by Steve Priest, President of Ethical Leadership Group, a Global Compliance company

Imagine your firm is under fire. Lawsuits threaten your business and profitability. NGOs and other do-gooders criticize your business practices. The media is circling. Employees are confused: “We are a good company. We provide something important for society. Why are we being vilified?”

Our great American story of expansion ever westward tells us what to do when under attack. Circle the wagons. Bring everybody inside. And fire when the attackers get too close.

Smart companies now realize that this is a perilous strategy.

Last night I attended a dinner conversation hosted by the Center for Audit Quality, a nonprofit organization largely sponsored by leading audit firms. Audit firms have been besieged in recent years. But instead of withdrawing inward, they convened a series of off the record meetings with leaders from academia, the press, investor advocates, F500 audit committee members, heads of internal audit, generals counsel and me.

Last night’s topic was what external auditors can do to more effectively prevent fraud—or at least reduce it. Several representatives from leading audit firms were there to listen. They didn’t attempt to pontificate nor to deny responsibility. (Although one made a vigorous case for a legal reform that doesn’t have a chance of passing in this climate where only 12% of Americans in a recent Gallup Poll believe business leaders are honest and ethical.) They engaged.

Will this improve the perception of audit firms? Maybe. Will anything concrete happen as a result? Hard to say. But it might.

Look at Wal-Mart. For years Wal-Mart was under attack. For years they circled the wagons and vigorously defended with a one idea mantra “Lower prices help Americans.” And it didn’t work. So they engaged with their critics. Nothing happened at first. But the Wal-Mart of today is far different from the Wal-Mart of five years ago. They have made significant strides in environmental practices, supplier standards, and even in areas like health care for employees.

Engagement is a good public relations strategy. But more importantly, it is a good corporate responsibility strategy, and a good business strategy. The engagement benefits all sides. Firms can change. An ancient Bedouin saying says “Once the nose of the camel is under the tent, it is hard to keep the camel out.” And either Sun Tzu, Machiavelli or Michael Corleone said “Keep your friends close and your enemies closer.”

In this world when regulations and expectations are evolving at lightning speed, engaging with critics is better than circling the wagons.

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Great points, Steve! I’d like to add to what you wrote.

Corporate responsibility is also about making sure your company controls its own brand and narrative. In 2006, at the Conference Board’s Business Ethics and Compliance Conference, a speaker from a well-known public company remarked that, for most of their corporate history, they’d assumed if they did right by their customers, that would be enough. And while this attitude is certainly admirable, it didn’t prevent outside organizations from hijacking their reputation and causing them all sorts of reputational and even legal problems. They learned the hard way that actions are not enough.

You need to tell your story “early and often,” because chances are you may not like the way others tell it. In the post-Enron age of transparency, being open about all your practices (business, governance, ethical, compliance or corporate responsibility) is not a luxury but a necessity. The activist/NGO leaders have become masters at taking a brand identity and turning it against a company.

Click on the links below to see some examples:

Example 1

Example 2

The nightmare scenario is for a dedicated group of people to organize themselves exclusively around destroying your company. And such groups do exist. The best way to counter their actions is by (1) having responsible business practices; (2) being open and honest and (3) engaging with responsible NGOs in the field of interest. And no, “responsible NGOs” is not an oxymoron. They are out there, and they can help you understand emerging concerns.

Obviously, if your actions don’t match your values, then you have a problem no amount of words can solve.

In other words – take care of your actions and your words. You’ll need both.

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Staples has cancelled its contracts with Asia Pulp & Paper, according to today’s Wall Street Journal. Worries that Singapore based APP is destroying rain forests in Sumatra led Staples to this move.

We understand that sophisticated companies prefer supplier engagement rather than divorce. We do too. It is hard to have leverage when you no longer wield the power of the dollar (although that, of course, is less powerful than it used to be.) To its credit, Staples tried engagement. But it didn’t work. Mark Buckley, Staples VP of environment, “decided engagement was not possible anymore.”

So they cut the cord. This is a big deal—APP, one of the world’s largest paper companies, supplied Staples with 9% of its paper supply. Yet Buckley believed that being a customer of APP was “great peril to our brand.”

Environmental and human rights activists often echo Martin Luther King in his letter from the Birmingham Jail. “For years now I have heard the word ‘Wait!’ It rings in the ears of every Negro with a piercing familiarity. This ‘Wait’ has almost always meant ‘Never.’”

