[98]
3.59
Ms Cox
referred to the effect these collapses have on organisations and the pressures
created for greater accountability:
The collapses a few years ago of some large corporations and the
problems others have with their reputations ... raise some serious questions
about ethics and how organizational cultures affect corporate structures and
governance. These added to increasing political and consumer pressures on both
commercial and non commercial organizations and corporations for greater
accountability and transparency.[99]
3.60
Corporate failures and scandals have led for calls for
increased regulation by governments and market regulators, and this in itself
can prompt some corporations to engage more with a corporate responsibility
agenda, in order to forestall regulatory responses.
3.61
The investment sector has also responded to corporate
collapses. A submission from researchers at Monash
University argued that in the wake
of several high profile corporate collapses there is an increasing tendency for
institutional investors to take a more activist stance, thus creating a push
for responsible corporate behaviour.[100]
The researchers noted, however, that:
To date however, such engagement has tended to be ad hoc and
reactionary, occurring after the event or in response to stakeholder pressure
rather than an integral component of investment strategy.[101]
Community expectations and licence
to operate
3.62
The concept of a company's 'community' or 'social' 'license
to operate' was raised in several submissions. By effectively engaging with the
communities in which they operate, companies gain tacit permission to continue
in operation. BTGAS provided this description:
Community risk: community stakeholders often determine what is
referred to as a ‘social license to operate’. If companies do not manage the expectations
of the communities in which they operate they will not retain or gain the
social license necessary for operation.[102]
3.63
A community licence to operate was mentioned with
particular reference to the mining industry. The Centre for Corporate Public
Affairs related how:
The mining industry in Australia
was one of the first sectors to lead the way in CSR activity in the 1970s and
early 1980s, after stakeholders demanded it better engage the communities in
which it operated. The key issues the community wanted addressed were land
access, indigenous employment and environmental impact. These issues were
linked with the social and community license to operate.[103]
Avoidance of regulation
3.64
The desire by business to avoid regulatory responses by
governments was also identified as a driver of corporate responsibility. By
taking voluntary action to improve corporate conduct, corporations may
forestall regulatory measures to control their conduct. The BCA submitted:
Poor corporate behaviour ... increases the risk of regulatory
intervention by Governments. In most cases, it will be less costly for
corporations to resolve issues themselves, rather than have regulation imposed.
Even where regulation is being imposed, the standing of corporations in the
community will determine their ability to influence the regulatory outcome.
Poor corporate behaviour therefore increases regulatory risk.[104]
3.65
BTGAS commented:
Regulatory risk arises when community
risks are so great governments respond by developing policies and
regulatory mechanisms to curb a particular activity or introduce taxes or
pricing incentives to restructure the burden of the costs away from external
stakeholders and towards the business. This not only has the potential to
create direct cost imposts on a company but also increases the transition costs
through compliance with the regulation.[105]
3.66
The Prime Minister recognised this risk of increased
regulation in a 1999 speech:
Companies and industries which are trusted and respected in the
community for doing the right thing are likely to find themselves less
constrained by government pressures or regulatory intervention, or pressure
from interest groups and the community generally.[106]
Globalisation
3.67
Globalisation was raised as a factor driving corporate
responsibility, influencing the corporate response in several different ways. Mr
Cooper of ASIC argued that the forces of
globalisation were one factor that was already driving corporate responsibility.[107] Mr
Cooper pointed out that companies with
operations in several countries were influenced by trends and regulatory
systems around the world. He used the example of BHP Billiton:
[BHP Billiton] operates around the world, including in the US,
so as an entity it absorbs a lot of these principles of regulatory systems.
What tends to happen is that it brings the whole entity up to the highest level
of regulation in any one of those areas...[108]
3.68
Oxfam noted that the increasing conduct of business on
a global basis has been a driver for corporate responsibility. Oxfam's Mr
Ensor expressed the view that much of the
trend towards adopting a corporate social responsibility agenda has been in
response to the recognition by global companies that poor environmental and
social performance can affect bottom lines.[109]
He told the committee:
[the initiative around
the CSR agenda] ... has occurred principally in Europe.
A lot of it has been driven from Europe [and] because of
the globalised nature of business, the joint listing of companies on various
stock exchange indices across Europe, the US,
the UK, and Australia,
that has been part of the driver. ...[O]ur
experience is that, relatively speaking, the better performance tends to be
with globalised companies with very high brand risk profiles in terms of
reputation that can translate into the bottom line very quickly.[110]
3.69
The Australasian Investor Relations Association pointed
out that when looking for investment opportunities globally (including in Australia),
the international investment sector was influenced by the non-financial,
sustainability performance of companies.
...at the end of the day the investment community increasingly
is a global industry and it looks for the same types of [non-financial] information.
