Forward Looking Indicators: How do we measure and put a value on CSR? David Wheeler York University

Forward Looking Indicators: Forward Looking Indicators: How do we measure and put a How do we measure and put a

value on CSR?value on CSR?

David WheelerDavid Wheeler

York UniversityYork University

CSR: Building the Business Model and tCSR: Building the Business Model and the Business Casehe Business Case

Three Somewhat Provocative Three Somewhat Provocative AssertionsAssertions

There is no generalizable ‘business case’ for There is no generalizable ‘business case’ for CSR or sustainability in businessCSR or sustainability in businessThere is no There is no a priori a priori evidence that certified evidence that certified management systems standards or other management systems standards or other voluntary standards enhance environmental, voluntary standards enhance environmental, social or economic performancesocial or economic performanceThere is no generalizable set of measures or There is no generalizable set of measures or indicators that prove the objective value of CSR indicators that prove the objective value of CSR or sustainability practices in business to firms or or sustainability practices in business to firms or their stakeholderstheir stakeholders


An ExperimentAn Experiment

Corporate governance reforms improve Corporate governance reforms improve accountability to investors and reduce risks to accountability to investors and reduce risks to shareholder valueshareholder valueIn general, companies that follow corporate In general, companies that follow corporate governance standards will outperform those that governance standards will outperform those that do not in economic and other termsdo not in economic and other termsCompliance with corporate governance Compliance with corporate governance standards may be a predictor of future standards may be a predictor of future performance and therefore should be measured performance and therefore should be measured and reported uponand reported upon


‘‘Correlation’ of corporate governance ratings Correlation’ of corporate governance ratings and 1 yr shareholder returnsand 1 yr shareholder returns

Report on Business Governance Ranking

One

Yea

r C

hang

e in

Mar

ket

Cap

So what is going So what is going on here?on here?


Optimal and Dysfunctional Director Optimal and Dysfunctional Director Behaviour Types Behaviour Types (Leblanc & Gillies, 2005)(Leblanc & Gillies, 2005)

OptimalOptimal

Conductor-ChairConductor-Chair

Change AgentChange Agent

Consensus BuilderConsensus Builder

ChallengerChallenger

CounsellorCounsellor

DysfunctionalDysfunctional

Caretaker-ChairCaretaker-Chair

ControllerController

ConformistConformist

CriticCritic

CheerleaderCheerleader

Optimal and Dysfunctional Director Optimal and Dysfunctional Director Behaviour Types Behaviour Types (Leblanc & Gillies, 2005)(Leblanc & Gillies, 2005)

Collective

Consensus

Individual

Dissent

Consensus-Builder or

Conformist

Counsellor or

Cheerleader

Change Agent or

Controller

Challenger or

Critic

Conductor or

Caretaker


ConclusionConclusion

Group culture and collective capabilities Group culture and collective capabilities may count much more than structures and may count much more than structures and accountability processes in making for accountability processes in making for effective boards and thereby achieving effective boards and thereby achieving ‘good governance’.‘good governance’.But how do you measure culture and But how do you measure culture and capabilities?capabilities?


Some hope on the horizonSome hope on the horizon

We are beginning to understand the We are beginning to understand the importance of intangible assets more importance of intangible assets more generally.generally.We are beginning to understand much We are beginning to understand much better how relationships with stakeholders better how relationships with stakeholders drive valuedrive valueSome people are beginning to understand Some people are beginning to understand that all value (including economic value) is that all value (including economic value) is socially constructed.socially constructed.


Sources of Competitive Sources of Competitive Advantage are Changing Advantage are Changing

20th Century Sources of 20th Century Sources of ValueValue

Production inputsProduction inputs

Access to capitalAccess to capital

Market dominationMarket domination

Proprietary informationProprietary information

21st Century Sources of Value21st Century Sources of Value

Human capital:Human capital:– knowledgeknowledge– innovationinnovation– capabilitiescapabilities

Intellectual capitalIntellectual capital– brandsbrands– know-howknow-how

Social capitalSocial capital– reputationreputation– relationshipsrelationships


Intangible ResourcesIntangible Resources (Holliday (Holliday et alet al, 2002)., 2002).

In 2001, the aIn 2001, the average market to book verage market to book ratio of firms in the Dow Jones Group ratio of firms in the Dow Jones Group Sustainability Index was 3.76. Sustainability Index was 3.76.

Thus the average market value of Thus the average market value of these companies in 2001 comprised these companies in 2001 comprised approximately 80% intangible assets. approximately 80% intangible assets.