To send a credible message to those scrutinizing corporate actions for responsibility, sometimes engagement must end in divorce. Staples is to be applauded for taking this step. We also trust that they have held out hope for reconciliation, should Asia Pulp & Paper embrace its environmental responsibilities. Then the ‘Wait’ combined with action will have been well worth it.

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Lehman Brothers, the investment banking and financial services firm, released a report on the economic impact of climate change in September. Their analysis concludes that carbon emissions carry a social cost of about $50 per ton, and that companies should be planning for how they will deal with likely emerging regulatory requirements and opportunities presented by emissions trading and reduced energy usage.

While this is the first comprehensive report of its kind by an organization like Lehman Brothers, these conclusions are hardly new. In fact, if you open the annual report of any energy company, you’re likely to see at least a short discussion of the company’s approach to climate change. (Take a look at at Edison International’s 2006 corporate annual report for an excellent example of how to address this issue. In particular, check out pages 4 and 81.)

And don’t think the regulators aren’t busy. Two environmentally focused NGOs, Ceres and Environmental Defense, along with financial officers of 10 states and New York City have asked the Securities and Exchange Commission to require companies to disclose the risks that climate change may pose to their bottom lines (New York Times news article available here, free registration required).

In addition to Federal regulation, there has been additional movement at the State level. New York’s Attorney General Andrew Cuomo has started an investigation of five energy companies to determine if they have adequately disclosed financial risks associated with climate change.

In the near term, energy companies are going to be the most directly effected by climate change regulations, but they will hardly be alone. Any organization that is a major user of energy should consider what impact predicted climate change will have – in terms of higher energy costs, new potential regulatory challenges, impacts on facilities, and even disruptions to global supply chains.

The good news is that there are significant economic opportunities for organizations that successfully manage their climate change risks. Emissions trading is a tool for addressing air pollution problems and providing economic benefits to companies that are the cleanest. And of course any reductions in energy use are savings that go directly to the bottom line.

Even those who are global warming skeptics should consider that it doesn’t seem prudent to ignore it from a business perspective. Businesses are better off managing the risks associated with climate change themselves rather than having an antagonist’s solutions imposed on them.

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We hear it all the time in our focus groups. “If I were in charge . . .” or “If only management would . . .” Phrases that suggest that ordinary employees (or managers or even Vice Presidents) have little power to change things in a company.

Contrast that attitude with a story from the October 1, 2007 New York Times “The Everyman who Exposed Tainted Toothpaste.” Eduardo Arias really is an everyman. This 51 year old lives in Panama City, Panama. He is a mid level government employee. He lives alone and does not own a car, let alone have access to newspapers or the airwaves.

Eduardo read a label on a tube of toothpaste for sale—and saw that it contained diethylene glycol. Many Panamanians had died taking cough syrup with diethylene glycol—so the ingredient and its negative connotations were well known to Mr. Arias.

But this is what is—sadly—remarkable. He bought a tube, and took it to a government health office. Who told him to go to another office. And another. He persisted. And—equally remarkably—somebody in the government office paid attention. Three days later Panama’s top health official held a news conference alerting the country—and eventually the world—of this problem.

If a working class shopper in Panama can make a difference, what does this tell the rest of us?

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A recent Wall Street Journal front page headline (Monday, July 9) announced that the development of alternative energy in the U.S. was being impeded by a shortage of windmills. This reinforced my suspicions that the free market isn't going to wait for Congress to quit dithering over how -- in President Bush's own words -- to reverse this country's "addiction" to fossil fuels. Clearly demand for alternative energy sources was driving market activity, regardless of what Congressional nay-sayers and global warming skeptics who profess their unshakeable belief in the free market are saying on the topic.

I laid out some thoughts on this subject in an article that was just posted on Ethical Corporation On-Line. Here's the link. Take a look, and let me know what you think.

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One of the great challenges of any business function is overcoming functional silos and working in a more integrated way with the organization as a whole. This is particularly difficult for functions, like ethics and corporate responsibility, that in many companies were either created or have grown as a response to external stimuli or events (can anyone say "Federal Sentencing Guidelines" or "Enron"?) The newest print edition of Ethical Corporation magazine carries a piece I just wrote addressing this issue. It identifies the desire on the part of ethics and corporate responsibility professionals to become more fully integrated into the core business of their companies. But it also identifies some promising developments that suggest movement in that direction. Have a read and let me know what you think.

