Three letters that will change business as we know it

Note: The rules and law may have changed since this article was first published. It is provided for archival purposes but you should consult with your lawyer for the current state of the law

Corporate Social Responsibility. Even if you haven’t heard of CSR yet, you will hear a lot about it in the future. In a generation, CSR has evolved from what some considered a radical enviro-leftist utopian ideal to an integral component of many leading corporate players.  In fact, CSR may be on the doorstep of becoming enshrined in our corporate law.

The origins of Canadian corporate law date from the 19th Century, an age where the earth’s resources and its ability to absorb the by-products of industry were thought limitless, and a company board’s primary (if not sole) duty was to maximize profitability and shareholder value. CSR represents a dramatic break from this line of thinking.

So what is Corporate Social Responsibility? It is a previously-loose blend of concepts which integrate social and environmental considerations into a business’s traditional operating decisions. CSR means businesses make choices not only based on short term economic/profit factors, but also on the long term impact those decisions have on “societal” issues, such as climate change, water usage, air pollution, human health/rights, waste management, and others. CSR replaces the supremacy of shareholder interests with stakeholder interests. “Sustainability” is a word you hear often in the world of CSR.

Tethering social responsibility to corporate activity is not new, but this time it seems to have taken root. 55% of the companies on the TSX60 currently have CSR committees. Close to home, Cameco Corporation’s HR and Compensation Committees conduct annual reviews of CSR performance for compensation purposes, and CSR expertise is a factor in director nominations. PotashCorp’s audit committee recognizes CSR risks as part of its risk management framework, and includes CSR as a factor in recruitment. On large public company boards, CSR has gone from blue-sky craziness, to cutting-edge, to mainstream.  Shareholders, analysts and the public at large now have a reasonable expectation that these companies pay attention to CSR-related matters.

Sceptics argue that despite the increased prevalence of CSR in the world of corporate governance, it is only a fashionable trend, and a long way from becoming law. The sceptics are wrong.

The South African King III Code of Governance Principles promotes good corporate governance.  Now in its third edition, the King Report was among the first to embrace the concepts of stakeholder engagement, ethics and environmental management. It actively encourages an inclusive approach to these issues. The King Code argues strongly in favour of external assurance of sustainability reports becoming a mandatory corporate requirement.

In 2006, the UK Companies Act codified directors’ obligations into a statutory statement of seven general duties. To discharge these duties, directors must consider a number of factors beyond short term shareholder value, including the long term consequences of a corporate decision, and its impact on the broader community and the environment. In other words, a statutory recognition of wider corporate social responsibility must be incorporated into a board’s decision-making process.

In a 2008 case known as “BCE”, the Supreme Court of Canada made a series of statements that effectively ended the notion of absolute shareholder primacy. The Court said that there is no one set of interests that automatically prevail over others. Instead, directors must treat stakeholders “equitably and fairly”, in a manner “commensurate with the corporation’s duties as a responsible corporate citizen”. After BCE, Canadian companies which ignore broader stakeholder interests do so at their peril.

When you look around, CSR is everywhere – from hotels that provide the option of keeping towels an extra day, to companies that promote electronic billing, or energy and water use studies on plans for new buildings. The advancing legal changes, but more importantly, consumer and investor expectations, are making CSR-based decision making processes more prevalent (and necessary) each year. Those that are quickest to understand and adopt it will have an edge in this new environment of stakeholder-based corporate governance.