Brand Value Brand Value (Aaker & Joachimstaler, 2000)(Aaker & Joachimstaler, 2000)

In 1999, Coca Cola’s brand represented 59% of its In 1999, Coca Cola’s brand represented 59% of its market capitalization.market capitalization.Figures for McDonalds and Nike were 64% and 77% Figures for McDonalds and Nike were 64% and 77% respectively.respectively.In 2002, Interbrand calculated the value of Coca Cola’s In 2002, Interbrand calculated the value of Coca Cola’s brand at $69.6 billion.brand at $69.6 billion.


Intangible ResourcesIntangible Resources

““Intangible assets are excluded from the balance Intangible assets are excluded from the balance sheet because of the difficulty of objectively sheet because of the difficulty of objectively valuing them. Yet such assets – in the form of valuing them. Yet such assets – in the form of management skill, reputation, strategic management skill, reputation, strategic positioning and patents and copyrights – are positioning and patents and copyrights – are usually the most important assets for successful usually the most important assets for successful firms”firms”

Alan Shapiro quoted in Walking the TalkAlan Shapiro quoted in Walking the Talk

Holliday et al, 2002Holliday et al, 2002


Let’s Encourage Some Let’s Encourage Some ‘Fanciful Thinking’‘Fanciful Thinking’

Assets and liabilities that can’t be connected to Assets and liabilities that can’t be connected to historical transactions or tradable contracts historical transactions or tradable contracts have no assignable market value. Goodwill is have no assignable market value. Goodwill is like that. If it isn’t from an arm’s-length like that. If it isn’t from an arm’s-length acquisition, the number you might put on this acquisition, the number you might put on this asset is entirely arbitrary. So investors are asset is entirely arbitrary. So investors are better off if the asset is not counted. So, too, for better off if the asset is not counted. So, too, for liabilities that are to be plucked from the air. liabilities that are to be plucked from the air. Accounting is not a field in which we want to Accounting is not a field in which we want to encourage fanciful thinking….encourage fanciful thinking….

Smith, F.L., ‘ Smith, F.L., ‘ Forbes MagazineForbes Magazine, 26th July 2004., 26th July 2004.

Back to the Back to the evidence and evidence and

Bob’s ‘Integrated Bob’s ‘Integrated Strategy’Strategy’


This we know…This we know…There are Four Key Characteristics of There are Four Key Characteristics of

‘Sustainable Enterprises’:‘Sustainable Enterprises’:Stay Connected to Changes in the External Business Stay Connected to Changes in the External Business EnvironmentEnvironment– political, social, technological, environmental, economicpolitical, social, technological, environmental, economic

Build Internal Capabilities Build Internal Capabilities – leadership, stakeholder inclusion, communication & leadership, stakeholder inclusion, communication &

dialoguedialogue

Achieve Alignment on Culture and ValuesAchieve Alignment on Culture and Values

Design Mission and Strategy to Maximize Competitive Design Mission and Strategy to Maximize Competitive AdvantageAdvantage


Unsustainable enterprises….Unsustainable enterprises….Misjudge external changes……Misjudge external changes……………………and risk becoming irrelevant or uncompetitive and risk becoming irrelevant or uncompetitive Fail to build capabilities….…Fail to build capabilities….…………………..and suffer embarrassment and/or misunderstandingand suffer embarrassment and/or misunderstandingFail to align values and culture…...Fail to align values and culture…...…………and waste a lot of time on endless theorizing and and waste a lot of time on endless theorizing and

debatedebateFail to adjust strategy……..Fail to adjust strategy……..…………..and prepare for oblivionand prepare for oblivion


Staying Staying Connected to Connected to

External ChangeExternal Change


The Royal Dutch/Shell Group The Royal Dutch/Shell Group CaseCase

1897 - Shell Transport and Trading founded1897 - Shell Transport and Trading founded

1907 - Alliance with Royal Dutch Petroleum1907 - Alliance with Royal Dutch Petroleum

1990s - One of the three largest oil companies on 1990s - One of the three largest oil companies on the planetthe planet-- 3000 operating companies3000 operating companies

-- 100 countries100 countries

-- 100,000 direct employees100,000 direct employees

-- 240,000 indirect employees240,000 indirect employees


June 1995:June 1995:The Brent Spar IncidentThe Brent Spar Incident


November 2005:November 2005:The Execution of Ken Saro-WiwaThe Execution of Ken Saro-Wiwa““I repeat that we all stand I repeat that we all stand before history. I and my before history. I and my colleagues are not the only colleagues are not the only ones on trial. Shell has ones on trial. Shell has ducked this particular trial, ducked this particular trial, but its day will surely come but its day will surely come and the lessons learnt here and the lessons learnt here may prove useful to it for may prove useful to it for there is no doubt in my mind there is no doubt in my mind that the ecological war that that the ecological war that the Company has waged in the Company has waged in the Delta will be called to the Delta will be called to question sooner than later question sooner than later and the crimes of that war and the crimes of that war be duly punished. The crime be duly punished. The crime of the Company's dirty wars of the Company's dirty wars against the Ogoni people against the Ogoni people will also be punished."will also be punished."


