CASE: Switcher/Prem Durai, Switzerland and India.

Case: Apparel Avenue (FIND), Thailand

Dr. Kaewta Rohitratana of the Thammasat Business School attempted a detailed study of the impact of SA8000 on Apparel Avenue, which was the first factory in Thailand certified to SA8000.

She found overtime was down by 24 hours per week. Before, 84 hours of work/week was legal. After, the company sought to keep overtime down to 60 hours max og work per week.

• Results:

– Productivity up through redesigned work space.

– Retention up.

– Absenteeism down.

– Overtime down by 28%.

John Tepper Marlin, Feb. 10, 2008

Brands and CSR: Metrics, Standards

Concept: Investors Seek Certified Valuations of Assets, Including Intangibles Like Reputation

When a few shareholders own a company, it may be enough to generate some basic earning statements because the large shareholders will naturally take a personal interest in their investment.  This is also the concept behind a bank-centered industry group as exemplified by the German Hausbank or the Japanese keiretsu bank. 

When shareholding is more diversified, shareholders properly worry about the Principal-Agent problem, where their hired managers are less concerned about the owners than about themselves.  Until 2002, the main system of outside review in the United States was one of outside review by large auditing firms reviewed the financial statements. Independent analysts on Wall Street then commented on these statements. 

In this information age, businesses rely more on attracting and retaining a talented workforce than ever before. Intellectual capital does not come cheaply and the loss of a key employee can affect a company’s value. Key employees can go down the elevator and with them take important company information and clients.[1]  Recruitment and training are expensive. Productive, innovative employees who know and care for your company certainly provide value, and thus are an intangible asset. 

Financial statements fail to tell investors much about what could be a company’s most important asset, namely its employees.[2] If people matter most, as company CEOs like to say in annual reports, then their worth must be measured and a value put on them. 

Balance sheets as presently constructed provide useful information, but leave out significant factors.  Tangible assets such as machinery can be worthless in a few months if the product they make is superseded; they can only depreciate in value, whether they are used or not.  Intangible assets can either increase or decrease in value.  Because a reliable market price can not be determined, valuing intangibles is more art than science.  And many intangibles, such as intellectual capital or brand loyalty, will not be found in a financial statement. 

As investors peruse their annual reports for 2003, they are going to have on their mind major issues  of credibility and trust.  These are at the heart of the value that shareholders place on the companies they invest in. 

The UK government’s Department of Trade and Industry has asked the UK Accounting Standards Board to look at better guidance for disclosure of intangible assets.  To help develop an alternative model, the Academy of Enterprise commissioned the Smith Institute to investigate the issue globally.  Its report concludes:
Although the economy has changed, many of its institutions, like the accountancy profession, have failed to keep pace.   In many respects, the current accountancy model, developed 500 years ago, attempts to measure the assets of the creative economy with the tools of the manufacturing-based economy.  A profession which fails to acknowledge, let alone measure, the core people-based assets of many companies has become cumbersome in its ability to adapt to a changing environment.  Today an entire industry -- accountancy -- is based on a fiction: that the valuation auditors produce reflects the real value of the companies they audit. They simply do not.  - Smith Institute, Dynamic Reporting for a Dynamic Economy.

Discussion Questions 1: Reporting What Users Need to Know

1.      Wal-Mart has ranked high on Fortune’s annual Most Admired list. Yet many stakeholders vilify the company. Which is closer to your view? Have you modified your view during the last few years? 

2.      You are an account executive at Fleishman-Hillard and the Wal-Mart account was dropped on your desk, what would you advise the client?

3.      Toys R Us (TRU), a key competitor of Wal-Mart in the toy sector, is committed as a Signator to the SA8000 system, devoting substantial resources to audits and training of its suppliers and serving on the SA8000 Advisory Board.  Where TRU shares factories, Wal-Mart is a free rider.  Which firm do you think will benefit more from this asymmetry? How would you advise TRU to address the free rider problem?