Whether it be an analyst sitting in Boston or a fund manager sitting in
Frankfurt or a fund manager sitting in Melbourne, they do consider the same
sorts of information sets whether financial ... or, increasingly, non-financial.
Perhaps to a lesser extent it is non-financial but I think the information that
the investment community and other stakeholders are looking for is largely the
same.[111]
3.70
The free flow of information globally was also cited by
some as an influencing factor. Mr Ensor
of Oxfam described how modern technology facilitated the rapid flow of
information, and also facilitated the involvement of the media in reporting
company behaviour:
One of the fundamental drivers of this agenda is [the] element
of globalisation that enables there to be such a rapidly instantaneous flow of
information analysis around the world. I can receive an email from a remote
village in the middle of West Papua containing detailed information about an
event that may have happened two or three hours ago. I have the capacity to get
that information on to page 1 of the New York Times within a 10- or 12-hour
period in theory. That aspect of globalisation has fundamentally driven the CSR
agenda.[112]
3.71
Finally, globalisation is significantly increasing the
rate of sustainability reporting observed in Australia.
According to a recent study by the Centre for Australian Ethical Research, the
rate of production of sustainability reports by foreign owned companies
operating in Australia
is more than twice that of Australian owned companies.[113]
Principles of corporate responsibility
3.72
The evidence presented to the committee on factors that
drive corporate responsibility indicates that there is a wide range of
influences governing the behaviour of companies and organisations. Also
emerging from the evidence were some common themes regarding the principles
that should underlie corporate responsibility. This section discusses these
principles.
Business led or government led?
3.73
A theme emerging in evidence to the committee was an
industry preference for corporate responsibility to be led by business, and not
imposed by government. Evidence regarding factors that drive corporate
responsibility presented earlier in this chapter indicates that long-term sustainability
practices are already being taken up by business, responding largely to market
forces, rather than to any push from government.
3.74
Ms Mostyn
of IAG told the committee that government had a role in providing the right
environment for companies to engage with sustainable business practices:
[by] providing an environment where companies are encouraged to
create innovative corporate responsibility and sustainability approaches by
providing for flexibility, competitive and market led developments.[114]
3.75
Similarly, GlaxoSmithKline representative Mr
Gosman expressed support for government
activities that encouraged corporate responsibility:
We believe that the role of government is essentially one of
encouragement rather than mandatory reporting or the prescribing of activities.
In that respect, activities that encourage companies to take an interest in
this area, such as the Prime Minister’s corporate social responsibility awards,
are what we believe is needed to go forward. We very much favour a voluntary
approach rather than a mix of prescriptive or proscriptive regulations.[115]
3.76
The role of government in encouraging corporate
responsibility is discussed in some detail in chapter 8.
Mandatory or voluntary?
3.77
Central to the question of business versus government as
the driver for corporate responsibility is the issue of whether sustainable
behaviour should be mandatory or voluntary. The committee received much
evidence regarding the appropriateness of measures to mandate corporate
responsibility and was told more than once that it is not possible to mandate
good corporate behaviour. For example, Westpac's Dr
Purcell argued that:
...it is difficult, if not impossible, to mandate good values
based business behaviour through legislation or regulation—and there are plenty
examples of that. In the future if there is inadequate corporate progress in
adopting responsible business practices there may be a case for considering
non-prescriptive type approaches.[116]
3.78
The St
James Ethics Centre expressed the view that mandating corporate responsibility
was not appropriate:
We believe that the use
of legislation, regulation and surveillance as the principal means for
protecting the interests of stakeholders other than shareholders is misguided.
... an over-reliance on such an approach is largely ineffective because it
invites a negative culture of compliance characterised by indifference to the
principles that inform the legislation or regulations.[117]
3.79
Some evidence to the committee questioned whether
voluntary mechanisms were sufficient. The Brotherhood of St Laurence, for
example, commented that:
...many of the initiatives taken by enterprises to demonstrate
that they are good corporate citizens or to demonstrate their commitment to CSR
have been through the introduction and application of voluntary mechanisms.
While voluntary mechanisms are a useful starting point and a useful tool to
help harness an enterprise’s thinking about CSR, we have seen that in reality
they are not adequate to guarantee that an enterprise’s risk management
strategies will be met, their brand will be protected and ... in supply chain
management, labour standards will be upheld.[118]
3.80
The Australian Network of Environmental Defenders
Offices also doubted the effectiveness of voluntary mechanisms, and argued in
favour of regulation:
The position at the moment ... is essentially based on voluntary
codes and mechanisms of that ilk. Such codes, as we have seen, are not binding.
