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The 4CR strategic approach to corporate responsibility

.
Comparison with the Aupperle, Hatfield & Carrolls (1985) findings also showed that in the intervening
ten years the gap in the relative importance between economic and legal responsibilities had decreased,
while the importance of ethical responsibilities appeared to be increasing and that of philanthropic
responsibilities to be decreasing (Pinkston & Carroll, 1996).

The societal dimension of strategic management


In 1979, around the time Carroll published his CSR model, the societal dimension of strategic
management was explored by Igor Ansoff in The Changing Shape of the Strategic Problem 1. He
proposed that an enterprise strategy, describing the interaction of a firm with its environment, should
be added to the corporate, business and functional levels of strategic management. According to Ansoff,
an enterprise strategy was needed in order to enhance a companys societal legitimacy and to address
new variables in strategic management such as new consumer attitudes, new dimensions of social
control and above all, a questioning of the firms role in society. These ideas are today at the heart of
stakeholder approaches to strategic management.
The stakeholder theory, emphasising a broad set of social responsibilities for business was established
by R Freeman in 1984 through the ground breaking work published in his book Strategic management:
A stakeholder approach2 which effectively established the field of Business & Society. Freeman defined
stakeholders as any group or individual who is affected by or can affect the achievement of an
organisations objectives.
According to Freeman, the use of the term stakeholder grew out of the pioneering ideas at Stanford
Research Institute (now SRI International) in the 1960s which were further developed through the work
of Igor Ansoff and others. The basic SRI concept was that managers needed to understand the
concerns of shareholders, employees, customers, suppliers, lenders and society, in order to develop
objectives that stakeholders would support. This support was deemed necessary for long term success
and therefore management should actively explore its relationships with all stakeholders in order to
develop business strategies.
Stakeholder approaches to strategic management provide the foundations for the 4CR methodology and
are described in some detail in section 7.3

Overview of theoretical perspectives


A summary of the theoretical streams described above is presented in the following diagram.

1
2

H. Igor Ansoff, 1979 "The Changing Shape of the Strategic Problem." in Schendel and Hofer, Strategic Management.
Freeman, E. R., 1984, Strategic management: A stakeholder approach, Pitman, Boston.

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The 4CR strategic approach to corporate responsibility

We can distinguish two main theoretical streams associated with corporate responsibility. The first
stream represents the CSR perspective emphasising ethical issues and social audit. The second stream
represents the social dimension of strategic management based on stakeholder approaches. It should be
noted that sustainability related responsibilities do not feature in the described theoretical framework.
However corporate sustainability issues are related to environmental economics established also in the
70s-80s to address environment as a scarce resource and to ensure that the costs and the benefits of
environmental measures are well balanced.

1.3 Corporate responsibility goals and principles


CR related initiatives
The influential initiatives that are shaping the goals and principles underpinning the field of corporate
responsibility are:

the Global Compact initiated by the UN Secretary -General in 1999 as a network involving
governments, who defined the principles on which the initiative is based; hundreds of companies
from all regions of the world, whose actions it seeks to influence; labour, in whose hands the
concrete process of global production takes place; civil society organisations representing the wider
community of stakeholders and the United Nations.

the Millennium Development Goals representing a road map for Millennium Declaration unanimously
adopted in September 2000 by the member states of the United Nations.

the 'United Nations Norms on the Responsibilities of Transnational Corporations and other business
enterprises with Regard to Human Rights' providing the baseline for human rights principles. The
Business Leaders Initiative on Human Rights (BLIHR) extends this baseline by mapping issues from
the UN Norms to essential, expected and desirable business actions;

the World Commission on the Social Dimension of Globalization was established by the International
Labour Organization (ILO) in February 2002 and provided a final report in February 2004
complementing the Millennium Development Goals and creating a major contribution "to
international dialogue towards a fully inclusive and equitable globalization".

A historic review of milestones associated with corporate social responsibility and sustainability is given
in Annex 2.

Corporate responsibility goals and principles summary


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The fundamental CSR, sustainability and governance goals and principles are summarised in the
following table based on the initiatives outlined above.
The areas addressed are:
a)

Human Rights

b)

Labour Standards

c)

Environment

d)

Health

e)

Anti-Corruption

f)

Economic responsibility

g)

Corporate Governance

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Corporate Responsibility and Sustainability Goals and Principles


Global Compact

Human
Rights

Labour
Standards

Environment

AntiCorruption

Principle 1: Businesses should


support and respect the protection of
internationally proclaimed human
rights;
Principle 2: Make sure that they are
not complicit in human rights
abuses.
Principle 3: Businesses should
uphold the freedom of association
and the effective recognition of the
right to collective bargaining;
Principle 4: The elimination of all
forms of forced and compulsory
labour;
Principle 5: The effective abolition of
child labour;
Principle 6: The elimination of
employment discrimination.
Principle 7: Businesses should
support a precautionary approach to
environmental challenges;
Principle 8: Undertake initiatives to
promote greater environmental
responsibility;
Principle 9: Encourage the
development and diffusion of
environmentally friendly
technologies.
Principle 10: Businesses should work
against all forms of corruption,
including extortion and bribery.

The Millennium development


Goals
Goal 1 Eradicate extreme
poverty and hunger;
Goal 2 Achieve universal
primary education;
Goal 3 Promote gender
equality and empower women.

The 'United Nations Norms on


Human Rights'
B. Right to equal opportunity
and non-discriminatory
treatment;
C. Right to security of persons;
E. Respect for national
sovereignty and human rights.
D. Rights of workers.

Goal 7: Ensure environmental


sustainability.

Health

Goal 4 Reduce child mortality;


Goal 5 Improve maternal
health;
Goal 6 Combat HIV/AIDS,
malaria, and other diseases.

Economic
responsibility

Goal 8 Develop a global


partnership for development.

G. Obligations with regard to


environmental protection.

F. Obligations with regard to


consumer protection.

OECD Principles of Corporate Governance - 2004


Ensuring the Basis for an Effective Corporate Governance Framework
The Rights of Shareholders and Key Ownership Functions
The Equitable Treatment of Shareholders
The Role of Stakeholders in Corporate Governance
Disclosure and Transparency
The Responsibilities of the Board

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2 Corporate Social Responsibility CSR


2.1 Background
In the 1990s, the Corporate Social Responsibility (CSR) movement gained prominence in the politicaleconomic debate and in the strategies of leading business organisations. CSR stressed corporate selfregulation associated with ethical issues, human rights, health and safety, environmental protection and
social and environmental reporting and voluntary initiatives involving support for community projects
and philanthropy.
The underlying principles of the CSR movement are represented by the Global Compact principles for
responsible corporate citizenship.
In march 2000, the European Council meeting in Lisbon placed Corporate Social Responsibility in the
European Social Program. The Commission published the Green Paper entitled 'Promoting a European
Framework for Corporate Social Responsibility' in July 2001. The aims of this document were to launch a
public debate in European, national and international level, about the concept of CSR and to identify
how to build a partnership for the development of a European framework for the promotion of CSR. It
was followed between 2002 and 205 by

the Communication 'Corporate the European Social

Responsibility: a business contribution to Sustainable Development' which set up a European


Multistakeholder Forum on CSR, to be used as a platform to promote transparency and convergence of
CSR practices and instruments. In its contribution to the March 2005 Spring Council, the Commission
recognised that CSR can play a key role in contributing to sustainable development while enhancing
Europes innovative potential and competitiveness 3. In the Social Agenda4, the Commission announced
that it would, in co-operation with Member States and stakeholders, present initiatives to further
enhance the development and transparency of CSR. In the revised Sustainable Development Strategy 5,
the Commission called on the business leaders and other key stakeholders of Europe to engage in
urgent reflection with political leaders on the medium- and long-term policies needed for sustainability
and propose ambitious business responses which go beyond existing minimum legal requirements.
In 2006 the Commission and business representatives have launched a European Alliance for CSR. To
inspire more European enterprises to go beyond their minimum legal obligations in favour of society and
sustainable development and to mobilise the capacities of European enterprises in order to make Europe
a pole of excellence on CSR (Corporate Social Responsibility).
A major force in the CSR movement is CSR Europe established in January 1996 by a group of 57
European companies with the mission to help companies integrate CSR into the way they do business.
CSR Europe reaches out to 1400 companies through 18 National Partner Organisations.

2.2 CSR definitions


3

COM(2005) 24.

COM(2005) 33.

COM(2005) 658.

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CSR is generally understood to be the way a company balances the economic, environmental and social
aspects of its operation, addressing the expectations of its stakeholders.
CSR definitions have proliferated in the literature particularly since the 1980s. Nevertheless, common
ground between CSR concepts and definitions is widely acknowledged and evident from the
representative definitions given below.
CSR is a companys positive impact on society and the environment through its operations, products or
services and through its interaction with key stakeholders such as employees, customers, investors,
communities and suppliers - Business in the Community.
CSR means open and transparent business practices that are based on ethical values and respect for
employees, communities and the environment - CSR Forum.
CSR is about how companies manage the business processes to produce an overall positive impact on
society- Mallen Baker.
Corporate Social Responsibility is the continuing commitment by business to behave ethically and
contribute to economic development while improving the quality of life of the workforce and their
families as well as of the local community and society at large - World Business Council for Sustainable
Development.
CSR is defined as a concept whereby companies integrate social and environmental concerns in their
business operations and in their interaction with their stakeholders on a voluntary basis as they are
increasingly aware that responsible behaviour leads to sustainable business success - EU Green paper
on CSR.
CSR is defined as operating a business in a manner that meets or exceeds the ethical, legal,
commercial and public expectations that society has of business. CSR is seen by leadership companies
as more than a collection of discrete practices or occasional gestures, or initiatives motivated by
marketing, public relations or other business benefits. Rather, it is viewed as a comprehensive set of
policies, practices and programs that are integrated throughout business operations, and decisionmaking processes and are supported and rewarded by top management - Business for Social
Responsibility..
Corporate Social Responsibility involves the conduct of a business so that it is economically profitable,
law abiding, ethical and socially supportive. To be socially responsible then means that profitability and
obedience to the law are foremost conditions when discussing the firms ethics and the extent to which
it supports the society in which it exists with contributions of money, time and talent- Carroll (1983)
To summarise, a CSR practising corporation should strive to obey the law, make a profit, be ethical and
provide societal value and accountability.

2.3 Views for and against CSR

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To complete the picture of what CSR s about representative views for and against CSR are given in the
following table.
Social
responsibility is
just a PR tool
for businesses,
says report

A report from Christian Aid warns that businesses are using corporate social
responsibility as a shield to hide behind to campaign against environmental
and human rights regulations, reports Terry Macalister. The report claims
CSR is in some cases counter-productive, worsening relations between
business and local communities. The report is called Behind the Mask: The
Real Face of Corporate Social Responsibility and calls for new international
guidelines to govern company behaviour.

T Macalister,
The Guardian
21st January
2004

Two-faced
capitalism

Corporate social responsibility is all the rage. Does it, and should it, make
any difference to the way firms behave?

The Economist
22nd January
2004

'A crisis of
legitimacy'

Business route
to make the
world better
The misguided
moral code of
corporate
responsibility
Why should
business engage
in social
responsibility?

Despite the rallying economy, despite management shake-ups, reforms and


diversity programmes, the idea persists that companies are inherently
selfish entities, intent only on maximising their profits. There is scepticism
about corporate responsibility, and in particular, the flood of selfpromotional material that companies around the world have begun to
produce - the glossy publications, the social and environmental reports, the
declarations of good intentions and best practice. Corporate leaders should
make sure that statements and reports produced are not just pretty words
and phrases but are backed up by real action.
CSR has to be part of the "DNA" of a company with everyone involved
because they wanted to be. Regulation is an imposition on the free spirit of
business. It is important to have rules, for example on health and safety,
but over-regulation, especially in areas like CSR is counter-productive.
The hypocritical behaviour of companies that undertake some high profile
social responsibility projects whilst major business activities have a
negative impact on society or the environment is exposed. The fact that
companies exist to make profit is highlighted.
The first thing people need to understand around corporate social
responsibility is that the business case is very strong. If you look at any
survey, all other things being equal (such as price and quality), the
consumer will buy from the company that has a responsible attitude
towards its community. In recruitment, people want to work for a company
with a responsible social attitude.