As mentioned in Chapter 1, the UK consultancy, SustainAbility,  popularized the term "triple bottom line" to mean, in addition to the financial bottom line, an environmental and social bottom line.[3]  SustainAbility each year selects the top 50 social and environmental reports based on clarity of measuring and reporting, transparency, and management approach.  The SustainAbility worldwide ranking of annual reports follows the model created by Tellus in Boston of ranking the top U.S. companies on their environmental reporting.

The companies most frequently cited for having good reports tend to fall into two categories:

·        relatively younger(to be consistent with next point) companies (post-1970), often with an organic orientation, that have made social issues part of its brand;[4]

·        older companies that have made mistakes and are now making amends. 

Some larger companies producing social reports have had to deal with a history or crisis that has at times threatened their existence as a company.  For example:

Chiquita is given credit for producing the “gold standard”[5] of CSR supply-chain reporting; as successor to the United Fruit Company, it has the burden of memories of “banana republics” to bear and in the 1990s was the subject of a major expose by the Cincinnati Enquirer on treatment of its workers in Central America. [6]

What will it take for other companies to get ahead of the issue without a crisis in hand, or is it too much to expect?  Could this lead to a collective crisis point for companies that generates some fundamental change in the years to come? 

Concept: Brand “Betas” - Steeper Ladders, Steeper Spirals

The CSR aspects of brand creation and maintenance are part of a broader trend.  Brands can be introduced faster and more cost-effectively. With money and professional management of the process, it is easier to launch a brand today because of media penetration and the related power of advertising, public relations and marketing.  Two reasons, among others:

·        Young people are far more aware and concerned about brands;

·        They are easily reached through television and the Internet.

The other side of this coin is that brands can also decline more rapidly.  Media penetration works both ways.  Bad news on the CSR side can destroy a brand even faster than use of CSR in advertising can help it.  The people who are expert at creating a brand are not always so clever at controlling the devastation from negative publicity.  Johnson & Johnson managed to do it with Tylenol.  But Bridgestone/Firestone lost the faith of its customers in the quality of its brand.  More broadly speaking, corporate mortality rates have risen.  The average life expectancy of a Fortune 500 company in 1938 was 100 years.  It is now 20 years.  More threats to brands exist and therefore corporations have less time to realize value.

One way of summarizing all this is to say that the corporate “Brand Beta” has been tilting upward (the coefficient of β has been rising).  The ladders to brand success are steeper, but so are the downward spirals.  Just one exaggerated claim that is attacked in the press can be devastating for the company.[7] 

Concept: Building Intangible Assets through CSR

CSR issues are important not only to the maintenance of a brand built over several years but also to the building of a new brand.  This is both easier and harder than it used to be, because public perception of many brands today is greatly affected by the social message conveyed by the brand.[8]  Some convey it as a conscious strategy called cause-related marketing, i.e., linking a commercial product to a cause.  Various organizations have begun efforts to quantify the value of a company’s reputation (see the excerpt below on one organization’s findings) to help companies measure the effects of their social responsibility marketing efforts.

Alternatively, a company can suffer negative repercussions for not addressing socially responsible issues. When a company’s value depends on its employees and its reputation, the lines between social reporting and financial reporting become blurred.  Failures in social reporting could adversely affect the company.

For instance, Nike suffered greatly from the negative publicity concerning the pay and abusive work conditions of workers in Asia who make its athletic shoes. As a result, Nike decided to invest in improving its reputation.  Shell suffered from publicity linking the company to human rights abuses in Nigeria, and Exxon was vilified following the Valdez oil spill in Alaska.  While it is difficult to pinpoint the economic effect, certainly Shell turned itself around and is now perceived as a world leader in social reporting. 

Discussion Questions 2: Social Reports and Reputation

1.      Do CPA firms like KPMG and PwC have special expertise in social and environmental auditing?  Are there differences between social auditing and financial auditing?