They are practised by a few large corporations, and they are not regularly
independently monitored. Such codes are problematic. I think most people, and
perhaps even corporations privately, would concede that fact. We need to move
beyond this to clear and enforceable rules that would allow for a level playing
field and produce better outcomes.[119]
3.81
The mandatory versus voluntary debate is discussed further
elsewhere in this report. It is discussed in chapter 4 in the context of
directors' duties, in particular the option of changing those duties to require
that the interests of stakeholders other than shareholders be taken into
account. A discussion of mandatory versus voluntary sustainability reporting is
included in chapter 7.
A medium to long-term outlook
3.82
Another theme emerging in evidence was that there was a
tendency for capital markets to focus on companies' short-term gains, which militated
against the medium to long-term view of sustainability and profitability that
was required to engage with a corporate responsibility agenda. This
'short-termism' was raised by many submitters as a barrier to increasing the
uptake of sustainable behaviour.
3.83
Mr Berg
of the AICD told the committee that there are a lot of pressures in the market
for short-term financial performance:
Companies are being encouraged to give guidance as to what their
results will be and then obviously there is a lot of pressure to meet the
guidance that has been given. The markets have tended to punish companies that
fall short of profit forecasts, whether they have given the guidance or whether
it has just been the market forecast. Their share price is often punished quite
severely when they fall short. Inevitably amongst top management and boards
there is quite a focus on that short-term performance.[120]
3.84
Ms Mostyn
of IAG echoed this view, and pointed out that pressure for short-term
performance was great when shares were traded on a daily and hourly basis:
[There is a] need to get away from this rampant short termism
that is driven by markets where trillions of dollars are washed in and out
through day traders where it does not matter that we have a long term view;
they are looking at a share price differential on a daily, or even hourly,
basis.[121]
3.85
Mr Mather
of BTGAS even pointed out that existence of so-called 'minute traders' or
'minute investors', 'seeking to arbitrage a moment in time.'[122]
3.86
Other market forces are also apparent that encourage a
short term view. Directors and senior executives are often provided incentives
through their remuneration arrangements to pursue short term company profits.
The committee heard evidence that these incentives can negatively impact a
company's long term performance. On the other hand, the committee also heard
evidence that some companies are making a positive link between corporate
responsibility performance and remuneration packages. For example:
there is one building materials company that I can think of
whose chief executive suffers a seven per cent diminution in their performance
bonus for a death in the workplace, and that is cumulative. So, in that
instance—and this is an adverse example—if 13 people died, you would get no
bonus.[123]
3.87
However BTGAS pointed out that this was the exception
rather than the rule.
3.88
Ms Mostyn
of IAG argued that markets needed to take a longer term view:
Corporate responsibility and sustainability only work if those
markets begin to take notice of these issues and move their investments
accordingly and show the value over time to their investors.[124]
Integration into company core
business and strategy
3.89
Evidence received by the committee over the course of
the inquiry strongly underlined the importance of integrating the consideration
of broader community interests into the core business strategy of companies, if
corporate responsibility was to succeed.
3.90
A number of companies told the committee that corporate
responsibility was central to their core business, rather than being an add-on
or a 'sideshow'. For example, IAG told the committee:
We actively make sustainability central to our core business by
embracing opportunities and managing risks deriving from the full range of economic,
environmental and social factors that interact with and impact on our operations
every day.[125]
3.91
The National Australia Bank emphasised that corporate
responsibility was not a side function:
By having CSR embedded into our group strategy function ... the
two are intertwined and that we cannot look at strategic issues, such as how we
expand, without taking into account CSR. We have not made it a side function;
we have integrated it with our group strategy activities and given it
significant prominence organisationally.[126]
3.92
The ANZ Bank also took this view:
The core point from ANZ’s perspective is that what we have
sought to do at ANZ is infuse our business strategy with corporate
responsibility issues or perspectives as opposed to the reverse, which is to
have a stand-alone corporate responsibility strategy. We have sought to
integrate the relevant issues into our business strategy and make them a very
important part of that approach.[127]
3.93
Westpac said of its approach:
Corporate responsibility is at the heart of Westpac’s business
model. Consequently, there is no corporate responsibility or sustainability
strategy as such; rather this is integrated into the core business strategy. In
turn, corporate responsibility is built into strategic decision-making across the
business.[128]
3.94
Wesfarmers' representative Mr
Kessell emphasised the importance of
embedding sustainability reporting mechanisms into company culture:
I have no hesitation in saying that [data collection, analysis
and reporting] is now totally a part of the culture of the company, right from
the managing director of Wesfarmers, through his managing directors into the
general managers and down to supervisors, who are asked to provide the data to
go into this report. It is part of the way of doing business.[129]
3.95
Despite the positive approaches taken by some
companies, some submitters expressed concern that Australian companies were
lagging behind in engaging properly with corporate responsibility. Mr
O'Donoghue of the Australian Council of
Social Service (ACOSS), which conducted extensive research into rates of workplace
giving in 2005, told the committee:
In our view, corporate social responsibility should be seen as
part of good governance. I think that Australia
has got a long way to go in terms of integrating corporate social
responsibility initiatives into general decision making and good governance in
corporations.[130]
3.96
The Smith Family supported an increase in the number of
companies moving towards integrating corporate responsibility into their core
business:
...the Smith Family supports and encourages the position that
the time has arrived for a greater number of Australian companies to move from
viewing CSR as a minimum standard to an integrated component of strategy and
operations in providing leadership in the continuing development of a
distinctive model of corporate social responsibility.[131]
Corporate responsibility is an
evolutionary process
3.97
A strong message from the evidence received was that
progress towards sustainable corporate behaviour for corporations is an
evolutionary process, which requires flexibility to respond to changing
expectations of the community, employees, and other stakeholders.