David Varney,
Chairman, mm02
and Business in
the Community
March 2004

Digby Jones,
Confederation of
British Industry
7th April 2004
J Guthrie,
Financial
Times20th April
2004
Michael Rake,
KPMG- DAVOS
World Economic
Forum interview
29th January 2005

Irrespective of positions for or against CSR there are a number of generally accepted positive impacts
that are attributed to the CSR movement. The main one is that CSR is credited with re-humanising a
business world that had become dangerously detached from the physical and cultural environment in
which it operates. Corporations have recognised the importance of CSR practices on ethics of resource
and people management even if the reasons are mainly linked to protecting reputations.

2.4 Business ethics


Business ethics represent the broad principles of integrity and fairness associated with governance,
human rights and ethical trading.
Most companies have well documented standards and ethical codes (90% of FTSE 100 43% of FTSE
250) proclaiming their commitment to conducting business responsibly thus avoiding corporate scandals
that have dominated the business news in recent years.
Quality varies widely BUT even having an excellent code is no guarantee that it will be followed. To be
effective, a code needs to be rigorously enforced by embedding its principles into the companys culture

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and managing properly its implementation. Research shows that there is a gap between the existence
of company codes of ethics and the embedding of its substance in the organisations blood stream 6.
The Sarbanes-Oxley Act in the USA and European Union directives continue to raise the bar for
corporate ethics and compliance programs. However, enforcement is also difficult at the level of
government agencies and is likely to remain so.
Possibly, real solutions can only be achieved by improved transparency systems at company level
coupled with stronger efforts by administrations.
Good business ethics practices include:

publishing a Code of Conduct/Ethics;

providing examples of business ethics dilemmas;

defining ethical tests that can be used by staff to facilitate decision-making;

making the companys conflict of interest guidelines publicly available to investors and other
stakeholders, as appropriate;

designating an Ethics/Compliance Officer easily accessible by relevant stakeholder groups;

communicating the codes and procedures to all employees, agents and other appropriate
stakeholders;

establishing systems for monitoring and overseeing the actions of the organisation, its employees,
agents and other critical stakeholders and detecting / preventing unethical and/or illegal activities;

gathering relevant data and reporting on a regular basis those charged with ethical oversight;

providing code enforcement mechanisms;

specifying appropriate offence responses;

providing an easy ethics complaint self-disclosing process.

2.5 Corporate citizenship


Corporate citizenship emphasises the contribution a company makes to society through its core business
activities, its social investment and engagement in good causes.
Good corporate citizens are companies behaving according to values that society expects them to hold
or more specifically according to what is expected from a good company from its stakeholders. The
emphasis is therefore on stakeholder engagement, accountability, trust and reputation management.
The Center for Corporate Citizenship at Boston College identifies four core principles that define the
essence of corporate citizenship:
Minimize harm: minimize the negative consequences of business activities and decisions on
stakeholders, including employees, customers, communities, ecosystems, shareholders, and suppliers;

More, E., & Webley, S. (2003). Does Business Ethics Pay?; London: Institute of Business Ethics

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Maximize benefit: contribute to societal and economic well-being by investing resources in activities that
benefit shareholders as well as broader stakeholders;
Be accountable and responsive to key stakeholders: build relationships of trust that involve becoming
more transparent and open about the progress and setbacks businesses experience in an effort to
operate ethically;
Support strong financial results: the responsibility of a company to return a profit to shareholders must
always be considered as part of its obligation to society.

2.6 Social accountability


Social accountability is primarily concerned with the management and reporting of quantitative and
qualitative aspects of social, ethical and environmental performance to both internal and external
stakeholders.
A number of initiatives/organisations are promoting social accountability including:
a) The Institute of Social and Ethical AccountAbility established in 1995 to promote accountability for
sustainable development by providing tools and standards (AA1000 Series);
b) The Social Accountability International (SAI) dedicated to promoting human rights for workers
around the world and best known for the SA8000 standards for managing ethical workplace
conditions throughout global supply chains;
c) The Business Social Compliance Initiative BSCI is the European approach to improve social
performance in supplier countries through a common monitoring system simplifying and
standardising the requirements and individual monitoring procedures.

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3 Corporate Sustainability
3.1 Background
Corporate Sustainability is related to the broader concept of sustainable development which originated
with the 1987 report Our Common Future by the World Commission on Environment and Development
(known as the Brundland Commission). Sustainable development refers to meeting the needs of the
present without compromising the ability of future generations to meet their own needs".
Sustainable

development emphasise

intergenerational

responsibilities

and the

need for multi-

stakeholder coalitions to create the conditions for better quality of life for everyone, now and for future
generations
The first conference on sustainable development was held in Stockholm in 1972 where 113 nations and
500 non governmental organisations attended. It was the first time that attention was drawn to the
need to preserve natural habitats to produce a sustained improvement in living conditions for all, and
the need for international cooperation to achieve this. The emphasis was on solving environmental
problems but without ignoring social, economic and development factors.
The World Conservation Strategy of 1980 clarified the ideas of sustainable development defined as
development improving the quality of human life while living within the carrying capacity of supporting
eco-systems "This is the kind of development that provides real improvements in the quality of human
life and at the same time conserves the vitality and diversity of the Earth. The goal is development that
will be sustainable. Today it may seem visionary but it is attainable. To more and more people it also
appears our only rational option". (The World Conservation Strategy, IUCN, UNEP, WWF 1980).
The Brundland Report in 1987 provided a detailed analysis of sustainable development and alerted the
world to the urgency of making progress toward economic development that could be sustained without
the destruction of natural resources or the harming of the environment. The report highlighted three
main components to sustainable development:

environmental protection;

economic growth;

social equity.

In 1992 The 'Earth Summit' (UN Conference on Environment and Development) in Rio de Janeiro agreed
the Rio Declaration setting out 27 principles supporting sustainable development, a plan of action
(Agenda 21) and a recommendation that all countries should produce national sustainable development
strategies .
Closely linked with the sustainability movement is the Millennium Development Goals promoting human
development as the key to sustaining social and economic progress in all countries and recognising the
importance of creating a global partnership for development.

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The Global Reporting Initiative (GRI) that grew out of the Coalition for Environmentally Responsible
Economies (CERES) and the United Nations Environment Programme (UNEP) produced, in June 2000,
the GRI Sustainability Reporting Guidelines with reporting principles and specific content indicators to
guide the preparation of organisation-level sustainability reports.

3.2 The need for sustainable development


The requirements for sustainable development come from the realisation that development, centred
only on economic growth paradigms is unsustainable and there is a need for a more pro-active role by
states, companies and communities in the development process. Creating a sustainable future,
economically, socially and environmentally requires governments, society, corporations and individuals
to rethink their expectations, their responsibilities and their interactions.
A central concept in corporate sustainability is participation in the establishment and expansion of
international institutions for co-operation to confront common concerns for sustainable development
such as climate change, energy and poverty issues.
By 2050, 85% of the worlds population of some nine billion people will be in developing countries. If
these people are not by then engaged in the market place, business cannot prosper and the benefits of
a global market will not exist. Clearly it is in our mutual interest to help societies shift to a more
sustainable path. WBCSDs -Sustainable Livelihoods Project
There is increasing recognition that we are all part of a complex dynamic system whose sustainable
development is dependant on establishing a responsible global partnership between people, companies
and governments. Such a global partnership should strive towards growth with equity whilst preserving
the integrity of the environment and natural resources for future generations. This mandates a
collaboration process in which the use of natural resources, the directing of investments at national and
corporate levels, the orientation of technological developments and international co-operation must
converge to create conditions for better satisfying human needs and aspirations now and in the future.
Sustainable development is possibly, in the first place, a priority for governments that need to set
policies and strategies to mobilise the required actions. However it is recognised that sustainable
development poses a challenge to the balance of responsibilities between companies, governments, non
government organisations and individuals. In the new order of global governance it is not unreasonable
to assume that companies will have to play a more proactive role to get things moving.

3.3 Corporate Sustainability definition


Corporate Sustainability can be regarded as the corporate response to sustainable development
represented by strategies and practices that address the key issues for the worlds sustainable
development. Sustainable development is about creating the conditions for better quality of life for
everyone, now and in the future, based on eco-efficiency and innovative solutions for engaging everyone
and particularly the developing countries in the global economy.

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Corporate sustainability means that your service or product does not compete in the marketplace only
in terms of its superior image, power, speed, packaging, etc. Additionally, your business must deliver
products or services to the customer in a way that reduces consumption, energy use, distribution costs,
economic concentration, soil erosion, atmospheric pollution, and other forms of environmental damage.
The Ecology of Commerce (1993)
PricewaterhouseCoopers now define corporate sustainability as aligning an organisation's products and
services with stakeholder expectations, thereby adding economic, environmental and social value.
According to Dow Jones Sustainability Index., Corporate Sustainability is a business approach that
creates long-term shareholder value by embracing opportunities and managing risks deriving from
economic, environmental and social developments.
The corporate sustainability movement is about companies contributing effectively to a global
partnership for sustainable development. It is about companies delivering wide societal value including
support for health and human rights improvements, regional development and fair globalisation and
respecting the environment by promoting technologies to reduce the emission of greenhouse gases and
by implementing effective environmental risk management systems. It is also about companies that
make long term performance stability a top priority in corporate strategy.

3.4 Corporate sustainability challenges


Sustainability is about living and working in ways that meet and integrate existing environmental,
economic and social needs without compromising the well-being of future generations. Related aspects
are the Environmental Justice and contemporary international law dealing with Intergenerational Equity
under environmental protection, human rights and economic development.
The World Economic Forum 7 has repeatedly emphasised that poverty, climate change, education,
equitable globalisation and good global governance is the responsibility of all society. In the 2005 closing
session, business, government, academic and civil society leaders urged adoption of technology to
reduce the emission of greenhouse gases, the creation of a fund to accelerate financial aid to the
poorest nations and the removal of trade barriers that deprive developing countries of the dividends of
global economic growth. In 1996 the call is very similar, even though disaster relief takes prominence,
and using the "creative imperative" is suggested as a way of making progress.
According to Hawken 19938, creating a restorative economy means rethinking the fundamental purpose
of business and creating a very different kind of economy, one that can restore ecosystems and protect
the environment while bringing forth innovation, prosperity, meaningful work and true security. For
this, companies must minimise harmful exploitation of natural resources, generation of excessive
amounts of toxins, pollutants and waste.

http://www.weforum.org/

Paul Hawken, 1993. The Ecology of Commerce a Declaration of Sustainability; HarperCollins

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We could summarise that the main corporate challenges in supporting sustainable development lie along
two interrelated dimensions:

accelerating the pace of improving corporate sustainability performance;

participating actively in partnerships and networks that can create the capacity for sustainable
development.

Companies need to accept a new proactive role in shaping the future of the world by supporting and
developing the social dimension of globalisation and taking when necessary a leading role in:

organising responsible supply chains;

investing in innovative health, energy and environmental products;

establishing business models that will work in poorer countries;

transferring knowledge and improving conditions and infrastructure in developing countries.

partnerships and dynamic coalitions to strengthen the worlds sustainability capacity.

Specific issues associated with health, environment and human rights are outlined in the following
subsections.

Health related challenges


Unprecedented economic change and increased global instabilities over the last decade have created
acute new challenges for health. Persistent poverty, accelerated by population growth and large scale
migration, has a large impact on health issues. Nearly half of the worlds population have inadequate
access to medicine and health care, diseases assumed to have been conquered are re-emerging and
obesity and stress related problems are becoming new health challenges. Additionally, the HIV/AIDS
problems are far from contained.
Recent statistics indicate that:

three million children die every year due to lack of clean water;

12 million children die every year due to disease;

18 million people worldwide have been infected with HIV and 2.5 million have died of AIDS. 90% of
new infections are in developing countries;

AIDS is now the leading cause of death for adults under the age of 45 in Europe and North America.