Mark Moody-Stuart on Shell’s Re-invention Mark Moody-Stuart on Shell’s Re-invention Around SD PrinciplesAround SD Principles

““I believe our I believe our transformation’s transformation’s biggest contribution to biggest contribution to our business will be the our business will be the way it releases people’s way it releases people’s creativity and speeds creativity and speeds their response to what their response to what the customer wants, the customer wants, making our everyday making our everyday business truly excellent business truly excellent while identifying the while identifying the new opportunities.”new opportunities.”

Mark Moody-Stuart, Chairman CMD, Mark Moody-Stuart, Chairman CMD, Royal Dutch/Shell, 1998Royal Dutch/Shell, 1998


BuildingBuilding CapabilitiesCapabilities


The Monsanto Case


Monsanto HistoryMonsanto History

100 year history100 year history

1995 Bob Shapiro arrives as CEO with a mission1995 Bob Shapiro arrives as CEO with a mission

1998 $8bn acquisitions later, Monsanto is global number 2 in 1998 $8bn acquisitions later, Monsanto is global number 2 in agrichemicalsagrichemicals

1998 Controversies at their height1998 Controversies at their height

1998 Merger with American Home Products fails1998 Merger with American Home Products fails

2000 Bought by Pharmacia (for GD Searle business). Shapiro 2000 Bought by Pharmacia (for GD Searle business). Shapiro replaced by Verfaillie as CEO.replaced by Verfaillie as CEO.

2001 Pharmacia’s 85% stake up for sale for underperformance2001 Pharmacia’s 85% stake up for sale for underperformance

2002 Spun off from Pharmacia. Verfaillie departs without a 2002 Spun off from Pharmacia. Verfaillie departs without a successorsuccessor


A cautionary tale of sustainability ‘overshoot’: Monsanto and GMOs


Robert B Shapiro Robert B Shapiro ReflectionsReflections

Monsanto, and I personally, have Monsanto, and I personally, have to bear our share of responsibility to bear our share of responsibility for that situation. We started with for that situation. We started with a conviction that biotechnology a conviction that biotechnology was a good technology, was and was a good technology, was and is safe, useful and valuable. We've is safe, useful and valuable. We've been working on it for 20 years been working on it for 20 years and that's the source of that and that's the source of that conviction, but because of that, I conviction, but because of that, I think we have tended to see it as think we have tended to see it as our task to convince people that our task to convince people that this is good technology. And we've this is good technology. And we've tried to convince people that we're tried to convince people that we're right and that by extension people right and that by extension people who have different points of view who have different points of view are wrong or at best misguided. are wrong or at best misguided.


Bringing It All Bringing It All TogetherTogether


DuPont Culture and ValuesDuPont Culture and Values

I believe that if we use our I believe that if we use our creativity and scientific creativity and scientific knowledge effectively, we can knowledge effectively, we can provide a strong return for our provide a strong return for our shareholders and grow our shareholders and grow our businesses - all while meeting businesses - all while meeting the human needs of societies the human needs of societies around the world and reducing around the world and reducing the environmental footprint of the environmental footprint of our operations and products.our operations and products.

Chad Holliday, Chairman and CEO, DuPontChad Holliday, Chairman and CEO, DuPont HBR, September 2001HBR, September 2001


The DuPont The DuPont Business Strategy Strategy

““Go where the growth is” – geographies and Go where the growth is” – geographies and technologiestechnologies– Safety and protection Safety and protection ($4.1bn)4.1bn)– Electronic and communications technologies ($2.9bn)Electronic and communications technologies ($2.9bn)– Coatings and colour technologies ($5.5bn)Coatings and colour technologies ($5.5bn)– Performance materials ($5.4bn)Performance materials ($5.4bn)– Agriculture and nutrition ($5.5bn)Agriculture and nutrition ($5.5bn)

Improve marketing and salesImprove marketing and sales– $30bn (2003) from $25bn (2001)$30bn (2003) from $25bn (2001)– ““dozens of new products” $20-200m by salesdozens of new products” $20-200m by sales

Reduce costs by $900 million by 2005Reduce costs by $900 million by 2005


The DuPont SD Strategy: Biodiversity & Renewable Materials

Strategic Insight: DuPont depends Strategic Insight: DuPont depends upon biodiversityupon biodiversity

Strategic Positioning: Biodiversity Strategic Positioning: Biodiversity is a component of DuPont’s is a component of DuPont’s sustainable development sustainable development commitmentscommitments

Strategic Goal: New markets and Strategic Goal: New markets and top-line growthtop-line growth

Strategic Target: 25% of 2010 Strategic Target: 25% of 2010 revenues from non-depletable raw revenues from non-depletable raw materials materials


Suncor Culture and Values

Sustainability is about earning the consent of stakeholders to operate and grow our business. This requires that we understand the expectations of our stakeholders and, where possible, integrate the social, economic and environmental goals that are important to them into our business planning.

