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November 1, 2005

Doing Good To Do Better

Thirty years ago, Milton Friedman wrote that the “business of business is business” and termed corporate social responsibility “socialism.” My, how times have changed.

Bill Jones sits in his office in Birmingham, Alabama, looking out at a parking lot filled with O’Neal Steel employees. They’re armed with sponges and hoses, washing down cars to raise money for juvenile diabetes. “It looks like they’re having fun,” says Jones, the company’s president and CEO.

To some corporate leaders, it might seem a frivolous way for workers to spend a weekday afternoon. But not to Jones. “We value what some might call ‘paying our civic dues.’ It’s part of our business. We don’t do it because we feel we have to.” The hours O’Neal employees devote to volunteerism “we get back in another way. Civic involvement helps train employees. It certainly helps round them out and it gives the company exposure in the community,” Jones says. At the family owned business, the O’Neals have always taken an active role in the community “and that permeates throughout the organization.”

When Economist Milton Friedman famously wrote in a 1970 New York Times Magazine article that corporate social responsibility was “pure and unadulterated socialism,” he could not have dreamed how much things would change over the next 30 years. The era of corporate social responsibility (CSR) has large companies placing as much emphasis on their annual CSR reports as on their annual reports. Al Golin, chairman of GolinHarris Public Relations, has seen the acceptance of his concept, the “trust bank” in which a corporation makes “deposits” in a community (of customers, of employees, vendors, investors and lenders) which, when needed later, can be drawn on. John Elkington, co-founder of SustainAbility, has gone from slightly out-there academic do-gooder to “father” of the CSR movement. (See sidebar below.)

In the years since Friedman’s commentary, a great deal of money has been spent on CSR initiatives, not all of it willingly or wisely. Too often, the efforts are defensive, reactive and intended to make a company look good than rather than to align with its strategic goals. As the concept matures, however, what companies do and how they do it is changing. Most importantly, they are measuring the results in terms of ROI and aligning CSR outcomes with strategic objectives.

The 2005 “State of Corporate Citizenship” report from Boston College’s eponymous Center says that, of the 1,189 companies surveyed, half of them in heavy industry, 98% believe that corporate citizenship needs to be a priority and 84% believe that it makes a tangible contribution to the bottom line. Some 64% say that CSR is part of their business strategy.

“We actually believe that doing the right thing for society and the environment indeed will help our shareholders as well as all stakeholders,” said DuPont Chairman and CEO Charles O. Holliday Jr. when announcing The Business Roundtable’s S.E.E. Change initiative in September. The Roundtable, an association of 160 member corporations with annual revenues of $4 trillion and more than 10 million employees, unveiled the program (for Society, Environment and Economy), to foster sustainable growth. Under the program, CEOs are urged to set goals publicly that combine higher profits and lower costs with efforts to protect the environment and improve society. They then are asked to measure progress on those goals and make the information public.

Holliday said that DuPont plans to reduce water consumption by 30%, while Steve Odland, the chairman and CEO of Office Depot, said his company plans to introduce a recycling program for computers and other electronics.

THE ENRON STAIN

“This is doing things that make good economic sense for your company. This is not philanthropy,” says Marian Hopkins, director of public policy for The Business Roundtable, based in Washington, D.C. “It’s about the long-term need to treat these things responsibly for future generations. It’s not about fending off regulatory concerns. It’s about recognizing that industry just needs to behave in a way that is smart and responsible.”

To Bill Hickey, president of Lapham-Hickey Steel in Chicago, “Having a moral compass in corporate America is something that is desperately needed. Enron stained everyone.”

He believes corporate social responsibility is about more than giving aid to victims of Hurricane Katrina, although the company is matching employee contributions dollar for dollar. Instead, Hickey says it encompasses issues such as treating stakeholders fairly and honestly, treating employees with dignity, providing acceptable benefits packages and understanding the environment and culture in which a company operates.

“If you don’t, society is going to come back and decide how you are going to be nurtured,” Hickey says, pointing to Sarbanes-Oxley as one example. “We’re all paying for it.”

Curtis Verschoor, research professor in the School of Accountancy and Management Information Systems at DePaul University in Chicago, has examined the bottom lines of corporations that engaged in socially responsible behavior since the early 1990s. He finds that:

  • They are able to minimize their reputational risk.
  • They draw customers who want to support responsible corporations.
  • They attract investors.

In addition, “college graduates at the top of their game want to work for companies they’re going to be proud of,” Verschoor says.

“There are so many logical advantages beyond that it’s just the right thing to do,” he says.

In his study published in Strategic Finance in 2003, Verschoor examined those companies that were designated Best Corporate Citizens by Business Ethics magazine, U.S. corporations in the FTSE4Good Index and U.S. corporations in the Dow Jones Sustainability Index. Using market value-added to measure financial performance, he found, “Responsible corporations generate significantly larger long-term wealth (two to four times more) statistically for their shareowners than the mean of each of the remaining corporations in the S&P 500.”

For companies like Alcoa, which have had sustainability and corporate responsibility integrated into their operations for decades, “Whatever a company does, it must be more than lip service,” says Kathleen W. Buechel, president and treasurer of the Alcoa Foundation in Pittsburgh. “You have to have substance. This is an age of increased scrutiny of what we do.” Some of Alcoa’s decisions regarding sustainability can be traced back to the 1950s.

“We seek to represent more than money in our communities,” Buechel says. “It’s integral that our future is the future of the communities.”

 ZERO EMISSIONS

Business Ethics magazine has published its list of 100 best corporate citizens for the last six years. Cummins Inc. has made the list every year, ranking first in 2005.