A crucial factor in successfully addressing the health challenges is the effective development of
partnerships between business organisations, the World Health Organisation (WHO) and health
authorities. Corporate participation in health promotion is important either through core business
activities, management expertise, training, health and safety policies or through social investments and
engagement in health promoting initiatives.

Environment related challenges

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Management of environmental issues has reached relative maturity compared to other corporate
responsibility and sustainability issues as many organisations have been reporting on environmental
performance for some 10 years and in some sectors compliance to environmental standards is
mandatory. This has been helped by the ISO 14000 environmental management standard.
Companies are nowadays expected to integrate environmental responsibility at all levels of their
operations; to find sustainable solutions for natural resources use in order to reduce companys impact
on the environment; to manage environmental risks ensuring reduction in waste, pollution and
emissions; to maximise the efficiency and productivity of all assets and resources including
improvements in the management of water, energy and materials.
Corporate environmental performance should be measured against evolving environmental priorities and
targets

formulated

collectively

by

stakeholders

including

governments,

environment

support

organisations, sector associations and businesses. Companies themselves should be aiming at improving
elements of their environmental programs including broader participation in combating critical
environmental

problems,

working

with

local authorities

to

build

capacity

and enhance

their

organisational ability to develop integrated approaches to environmental management.


Global efforts to reduce the greenhouse gas emissions from human activities that threaten the worlds
climate are beginning to make an impact. The Kyoto Protocol is now legally binding, and the European
Union has introduced its pioneering Emissions Trading Scheme. Discussions have started on the global
framework beyond Kyoto.
Despite the success in understanding the environmental issues and addressing environmental risks in
business processes there is certainly substantial room for improvement. The main challenge is to create
a global participative network that raises the standards and monitors and responds to environmental
challenges. The crucial goal is the development of responsiveness capabilities and adaptive capacity to
reduce vulnerability from climate change and other environmental risks particularly in the high risk
industrial sectors and vulnerable regions.
The Global Environment Outlook (GEO), published periodically by the United Nations Environment
Programme (UNEP)9, provides an assessment on the state and trends of environmental parameters
across the world. The assessment tries to answer the following questions:

What is happening to the world's environment?

Why is it happening?

What are we doing to address the problems?

How would alternative decisions affect the future?

Human rights related challenges

http://www.unep.org/geo/yearbook/yb2006/

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Amidst an increasing climate of mistrust around the world fuelled by terrorism threat and conflict,
balancing human rights issues and security concerns is a major Human Rights challenge.
The role of business organisations on human rights is complex. The United Nations Global Compact first
two principles are that: "Businesses should support and respect the protection of internationally
proclaimed human rights within their sphere of influence; and make sure that they are not complicit in
human rights abuses."
The basic corporate obligation of ensuring equal opportunities for all employees and taking adequate
measures to assure that suppliers also have proper policies and processes on human rights is a matter
reaching relative maturity. However, given the increasing influence of corporations in the global
economy a more proactive role in the guardianship of human rights is possibly the new challenge.
Former UN High Commissioner for Human Rights, Mary Robinson, has stressed the need to find common
ground about the role of the private sector in contributing to the realisation of human rights 10. This
means businesses avoiding policies and practices that lead to rights violations. But it also means
fulfilling appropriate responsibilities for positive actions which promote greater respect for fundamental
rights around the world

as extreme poverty is the single biggest human rights challenge facing the

world today. Quoting statistics such as the 6.3 million children that die each year of hunger and the
more than 30,000 children that die every day from preventable diseases, Mary Robinson argued that
poverty on this scale translates into a denial of fundamental rights to life, to adequate food, healthcare
and education on a massive scale.

A way forward
The outlined corporate sustainability challenge represents a tall order for the business world that is
accustomed to worry about the next contract and the annual financial performance rather than climate
change, ecosystem capacity and poverty issues. The emerging requirements for corporate support to
sustainable development probably represent a cultural shock that will take time to sink in the business
way of thinking and working. Practically and realistically only the very successful companies could take
up the challenge and hopefully will establish the required new sustainability bound business models that
can be followed more widely in the future.

10

The Human Rights and the Private Sector Symposium, Novartis; Basel, Switzerland, 27 November 2003

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3.5 An integrated perspective between global sustainable development and


corporate sustainability
Despite the obvious interrelationship between sustainability issues at global/national/sector level and
corporate level, as yet, there are no serious attempts to link the two together. This effectively
undermines both the national sustainability policies and strategies and reduces the potential impact of
the corporate sustainability movement.
An integrated perspective between sustainable development and corporate sustainability is shown in the
following diagram.

The approach highlights the following aspects:

harmonisation of corporate strategies with national sustainability strategies;

harmonisation of sustainability indicators measuring the impact of national and international policies
with corporate sustainability criteria;

establishing feedback loops from corporate sustainability performance and best practices to
corporate strategy and to the broader sustainable development goals and action plans at national
and international levels.

3.6 The role of Governments in Corporate Sustainability


Chapter 8 of the Agenda 21 (Rio declaration) calls on countries to adopt national strategies for
sustainable development that should build upon and harmonize the various sectoral economic, social
and environmental policies and plans that are operating in the country.
In 2002, the World Summit for Sustainable Development (WSSD) urged States not only to take
immediate steps to make progress in the formulation and elaboration of national strategies for
sustainable development but also to begin their implementation by 2005.

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In addition, integrating the principles of sustainable development into country policies and programmes
is one of the targets contained in the United Nations Millennium Declaration to reach the goal of
environmental sustainability.
Governments are expected to formulate fiscal, energy, transport, urban development and other policies
supporting sustainable development, to invest in infrastructure that stimulates sustainable growth and
to create awareness and transparency on sustainability issues, promoting knowledge sharing and
innovation.
Governmental commitment to sustainable development is reflected in the ratification of the Kyoto
Protocol and the European Environmental Liability Directive 2004/35/EC and Emissions Trading Scheme
(EU ETS). The Environmental Liability Directive 2004/35/EC 11 relating to EU policy on the environment is
"based on the precautionary principle and on the principles that preventive action should be taken, that
environmental damage should as a priority be rectified at source and that the polluter should pay".
Government sustainability strategies have been formulated in many countries to address sustainability
issues including climate change focusing on high impact sectors such as power generation and
transport.
The EU overall sustainable development strategy includes economic policy and production changes that
influence demand for transport, urban policies and energy policies.
Of particular interest are the transport policies that emphasise "Putting Users at the Heart of Transport
Policy by providing a system that meets their needs and expectations. Proposed actions include:

improve road safety;

reform legislation on charging for the use of transport infrastructure;

develop proposals on fuel taxation;

provide easier intermodal travel for people;

enhance cohesion.

An example of a governmental response to sustainable developments is the UK Governments strategy,


which is based on the following four objectives:
a)

social progress which recognises the needs of everyone;

b)

effective protection of the environment;

c)

prudent use of natural resources;

d)

maintaining high and stable levels of economic growth and employment.

Business should align their strategies with national strategies as outlined in the previous section and
activate sustainable solutions applying when necessary innovative business models in collaboration with
NGOs and other stakeholders.
11

Directive 2004/35/EC of the European Parliament on environmental liability with regard to the prevention and

remedying of environmental damage has been published in the Official Journal L 143 of 30 April 2004.

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3.7 Sustainable development milestones


Source: Sustainable Development the UK Approach, UN Commission for Sustainable Development

Since 1987 the progress achieved in "sustainable development" can be traced by the following
landmarks represented by policies and initiative by the UN and various governments
1987

The World Commission on Environment and Development chaired by the Prime Minister of Norway, Mrs Gro
Harlem Bruntland, publishes a report Our Common Future (The Bruntland Report) which brings the concept

1992

of sustainable development onto the international agenda.


Nearly 180 countries meet at the 'Earth Summit' (UN Conference on Environment and Development) in Rio
de Janeiro to discuss how to achieve sustainable development. The Summit agrees the Rio Declaration on
Environment and Development which sets out 27 principles supporting sustainable development. Also
agreed is a plan of action, Agenda 21, and a recommendation that all countries should produce national
sustainable development strategies.
The Earth Summit also establishes the UN Commission on Sustainable Development, which meets every
year, as well as important UN bodies - the Framework Convention on Climate Change and the Convention
on Biological Diversity.

1997

Towards Sustainability, the Fifth Environmental Action Programme of the European Union is adopted
A special UN conference is held to review the implementation of Agenda 21 (Rio+5). This repeats the call
for all countries to have sustainable development strategies in place - in particular by the time of the next
review of Agenda 21 in 2002 (Rio+10).
In Europe, changes to Articles 2 to 6 of the Treaty establishing the European Community are agreed in the

1999

Treaty of Amsterdam, give sustainable development a much greater prominence.


In May, the UK Government launches its new strategy, A better quality of life - A strategy for sustainable
development for the UK. In December, Quality of life counts - Indicators for a strategy for sustainable

2000

development for the United Kingdom: a baseline assessment is published.


The UK Government publishes its first review of progress towards sustainable development, Achieving a

2002

better quality of life, Government annual report 2000.


The World Summit on Sustainable Development Johannesburg 26 August - 4 September 2002, in the
face of growing poverty and increasing environmental degradation, succeeded in generating a sense of
urgency, commitments for action, and partnerships to achieve measurable results. More than 220
partnerships, representing $235 million in resources, were identified during the Summit process to

2003

complement the government commitments. Report of the World Summit on Sustainable Development.
The Commission on Sustainable Development, 11th Session, New York, 28 April - 9 May 2003, adopts
new work programme for the Commission on Sustainable Development (CSD), based on two-year cycles
with a clear set of thematic issues, provides the global community with a unique opportunity to focus indepth attention on specific issues. Building on the outcomes of the twelfth session of CSDs (CSD-12) focus
on water, sanitation and human settlements, the thirteenth session of CSD (CSD-13) will strive to be

2006

forward looking and action orient


CSD-14 begins the second cycle of the Commissions new work programme. Scheduled for 1 to 12 May
2006, the Commission will review progress in the following areas: Energy for Sustainable Development;
Industrial Development; Air pollution/Atmosphere; and Climate Change

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4 Corporate Governance
4.1 Background
Corporate governance denotes the entire range of mechanisms and arrangements that determine the
way key decisions are made in corporations including policies and practices that shareholders and
boards of directors use to manage themselves and to fulfil their responsibilities to investors and other
stakeholders.

As

corporations

are

chartered

institutions

regulated

by

state

corporation

law,

fundamentally corporate governance is about accountability of decision making and conformance with
applicable laws.
Following the financial accounting scandals and discontent over stock market losses in recent years,
improved corporate governance practices have become critical to worldwide efforts to protect investors
and to stabilise and strengthen global capital markets.
Corporate governance reforms are occurring in countries around the world and representative outputs
include:

the OECD Principles of Corporate Governance first issued in 1999 (outlined in section 1.4);

the Sarbanes-Oxley Act of 2002 in the USA;

the Action Plan "Modernising Company Law and Enhancing Corporate Governance in the European
Union A Plan to Move Forward", adopted by the European Commission on 21 May 2003.