3.98
BHP Billiton described how influences such as community
expectations shaped its approach to corporate responsibility:
BHP Billiton's approach to Corporate Social Responsibility
("CSR") and associated public reporting has evolved over time, in
step with our own experiences and perceptions of the environment within which
we operate, community expectations communicated to BHP Billiton and, in some
instances, regulatory requirements.[132]
3.99
Many companies used the analogy of a 'journey' when referring
to their experiences with adopting responsible corporate practices and
integrating them into core business. Ms Sheehan of Holden GM described that
company's journey:
Corporate social responsibility is a journey. ... [P]rior to
2001 our community programs were fairly ad hoc—it was basically chequebook
philanthropy. What we wanted to do was try and come up with something that was
better aligned with our business strategy. When we reviewed our community
relations programs we decided that we should try and develop priority areas
that were actually linked to the brand and to our business strategy. As we go
down that corporate responsibility journey, that will get a better buy in from
our stakeholders, including our internal stakeholders—our employees and the
board.[133]
3.100
NAB representatives also referred to the journey of
corporate responsibility:
We recognise that it is a continuing journey... It is evolving
all the time. The benchmark for what is good disclosure is moving all the time
and so we have made a commitment to basically take ourselves on a continuous
journey, improving where we can as we go.[134]
3.101
ANZ representatives told the committee that ANZ's
corporate responsibility journey was one that unfolded over time, rather than
being well-planned.[135] ANZ also
referred to the impediments in changing company and staff practices, engaging
with the community and empowering local branch staff. ANZ representative Mr
Brown likened the process to changing the
course of a supertanker:
Organisations like ANZ are supertankers and they take a long
time to turn around. Whilst we have started down that pathway, we still have a
long way to go. ...[T]hings take a long time to flow through.[136]
3.102
Unilever Australasia referred to the 'long journey' of
bringing capital markets to an understanding of the long-term benefits of
sustainable practices.[137] This journey
then is one undertaken not only by companies and their employees, but also by
other stakeholders, such as institutional investors.[138]
One size doesn't fit all
3.103
The committee heard repeatedly that the range of
companies and organisations of different sizes and from different sectors meant
that it was inappropriate to apply a 'one-size-fits all' approach to corporate
responsibility and any mechanisms used to encourage it.
3.104
The Australian Banker's Association emphasised that all
companies were different, and that stakeholder interests could also be
different:
It is important to recognise that for companies to deliver
greatest value for all stakeholders, a “one size fits all” approach does not
adequately recognise the diverse and complex needs of all stakeholders. A
“one-size-fits-all” approach to corporate responsibility or sustainability will
not work due to the uniqueness of each business and the variation in strategic
approach across companies. The dynamics of the relevant industry, market
sector, operating environment, product or service means that each company is different.
The real and comparative influence of, and priority assigned to, varying
stakeholder interests will be different.[139]
3.105
GlaxoSmithKline also argued against a one-size-fits-all
approach:
We recognise that the concept of corporate social responsibility
will mean different things for companies of different sizes and different
sectors. Therefore, it is not really appropriate to have the one size fits all.
....appropriate types of corporate social responsibility activities will vary
greatly across sectors. What makes sense to an organisation involved in the
health care industry could be quite different to what makes sense to [those in]
the resources industry.[140]
3.106
GlaxoSmithKline's submission commented that one-size-fits-all
legislative approaches ran the risk of constraining other possible responses.[141]
Cost-effective, comparable, and
transparent sustainability reporting
3.107
Other principles that emerged during the inquiry
related primarily to sustainability reporting. Many submitters argued that any
sustainability reporting mechanisms, whether voluntary or mandatory, had to be
cost-effective, comparable across companies, and transparent. These issues are
discussed separately in chapter 7.
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