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The recently announced offer by Wall Street financiers and private equity firms to buy Texas electric utility TXU is not your typical leveraged buyout, by any definition. It is the largest LBO in history -- but that only makes it interesting as an answer to a Trivial Pursuit question a few years from now (until it is supplanted by a larger deal). What truly makes one sit up and take notice is the inclusion of prominent environmental groups in the deliberations that culminated in the TXU offer by Texas Pacific Group and Kohlberg Kravis Roberts & Company (KKR). I address the significance of these events, and the interesting juxtaposition of this green LBO with Al Gore's recent Oscar for "An Inconvenient Truth", in my most recent column for Ethical Corporation. You can read it by clicking here. Let me know what you think.

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Once upon a time, annual shareholder meetings were virtual rubber stamps for the status quo at companies. Sure, shareholders were always invited to stand up and offer some comments, often critical comments, about issues of interest or concern -- at least to those who chose to speak. But these carefully choreographed events generally ended the same way. Management proposals were approved by an overwhelming majority of voted shares, and "dissident" proposals typically were voted down by an equally overwhelming majority of votes.

Not so at Home Depot.

Indeed, an amazing thing happened at that company's recent annual meeting (actually, several amazing things happened, but I will focus on one). In the face of increasing scrutiny of ethics and governance challenges in corporate America, and in the wake of growing unhappiness over various issues, including claims that the relationship between Home Depot's Board and its CEO were too cozy, the company's shareholders rose up and spoke loudly and effectively. According to a June 2 New York Times story, thirty percent or more of shareholders who voted withheld approval from 10 of the 11 directors. Forty percent voted in favor of a proposal opposed by management that would give shareholders a voice in deciding executive compensation. Forty-one percent voted to split the role of chairman and chief executive. And fully forty-five percent voted in favor of a proposal that would give shareholders the right to approve extraordinary retirement benefits for executives (read the article here). Percentages like these cannot be dismissed as reflecting merely the views of the "activist fringe" of Home Depot shareholders. Rather, such totals can only occur if "mainstream" shareholders are similarly discontent.

Indeed, the extraordinary Home Depot numbers speak to the increasing impact and influence of mainstream shareholder groups, including pension funds and other large institutional investors, on ethics, governance and corporate responsibility issues in corporate America. Shareholder activism is on the rise and has proven to be increasingly effective in recent years. This trend will continue. A January 2006 survey by Mercer Investment Consulting reported that roughly a quarter of 183 institutional investor respondents plan to step up their proxy voting and shareholder engagement activity over the coming two years. And in April, the heads of leading institutional investment firms from 16 countries and representing over $2 trillion in assets officially signed onto the newly launched "Principles for Responsible Investment". These principles -- initiated by the UN Secretary General and developed in conjunction with the UN Environment Programme Finance Initiative and the UN Global Compact -- are designed to provide a framework for achieving enhanced long-term investment returns by better reflecting environmental, social, corporate governance and ethics considerations.

Home Depot presents just the most recent, and most dramatic, example of this evolving trend, but it is certainly not alone. ExxonMobil has been the repeated recipient of enhanced shareholder attention, and indeed its active shareholders have recognized strength in numbers by working together on proxy campaigns involving issues of common interest and concern. Put a few institutional investors together and you can produce a healthy block of votes for or against any of a full range of issues that shareholders care about. Alan Murray commented about this trend in his June 7 column in the Wall Street Journal.

All of which is to urge wise, thoughtful business leaders to pay heed to the shareholder groups that are knocking at your doors. Take them seriously, and develop true strategies for constructive engagement. Your owners are increasingly effective and increasingly mobilized. This trend is not likely to reverse itself. Most critics of the social responsibility movement argue that shareholders are the only relevant stakeholders that management should consider in running companies. Even accepting this as true (a topic for another blog, perhaps), your shareholders are speaking. Are you listening?

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A key focus of professionals both in the corporate responsibility and corporate ethics fields is reputational risk management. These words have become a fairly standard mantra lately. But as we all know, the challenge is in bringing them to life. I was reminded once again of the gossamer nature of reputation recently when I found myself reading yet another news story about the Duke University lacrosse team debacle. This story inspired me to write an article for Ethical Corporation on the fleeting and fragile nature of reputation, and on the expanding universe of people who can damage or destroy it.