In developing countries reforms are aimed at promoting development and economic globalisation. In
this context, corporate governance reforms in combination with liberalising reforms, in effect, represent
a new development strategy for third world countries. 12
There are many styles of corporate governance, including U.S., European, and Asian styles, or marketbased, stakeholder oriented and state oriented systems.
The market approach followed in the United States, UK, Canada and Australia stress the primacy of
ownership, property rights and maximising shareholder value.
The stakeholder oriented approach followed in Western Europe and specifically Germany, France, the
Netherlands and the Scandinavian countries, emphasise society's expectations of governance systems
and especially the interests of employees and other stakeholders.
Despite the differences between different national styles of corporate governance there is convergence
on the importance of:

transparency

integrity

accountability

12

Darryl Reed 2002, Corporate Governance Reforms in Developing Countries Journal of Business Ethics 37

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Corporate Governance looks at the institutional and policy framework for corporations including
governance structures, company law, privatisation and market exit. Good Corporate Governance enables
corporations to realise their corporate objectives, protect shareholder rights, meet legal requirements
and create transparency for all stakeholders and the public on how they are conducting their business.
Corporate Governance is a key instrument in the achievement of CSR and corporate sustainability
objectives both because it provides the means of enhanced transparency on CSR concerns and because
it highlights through guidelines what is expected from socially responsible businesses. A key question
however is whether there is room for convergence between the markets oriented governance system
and stakeholder-oriented corporate governance.
Will responsible corporate governance trigger an increased level of stakeholder orientation?

4.2 Corporate Governance definitions


Corporate governance refers to the way a corporation is directed under applicable laws and norms. It
includes the laws governing the formation of firms, the bylaws established by the firm itself and the
organisational structure of the firm. Issues of fiduciary duty and accountability are within the framework
of corporate governance.
The following definitions clarify the objectives and scope of Corporate Governance.
Corporate governance ensures that the board of directors is accountable for the pursuit of corporate
objectives and that the corporation itself conforms to the law and regulations. - The International
Chamber of Commerce.
The following definition highlights the importance of clear responsibilities and rules in making and
monitoring decisions.
"Corporate governance is the system by which business corporations are directed and controlled. The
corporate governance structure specifies the distribution of rights and responsibilities among different
participants in the corporation, such as, the board, managers, shareholders and other stakeholders and
spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also
provides the structure through which the company objectives are set and the means of attaining those
objectives and monitoring performance", OECD April 1999.
The crucial dimension of transparency is emphasised in the following definition.
"Corporate governance is about promoting corporate fairness, transparency and accountability" 13.

Corporate Governance systems should ensure that:

accountancy standards are beyond reproach;

audit quality is safeguarded;

the board of directors is effective and properly constituted;

governance structures are fostering efficiency and competitiveness of business;

13

J. Wolfensohn, Word bank, article in Financial Times, June 21, 1999

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disclosure and transparency is enhanced to satisfy all key stakeholders;

the interests of shareholders and other key stakeholders are protected;

corporate risks are properly managed.

4.3 Codes and standards on corporate governance


There are hundreds of codes and standards on corporate governance reflecting differing legal traditions
and national practices. Given the variety of ownership structures, cultural differences and the changing
nature of capital markets and legal environments, there is no best governance structure for all.
Information on the different corporate governance codes per country are provided by the International
Chamber of Commerce.
Failure to adhere to the standards of corporate governance can have severe consequences for the
individuals involved as well as for the companies they manage. Bad governance practices damage
investor confidence, whereas the adoption of good corporate governance practices can enhance a
companys share prices. This has given rise to corporate governance reforms outlined earlier and more
rigorous assessment of companies by market analysts.
Across the world, all codes of corporate governance recognise that the directors of a company must take
responsibility for

understanding and addressing the risks a company faces;

understand business opportunities and take measures to enhance performance;

providing accountability to both the company and the shareholders;

providing broad, timely and accurate disclosure of information about financial and operating
performance;

informing the outside world on matters that impact external stakeholders.

4.4 Corporate Governance Trends


Since the end of 2001 corporate governance reforms in many countries are aimed to improve auditor
independence, corporate responsibility, financial disclosure, and corporate accountability while guarding
against conflicts of interest.

Board related changes


The main changes associated with boards are:
more non-executives directors possibly having the majority to strengthen the independent voice in the
boardroom;
independent chairpersons separating the roles of chairpersons and CEO;
appointing a senior non-executive director to represent the interests of shareholders.

Board committees
A number of board committees are suggested to provide increased transparency on sensitive issues
such as the audit process, nominations and remuneration of directors.

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Audit Committee
The primary role is to ensure the integrity of financial reporting and the audit process. The purpose is
not to manage the preparation of financial statements or to conduct the financial audit but to oversee
the financial control system and the audit function. It is important to bear in mind that the directors are
responsible for producing correct financial statements and the auditors have a legal and professional
obligation to ensure the accounts comply with applicable standards prescribed by various governing
bodies. The role and responsibilities of the committee should be available on request and preferably
published on the companys web site.

Nominations Committee
The role of the Nominations Committee is to review the balance and the effectiveness of the Board and
help ensure that the company has the best possible Board. The Nominations Committee also provides a
formal function for recruitment of directors.

Remunerations Committee
The purpose is to ensure that remuneration of executive directors is properly monitored and is justified.
Companies produce a Directors Remuneration Report to ensure transparency.

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5 Corporate responsibility drivers


5.1 An overview of corporate responsibility drivers
The main driving forces for corporate responsibility are investor and consumer demands and
governmental and public pressures as shown in the following diagram.

Governments are tightening corporate governance and sectoral compulsory standards making selfregulation an appealing option for most businesses.
The loss of public confidence in the corporate word drives the markets down and therefore has a
significant impact on the value and growth potential for many companies. As a consequence, public
expectations on corporate integrity and ethical operations are particularly important drivers for
corporate responsibility.
Consumers are increasingly exercising their green buying power exerting pressure on companies to
address their environment impact and to invest in environmentally friendly products.
The Code of Practice for Transnational Corporations initiated by the UN

in the early 1970s, in

collaboration with many organisations including Consumer International, defined what consumers expect
from businesses in terms of ethics, product standards, competition, marketing and disclosure of
information.
Finally the growth of a strong Socially Responsible Investment movement gives distinct advantages to
companies performing well on sustainability criteria and therefore provides a key driving force for
improved corporate responsibility practices.
The increasing interest in social responsibilities can be associated with various factors from stabilising
markets to avoiding increased regulation, to taking advantage of green consumer preferences and to
doing the right thing to strengthen corporate reputation.

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However, potentially the strongest driving force is the recognition by an increasing number of people
that it is time for a fundamental change in the role of businesses in a world that has to develop in a
sustainable manner. This strengthens the motivation for companies to join the relatively few companies
that have adopted corporate responsibility and sustainability as a business philosophy.

5.2 The evolution of corporate regulation


Business organisations are established to pursue profit mainly by selling products/services that address
market demand in specific areas. This invariably involves the use of various types of resources in
business processes. In some cases, especially when the objective is short-run profit maximisation, there
are abuses of resources and disregard of the impact of business processes or products in social and
environmental factors. Further, the pursuit of profit maximisation often involves the use of
monopolisation and/or unfair practices at the expense of other firms and consumers.
To restrain business miss-conduct, legislation and regulation has been used by national governments
prescribing rules under which companies are obliged to operate. Governmental agencies have been set
up to manage corporate legislation including registration and reporting obligations and trading, health
and safety, human rights, consumer and environmental protection standards. Further, a number of
international organisations have been established to supervise the implementation of mandatory sector
standards. In this context the financial sector is a good example of the way regulatory standards have
been applied. First, rules and regulations were established to govern how shares and other financial
instruments are traded. Commercial banks then became heavily regulated to raise public confidence.
More recently the Basel global supervisory standards came in force regulating the capital adequacy of
internationally active banks. Another good example is shipping safety regulations supervised by IMO,
the International Maritime Organisation, which mandated since the 90s the ISM code for safety
management and environmental protection.
Socio-legal research in the late 1970s raised many questions regarding the effectiveness of strict
regulation and of the associated command-control approaches. This supported the neo-liberal discourse
of the 1980s, which emphasized deregulation and corporate rights. The corporate world responded
positively by voluntarily adopting management standards which, in the main were developed by the
International Organisation for Standardisation (ISO). ISO 9000 became an international reference for
quality management requirements in business-to-business dealings and ISO 14000 has been widely
used by organisations to meet their environmental challenges.
Since the 1990s, the Corporate Social Responsibility (CSR) is seen as a way for

corporate self-

regulation involving, codes of conduct, improvements in occupational health and safety, environmental
protection and social and environmental reporting, According to the UN Research Institute on Social
Development, the CSR approach to regulation is nowadays evolving to public-private partnerships and
multi-stakeholder initiatives for standard setting, reporting, monitoring, auditing and certification.

5.3 Green buying and environmentally friendly products


Public concern on environmental issues has been translated in consumer preferences for green products,
which are becoming an effective CSR driving force. Governments are further increasing the impact of

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this trend through green procurement policies. The net result is that many companies are committing to
green product policies and are using environmental performance indicators as critical success factors.
The development of environmentally friendly products is also supported by governmental policies
exemplified by the European Commissions Integrated Product Policy (IPP). IPP is aimed at creating
conditions in which environment-friendly products, or those with a reduced impact on the environment,
will gain widespread acceptance among the European Union's member states and consumers. The
development of IPP goes back to 1997, culminating in the February 2001 Green Paper on the rationale
for developing product-related environmental policies and its implementation in 200314.
Generally, environmentally friendly products will need to use fewer resources, have lower impacts and
risks in the environment and prevent waste generation. To support such products, IPP suggested the
following three strategies:

pricing;

promoting green consumer demand;

stimulating the supply of greener products through eco-design guidelines, standardisation,


regulation and problem solving product panels.

5.4 Socially Responsible Investment (SRI)


Socially responsible investing (SRI) is an investment process that considers the social and
environmental consequences of investments, both positive and negative, in addition to the normal
financial analysis. In other words, investment managers often overlay a qualitative analysis of
corporate policies, practices, and impacts onto the traditional quantitative analysis of profit potential.
This leads to the identification of companies that meet certain standards of corporate social
responsibility and sustainability for investment purposes.
SRI was originally promoted by church related and pension funds. The Christian church from 1970
adopted policies for financial investment promoting corporate responsibility: "Investors should seek the
best investment opportunities on financial grounds and then work from within to alter corporate
practices that are at variance with social concerns of the church.
SRI funds today have a significant position in the capital markets having grown during the last decade
to represent close to 10% of available resources. SRI has established a number of sustainability indexes
assessing and ranking companies according to sustainability criteria

which provides

valuable

benchmarking data and have created a driving force towards improved sustainability performance.
Socially responsible investment (SRI) assets grew faster than the entire universe of managed assets in
the United States during the last 10 years, according to the Social Investment Forums fifth biennial
report on SRI trends (Washington, D.C. 24th January, 2006).

14

http://cleantech.jrc.es

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According to Steven D. Lydenberg 15, chief investment officer of Domini Social Investments, European
institutional investors are leading the way with National pension funds in Sweden and Denmark using
social and environmental screens; two large pension funds in the Netherlands having pilot investment
programs with environmental screens, and France's state pension reserve fund incorporating social and
environmental issues in some investments.

SRI strategies
Three SRI strategies have evolved over the years: Screening, Shareholder Advocacy, and Community
Investing. These are defined as follows:

Screening: the practice of including or excluding publicly traded securities from investment
portfolios or mutual funds based on social and/or environmental criteria. Socially concerned
investors generally seek to invest in profitable companies with respectable employee relations, good
environmental performance, respect for human rights around the world, and safe and useful
products. A special category of screening strategy is the Social Venture Capital supporting
companies creating innovative solutions to social and environmental problems.

Shareholder Advocacy: describes the efforts of socially concerned investors to influence the
behaviour of a company. This strategy gained prominence during the boycotts of companies doing
business in South Africa during apartheid. There are different types of shareholder activism: voting
proxies on social and environmental issues at annual meetings, initiating dialogue with company
management, sponsoring shareowner resolutions and divestment.

Community Investing: represents the flow of capital from investors to communities that are
underserved by traditional financial services. It provides access to credit, equity, capital and basic
banking products. Assets held and invested locally by community development financial institutions
(CDFIs) based in the United States totalled $14 billion in 2003, up from $7.6 billion in 2001.

