Corporate Governance The Foundation for Corporate Citizenship and Sustainable Businesses Corporate Citizenship and Sustainable Businesses Corporate citizenship — a commitment The global financial crisis has heightened to ethical behavior in business strategy, the need for corporate boards of directors operations and culture — has been on the to provide well-informed strategic direction periphery of corporate governance and and engaged oversight that stretches board leadership, linked mainly to corporate beyond short-term financial performance. reputation. However, in today’s globalized and Doing so prepares companies to more interconnected world, investors, creditors and comprehensively address risks, by anticipating other stakeholders have come to recognize potentially adverse impacts on people and that environmental, social, and governance the environment and managing tangible responsibilities of a company are integral to its and reputational risks. It can also generate performance and long-term sustainability. wealth by creating shareholder value through an increase in business opportunities and Today, these concerns help determine profits. broader access to markets. For companies to operate successfully and sustain growth, boards must incorporate A new vision of business is emerging — one these new dimensions into their core decision- where a set of core values, encompassing making processes. human rights, environmental protection and anti-corruption measures, guide the board’s oversight, relationship with management, and accountability to shareowners. “Good corporate governance practices instill in companies the essential vision, processes, and structures to make decisions that ensure longer-term sustainability. More than ever, we need companies that can be profitable as well as achieving environmental, social, and economic value for society.” Rachel Kyte | Vice President, Business Advisory Services, IFC 1 Boards, collectively and directors individually, The figure below shows how responsible business are central in accomplishing these objectives, and sustainable profits are embedded into the function of the board: for, as Sir Adrian Cadbury said, “corporate governance is concerned with holding the shareoWners or balance between economic and social goals oTher sTaKeholders and between individual and communal reporting to goals.” The impetus for this new understanding board of board responsibilities can be found in a Integration of corporate citizenship growing number of global and industry- values, shareowner and other stakeholder interests in corporate strategy specific initiatives. Chief among these are the and risk management OECD Principles of Corporate Governance and the United Nations Global Compact. These benchmarks inform the work of the Global Corporate Governance Forum in its efforts to promote good corporate governance practices in emerging markets ManaGeMenT day-To-day Feedback from and low income countries. Mainstreaming corporate operaTions sTaKeholder citizenship targets within Implementation of new enGaGeMenT, company action plans policies in supply chain, including Ombudsman and reporting to board marketing, standard or Whistleblowers on progress operating procedures, and other business practices “a well-governed company takes a longer-term view that integrates environmental and social responsibilities in analyzing risks, discovering opportunities and allocating capital in the best interests of shareowners. There can be no better way to restore public confidence in both businesses and markets and build a prosperous future.” GeorG Kell | eXeCuTiVe direCTor, un Global CoMpaCT 2 “Good corporate governance is the glue that holds together responsible business practices, which ensures positive workplace management, marketplace responsibility, environmental stewardship, community engagement, and sustained financial performance. This is even more true now as we work worldwide to restore confidence and promote economic growth.” Thierry buChs head, priVaTe seCTor deVelopMenT diVision oF sWiTzerland’s sTaTe seCreTariaT For eConoMiC aFFairs (seCo) Board responsibilities Today’s corporate citizenship — defined by a clear call to environmental, social and governance responsibility — links directly to three fundamental functions of boards and their directors’ duties to the companies and shareowners they serve: > Protecting stakeholder rights and interests > Managing risk > Creating long-term business value The following sections explain how these aspects link through the OECD Principles and UN Global Compact. The examples of strategies illustrate the business benefits of proactive leadership. proTeCTinG sTaKeholder riGhTs and inTeresTs The OECD Principles call on businesses to recognize and safeguard stakeholders’ rights, including legitimate interests and information needs. These Principles call on boards to be truly accountable to shareowners and to take ultimate responsibility for their firm’s adherence to a high standard of corporate behavior and ethics. Effective corporate governance requires due diligence in rallying the support and commitment of the broad network of business stakeholders, including shareowners, employees, customers