As one of the eight criteria upon which the ranking is based (community, governance, diversity, employees, environment, human rights and product), environmental responsibility is what pushed Cummins into the top spot from No. 2 last year. Cummins has reduced diesel engine emissions by 90% and, within the next 10 years, aims to be at zero or close to zero, says Tim Solso, chairman and CEO of the Columbus, Indiana, engine manufacturer. Over the last 10 years, the company has spent more than half of its R&D budget on emission-reduction technologies. And while one could argue that that was in response to the more stringent EPA-mandated emission standards coming in 2007, it illustrates that much of so-called corporate social responsibility is what companies already are doing. The difference at companies like Cummins is that CSR goes beyond the reactive to become part of how it does business, part of the culture.

Not to be ignored are the ROI results. The reduction of emissions also has contributed to the company’s 34% increase in sales in 2004, to $8.44 billion, and a tripling in earnings, to $545 million.

Cummins’ Sustainability Report, published every two years, last came out in 2004. A Shared Global Vision gives a snapshot into what the company was doing toward an array of “performance indicators” based on best practices advocated by the Global Reporting Initiative (GRI), the entity working to establish reporting guidelines for CSR that are similar to annual report standards. It also provides what Allen L. White, senior advisor at Business for Social Responsibility, calls “a penetrating look into the mind of the company.”

The report concludes where CSR begins: “A company is only as healthy as the environment and communities in which its employees work and live. It is in Cummins self-interest, not selfish interest, to create an environment in which people treat others as they want to be treated. This is consistent with the company’s core values.”

In addition to the impressive information on how the 96-year-old company reduced emissions, the environmental section details chapter and verse on everything from recycling to the conversion of pig manure into low-grade methane fuel. A company’s efforts to create a complete socially responsible supply chain, from raw material to beyond useful life, is an important CSR indicator.

Part of the ROI on Cummins’ environmental initiatives mesh with one of the company’s five core strategies: to “focus on businesses that complement its capital-intensive and cyclical core businesses.” In this regard, Cummins’ Filtration Business, the smallest of its four business lines (along with engines, power generation, international distributors), created Emission Solutions in 2002. The Fleetguard brand, a diesel oxidation catalyst, can reduce particulate matter 20% to 50% and carbon monoxide and hydrocarbons by more than 90%.

The Sustainability Report’s section on facilities performance indicators—energy and safety—goes into intense detail about quantities of fuel, solvents, acids, etc.—materials used and waste and emissions generated, how they were measured and how they’re being improved.

Cummins spends more than 90% of its utility dollar on electricity and natural gas and uses Six Sigma projects to help control consumption and costs.

In Seymour, Indiana, Cummins’ Industrial Center, for instance, implemented several ISO 14001 improvement initiatives in 2003. The installation of a thermostat-controlled air heater and high turn-down controls enabled CIC to shut off boilers in the summer months that had previously run year-round. Natural gas consumption was cut almost in half and $240,000 was saved annually.

Facility improvements allowed CIC to become self-sufficient in wastewater treatment and to re-route wastewater back into the process. This saved 4.6 million gallons of water a year. Improvements in CIC’s oil separation capabilities saved $45,000 annually. Onsite management of cooling tower process water yielded $96,000 in savings.

In 2004, Cummins’ Fleetguard facility in Cookeville, Tennessee, won the Commissioner’s Award of Excellence from the Tennessee Department of Labor and Workforce Development. The award goes to companies that have worked the required number of hours without losing a workday due to safety issues and have maintained total injury and illness incident rates at least 10% below the national average for three consecutive years.

In terms of pure social performance, Cummins has a department devoted to three primary areas: community involvement, corporate donations and the Cummins Foundation, which celebrated its 50th year in 2004. Employee-driven committees oversee each of the three.

In 2003, the company donated nearly $700,000 directly to charitable causes and $2 million from its Foundation.

After topping the Business Ethics list last spring, Cummins made the Dow Jones Sustainability Index (DJSI) in September, one of 44 industrial goods companies on the list. The DJSI, launched in 1999, tracks the financial performance of global companies with strong sustainability commitments. Asset managers in 14 countries use the data to make investment decisions for mutual funds, segregated accounts, structured products and a Euronext (encompassing five European exchanges) -listed exchange traded fund.

 

TRIPLE BOTTOM LINE

Accounting can be about more than just financial matters, says John Elkington, founder of London-based consultancy SustainAbility, author of The Chrysalis Economy: How Citizen CEOs and Corporations Can Fuse Values and Value Creation and coiner of the phrase “triple bottom line.” As companies try to engage with a broader range of stakeholders, address the additional responsibilities of globalization and meet the demands of various pressure groups, Elkington says, the issues boil down to three: the hard bottom line, environmental impact and human rights. The three, taken together, make up the triple bottom line.

Unless companies broaden their concerns beyond pure profitability, they won’t be profitable for long, says Elkington, eventually something trips them up. “In any industry,” he says, “you will have any number of ‘blind-side’ risks—asbestos, tobacco, fast food and obesity, climate change. These all represent a liability set of pressures and the set is mutating fast.”

Being proactive about corporate social responsibility lessens the chance of being blind-sided by something that will derail your bottom line. Asbestos liability being partially responsible for the fall of Lloyds Insurance is Elkington’s favorite example.

Commitment for this sort of activity must come from the top, he says. “You can have all sorts of grassroots activities going on in a company,” Elkington says, “but unless somebody at the top is prepared to sit down and say, ‘This is a significant set of risks—and a significant set of opportunities—and we as a company are going to invest in meeting this,’ then that grassroots stuff is simply going to dissipate. You need signals from the top.”