Comparative performance of SRI funds


The key question is do socially responsible investments deliver comparable returns to their investors as
non-binding ones?
It is clear that values and ethics have attained higher priority with some investors than getting best
possible returns. Despite this fact, the performance of SRI funds demonstrates that their investors can
achieve competitive returns.
A report from the Social Investment Forum noted that well over two-thirds (71 percent) of the largest
(over $100 million in assets) socially and environmentally responsible mutual funds in the US earned the
highest possible ratings through the end of 2003 from Morningstar and Lipper.
In general it is accepted that there are good securities to choose from in both socially responsible
companies and those that are not. However, by investing in socially responsible companies, individuals
obtain the added value that they are contributing to a better future for generations to come and are
becoming part of a growing force that wants to make a difference in the worlds sustainability
challenges.

SRI indexes
A number of SRI indexes have been established to support socially responsible investing. They include:
15

Steven D. Lydenberg, 2005, Corporations and the Public Interest: Guiding the Invisible Hand2, Berrett-Koehler
Publishers ISBN: 1576752917

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Dow Jones Sustainability Indexes (DJSI) established in 1999, including the global, European,
Eurozone, North American and US benchmarks. DJSI World consists of more than 200 companies
that represent the top 10% of the leading sustainability companies in 64 industry groups in the 33
countries covered by the DJGI. DJSI uses the SAM assessment methodology which will be explained
later.

FTSE4Good Index Series encompassing four tradable and four benchmark indices, representing
Global, European, US and UK markets. The Global index consists of over 600 companies.
Companies are assigned a high, medium or low impact weighting according to their industry sector.
The higher the environmental impact of the companys operations, the more stringent the inclusion
criteria.

Ethibel Sustainability Index (ESI) including four regional indexes: ESI Global, ESI Americas, ESI
Europe and ESI Asia Pacific. The ESI screening methodology uses a checklist of sustainability
criteria, divided into four areas: internal social policy, environmental policy, external social policy
and the ethical economic policy.

KLD Domini 400 Social Index (DSI) supporting investors who integrate environmental, social and
governance factors into their investment decisions. KLD Social Ratings consist of two categories:
Social Issues and Controversial Business Issues. Social Issue ratings measure corporate social
responsibility across a range of issues that affect the company's various stakeholders. Controversial
Business Issues reflect company involvement in lines of business of interest to social investors.

Innovest EcoValue Index supporting investors interested in companies associated with "ecoefficiency" or capabilities to maximize shareholder value while minimizing the financial and business
risks from any adverse impacts on the environment. Environmental data compiled for the EcoValue
'21 platform include emissions of harmful substances, hazardous waste disposal, and whether
products can be easily recycled.

The Calvert Social Index providing a broad-based benchmark for measuring the performance of
large, US-based socially responsible companies focusing on products, environment, workplace and
integrity.

5.5 Corporate responsibility and sustainability as business philosophy


A number of companies have adopted corporate responsibility and sustainability as a business
philosophy. In these cases, companies believe that integrating social and sustainability principles in their
operation provides the best possible strategic approach and strive to deliver long-term shareholder
value through practices that are increasingly satisfying to all its stakeholders. Corporate strategy is
developed taking into account, as part of business opportunities, environmental and social opportunities
and strategic capabilities are developed to exploit efficiently such opportunities.
The main principles of a responsibility driven business philosophy are:

serving all the companys stakeholders is accepted as the best way to produce long term success
and to create a growing, prosperous company;

the companys products and technologies are directed to contribute (as much as possible) to the
culture, benefits and welfare of people throughout the world;

the company creates long term win-win relationships with stakeholders;

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the company grows hand-in-hand with its employees supporting them to reach their full potential
and to improve their standard of living;

company success is directly linked to optimising stakeholder value.

A corporate responsibility driven business philosophy is often about how to resolve conflicting
stakeholder demands. It is therefore about leadership and how a company can shape the expectations
of its marketplace.

6 Corporate responsibility indicators and reporting standards


Sustainable

development

indicators

are

being

developed

by

the

UN and other

international

organisations. Corporate sustainability indicators have been mainly developed by SRI indexes to
evaluate corporate responsibility performance. A number of award schemes also provide useful
corporate responsibility criteria.
A number of reporting standards have been developed , notably GRI and AA1000 which should provide
in the future the definitive set of indicators for benchmarking purposes. Additional contributions are
made by common reporting adopted by membership organisations such the Corporate Impact Reporting
framework from BITC supporting their members with measuring and communicating their key impacts.

6.1 Sustainable development indicators at national and international levels


The United Nations Commission on Sustainable Development (CSD) has defined a working list of
sustainability indicators from which countries can choose indicators according to national priorities,
problems and targets.
The Environmental Sustainability Index (ESI)16 also provides a useful source of data. ESI is a measure of
overall progress towards environmental sustainability developed for 122 countries. A high ESI ranking
indicates that a country has achieved a higher level of environmental sustainability than most other
countries and a low ESI ranking signals that a country is facing problems in achieving environmental
sustainability along multiple dimensions. The ESI assessment is based on 22 core indicators (Annex 3).
Two popular methods for organizing sustainability indicators are:
a)

The goal-indicator matrix which is the most traditional approach used for measurement analysis
and allows multiple levels of decomposition from primary goals to quantifiable measurements;

b)

Driving force-state-response tables, which attempt to balance measures of causes, or driving


forces; measures of the results, or state; and measures of programs and other human activities
designed to alter driving forces to improve the state.

The Driving Force-State-Response framework shows the connections between human activities and
environmental states. It is mainly used by policy-makers or decision-makers and has been adopted by
the UN Commission on Sustainable Development.

16

established through collaboration among the World Economic Forum, the Yale Center for Environmental Law and
Policy (YCELP) and the Columbia University (CIESIN)

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The OECD and the European Environmental Agency (EEA) have also developed response indicators to
describe responses by groups in society and enterprises as well as governmental attempts to prevent,
compensate or adapt to changes. Impact level is then differentiated in the following categories:

Global

European

National

Regional

Local

Many organizations in the public and private sector generate information on sustainable development
including:
a) The World Resources Institute provides EarthTrends, an online database on environmental, social
and economic trends (statistical, graphic, and analytical data).
b) The Earth Policy Institute reports on twelve Eco-Economy Indicators including population and
economic growth and status on fish, forests, emissions, water and climate change.
c) The Worldwatch Institute produces fact sheets. The Worldwatch Institute provides a number of
publications including Vital Signs on the transition to an environmentally sustainable and socially
just societyand how to achieve it.
d) The European Environmental Agency reports progress in a number of policy areas including:
Agriculture, Air, Air Quality, Climate change, Coasts and seas, Energy, Nature, Transport, Waste,
Water.
The need for harmonisation of indicators and improved co-ordination of assessment methods is
recognised and a number of projects are addressing these issues.
Founded in 1990, the International Institute for Sustainable Development (IISD) is in the business of
promoting change towards sustainable development 17. IISD's strategic objective on Measurement and
Assessment is to facilitate the development of robust sets of indicators for public and private-sector
decision-makers wishing to measure progress toward sustainable development and to build an
international consensus to promote their systematic use in assessment, reporting and planning.

6.2 Company level SRI associated indicators


At the company level, corporate sustainability indicators have been produced by various SRI indexes to
assess sustainability performance in order to identify and select leading companies for investment
purposes. In this context corporate sustainability performance is regarded an investable concept which
creates motivation for investments in sustainability performance improvements.
According

to

the

Dow

Jones

Sustainability

Indexes,

leading

sustainability

companies

display

competencies in the following areas:


a) Strategy: integrating long-term economic, environmental and social aspects in their business
strategies to support global competitiveness and reputation.

17

http://www.iisd.org/measure/

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b) Financial: meeting shareholders' demands for sound financial returns, long-term economic growth,
open communication and transparent financial accounting.
c) Customer & Product: fostering loyalty by investing in customer relationships and product and
service innovation taking into account eco-efficiency requirements.
d) Governance and Stakeholder engagement: setting the highest standards of corporate governance
and stakeholder engagement, including corporate codes of conduct and public reporting.
e) Human: Managing human resources to maintain workforce capabilities and employee satisfaction
through

best-in-class

organisational

learning

and

knowledge

management

practices

and

remuneration and benefit programs.

The Dow Jones Sustainability Index assessment approach


The Dow Jones Sustainability Index approach, summarised in the following table, represents a practical
way to highlight key sustainability performance areas measured through questionnaire-based techniques
and weighted to provide overall sustainability ratings. The criteria reflect organisational design,
processes and outputs.

The FTSE4Good approach


For inclusion in the FTSE4Good Indexes, eligible companies must meet criteria requirements in three
areas:

working towards environmental sustainability;

developing positive relationships with stakeholders;

up-holding and supporting universal human rights.

Interesting features include:

evolving selection criteria to reflect changes in globally accepted corporate responsibility standards;

higher impact companies have to meet higher standards;

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criteria covering policies, management system and reporting.

The FTSE4Good Indexes Sector Classification is given in Annex 4.

KLD ratings
An interesting evaluation approach is the KLD rating method utilising strength and concern criteria for
each responsibility category. To illustrate the approach an example of product strength and concerns
criteria is given below.
Product strengths:
a) Quality: long-term, well-developed, company-wide quality program, or quality program recognised
as exceptional in U.S. industry.
b) R&D/Innovation: leadership for research and development (R&D), particularly by bringing notably
innovative products to market.
c) Benefits to Economically Disadvantaged: provision of products or services for the economically
disadvantaged.
d) Other Strength: products with notable social benefits that are highly unusual or unique for the
company's industry.
Concerns:
a) Product Safety based on fines or civil penalties, or involvement in major recent controversies or
regulatory actions, relating to the safety of products and services.
b) Marketing/Contracting Controversy reflecting major marketing or contracting controversies, fines or
civil penalties relating to advertising practices, consumer fraud, or government contracting.
c) Antitrust: reflecting fines or civil penalties for antitrust violations such as price fixing, collusion, or
predatory pricing, or involvement in recent major controversies or regulatory actions relating to
antitrust allegations.

6.3 Reporting standards and indicators


A number of reporting initiatives were established in the 1990s to develop standards for CSR and
sustainability related reporting. The main ones are GRI, AA1000 and ISO 2600.

The Global Reporting Initiative (GRI)


The Global Reporting Initiative (GRI) is independent institution (started in 1997 by the Coalition for
Environmentally Responsible Economies (CERES) and became independent in 2002) whose mission is to
develop and disseminate globally applicable Sustainability Reporting Guidelines. The GRI incorporates
the active participation of representatives from business, accountancy, investment, environmental,
human rights, research and labour organisations from around the world, and is an official collaborating
centre of the United Nations Environment Programme (UNEP)
The

GRI

performance

indicators

are

grouped

under

three

sections

covering

the

economic,

environmental, and social dimensions of sustainability and are intended to aid users of the Guidelines.
GRI highlights that advancing sustainable development requires coordinated movement across a set of
performance measurements, rather than random improvement within the full range of measurements
and has introduced a fourth dimension of information integrated performance to address this issue.