and communities. If stakeholders are adversely affected by a company’s actions, shareowner value will suffer. With the growth in pension and insurance funds and other institutional investors, shareowners are increasingly also company stakeholders, such as employees or customers. Therefore, these groups’ needs are increasingly interconnected. The UN Global Compact’s ten principles similarly call on boards to address critical dimensions of concern to stakeholders. Boards that recognize the value of a holistic approach to stakeholder engagement, particularly in the environmental, social and governance realms, find that shareowners are similarly committed to such issues. This includes ongoing communication with 3 stakeholders about material concerns, as well as regular disclosure Why is corporate about company performance, ideally linked to periodic financial governance important? reporting. responding to stakeholder concerns can have other direct Corporate governance refers business benefits: to the way that Boards oversee the running of a company by > Widespread consensus is that the long-term costs of corruption are its managers, and how Board high for both society and business. Anti-corruption measures can members are held accountable strengthen relationships with stakeholders by building a culture of to shareowners and the company. This has implications trust and collaboration. for company behavior not only to shareowners but also to > When companies enact anti-corruption initiatives that include employees, customers, those empowering employees, this in turn can cultivate good reflexes on financing the company, and the part of individuals to address workplace dilemmas. other stakeholders, including the communities in which the > Employees who work where their rights and needs are respected business operates. tend to be more productive, delivering higher quality work than Research shows that responsible those who are routinely mistreated. management of environmental, social and governance issues High standards of integrity, transparency and disclosure can be creates a business ethos and influential in restoring public and investor trust in the private sector. environment that builds both They are also a starting point for ongoing, constructive dialogue with a company’s integrity within stakeholders, such as communities, who are affected by and can, in society and the trust of its shareowners. turn, help determine a business’s performance. The OECD Principles of Corporate Governance First published in 1999, the OECD Principles assist governments in improving the legal, institutional and regulatory framework that underpins corporate governance and ultimately helps preserve financial and economic stability. The Principles provide practical guidance for corporate governance best practices, including protection of shareowner rights and board responsibilities, to stock exchanges, investors, corporations, and others. Updated in 2004, following a spate of corporate scandals, the Principles now contain even stronger recognition of the importance of stakeholders in corporate governance as well as emphasizing the need for timely, accurate, and transparent disclosure mechanisms and communication. Learn More www.oecd.org/corporate 4 Managing risk New understandings of business risk show that boards have a legal and fiduciary responsibility to manage environmental, social and governance risks. Directors need to be informed and prepared to manage these long- term concerns alongside typical corporate directives. By addressing and managing these risks effectively, boards can position their businesses to perform well financially and secure a long-term license to operate. By failing to do so, boards can undermine their company’s reputation. More and more companies are extending their internal controls to encompass a range of ethics and integrity issues. Many investment managers examine the rigor Voluntary Initiatives and quality of these controls as evidence that companies Voluntary initiatives such as the OECD are undertaking good business practices and are well Principles, the UN Global Compact, the managed: IFC-led Equator Principles (www.equator- principles.com), the International Corporate > Proactively identifying possible human rights concerns Governance Network (www.icgn.org) allows a business to more effectively address potential and numerous others seek to complement risks. regulatory frameworks while encouraging innovation and proactive management among > Initiatives such as the IFC-led Equator Principles — a companies who are ready to be leaders in good financial industry benchmark used by more than 60 practice. In cases of poor governance or weak financial institutions worldwide to determine, assess governments, voluntary initiatives can also help and manage social and environmental risk in project set an ethical bar that would otherwise be financing — and the Dow Jones and FTSE4Good absent. Sustainability Indexes have made it increasingly apparent that socially responsible practices can IFC, the private sector arm of the World Bank improve access to financial markets and reduce capital Group, is helping board directors and company costs. managers understand sustainability-related risks and opportunities alongside other aspects > The competitive advantage of risk management gained of core business decisions and processes. IFC through anti-corruption includes ensuring alignment also promotes this understanding through the with customer expectations, safeguarding reputation, international platforms of the Global Corporate and meeting demands of ethical investment funds, Governance Forum and the Equator Principles, pensions, and other investors. a finance industry benchmark for assessing sustainability in private sector investments. 