I've attached a link to my new article, and hope you find it interesting. [http://www.ethicalcorp.com/content.asp?ContentID=4688] I'll note that the article wasn't on-line for more than a few minutes before I received an e-mail from a reader pointing out that the trigger for the damage to Duke's reputation wasn't so much the precipitating event itself (an alleged rape that may well have not happened at all) but the ham-handed way the matter has been handled by the University. This is a good point, though my article was making a slightly different point. Nevertheless, the reader's e-mail suggests the possibility of a follow-up piece that discusses how little issues can easily become major scandals simply because they were not addressed correctly when they were first identified. I suspect this has been done to death already. We'll see. Stay tuned.

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I've long believed that corporate ethics professionals in the United States have an important role to play in their companies' corporate responsibility activities. But my suspicion has been that, unlike their European counterparts, U.S. companies, for the most part, maintain a separation between their ethics and CR efforts.

A recent food industry benchmarking project completed by Ethical Leadership Group supports this conclusion. For the most part, the participating food companies that are based in the U.S. have devoted less attention to integrating these functions, though the ethics officers we spoke to for this study all indicated both an interest in, and a recognized need for greater integration.

Similar sentiments could be heard at the recent ECOA conference in Salt Lake City, where there appeared to be a growing recognition that protection of brand and goodwill -- the job of the ethics officer -- demands more than simply compliance with the Federal Sentencing Guidelines.

I recently wrote a piece that appears in the current (October 2006) issue of Ethical Corporation magazine in which I address this issue in somewhat greater length. Click here to download a PDF of this article. In this article, I make the case that convergence of ethics and CR in the United States is necessary for the creation within companies of true cultures of integrity. I think this convergence is occurring, slowly but surely.

Whether you agree or disagree that greater integration is inevitable and important, it can't hurt you to think about the degree to which your own company has addressed or is addressing this issue. And it can't hurt to ask yourself whether you want to be on the front edge of these developments, or chasing them.

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An article in the Wall Street Journal on September 6 reported on a study showing that an increasing number of large companies are “aligning disclosures related to their social-responsibility practices with a set of international guidelines” set by the Global Reporting Initiative, or GRI.

Frankly, what was newsworthy to me about the article wasn’t the convergence around GRI – guidelines designed to help companies report on their corporate responsibility activities pursuant to a consistent, comparable framework. Rather, what struck me was the fact that corporate responsibility reporting has become so commonplace that this study actually merited its own WSJ article. I’m not sure I would have expected to see a similar story reported in the Journal two years ago.

It is indeed the case that increasing numbers of public companies are producing corporate responsibility, or citizenship, reports in addition to the legally mandated financial disclosures that they must file each year. The growing prevalence of such voluntary reports – which are not particularly easy or cheap to generate or publish – speaks to the impact that corporate stakeholders – including but not limited to socially responsible investors and NGOs – are having in the executive suites here in the US and abroad. Stated simply, companies do not undertake such burdens lightly; clearly they are finding value in these non-financial disclosures.

But where is this value found? Maybe not where you’d expect. Some companies kid themselves into believing that their shareholders are clamoring for such reports. I think it’s true that some shareholders find these reports essential; it is nevertheless probably fair to say that the majority of shareholders are not reading these materials. But other key stakeholders are. These include regulators, community groups, the ever-growing world of socially responsible investors, and even employees.

It’s this latter group that I want to focus on for a moment. While businesses often think of CR reports as vital tools for communicating with external constituents (which they are), they tend to underplay or miss entirely the value of these reports to internal constituents. And the value is not limited to employees who may read the finished product. It importantly encompasses the teams of managers and employees who gather the data, evaluate the programs, and construct the narratives that make up the guts of these reports.

In a nutshell, CR reports, and the process of creating them, are key catalysts for important dialogue and strategy around corporate responsibility activities within companies. GRI has developed some tools for constructing reports that will help external stakeholders make apples-to-apples comparisons after the reports are published. But companies considering the publication of such reports will help themselves considerably by keeping in mind the tremendous internal benefits that the creation of such reports will also produce.

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The AFL-CIO filed a trade complaint on June 8 asking President Bush to penalize China for violating international trade laws through repressive labor practices and failure to enforce its own labor laws. In a nutshell, the complaint asserts that sweatshop conditions in China, and the low labor costs that result, undercut American companies and harm employment prospects for US workers. This is something of a political stunt, and I doubt the AFL-CIO expected the President to take up this challenge (he didn't). The AFL-CIO's goal, instead, appears to be to make a point and to mobilize its membership in advance of the November elections. A similar complaint was filed by the AFL-CIO two years ago, to no avail.

The issue of working conditions in developing countries, and their impact on the US economy, is famously complex and tricky. Simplistic suggestions that the US should stop "doing business" with, or penalize, countries whose labor standards do not equal our own are silly and could -- if embraced -- have disastrously negative consequences for our own economy, as well as the economies of many developing countries.