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It is worth noting that GRI economic indicators in the sustainability reporting context focus more on the
manner in which an organisation affects the stakeholders with whom it has direct and indirect economic
interactions. Therefore, the focus of economic performance measurement is on how the economic status
of the stakeholder changes as a consequence of the organisations activities, rather than on changes in
the financial condition of the organisation itself. Further economic indicators address direct impacts
designed to measure the monetary flows between the organisation and its key stakeholders and indirect
impacts stemming from externalities that create impacts on communities.
The environmental dimension of sustainability concerns an organisations impacts on living and nonliving natural systems, including ecosystems, land, air and water. With respect to the environmental
measures in the report, organisations are encouraged to relate their individual performance to the
broader ecological systems within which they operate. For example, organisations could seek to report
their pollution output in terms of the ability of the environment (local, regional, or global) to absorb the
pollutants.
The social dimension of sustainability concerns an organisations impacts on the social systems within
which it operates. GRI has selected indicators by identifying key performance aspects surrounding
labour practices, human rights, and broader issues affecting consumers, community, and other
stakeholders in society.
The new GRI draft G3 Guideline, to be published on 31st March 2006, has adopted a multi-stakeholder
approach to its development and it is expected that will enable reporting to be both rigorous and
flexible.
A linkage document was developed by GRI to help businesses assess and report how their activities are
contributing to the achievement of the Millennium Development Goals

The AA1000 Standards


The AA1000 Framework is designed to improve accountability and performance by learning through
stakeholder engagement. The building blocks of the process framework are planning, accounting,
auditing and reporting. It does not prescribe what should be reported on but rather 'how' and is
designed to complement the GRI Reporting Guidelines
AA1000 standards include the AA1000AS Assurance Standard and the AA1000SES Stakeholder
Engagement draft Standard
The AA1000 Assurance Standard was launched on March 25th 2003 by AccountAbility, following an
extensive international consultation process with the business, public and civil society sectors.
The Standard addresses the qualitative as well as quantitative data that makes up sustainability
performance plus the systems that underpin the data and performance. It is designed to complement
the GRI Reporting Guidelines and other standardised or company-specific approaches to disclosure.
The AA1000 Assurance Standard is based on assessment of responsibility related reports against three
Assurance Principles:
a)

Materiality: does the sustainability report provide an account covering all the areas of performance
that stakeholders need to judge the organisation's sustainability performance?

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b)

Completeness: is the information complete and accurate enough to assess and understand the
organisation's performance in all these areas?

c)

Responsiveness: has the organisation responded coherently and consistently to stakeholders'


concerns and interests?

The AA1000 Stakeholder Engagement draft Standard (AA1000SES) is a generally applicable to the
quality of the design, implementation, assessment, communication and assurance of stakeholder
engagements including:
a) functional engagements (e.g. customer care);
b) issue-based engagements (e.g. human rights);
c) organisation-wide engagements (e.g. reporting and assurance).
Engagements may range from micro-level (organisation-stakeholder specific issues) to macro-level
engagements on major societal concerns.
AccountAbility and csrnetwork have developed the first global index, the Accountability Rating, which
measures the state of corporate accountability by ranking individual companies against six key areas:
stakeholder engagement, strategy, governance, performance management, public disclosure and
assurance.

ISO 2600
The International Standards Organisation (ISO) is developing the ISO 2600, a "guidance document" on
social responsibility with a 2008 deadline. ISO 2600 is aimed to provide practical guidance to a wide
variety of organisations on a range of methods and options for implementing social responsibility.

Other standards
The accountancy profession has introduced a standard for assurance on non-financial information, the
International Standard for Assurance Engagements (ISAE) 3000.

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7. The 4CR multi-dimensional corporate responsibility perspective


7.1 The 4CR conceptual model
The 4CR multi-dimensional corporate responsibility perspective is aimed at establishing a coherent
approach to addressing the various strands of corporate responsibility and their integration with
strategic management. The approach is based on a revised Carroll model for corporate responsibility, as
shown in the following diagram.

The 4CR model retains four corporate responsibility layers but the discretionary responsibilities in the
Carroll model are replaced by the sustainability responsibilities
The main reason for the revision is that the sustainability aspects which were not included in the Carroll
model represent today a major corporate responsibility which is distinctly different from the other
responsibilities. On the other hand, the relative importance of philanthropy in the context of corporate
responsibility is diminishing as evident from the empirical studies on the Carroll model and the fact that
philanthropy does not feature in the goals and principles for corporate responsibilities as summarised in
section 1.3. Furthermore, philanthropy can be included either within the sustainability layer or the
ethical layer.
Arguably corporate sustainability could be merged with the ethical layer but the separation serves to
highlight two possibly equally important areas for corporate attention, namely ethics and sustainability.
In this context it is also useful to clarify the main differences between these two dimensions. Ethical
responsibilities are primarily inward looking, asking companies to put their house in order, particularly
with respect to labour standards, health and safety, environmental impact and anticorruption.
Sustainability responsibilities are distinctly different; outwards looking with a macro perspective
addressing intergenerational responsibilities and the need for multi-stakeholder coalitions to create
capacity for sustainable development.

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7.2 The 4CR stakeholder oriented corporate responsibility taxonomy


The 4CR taxonomy described in the following table highlights four corporate responsibility areas:
a) Corporate Competitiveness
b) Corporate Governance
c) CSR
d) Corporate Sustainability

The 4CR taxonomy summary


Responsibility
Areas

FocusApproach

Key Issues

Related concepts

Measurement

Corporate

Positioning

Responsiveness

Reputation risks

Economic

Competitiveness

Differentiation

National

Social innovation

performance

Corporate

Codes of

competitiveness
National models

and marketing
Competitive policy

Compliance

Governance

conduct

Sectoral

and regulation

CSR

Transparency
Voluntary

regulations
Mainstreaming

Business ethics

ethical

Social welfare

Corporate citizenship

Management

Stakeholder
management
Social capital

accountability
Ethical
performance

regulation

Social accountability

Social

Corporate

Social reporting
Support for
Climate change

Eco-efficiency

contribution
Sustainability

Sustainability

sustainable

Quality of life

Fair globalisation

performance

development

Intergenerational

Performance stability

responsibilities

The first area of responsibility in the 4CR taxonomy, representing economic performance, is Corporate
Competitiveness.
Next, Corporate Governance (CG) represents legal responsibilities providing accountability and
conformance with applicable laws. Good Corporate Governance promotes transparency to stakeholders
which creates a crucial link between Corporate Governance with CSR and Corporate Sustainability.
CSR and Corporate Sustainability share the same approach involving the assessment of the companys
economic, social and environmental impact, taking steps to improve it in line with stakeholder
requirements and reporting on relevant measurements.
CSR is specifically associated with ethical issues doing whats right and fair, and avoiding harm.
Related concepts are business ethics, corporate citizenship and social accountability. More specifically,
CSR represents commitments and activities that extend applicable laws and regulations on trading,
health and safety, human rights, consumer and environmental protection and reporting. This creates a
continuation from corporate governance responsibilities and facilitates harmonisation across these two
areas of responsibility.
Corporate Sustainability is specifically associated with support for sustainable development (ecoefficiency and fair globalisation) and the long term performance stability and survival of the corporation.

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The 4CR strategic approach to corporate responsibility

It addresses the needs of present stakeholders while seeking to protect, support and enhance the
human and natural resources that will be needed by stakeholders in the future.
There are a number of related concepts to each area of corporate responsibility with stakeholder
management and social capital being common to all of them. Stakeholder management relates to each
area of responsibility as follows:

stakeholder approaches to strategic management provide credible options for sustainable


competitiveness;

stakeholder oriented governance models are dominant in many countries;

both CSR and corporate sustainability approaches are aimed at dealing with stakeholder concerns
and requirements in a balanced way.

The concept of social capital described by OECD as networks, together with shared norms, values and
understandings which facilitate cooperation within or among groups is closely related to stakeholder
management. Stakeholder oriented governance, CSR and corporate sustainability, all generate social
capital which facilitates business networking, enhanced learning and organisational responsiveness all of
which are directly linked with corporate competitiveness.

Naming convention
Responsibility Areas
Corporate
competitiveness
Corporate governance
CSR
Corporate sustainability

Corporate Responsibility
CR

Corporate
Responsibility and
Sustainability
CRS

Total Corporate
Responsibility
TCR

7.3 Stakeholder management and social capital


The stakeholder perspective
In market economies, companies normally pursue maximisation of shareholder value (profit, share
price, etc). According to the agency theory of the firm, directors of an organisation are agents of the
owners and are duty bound to act to maximise the interests of those owners.
In contrast, the corporate responsibility and sustainability movement represents companies that
voluntarily recognise and address their responsibilities to all their stakeholders for mutual benefit or
even purely on ethical/moral grounds.
Stakeholder theory emphasising responsibility to stakeholders over profitability and shareholder
interests was established by R Freeman18 in 1984 as indicated earlier.
Stakeholders in the broader sense are everyone and everything affecting or being affected by the
company. Stakeholders normally include investors, customers, employees, business partners, local

18

Freeman, E. R., 1984, Strategic management: A stakeholder approach, Pitman, Boston.

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communities, the environment and society. However, it should be pointed out that there is an ongoing
debate about who are the key stakeholders and about criteria for shareholder classifications.

J Post et all in Redefining the Corporation

19

states: The legitimacy of the corporation as an institution,

its license to operate within society, depends not only on its success in wealth creation but also on its
ability to meet the expectations of diverse constituents who contribute to its existence and success.
These constituencies and interests are the corporations stakeholdersresource providers, customers,
suppliers, alliance partners and social and political actors. Consequently, the corporation must be seen
as an institution engaged in mobilizing resources to create wealth and benefits for all its stakeholders.
Jim Collins and Jerry Porras20, in their landmark book Built to Last, show how organisations with a
strong sense of identity and a clearly defined set of enduring values tend to prosper and evolve over
time. In Good to Great Collins again shows that greatness in an organisation, defined as sustained top
level performance, is directly related to a clear, compelling sense of purpose that enables an
organisation to gain a positive identity with customers, investors, employees and other stakeholders.

Based on extensive empirical research, Clarksons

21

view of corporations is a system of primary

stakeholder groups, a complex set of relationships between and among interest groups with different
rights, objectives, expectations and responsibilities. This undoubtedly pragmatic view of the corporation points
to the complexity of stakeholder management.

Ideally the stakeholder approach, as shown in the following diagram, could be interpreted as an
extension of the traditional agency approach as shareholders are also key stakeholders with ultimate
control on strategy and profitability remains a key performance indicator. However, addressing the
requirements of many stakeholders with conflicting objectives and expectations increases corporate
management complexity exponentially and therefore poses difficulties and risks.

19

James E. Post, Lee E. Preston, and Sybille Sachs, 2002, Redefining the Corporation - Stakeholder Management and
Organizational Wealth, Stanford University Press
20
J. Collins and J. Porras, Built to Last, New York: Harper Business, 1994; Good to Great, New York: Harper
Business, 2001.
21
Clarkson, M. B. E., 1995, A stakeholder framework for analyzing and evaluating corporate social performance,
Academy of Management Review, 20(1).

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Stakeholder management approaches can be very different in practice, spanning from instrumental
approaches which use stakeholder relationships strictly as an instrument to maximise profit to intrinsic
approaches where fundamental principles guide how a company does business particularly with respect
to how stakeholders are treated 22. National Corporate Governance approaches, being either market
oriented or stakeholder oriented, will also have a direct bearing on the way stakeholder approaches may
be practised by companies around the world.
Donaldson and Preston suggested that stakeholder theory encompasses descriptive, instrumental and
normative aspects which are in reality intertwined and mutually supportive. However, they argued that
the fundamental basis of stakeholder theory is normative on the basis that the justifications for
favouring stakeholder theory over other management theories ultimately rely upon normative
arguments. The instrumental and normative stakeholder concepts have received more attention possibly because
they have a value perspective which provides a basis for creating stakeholder specific management frameworks and
tools.

The descriptive aspect of stakeholder approaches is illustrated by the conclusion drawn by Clarkson from
fifty case studies that corporate social responsibilities, responsiveness and performance are best
understood by analysing and evaluating the way in which corporations actually manage their
relationships with employees, customers, shareholders, suppliers, governments, and the communities in
which they operate. The descriptive power of stakeholder approaches can therefore provide a means to
enhanced understanding of responsiveness and performance issues. As such it is argued here that the
descriptive dimension of stakeholder approaches provides an important tool for strategic management
not just in explaining why a company behaves in certain way but also in reasoning about performance
deviations and in the identification of corrective actions.

Instrumental stakeholder management

22

Donaldson, T., & Preston, L. E., 1995, The stakeholder theory of the corporation: Concepts, evidence, and
implication, Academy of Management Review, 20.