5 Creating business value The Ten Principles of the Core to the role of any board is guiding corporate UN Global Compact strategy and creating wealth for shareholders. Many The UN Global Compact asks companies to new business opportunities are emerging to address embrace, support and enact, within their sphere corporate citizenship priorities. Forward-thinking of influence, a set of core values in the areas of businesses are best placed to benefit. Immediate benefits human rights, labor standards, the environment, cited by leading companies include improved reputation, and anti-corruption: higher employee retention rates, greater productivity, and cost benefits through operational improvements Human Rights and innovation in products and services. Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and The most effective corporate citizenship and sustainability strategies are led from the top, incorporate a wide range Principle 2: make sure that they are not complicit of stakeholder views and are aligned with the company’s in human rights abuses. business priorities. This ensures a more efficient and strategic allocation of resources to these initiatives, Labor Standards which may generate new business opportunities: Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; > Improved labor practices in supplier operations can translate into improved productivity and reduced Principle 4: the elimination of all forms of reputational risks. Better working conditions improve forced and compulsory labor; the efficiency of the supply chain. Principle 5: the effective abolition of child labor; and > Human rights strategies, such as preventing Principle 6: the elimination of discrimination in discrimination in the workplace and promoting gender respect of employment and occupation. and ethnic equality in business processes, have been shown to secure diversity and increase innovation in Environment products and services. A diverse workforce and wider Principle 7: Businesses should support a customer base guide development within new markets precautionary approach to environmental and previously untapped customer demographics. challenges; Principle 8: undertake initiatives to promote > Environmental programs can provide financial greater environmental responsibility; and benefits, such as reducing operating costs, leading to Principle 9: encourage the development new markets and technologies, improving employee and diffusion of environmentally friendly morale and increasing employee health. technologies. > Good management of environmental, social and Anti-Corruption governance performance has been shown to Principle 10: Businesses should work against strengthen reputation and brand value, important corruption in all its forms, including extortion business assets. and bribery. 6 The un Global CoMpaCT is the largest corporate citizenship and sustainability initiative in the world. More than 5,000 corporations and 1,500 civil society organizations from 130- plus countries are working together to help align business practices with ten universally accepted principles in the areas of human rights, labor, environment and anti-corruption. Local networks in more than 70 countries, and three working groups at the global level in the areas of human rights, labor, and anti-corruption — all formed by representatives from business, government, civil society, and labor — are deepening policy recommendations and collective action to advance the Global Compact and its 10 principles. Learn More www.unglobalcompact.org Established in 1999, the Global CorporaTe GoVernanCe ForuM is a multi-donor trust facility located within IFC, the private sector arm of the World Bank Group. Through its activities, the Forum aims to promote the private sector as an engine of growth, reduce the vulnerability of developing and transition economies to financial crises, and provide incentives to corporations to invest and perform efficiently in a socially responsible manner. The Forum sponsors regional and local initiatives that address the corporate governance weaknesses of middle- and low-income countries in the context of broader un Global Compact national or regional economic reform. United Nations 2 United Nations Plaza, DC2-621 Learn More www.gcgf.org New York, NY 10017, USA T +1.917.367.3421 F +1.212.963.1207 www.unglobalcompact.org Global Corporate Governance Forum 2121 Pennsylvania Avenue, NW Washington, DC 20433 U.S.A. T +1.202.458.1857 F +1.202.522.7588 www.gcgf.org © 2009 U.N. Global Compact and the International Finance Corporation. All rights reserved. Printed on recycled paper.