Apropos of this, Nicholas Kristof authored a very thought-provoking Op-Ed piece in the New York Times on June 6. In it he extolled the virtues of sweatshops, arguing that, as bad as they are, they offer better employment opportunities, better conditions, and better financial rewards than other alternatives available to a vast array of working age people in the developing world. I'm not willing to go quite as far as Kristof in singing the praises of sweatshops. Many countries -- including China -- have failed to enforce their existing labor laws, and conditions in their factories -- while improving -- still have a long way to go. But Kristof performed a huge service by reminding us of the need to put the issue of sweatshops into perspective. A knee-jerk inclination to shut them down, whether voiced by well-meaning campus activist, union organizations, or protectionist politicians, is neither responsible nor sustainable.

Remember -- 100 years ago this country was rife with sweatshops, and many of the rights we take for granted today were barely a dream for the factory workers of that era. We, too, still have a long way to go, but we have also traveled a great distance. We should always keep this in mind as we explore new and creative ways to enable and empower workers in the developing world to do the same.

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For years, ethics officers have occupied the front lines in the fight to protect and maintain the reputations of their companies. In the legal profession, lawyers play a similar role, protecting their clients from legal risks.

But the game is changing both for ethics professionals and for lawyers, and their role as defenders of their companies' reputations and integrity is becoming increasingly difficult. In a recent article in CNNMoney.com, senior Fortune Magazine writer Marc Gunther correctly observed that "moral liability" is a growing risk for businesses. Corporate America's Hidden Risks, CNNMoney.com (June 28, 2006)

As Gunther explains, moral liability emerges from the notion that companies can pay a dear price, both reputationally and financially, for failure to live up to evolving and ever-changing ethical norms that are defined by society at large but not necessarily codified into laws or regulations. To offer just a few examples, "moral liability" risks and issues have become serious problems for companies doing business with repressive political regimes, companies sourcing products through reliance on alleged "sweatshop" labor, and companies selling entirely lawful products that have nevertheless been deemed by one vocal constituency or another unsafe, unhealthy, or otherwise detrimental to the well-being of a segment of the population.

I won't say whether I believe these developments are good or bad. My own views are irrelevant. But as a great philosopher (I'm not sure who) once sagely noted, "it is what it is," and like it or not, the issue of moral liability decidedly "is." What this means is that for better or worse, the issue is alive, it is ripe, and it is not likely to go away. Indeed, because the internet creates the potential for global flash mobs at the click of a mouse, it is hard not to conclude that moral liability risks (and opportunities) will only grow over time. One can complain about it -- many do -- but you may as well howl at the moon for all the good it will do you.

As an alternative, you can acknowledge the reality of this evolving trend, and prepare yourself to be on the forefront of dealing with it. Ethics officers and lawyers know well where their companies' risks lie, and are equally well-equipped to manage those risks in ways that minimize direct or collateral negative consequences for their clients.

The growth of moral liability presents great risks for business. But it also presents tremendous opportunities for forward looking lawyers and ethics officers to expand their professional horizons and add value to your organizations in the process. Where do you see yourself in this picture?

For more information, see the Resources page at www.ethicalleadershipgroup.com. Another excellent resource, "The Changing Landscape of Liability: A Director's Guide to Trends in Corporate Environmental, Social and Economic Liability", was published by SustainAbility, and is available here

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Once upon a time, annual shareholder meetings were virtual rubber stamps for the status quo at companies. Sure, shareholders were always invited to stand up and offer some comments, often critical comments, about issues of interest or concern -- at least to those who chose to speak. But these carefully choreographed events generally ended the same way. Management proposals were approved by an overwhelming majority of voted shares, and "dissident" proposals typically were voted down by an equally overwhelming majority of votes.

Not so at Home Depot.

Continue reading "The Grass-Roots Democratization of Corporations" »

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I read the New York Times online. Usually I ignore the advertising--or try to. Whether or not I am successful is a matter debated by advertising specialists. At any rate, the other day I was not successful at ignoring the Starbucks banner ad telling viewers to go to their website to read their Corporate Social Responsibility Report.

A banner ad promoting a Corporate Social Responsibility Report! Granted, it is Starbucks, but this still seems to me to mark a new phase in publicly telling one's story of commitment to doing the right thing.

Continue reading "Starbucks advertises Corporate Social Responsibility" »

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