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Instrumental approaches are aimed at maximising shareholder value paying attention to stakeholder
relationships. The basic assumption in this model is that stakeholders control resources that can
facilitate or slow down the implementation of strategies and therefore must be managed to create
competitive advantage to maximise profits and ultimately returns to shareholders. Clearly, in all cases,
instrumental stakeholder management is a means to an end which may have nothing to do with the
welfare of stakeholders.
An instrumental approach is essentially hypothetical; it is based on causal rules such as to achieve
(avoid) X, Y, or Z, then adopt (dont adopt) practices A, B, or C. In a defensive situation, stakeholder
concerns could be managed to avoid stakeholder action that may undermine the companys objectives
[e.g. to avoid action X from stakeholder P adopt practice A].

In a proactive situation, stakeholder

concerns could be managed by building trust with stakeholders [e.g. to achieve customer retention build
trust on product dependability]. Such rules in different formats and complexity can be used to represent
organisational knowledge on how to manage stakeholder relations.
Instrumental approaches are often associated with stakeholder analysis used to improve strategic
decision making. Examples include the work by Mason and Mitroff on SAST (Strategic Assumption
Surfacing and Testing), which primarily aims at assisting decision makers in the problem formulation
stage of planning23

and the unbounded systems thinking approach of Mitroff and Linstone 24 that

recognizes and seeks to manage the complexity and interconnections of business problems, messes in
Ackoffs terms25 or system archetypes in Senges terms 26. The breadth of stakeholder theory (Phillips,
Freeman, & Wicks, 2003) and its complexity are a potential explanation for the lack of empirical support
to the instrumental power of stakeholders 27.

Instrumental stakeholder management is regarded part of corporate strategy but does not drive
strategy. Two variants of the strategic stakeholder management approach are the direct effects model
and the moderation model. In the direct effects model, managers attitudes and actions towards
stakeholders are perceived as having a direct effect on the companys financial performance
independent of the strategy. In the moderation model, managerial orientation towards stakeholders
does impact strategy by moderating the relationship between strategy and financial performance.

Intrinsic or normative stakeholder commitment


Intrinsic stakeholder approaches imply that stakeholder relationships are based on moral commitments
accepted as norms. The company adopts certain fundamental principles on how it treats its stakeholders
which affect strategy and decision making at all levels of the companys operation.
Stakeholder interests form the foundation of corporate strategy itself representing what the company
stands for. Stakeholders enter into decision making before business considerations and success is
measured by the satisfaction among all stakeholders.

23

Mason, R. O., & Mitroff, I. I. (1981). Challenging Strategic Planning Assumptions; New York: John Wiley & Sons

24

I. I Mitroff & H. Linstone, (1993), The unbounded mind: breaking the chains of traditional business thinking,
Oxford University Press.
25
R. L. Ackoff, (1974), Redesigning the future, New York: Wiley.
26

P. Senge, (1990). The Fifth Discipline: The Art and Practice of the Learning Organization. New York : Doubleday

27

R. Phillips, R. E. Freeman, A. Wicks, 2003, What stakeholder theory is not, Bus. Ethics Quart. 13(4)

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Social norms are not outcome-oriented and usually can be described by prescriptive rules: Do X, or:
Don't do X. Social norms represent informal, decentralized systems of consensus and cooperation and
influence long-term relational exchanges between firms and their stakeholders.
It has been argued that to reap the benefits of an instrumental approach a company must built trust
with its stakeholders which can only be done through commitment to ethical relations with stakeholders
regardless of expected benefits.

The counter argument is that the use of ethics for acquiring good

reputation is essentially part of an instrumental approach. Obviously there is a difference between


behaving well so that people like you and behaving well because thats how you are. In other words,
trustworthiness, honesty and integrity are difficult to fake.
The normative core of stakeholder theory has been criticised on the grounds of inconsistencies or
conflictive demands. Typical of criticism is represented by the stakeholder paradox 28 describing the
result of contradictory duties of the managers to various stakeholders that can result in business
without ethics if the shareholders interests are given priority and ethics without business if other
stakeholders interests are served at the expense of profits.
The second generation of normative theory emphasise the multilateral view of stakeholders relations 29
with increasing emphasis on co-operation and collaboration 30.

Classification of stakeholders
Review of stakeholder classifications
Stakeholder classification schemes are often based on the level and type of influence a stakeholder
group exerts on the company; what Freeman (1994) called the principle of who or what really counts.
Consequently, stakeholder classifications often reflect criteria representing stakeholders ability to
influence the companys direction, behaviour, process or outcome.
Freemans definition of stakeholderany group or individual who can affect or who is affected by the
achievement of the companys objectives provides the baseline position of who are stakeholders.
Clarkson (1995) defined stakeholders more narrowly as risk-bearers, arguing that a stakeholder must
have some form of capital at risk (either financial or human) and therefore has something to lose or
gain depending on a companys behaviour. However it should be pointed out that human capital risks
are more difficult to define and to compare with financial risk.
Mitchell et al. (1997)31 suggested that stakeholders can be classified according to whether they have, or
perceived to have one, two, or all three of the following attributes: power to influence, legitimacy of
their claim and urgency of their claim.
Stakeholder power exists where one stakeholder can get another to do something that would not have
otherwise done. Stakeholder legitimacy represents the belief that the actions of a stakeholder or
28

K. E. Goodpaster, (1993), Business Ethics and Stakeholder Analysis, In T. L. Beauchamp & N. E. Bowie (Eds.),
Ethical Theory and Business, N. J Englewood Cliffs, Prentice Hall.
29
E Freeman & J Liedtka, (1997), Stakeholder capitalism and the value chain, European Management Journal, 15 (3)
30

Jones, T. M. (1995). Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics. Academy of
Management Review, 20 (2)
31
R Mitchell, B Agle and D Wood, 1997, Towards a theory of stakeholder identification: defining the principle of who
and what really counts, Academy of Management Review, 22(4)

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stakeholder group are desirable or appropriate within the companys accepted norms and values.
Stakeholder urgency includes both criticality and time urgency, with a stakeholder claim considered to
be urgent both when it is critical and/or when a response delay is unacceptable.
According to this approach, stakeholders with power can influence or disrupt the companys core
business operations, so powerful stakeholders are important. However, some stakeholders are not
powerful but still influential because their claims are legitimate and therefore acted upon by the
company. Some powerful and legitimate stakeholders may not have influence when their claims are
recognised but are not actioned due to lack of urgency.

Stakeholder salience represents different combinations of the power, legitimacy and urgency attributes
and provides the basis for the typology of stakeholders described in the following table.

The Mitchell typology of stakeholders


Stakeholder category

Stakeholder

Attributes

Stakeholder subcategory

Legitimacy
Power

Discretionary stakeholders
Dormant stakeholders

Low

Urgency

Demanding stakeholders

moderate

power and legitimacy


legitimacy and urgency
power and urgency

Dominant stakeholders
Dependent stakeholders
Dangerous stakeholders

salience
Latent stakeholders
with

only one

of

the

three

attributes
Expectant stakeholders
with two of the three attributes
Definitive stakeholders
with all the three attributes

power, legitimacy and

High

urgency

Stakeholders salience could increase/decrease by changes in one or more of their attributes and as a
result stakeholders can shift from one category to another. Agle et al32 confirmed the above typology
empirically in 1999.
Kochan and Rubinstein (2000)33 suggested that all stakeholders should be categorized by the role they
play in the enterprise and list three criteria to identify the saliency of potential stakeholders:
a)

the extent to which they contribute valuable resources to the enterprise;

b)

the extent to which they put these resources at risk and would incur costs if the enterprise were to
fail or their relationship with the enterprise was terminated;

c)

the power they have over the enterprise.

Performance related criteria provide the basis for alternative stakeholder classification approaches,
obviously akin to instrumental approaches. An example of a performance oriented classification is
32

B. R. Agle, R. K. Mitchell and J. A. Sonnenfield, (1999), Who matters to CEOs? An investigation into stakeholder
attributes and salience, corporate performance and CEO values, Academy of Management Journal, 42(5)
33
T.A. Kochan and S.A. Rubinstein, 2000, Toward a Stakeholder Theory of the Firm: The Saturn Partnership,
Organization Science, 11:4 (July-Aug 2000).

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provided by Atkinson, Waterhouse and Wells (1997) 34.

Their approach is based on the premise that

companies exist to achieve their primary objectives, which are controlled by the organizations owners.
What the company expects from and gives to other stakeholder groups relates to their involvement in
achieving the secondary objectives representing the operational targets dictated by the primary
objectives. The contribution and performance of each stakeholder group is evaluated to guide rewards
and other measures to improve or maintain progress. The approach makes use of a classification of
stakeholders into two groups:
a) environmental (customers, owners and the community)
b) process (employees and suppliers).

Who are regarded business stakeholders in practice


There is no clear picture of who companies regard as their business stakeholders, although
shareholders, employees and customers seem almost undisputed.
The role of employees as stakeholders has been explored extensively (Blair, 1995, 1996; Blair and
Stout, 1999; Child and Rodriguez, 2004) as that of customers and suppliers (Freeman, 1984; Freeman
and Evan, 1990; Freeman and Liedtka, 1997).
Additional stakeholders highlighted in literature include options and debt holders (Parrino and Weisbach,
1999), local communities (e.g. regional agencies, charities) (Morris et all 1990), environment as latent
stakeholders (Driscoll and Starik, 2004; Phillips and Reichart, 2000) and the government (Brouthers and
Bamossy, 1997; Buchholz and Rosenthal, 2004), future generations (Wheeler and Sillanp, 1997).
A useful survey of stakeholders included in various academic/professional lists and company reports is
provided in reference35 (Annex 5).

Stakeholder management frameworks


Freemans analysis framework
Freeman proposed three levels of stakeholder analysis - rational, process and transactional.
At the rational level, an understanding of who are the stakeholders of the organisation and what are
their perceived stakes is necessary. Freeman uses a generic stakeholder map as a starting point which
can be also specified for each major strategic issue. The stakes of each specific stakeholder group are
identified and analysed and linked to their power characteristics.
At the process level, the organisation either implicitly or explicitly manages its relationships with its
stakeholders, and therefore processes should designed/refined to reflect the rational of the stakeholder
map of the organisation. According to Freeman, existing strategic processes that work reasonably well
could be enriched with requirements for multiple stakeholders. For this purpose, he uses a revised
version of Loranges schema for strategic management processes.

34

Anthony A. Atkinson, John H. Waterhouse and Robert B. Wells, 1997, A Stakeholder Approach to Strategic
Performance Measurement; MIT/Sloan, Management Review Vol. 38, No. 3
35
R Maessen, P van Seters & E van Rijckevorsel, Globus Circles of Stakeholders, Institute for Globalization and
Sustainable Development, Tilburg University, the Netherlands

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At the transactional level the organisation manages stakeholder negotiations in line with the stakeholder
map and the organisational processes. According to Freeman successful transactions with stakeholders
require an understanding of the legitimacy of the various stakeholders and processes enabling
stakeholders to routinely surface their concerns.

Freeman has also established a set of fundamental principles/characteristics for stakeholder firms
including:

a stakeholder approach emphasizes active management of the business environment, relationships


and the promotion of shared interests to ensure the long-term success of the firm;

the interests of key stakeholders must be integrated into the very purpose of the firm, and
stakeholder relationships must be managed in a coherent and strategic fashion. Good stakeholder
management develops strategies that are viable for stakeholders over the long run so that while
individual stakeholders may lose out on some individual decisions, all stakeholders remain
supporters of the firm;

a stakeholder approach is intended to provide a single strategic framework, flexible enough to deal
with environmental shifts without requiring managers to regularly adopt new strategic paradigms;

a stakeholder approach is a strategic management process actively plotting a new direction for the
firm by considering how the firm can affect the environment as well as how the environment may
affect the firm. Therefore understanding stakeholder relationships is, at least, a matter of achieving
the organizations objectives which is in turn a matter of survival;

The stakeholder framework does not rely on a single over-riding management objective for all
decisions. As such it provides no rival to the traditional aim of maximizing shareholder wealth.
Stakeholder management is a never-ending task of balancing and integrating multiple relationships
and multiple objectives;

Diverse collections of stakeholders can only cooperate over the long run if, despite their differences,
they share a set of core values. For a stakeholder approach to be successful it must incorporate
values as a key element of the strategic management process.