2.      What kind of attestation or verification would you like to see in the back of a social or environmental report?

3.      What market factors do you think will drive corporations to adopt the practice of audited social reports?

4.      What types of steps have BP, Ford and the other companies listed in Echo’s report taken in order to incorporate CSR into its branding efforts?

Sustainability has come into use as a word that covers both environmental reporting and workplace reporting.  The issue is the sustainability of individual corporations, the existing capitalist system, and the world as a whole. 

Concept: GRI Reporting Principles

Today, the field is crowded with numerous rating and evaluation services.  Because criteria and available data vary by country, GRI was convened by CERES in 1997 as a multi-stakeholder, international harmonization program with the goal of making sustainability reporting as rigorous and universal as financial reporting.  It cut its formal ties with CERES in 2002 and is now an independent NGO that partners with the UN Environment Program (UNEP). 

GRI described itself in April 2002 as follows: “The GRI was established to develop, promote, and disseminate a generally accepted framework for sustainability reporting - voluntary reporting on the economic, environmental, and social performance of corporations and other organizations. Its mandate as an international standards body is to make sustainability reporting as routine as financial reporting while achieving the highest standards of consistency and rigour."

As with financial reporting, the centerpiece of GRI reporting is a CEO statement and some key environmental, social and economic indicators.  In addition, GRI requires a profile of the reporting entity, descriptions of relevant policies and management systems, stakeholder relationships, management performance, operational performance, product performance and a sustainability overview.

Example: The GRI’s First Indicators

Discussion Questions 3: Standardization of CSR Metrics

1.      Why do you think corporations support GRI?

2.      What are the Principles on which GRI is based?

3.      Do you agree with Mallen Baker’s view of GRI?

4.      Do you think that GRI will succeed?

5.      What steps should GRI take to ensure its success?

Because of the deluge of corporate scandals, stakeholders have become more skeptical of company claims.  They demand the same treatment that shareholders were presumed to be getting, transparency – i.e. credible evidence of performance, with third-party verification.

Social audits are designed to communicate a company’s social record.  General Motors produced a social report as early as 1970, but without an outside review.  Carl Jung once said it takes one generation, 30 years, for an idea to become part of the culture. Effective measurement and communication of a company’s commitment and performance has become a key component of successful social accountability, which led to some experiments with outside social audits.   Social and environmental reports were designed to benchmark, track progress, address challenges, reflect consultations with stakeholders, and on occasion respond to allegations. The social auditor was asked to attest to the fairness of these reports. 

Concept: The Need for Verification

The first example of independent verification of a major company CSR report by a large financial auditor was the Shell annual report for 2001.[13]  Social audits are designed to communicate and lend credibility to a company’s social record.  They are also a response to independent external reports on companies.[14]  They present the company’s record in a way that the company has some control over.  Effective measurement and communication of a company’s commitment and performance has become a key component of successful social accountability.   Social and environmental reports are designed to benchmark, track progress, address challenges, reflect consultations with stakeholders, and on occasion respond to allegations.

Example: Third-Party Assurance and Facility Verification

Certification

Certification is the process whereby products or facilities undergo an impartial third party audit against a set of standards. In order to provide credibility with consumers, government, and the business, and to overcome the consumer confusion and suspicions that self proclamation engenders, it is essential that standards be subject to independent, impartial verification by properly accredited certification bodies (these can be NGOs) and that sufficient transparency be evident.  For products, it means actual testing of samples; for facilities, it means a process that includes on-site inspection:

1.      Product certification: These certifications often entail “cradle to grave” standard elements for the item or service itself; for the facility where it was produced; and for the raw materials and energy use involved in its production, use and disposal.

2.      Facility certification: These certifications entail compliance with standards that typically include both management systems and performance elements for a facility.

If a facility or a product or service can demonstrate to a qualified impartial third party that it meets a standard, it will earn a certificate attesting to its compliant attributes, policies, management and/or operations. Generally, for facility certification, in contrast to product certification, the Mark or Seal signifying that it meets the standard can be displayed at facilities (a banner or framed certification or signs), on advertising, in general promotion, on packages and on hanging tags, but not on products themselves.

