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The Board’s Role in Corporate Social Responsibility

What is Corporate Social Responsibility (CSR) and what is a board’s role in the governance of CSR?  There is no standard definition of Corporate Social Responsibility.  Typical definitions provide that CSR is:

  • “a company’s environmental, social and economic performance and the impacts of the company on its internal and external stakeholders”.[1. CSR Guidelines, Canadian Business for Social Responsibility,  p.2]
  • ‘the way firms integrate social, environmental, and economic concerns into their values, culture, decision making, strategy and operations in a transparent and accountable manner and thereby establish better practices within the firm, create wealth and improve society’.[2. Corporate Social Responsibility, An Implementation Guide for Business, 2007, p. 4 available at www.iisd.org/pdf/2007/csr_guide.pdf]

Securities regulators are placing more emphasis on the environmental and social disclosure requirements for listed companies.  Institutional investors are also indicating that they intend to incorporate environmental, social and governance issues into investment analysis and decision-making processes.  It’s becoming increasingly clear that companies that embrace their role as good corporate citizens can enhance their reputation with investors, customers, employees, government and the general public, thereby increasing shareholder value.   Companies that do not live up to their societal and legal obligations face significant legal, financial and reputation risks.  Boards have been referred to as the “guardians of their organization’s ethics”.  They set an important “tone at the top” and are expected to ensure that the corporation’s values and ethics are clear, broadly understood and demonstrated throughout the organization and beyond.

Given the significant opportunities and risks presented by CSR, what is a board’s role in relation to this important area?  In our view, they may be summarized as follows:

  • Understand the concept of corporate social responsibility and monitor best practices for the governance of CSR.   The field of corporate social responsibility is relatively new and constantly evolving.  Directors should monitor CSR trends and best practices in order to periodically evaluate whether the board’s governance of CSR needs to be strengthened in some way.  Periodic board education sessions on CSR may be helpful in this regard.
  • Understand their company’s definition of and approach towards CSR.  Directors will want to ask the CEO and Senior Management team to explain how they interpret the concept of CSR and where it fits into the company’s strategy and risk portfolio.  Directors will also want to understand whether the company prefers to treat each CSR element separately, such as community relations, employee relations and environmental stewardship, or whether the company prefers a more integrated or holistic CSR approach.  This organizational philosophy may impact how the board wishes to organize itself in relation to the governance of CSR.
  • Determine how the board will organize itself to fulfill its CSR stewardship responsibilities.  Some boards assign various aspects of CSR to existing committees such as Audit and Risk, Human Resources and Governance.  Other boards, particularly where CSR is a significant component of the corporate strategy and risk portfolio, establish dedicated CSR Committees.  The manner in which a board decides to address CSR should be reflected in clear Terms of Reference for its committees.  Another issue for the board is the type and frequency of information that it requires in order to provide effective CSR oversight.  This issue should be discussed with the CEO in order to reach agreement on the Board’s CSR-related information requirements.  Finally, boards should review their composition to ensure that they have CSR expertise or diverse stakeholder perspectives represented on the board.
  • Approve a corporate CSR policy or framework.  Many companies are adopting a CSR policy or framework to guide the development and implementation of CSR plans and strategies.  Such CSR policies are within the purview of the Board to approve and should provide a decision-making framework for the company to make fair, ethically just and defensible decisions when faced with difficult trade-offs.
  • Ensure that CSR opportunities and risks are considered as part of the company’s strategic and annual business planning process and risk management systems.  Given the importance that regulators, investors and the general public are placing on CSR, directors should be carefully considering whether CSR is given sufficient priority in the company’s strategy, planning and risk management processes.  The Board will also want to ensure that the company is seeking out, listening to and thoughtfully considering the perspectives of diverse stakeholders in the development of its CSR and business strategies and risk profiles.
  • Emphasize the need for consistency in the company’s CSR values in its relationship with employees and external stakeholders.  This component is very important to employees – they expect to be treated with the same fairness and given the same support as external stakeholders.  If they see a double standard emerge, it can lead to poor employee morale.
  • Monitor the company’s progress in relation to CSR.  What does success look like for the company in relation to CSR?  What are the desired outcomes of the company’s CSR strategies?  How will the company know whether or not it is moving towards those desired outcomes?  What information can and will be shared with the Board in this regard?  These are some of the questions that a Board will want to ask the CEO and Senior Management team.  The Board should then expect regular CSR progress updates.
  • Monitor the adequacy of the company’s CSR disclosure practices.  For publicly-traded companies, securities regulators have prescribed mandatory disclosure requirements.   In addition, a number of TSX listed issuers have voluntarily published CSR or sustainability reports.  Different initiatives are underway to encourage corporate reporting of this kind including the Global Reporting Initiative (www.globalreporting.org) and others.  Boards and management teams will want to monitor evolving disclosure standards and determine where their company should be on the continuum.

In summary, clarity of purpose, direction and role will enable effective CSR stewardship on the part of governing boards.

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