  want  to....  

The  need  for  a  business  case  exists  because    

 •  The  model  we  see  in  Anglo  Saxon  style  capitalism  (dominant  global  model)  is  highly  short  termist.  

•  Long  term  is  oMen  regarded  as  three  to  five  years.  

•  CEO  tenure  is  usually/oMen  five  years  or  less  in  PLCs.  

•  In  large  non-­‐listed/private/state  owned  companies  CEO  tenure  is  oMen  longer.  

•  BUT  firms  are  less  accountable  to  shareholders  or  the  public  due  to  opacity  and  a  quieter  set  of  shareholders.  

 

Other  reasons  companies  need  a  business  case    

•  Managers  don't  understand  what  social/green  issues  have  to  do  with  them.  

•  Ethics/responsibility  always  become  "diffused"  in  large  organisaXons  (Dan  Ariely).  

•  Companies  have  had  a  long  standing  culture  of  "purpose  is  profit  maximisa9on”  (This  is  not  true  anywhere  but  the  percepXon  exists  across  business  and  invesXng).  

•  Not  every  sustainability/corporate  responsibility  change/investment  has  an  obvious  payback  or  9mescale.  

•  Some/many  of  the  benefits  of  CR  are  very  hard  to  measure:  ReputaXon,  employee  saXsfacXon,  License  to  Operate.  

So  what  are  the  key  components  of  a  business  case?  (1)    

•  The  tradiXonal  business  case:    •  Energy  and  general  business  efficiency  and  cost  savings  (energy,  recycling).    

•  Employee  a^racXon,  recruitment,  retenXon,  moXvaXon  and  innovaXon.  

•  Enhancing/protecXng  basic  reputa9on  with  stakeholders:  CommuniXes,  NGOs,  Media,  InsXtuXons,  Governments,  Trade  Unions.    

So  what  are  the  key  components  of  a  business  case?  (2)    

The  more  modern  business  case:  (including  previous  slide)      •  Ge?ng  ahead  of  forthcoming  regulaXon  or  regulaXon  

trends  (climate  change,  polluXon).    •  ProtecXng/enhancing  online  and  social  media  reputa9on.  •  Finding  new  operaXng  market  opportuni9es  via  innovaXon  

(geographically  or  changing  demographics).    •  Opening  new  markets  with  enhanced  reputa9on.    •  Using  sustainability  reputaXon  to  protect  exisXng  posiXons  

and  disadvantage  compeXtors  (The  "Level  playing  field"  argument).        

So  what  does  the  academic/investor  research  say?    

“Corporate  social  responsibility  and  access  to  finance”  BeiXng  Cheng,  Ioannis  Ioannou  and  George  Serafeim    Researchers  found  be^er  access  to  finance  can  be  a^ributed  to:  (1)  reduced  agency  costs  due  to  enhanced  stakeholder  

engagement.  (2)  reduced  informa9onal  asymmetry  due  to  increased  

transparency.    (3)  Using  a  large  cross-­‐secXon  of  firms,  they  find  that  firms  with  

be^er  CSR  performance  face  significantly  lower  capital  constraints.  

 

The  Impact  of  Corporate  Sustainability  on  Organiza9onal  Processes  and  Performance  

 

Robert  G.  Eccles,  Ioannis  Ioannou,  George  Serafeim    

•  Matched  sample  of  180  US  companies.  

•  Found  that  corporaXons  that  voluntarily  adopted  sustainability  policies  by  1993  -­‐  termed  as  High  Sustainability  companies  -­‐  exhibit  by  2009  dis9nct  organiza9onal  processes  compared  to  a  matched  sample  of  companies  that  adopted  almost  none  of  these  policies  -­‐  termed  as  Low  Sustainability  companies.    

 

 

The  Impact  of  Corporate  Sustainability  on  Organiza9onal  Processes  and  Performance  

 •  The  boards  of  directors  of  High  Sustainability  companies  are  

more  likely  to  be  formally  responsible  for  sustainability  and  top  execuXve  compensaXon  incenXves  are  more  likely  to  be  a  funcXon  of  sustainability  metrics.    

•  High  Sustainability  companies  are  more  likely  to  have  established  processes  for  stakeholder  engagement,  to  be  more  long-­‐term  oriented,  and  to  exhibit  higher  measurement  and  disclosure  of  nonfinancial  informaXon.    

•  Finally,  High  Sustainability  companies  significantly  outperform  their  counterparts  over  the  long-­‐term,  both  in  terms  of  stock  market  and  accounXng  performance.  