Rick George

President & CEOSeptember 2003


Suncor Vision and StrategySuncor’s vision is to be a unique and sustainable energy company, dedicated to vigorous growth by meeting the changing expectations of our current and future stakeholders. To Suncor, being a sustainable energy company means managing our business in a way that enhances social and economic impacts to society, whilst striving to minimize the environmental impacts associated with resource development. Through:

•Operational excellence

•Products and services for the future

•Integrated decision making

•Public policy, education and awareness

•Organizational capabilities and commitment

•Stakeholder relations


“…sustainability is not a solitary pursuit”

Winner of the North American Winner of the North American CERES/ACCA corporate CERES/ACCA corporate reporting awardsreporting awardsListed on the Dow Jones Listed on the Dow Jones Sustainability World Index for Sustainability World Index for the fifth year in a rowthe fifth year in a rowListed on the Jantzi Social Listed on the Jantzi Social Index since 2000Index since 2000Listed in the FTSE4Good Listed in the FTSE4Good indexindexPlans to invest $100 million by Plans to invest $100 million by 2005 in alternative and 2005 in alternative and renewable energyrenewable energy Net earningsNet earnings

– 89 % from oil sands89 % from oil sands– 7 % from energy marketing and 7 % from energy marketing and

refiningrefining– 4 % from natural gas and renewables4 % from natural gas and renewables


Suncor Stock Price 1995-2004


A Virtuous Cycle of Four Components for A Virtuous Cycle of Four Components for Sustainable EnterpriseSustainable Enterprise

Staying ConnectedDesigning Mission and Strategy

Building Capabilities

Aligning Culture and Values


Three AssertionsThree Assertions

There is no generalizable ‘business case’ for There is no generalizable ‘business case’ for CSR or sustainability in businessCSR or sustainability in businessThere is no There is no a priori a priori evidence that certified evidence that certified management systems standards or other management systems standards or other voluntary standards enhance environmental, voluntary standards enhance environmental, social or economic performancesocial or economic performanceThere is no generalizable set of measures or There is no generalizable set of measures or indicators that prove the objective value of CSR indicators that prove the objective value of CSR or sustainability in business to firms or their or sustainability in business to firms or their stakeholdersstakeholders


Three Uncomfortable ImplicationsThree Uncomfortable Implications

Top management teams need to take Top management teams need to take responsibility for pursuing strategic CSR value responsibility for pursuing strategic CSR value propositions for their organizations.propositions for their organizations.Management systems standards, codes and Management systems standards, codes and other compliance-based measures may help other compliance-based measures may help deliver incremental performance improvements deliver incremental performance improvements but are unlikely to add value in a strategic but are unlikely to add value in a strategic competitive sense competitive sense Public reporting using standardized measures Public reporting using standardized measures and indicators will always be a non-strategic, low and indicators will always be a non-strategic, low value proposition for external stakeholdersvalue proposition for external stakeholders


ConclusionConclusion

Accept that all value is socially constructed Accept that all value is socially constructed between the firm and its stakeholders.between the firm and its stakeholders.Intuition and vision is as important as rational Intuition and vision is as important as rational measures for SMTsmeasures for SMTsSocially responsible, sustainable organizations Socially responsible, sustainable organizations are socially responsible and sustainable if our are socially responsible and sustainable if our stakeholders tell us so.stakeholders tell us so.Look for evidence of the 4 components of Look for evidence of the 4 components of sustainable enterprise if you really want to sustainable enterprise if you really want to predict sustainable performance, but don’t be predict sustainable performance, but don’t be surprised if you don’t find the evidence easy to surprised if you don’t find the evidence easy to assess!assess!

Goodwill

& Motivation

Drivers of Business Relationships: Shared values Perceived benefits Reciprocal exchange Minimisation of transaction costs Coercive power

Behavioural Outcomes of Business Relationships: Creative co-operation Loyalty Trust Compliance

Reputation-Based Amplification: Enhanced Prestige, Enhanced Moral Legitimacy,

Enhanced Pragmatic Legitimacy

Social Capital Amplification: Enhanced Networks, Enhanced Reciprocity,

Enhanced Understanding

Sustainable

Value

Documents

Forward Looking Indicators: How do we measure and put a value on CSR? David Wheeler York University