To qualify for facility certification, an applicant undergoes a three-step process:

1.      Office visit involving review of policies and procedures and documentation, inspection of the central office, and interviews with staff;

2.      Witness audits involving the observation by an accreditation audit team of the certification body conducting an audit; and

3.      Periodic re-evaluation in the form of surveillance audits at levels 1 and 2 above.

Three Types of Audits

An audit is a systematic, independent and documented process for obtaining audit evidence and evaluating it objectively to determine the extent to which audit criteria are fulfilled.[15] There are three types of assessments:

1.      First party, or internal, when a company audits itself;

2.      Second party, when a company contracts with a consultant to audit a supplier or when the company’s own staff conduct the audit of a supplier; and

3.      Third party, an open system, when an accredited certification body conducts an independent verification audit to a consensus-based standard, under procedures established and overseen or licensed by an accreditation body.

Since the interest of auditors is not identical to that of the management of the facility, sophisticated interview techniques are required.  This means interviewing management in ways that make it more difficult to avoid answering important questions relating to compliance with standards.  It means interviewing workers under conditions in which they are not afraid to speak and protecting them from any possible retribution. 

Preparation for an Audit

Each audit is a special challenge requiring an audit plan.  Auditors must organize their visit to each facility to make the best possible use of time, coordinate the inspection activities and findings of each member of the audit team, enable confirmation of allegations of non conformances that might be garnered in interviews, to make it likely that all necessary aspects of the audit can be completed in the pre-arranged time frame, and to open and close the audit with clear and productive communications with management.

Generally, before undergoing a full environmental and/or social accountability certification audit, an applicant will first take a course in the operation of the standard and its management system (if any), study the Guidance Document for the standard, perhaps hire a consultant to assist in its implementation, implement the standard, then arrange for a pre-assessment to determine if it is “certification ready”.  A Guidance Document is an updated interpretation of each element of a standard, with special attention to its application to particular locations and sectors.  For example, in a fair workplace standard: How does one determine if minimum wage requirements are met where workers are paid on a piece basis? How does one interpret freedom of association in China?  What is a living wage and how is it to be determined for a particular location? 

Complaints and Appeals

Should any interested party (e.g. a competitor, neighbor, worker, trade union or NGO) observe a non-compliance at a certified facility (that escaped the notice of the certification body), a complaint should be lodged with the certified facility itself. Failing satisfactory resolution of the complaint, another complaint or appeal of the certification can be lodged with the certification body that issues the certificate. Certification bodies are required to operate a complaints and appeals system that calls for timely, impartial investigation and resolution of all documented complaints and appeals. Should the allegations be substantiated, a Corrective Action process must be initiated and implementation of Corrective Actions confirmed for the certification to remain in effect. Failing satisfactory resolution, the complainant can further complain or appeal against the certification body to its Accreditation Agency.

An effective, open and transparent complaints and appeals system increases reliability and credibility or a certification program. Auditors are nor infallible. For facility certification, workers are in a facility every day, whereas auditors come in on a regular but far less frequent basis; for product certification, auditors check a sample, not every item. A facility might be incompliance one day but not thirty days later. 

Corrective Action

Non conformities identified in the process of an audit fall into three categories: Major (systemic violation), Minor (oversight or non-systemic problem), and Observation (non mandatory).

Majors and minors are written up and presented at the closing meeting with management in the form of Corrective Action Requests. These are designed to elicit plans for Corrective and Preventive Action. Ideally, at the closing meeting, the CSR manager and other key members of management are joined by the elected worker representative, and the team develops corrective and preventive actions together. Under no circumstances can a third party auditor design the Corrective Action, as this would pose a conflict of interest.