   

Employees  and  business  value:  Alex  Edmans  

London  Business  School  and  Wharton  researcher  Alex  Edmans    Three  key  points  to  remember  about  the  latest  research  on  the  business  case  for  CSR:  

1.            Employee  welfare  is  posi9vely  related  to  firm  value.  While  the  idea  that  “companies  do  be^er  if  their  workers  are  happier”  is  seemingly  intuiXve,  this  idea  is  contrary  to  tradiXonal  ways  of  managing  workers,  which  holds  that  a  dollar  paid  to  workers  is  a  dollar  taken  away  from  shareholders.  Human  resource  departments  are  not  just  cost  centres,  but  a  posiXve  source  of  value  creaXon.  

   

Employees  and  business  value:  Alex  Edmans  

2.            CSR  can  improve  firm  value.  TradiXonal  thought  is  that  considering  other  stakeholders  (e.g.  employees,  customers,  the  environment)  is  at  the  expense  of  shareholders.  Thus,  socially  responsible  invesXng  should  underperform  tradiXonal  invesXng,  since  responsible  companies  are  distracted  from  the  bo^om  line.  My  paper  suggests  that  there  need  be  no  tension  between  CSR  and  profit.  

3.            The  market  does  not  fully  value  intangibles  such  as  stakeholder  capital.  Results  suggest  that  the  market  doesn’t  immediately  recognise  the  benefits  of  stakeholder  capital.  As  a  result,  we  need  to  move  beyond  evaluaXng  managers  according  to  short-­‐term  performance  to  encourage  them  to  consider  the  long-­‐run  health  of  their  firms  –  and  society.        

Other  academic  research  on  the  business  case    

“From  the  Stockholder  to  the  Stakeholder:  How  Sustainability  can  drive  Financial  Outperformance”  (University  of  Oxford  /  Arabesque  Asset  Management  2013)  

 

•  “Meta  study”  analysis  of  190  papers  and  significant  sources  •  Report  "examines  the  relaXonship  between  sustainability  and  

corporate  operaXonal  performance,  sustainability  and  the  cost  of  capital  (both  equity  and  debt),  and  sustainability  and  stock  prices.  In  all  three  cases,  the  paper  summarizes  findings  from  the  literature  in  terms  of  the  usual  three  dimensions  of  sustainability:  environmental,  social,  and  governance."  

“From  the  Stockholder  to  the  Stakeholder”  research  study  findings  

In  brief,  the  report  writers  conclude  that:  

•  Companies  with  strong  sustainability  scores  show  beSer  operaXonal  performance  and  are  less  risky.  

•  Investment  strategies  that  incorporate  ESG  issues  outperform  comparable  non-­‐ESG  strategies.  

•  AcXve  ownership  creates  value  for  companies  and  investors.  

Eight  further  key  findings    1.            Sustainability  is  one  of  the  most  significant  trends  in  financial  markets  for  decades.    2.            The  report  represents  the  most  comprehensive  knowledge  base  on  sustainability  to  date.  It  is  based  on  more  than  190  academic  studies,  industry  reports,  newspaper  arXcles,  and  books.    3.            90%  of  the  studies  on  the  cost  of  capital  show  that  sound  sustainability  standards  lower  the  cost  of  capital  of  companies.    4.   88%  of  the  research  shows  that  solid  ESG  pracXces  result  in  be^er  

operaXonal  performance  of  firms.    

Eight  further  key  findings    5.            80%  of  the  studies  show  that  stock  price  performance  of  companies  is  posi9vely  influenced  by  good  sustainability  pracXces.    6.            Based  on  the  economic  impact,  it  is  in  the  best  interest  of  investors  and  corporate  managers  to  incorporate  sustainability  consideraXons  into  their  decision  making  processes.    7.            Ac9ve  ownership  allows  investors  to  influence  corporate  behavior  and  benefit  from  improvements  in  sustainable  business  pracXces.    8.            The  future  of  sustainable  invesXng  is  likely  to  be  acXve  ownership  by  mul9ple  stakeholder  groups  including  investors  and  consumers.  

So  what  does  the  business  case  look  like  in  pracXce?  (1)  

 •  Unilever:  Nearly  halved  energy  use  in  15  years.  

•  SAB  Miller:  Using  sustainable  innovaXon  to  create  new  markets/products  in  Mozambique,  Tanzania,  Uganda  and  Ghana.    

•  Solazyme:  Finding  new  sources  of  energy/oils  via  low  impact  Algae.  