In the case of a major, the audit team does not recommend certification. Instead, if the Corrective Action plan is approved by the auditors, a date is set for a return audit visit to ascertain whether or not the Corrective Action is emplaced and effective. Once all majors have been cleared, the audit team will recommend certification.

In the case of minors, the audit team may decide to recommend certification. Management will be expected to notify the auditors when the Corrective Actions are in place.  If certification takes place, confirmation will occur at the next scheduled surveillance, in six months. The emphasis should be on continuous improvement, so Observations are also important, even though no action in response is required. Observations are among the value added contributions an audit team can provide without posing a conflict of interest.

Management Systems

Frequency of Audits

Certification audits are conducted at regular intervals, frequently on a three year schedule with surveillance audits annually or more often. At both levels, a Corrective Action process is utilized. To qualify for certification or accreditation, no major Corrective Actions can be outstanding. A system of checks and balances provides for approval at several levels, generally both a positive auditor recommendation accompanied by an audit report with no outstanding major non-conformities and review and approval by an Accreditation Review Panel.

A company operating a group of facilities that share a management system and operate in rigorously similar manner can apply for group certification. In such cases, the certification body utilizes a sampling process to select individual facilities for auditing.

Global Accreditation

Companies seeking certification or relying on certification in business-to-business relations, look to certification bodies for assurance. Business prefers to rely on certification bodies that are accredited. Two global associations of accreditation bodies seek to assure high quality and consistency in standard setting, the interpretation of standards, and accreditation. 

International Accreditation Forum (IAF)

The older and more dominant is the International Accreditation Forum (IAF), which brings together national conformity assessment accreditation bodies for mutual recognition, harmonization, and high professional quality. Accreditation bodies which are members of IAF agree to operate in compliance with ISO standards for accreditation agencies and to require the bodies they accredit to comply with appropriate international standards. IAF is designed to establish Mutual Recognition Arrangements (MLA) to move from their national systems to a single global one, thus removing the need for duplicative recognition in each country where certification bodies operate.  IAF seeks to accomplish this integrative goal through Mutual Recognition Arrangements attained via peer audits among its members. IAF also develops guidance for and seeks to harmonize accreditation procedures and contributes to the work of ISO. IAF members include virtually all national accreditation agencies, but it has been hostile to global accreditation agencies, which it seems to view as posing a competitive threat to the nationals.[16]

International Social and Environmental Alliance for Labeling (ISEAL)

In a global world, the national accreditation agency system has been viewed as obsolete for global trade and business, just as is the system of the separate development of standards for each nation that apply to business products, services and processes that operate and trade globally.  A number of multinationals are on record as preferring not only global standard setting processes, but also global accreditation and certification systems, to avoid the higher cost and complexity of complying with multiple standards and multiple systems for their verification.

Therefore, eight global accreditation agencies formed ISEAL[17] (the International Social and Environmental Alliance for Labeling), to provide a home for the new wave of global standard setting and accreditation bodies established to develop and oversee the standards designed to assure ecological sustainability and social justice and verification of compliance with them.  ISEAL seeks to raise professional standards among accreditation and certification agencies and to seek harmonization among the standards.  Today most of the voluntary international standards and accreditation programs focused on social and environmental issues belong to ISEAL. Its mission is to support its member programs to attain a high level of quality, public credibility, political recognition, and market success.

Regular Members of ISEAL are committed to operate in accordance with international normative documents for standard setting and accreditation and to meet the requirements for Peer Review (in effect within two years of  joining). ISEAL is establishing a Multilateral Recognition Agreement (MLA) based on this Peer Review system.

ISEAL also operates programs in monitoring and analysis of policy and seeks to build capacity and promote best practice. Its first collaborative project is SASA (Social Accountability in Sustainable Agriculture). SASA seeks to improve social auditing processes in agriculture and to foster closer cooperation and shared learning among initiatives trough a series of pilot exercises. Optimal outcomes include the identification and adoption of best practice, harmonization of standards, development of procedures for integrated audits, and perhaps even laying the groundwork for joint public education and promotion among the project partners.[18]

Discussion Questions 4: Assurance and Verification

As social and environmental reports have grown in number and in specificity, the need has also grown to reduce duplication of efforts and lack of consistency among reporting systems.  

One way of reducing the burden is through harmonization of standards, i.e., sharing definitions and operational concepts so that complying with one set of standards leads to compliance with another.  Another step toward reducing the burden of certification and compliance is through mutual recognition, i.e., acceptance by one standard-setting body of compliance with another set of standards as leading to partial or full compliance with another.   Finally, a third approach is that of integrated audits, i.e., sharing of the certification tasks by certification bodies for two or more different standards.  

The shared goal of these efforts is to increase the diffusion and reduce the cost of adhering to common standards of reporting to improve the accuracy and reliability of corporate reports to stakeholders and in the process ensure decent and sustainable workplaces. 

Examples: ISO/SA8000, ISEAL, SASA

Convergence is already occurring with the integration in many companies of their ISO9000 and ISO14000 management systems audits (for operations and the environment) with SA8000 audits.   Quite a few companies are certified against all three of these standards.  Several ISEAL certification programs are working in alliance toward these goals. 

The SASA project (Social Accountability in Sustainable Agriculture) is a prime example.  SASA’s objectives include harmonization, developing methods for integrated audits (for example, pesticide use is an issue for both occupational health and safety of workers and protection of the environment, so it is an auditable item for both fair workplace and environmental standards), and adoption of best practice.  It also seeks better mutual understanding and a practical common strategy to address the special needs of small enterprises in poor countries.  Lastly, it seeks to enable and encourage the four organizations to work together to inform and attract consumers.

Example: Multi-Stakeholder Labor Initiatives (MI6)

Discussion Questions 5: Convergence of Standards

1.      What are some of the factors that impeded this kind of cooperation from taking place earlier? What are the risks these organizations take? How might they be minimized?

2.      How do you see the different systems cooperating?

3.      How would you test audits for best practice? 

4.      If you were an executive of an apparel factory (in Turkey) or a brand/retailer asked to participate in MI6, would you agree to do so?

5.      If you were CEO of a major brand or retailer, would you be significantly influenced to join one of these systems (or a newly combined one) if the MI6 project succeeds?

6.      How would you measure success? How would you rate the chances of success for SASA? For MI6?

7.      Would your decision be different if you were VP, Supply Chain Management? VP Human Resources? General Counsel?

AccountAbility in collaboration with CSR Europe, “The Impacts of Reporting: the Role of Social and Sustainability Reporting in Organisational Transformation.”  Check www.csreurope.org.

Association of Chartered Certified Accountants, www.acca.org.uk

Citizen Works in March 2003 launched a new public interest accounting group, the Association for Integrity in Accounting (AIA), which provides a public interest voice for integrity and responsibility in the profession.  Visit http://www.citizenworks.org.

Global Reporting Initiative (GRI), www.globalreporting.org.

Grayson, David, and Adrian Hodges, Everybody’s Business (London and New York: DK Publishing, 2002).  “The Seven-Step Process,” pp. 210-211, 302-303.  “Making a Business Case,” pp. 218-228.  “Engaging Stakeholders,” pp. 260-286.

Marlin, Randal, Propaganda and the Ethics of Persuasion (Peterborough, Ont., Canada: Broadview Press, 2002).  Chapter 5, “Advertising and Public Relations Ethics.”

McIntosh, Leipziger, Jones and Coleman, Corporate Citizenship. “How to Make a Case to a Board or Management Committee,” “Protecting Reputation” and “Managing Risk,” “Business as if There’s a Future.”  “Social Audits,” “Global Reporting Initiative,” 227-246. 

SustainAbility, www.sustainability.com – read about its UK and European Reporting Awards

Websites

Association of Chartered Certified Accountants, www.acca.org.uk

Global Reporting Initiative (GRI), www.globalreporting.org.

SustainAbility, www.sustainability.com