•  New  Britain  Palm  Oil:  Pioneering  change  in  the  palm  oil  /  agribusiness  industry.  

So  what  does  the  business  case  look  like  in  pracXce?  (2)    

•  Siemens/GE:  Bemng  a  big  part  of  their  futures  on  lower  carbon  economies.  

•  Phillips:  Pioneering  Circular  Economy  products.  •  Marks  &  Spencer  /  Alliance  Boots  /  Waitrose:  Building  lower  carbon  stores,  minimising  waste  to  landfill.  

•  Nike:  ReposiXoning  sustainability  as  innovaXon  in  products  and  helping  suppliers  go  lean    

•  Video:  Ray  Anderson  •  Video:  Steve  Howard  

So  this  all  sounds  great:  what's  the  problem?    

•  Accenture/PRI  study  shows  the  corporate/investor  gap.  

•  Big  investors  don't  understand  how  to  measure  and  value  sustainability.  

•  ESG  engaged  money  is  sXll  a  small  proporXon  of  the  total  money  invested  globally.  

•  CEOs  are  delusional  about  many  of  the  challenges  and  talk  more  than  they  deliver.  

So  this  all  sounds  great:  what's  the  problem?    

The  companies  taking  serious  acXon  are  either:    •  Lead  by  a  visionary  (oMen  founder)  board  or  CEO  and  are  small  with  limited  impact  (Interface).  

•  Big  and  have  been  hit  by  a  big  scandal  or  many,  which  drove  them  to  change  (McDonald's,  APP).  

•  Those  who  really  understand  how  exposed  they  are  to  future  risks  (Mars,  Mondelez,  Nestle).    

•  Suppliers  who  see  a  serious  future  market  opportunity  (Produce  World  /  Golden  Agri,  Nike  apparel  factories)  or  who  are  under  serious  pressure  from  buyers.    

So  this  all  sounds  great:  what's  the  problem?  (2)  

This  leaves:    1)  Lots  of  big  companies  (thousands)  outside  the  top  500  in  the  world  who  just  don't  feel  pressure  or  see  opportunity  (many  large  private  companies!).  2)    Most  SMEs,  all  over  the  world,  which  lack  knowledge,  resources  and  incenXve  as  above.  3)  Lots  of  big  powerful  state  owned  companies  who  lack  similar  incenXves  (CNOOC,  ONGC,  Russian/Indian  Railways,  Etc).    

So  what  does  the  future  hold  for  the  business  case?  (1)    

 •  Pressure  is  growing,  faster  than  ever,  across  many  issues,  for  most  large  companies,  parXcularly  those  with  valuable  brands.  

•  Global  access  to  informaXon,  oMen  in  real  Xme,  is  increasing  exponen9ally.  

•  Community  groups  and  NGOs  are  increasingly  able  to  use  media  channels  and  technology  to  show  the  impacts  of  large  companies.  Media  are  happy  to  report  on  this!  

•  Regulatory  requirements  (environment,  reporXng)  and  voluntarism  pressure  are  growing  in  OECD  naXons.  

 

So  what  does  the  future  hold  for  the  business  case?  (2)    

 •  Emerging  market  legal  enforcement  is  improving  as  ins9tu9ons  develop  AND  

•  "Emerging"  market  naXons  are  becoming  more  aggressive  towards  MNCs:  demonstraXng  holisXc  societal  value  is  key  (impact  studies  are  an  example).  

•  "Millennials"  say  they  want  sustainability  from  employers.  

•  Despite  mainstream  investors  being  slow  to  act,  pace  of  change  increasing,  some  acXvist  investors  have  driven  a  lot  of  progress  in  last  15/20  years.  (Aviva,  Calpers,  PGGM,  F&C,  State  Street,  First  State)  

So  what  does  the  future  hold  for  the  business  case?  (3)    

•  Governments  are  increasingly  aware  of  their  own  shortcomings  so  seek  both  greater  investment  and  great  voluntarism  from  companies  on  social  and  environmental  issues.  

•  CEOs  are  increasingly  concerned  about  the  trust  gap  and  widening  inequality  in  socieXes.  

•  Company  managers,  entrepreneurs  and  angel/VC  investors  are  becoming  excited  about  the  opportuni9es  around  innovaXon,  technology  and  global  access  that  sustainability  represents.    

•  (Innova9ons  range  from  healthcare  to  energy  to  communicaXons  technology  to  smart  ciXes,  cleaning  up  polluXon,  or  protecXng  forests  or  workers/human  rights).