Quality of stakeholder relationships


At the Centre for Innovation in Management (CIM), Ann Svendsen and her co-workers have developed a
stakeholder oriented management framework based on the quality of stakeholder relationships 36 which
are seen to underpin the emerging dominance of network organisations 37. The basic premise is that the

36

A. C., Svendsen, R.G. Boutilier, R.M. Abbott & D. Wheeler (2002), Measuring the Business Value of Stakeholder
Relationships: Part One, Vancouver: Centre for Innovation in Management
37
Manuel Castells, (2000), The Rise of the Network Society, Malden: Blackwell Publishers.

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The 4CR strategic approach to corporate responsibility

network economy is founded on technology, but it can only be built on relationships. It starts with chips
and ends with trust.

38

Relationship quality is measured using Nahapiet and Ghoshals three dimensions of social capital:
a) The structural quality of a relationship referring to the structure of the social network in which the
relationship is embedded;
b) The relational quality of the relationship associated with the levels of mutual trust and reciprocity;
c) The cognitive quality of the relationship reflecting the levels of shared understanding and goals.

The CIM approach, based on a multilevel model shown in the following diagram, reflects collected
evidence that links the quality of stakeholder relationships to competitive advantage.

The main goals at each level are described below:

Level 1 Compliant: avoiding harm in the three dimensions of sustainability, for example ensuring
safety of products and workers, avoiding economic losses, corruption and (illegal) environmental
damage.

Level 2 Responsive: meeting reasonable individual stakeholder expectations in the three dimensions
of sustainability, for example, achieving good levels of customer satisfaction, employee morale,
returns to investors and reducing environmental impacts of operations, products and services.

Level 3 Engaged: maximizing economic, social and environmental value, for example, achieving
simultaneous sales and stock value growth, customer and employment growth and eliminating or
offsetting environmental impacts.

38

Kevin Kelly, (1999), New Rules for the New Economy Penguin, USA.

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We can associate structural quality of social capital with information dissemination/ acquisition
efficiency; relational quality with transactional efficiency and cognitive quality with enhanced learning.
The relational dimension of social capital is based on three interlinked concepts: trust, norms, and
reciprocity. If a member of the network ceases to follow established norms or if trust and reciprocity are
withdrawn, social capital may be depleted or cease to exist.
The cognitive dimension of social capital deals with shared codes, language, and narratives. Tsai and
Ghoshal (1998) extended the cognitive dimension to include shared goals, values, and vision. In a case
study, Boutilier and Svendsen (2001) found the cognitive aspects of a companys stakeholder
relationship to be more important to the emergence of inter-organizational trust.

Stakeholder value
Freeman (1994)39 advocates that stakeholder theory is based on the assumption that values are a
necessarily part of doing business and management should articulate the shared sense of the value they
create and what brings core stakeholders together. He argues that the firm is in relationship with its
stakeholders supports the human process of value creation. In a recent article answering critics of
stakeholder theory Freeman states that many firms have developed and run their businesses highly
consistent with stakeholder theory including the companies featured in Built to Last and Good to Great
(Collins 2001, Collins and Porras 1994).

It is argued that whereas all these firms value their

shareholders and profitability, none of them make profitability the fundamental driver of what they do.
These firms also see the importance of values and relationships with stakeholders as a critical part of
their ongoing success.
Donaldson and Preston argue that the interests of all stakeholders are of intrinsic value. That is, each
group of stakeholders merits consideration for its own sake and not merely because of its ability to
further the interests of some other group, such as the shareowners.
Kochan and Rubinstein [42] highlight the concept of value exchange between the company and their
stakeholders.

They suggest that shareholder firms should balance value distribution to their

stakeholders according to their value contributions; in other words they should ensure a fair corporate
value distribution addressing the value needs of stakeholders.
In general, stakeholder approaches should be aimed at increasing in the long-run shareholder value
beyond the levels normally achievable with the agency approach by optimising profitability and
intangible assets such as reputation and intellectual capital. This requires the development of strategic
capabilities possibly centred on efficient stakeholder engagement processes and optimised development
of social capital.
It is clear that the concept of stakeholder value is not as yet clearly defined. We can assume that
stakeholder value can be regarded as the sum of value distributions to the companys stakeholders and
that this may contain instrumental and intrinsic elements. However the difficulty comes in defining value

39

R. E. Freeman, 1994, The politics of stakeholder theory, Bus. Ethics Quart. 4 (4).

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measurements for each stakeholder group, ranking their value contributions and quantifying the effect
of various elements of stakeholder value on economic performance indicators.

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Social capital
Social capital can be broadly defined as the current and potential advantages a person or organisation
or community has from social relations and networking.
According to James Coleman 40 social capital represents:
a)

Features of social organisations, such as trust, norms, and networks that can improve the efficiency
of society by facilitating coordinated actions;

b)

An attribute of an individual in a social context determined by:

the individuals connections (i.e. whom he/she knows and group memberships);
the strength of the connections ties;
the resources available in connection groups.
Social capital can be acquired partly through purposeful actions and can be transformed into
conventional economic gains.

Gabbay & Leenders (1999)

41

describe social capital as the productive set of resources, tangible or

virtual, that accrues to an actor through the actors social relationships and facilitate the attainment of
goals. Such definition views social capital in terms of the competitive or value generating outcomes of
social networks, rather than as the structural appearance of the network itself.
According to Don Cohen and Laurence Prusak 42

Social capital consists of the stock of active

connections among people: the trust, mutual understanding, and shared values and behaviours that
bind the members of human networks and communities and make cooperative action possible. This
definition which reflects the knowledge management background of the authors can be extended to
clarify the interrelationship between social capital and intellectual capital.
Intellectual capital is knowledge that can be exploited by organisations in pursuit of their objectives.
Intellectual capital include organisational or structural capital (the knowledge that is embedded in its
organisational design, processes and IT applications), human capital (the human resources within the
organisation and its suppliers) and customer capital (company's ongoing relationships with the people or
organisations to which it sells). The later can be extended to social capital representing the company's
knowledge and relationships with its stakeholders.

Nahapiet and Ghoshal (1998)43 identified the following three dimensions of social capital:
40

J. S Coleman, (1990), Foundations of Social Theory. Cambridge/London: Bellknap Press of Harvard University
Press.
41
S M Gabbay and R Th A J Leenders, (1999) CSC: The structure of advantage and disadvantage in R Th A.J.
Leenders and S M Gabbay (eds), Corporate Social Capital and Liability. Boston/ Dordrecht /London: Kluwer
Academic.
42
Don Cohen and Laurence Prusak (2000), In Good Company: How Social Capital Makes Organizations Work Harvard
Business School Press, Boston, MA
43
J Nahapiet & Ghoshal, (1998), Social capital, intellectual capital and the organizational advantage, Academy of
Management Review, 23(2),

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a) structural
b) relational
c) cognitive
The structural dimension of social capital facilitates information dissemination and acquisition and
relates to an individual's or organisational ability to make connections to others within a community.
Features include network ties, density, configuration and appropriateness.
The relational dimension of social capital is associated with trust, norms and obligations and the extent
to which such qualities are shared among the parties. It supports efficient transactions between people
and organisations from improved customers and supplier relations to enhanced transfer of best practices
within organizations.
The cognitive dimension of social capital has attracted significant interest as it is linked with the learning
capabilities of organisations specifically organisational knowledge absorptive capacity denoting the
ability of the firm to identify, value, assimilate and exploit information.
Narayan and Pritchett44 suggested that communities with high social capital have frequent interaction,
which in turn cultivates norms of reciprocity through which learners become more willing to help one
another thus facilitating coordination and dissemination of information and knowledge sharing. Features
include shared meanings, language, symbols, etc. across the members of a network.
Finally in the context of corporate sustainability environmental capital is another concept used. Natural
capital represents natural resources and ecological systems which form the basis of life, on which all
organisations (and wider society) depend. However the concept is not as yet well defined and associated
measures such as air, water and soil quality are need further development to be practically useful in
corporate sustainability or stakeholder management.

44

Narayan, D. and Pritchett , L. (1997). Cents and sociability: Household income and social capital in rural Tanzania.
Washington, DC: World Bank

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7.4 4CR related concepts


Related concepts in the 4CR taxonomy include:
1.

reputation risks

2.

social innovation and marketing

3.

regulation and competitive policy

4.

eco-efficiency

5.

fair globalisation

6.

performance stability

Reputation risks
Boards responsible for risk management under Sarbanes-Oxley and similar legislation face a challenging
time ahead, both in establishing a good understanding of the risks affecting their companies and in
setting policies and controls for their management.
Part of the challenge is dealing with reputation risks that are becoming a critical threat to the
performance and even survival of many companies. As can be seen from the following Reputation Risk
Matrix the sources of reputation risk are all associated with corporate responsibility and sustainability
issues which makes reputation risk management an integral part of corporate responsibility and
sustainability management.

Reputation Risk Matrix


Risk source area
Products/
services and
supply chain

Governance and
legal compliance

Environment

Risk type

Specific consequences

Common Consequence

Customer dissatisfaction

Loss of client trust

with product value and/or

Damage to brand value

quality

Cancellation delays of major

Human rights abuses


Financial, security,

contracts
Critical shareholder

regulatory, compliance and

resolutions / actions

governance areas which

Loss of high calibre personnel

result in stakeholder views

Cost of capital

of integrity
Environmental operational

Security cost
Loss of major asset(s)

impact

Disruption of essential

review groups

Industrial accidents

programs/services

Underachievement of

Increased insurance

business objectives

Loss of market confidence


Reputation damage
Loss of Key Corporate
knowledge
Litigation
Negative media attention
criticism by NGOs and

premiums

Social innovation and marketing


Social innovation refers to new or enhanced products or services that have a positive impact on social or
environmental issues; often termed environmentally friendly or green products. Examples illustrating
possibilities for social innovation include production of fibres entirely from renewable resources, fuel oils
from vegetation, energy and water savers, chemical free cleaning, recycled materials, organic food and
cosmetic products, natural home furnishings etc.
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Social innovation represents social learning and problem solving in areas ranging from improvements in
human health, education, human welfare, environmental protection and energy.
Innovation capabilities are no different than those needed to create new products with novel
functionalities. The difference is on the focus and perhaps on a stronger emphasis on understanding
social problem areas and creating new forms of alliances to create solutions.
Corporate Social Marketing (CSM) is aimed at behaviour changes that improve health, safety or the
environment and the consequent development of new markets. In other words CSM is a strategy that
uses marketing principles and techniques to foster behaviour change in a target population leading to
social improvements while at the same time building markets for products or services 45 . A CSM initiative
combines business strategy with a social need and thus provides opportunities for simultaneous social
and business returns.
Recent trends focusing on marketing playing a central role in the enablement and acceleration of
organizational learning can be particularly important in this area.
Key aspects of social innovation and marketing are:

assessing the companys potential for social innovation;

social innovation networking;

marketing, social understanding and organisational learning;

promoting a culture for social innovation and marketing;

promoting social innovation in R&D activities.

Regulation and competitive policy


Regulation and Competition Policy aims to constrain the behaviour of corporations when the latter are
directed towards strengthening and/or exploiting significant market (or monopoly) power, to the
detriment of competitors and, more significantly, to the detriment of consumers. It has been a
particularly popular microeconomic policy tool in the USA since the late 1800s and in Europe after the
World War II, but especially in the last 20 years or so. Emphasis has been recently placed by the
European Commission on the Regulation of liberalised public utilities and on Competition Policy for
oligopolistic markets.

Eco-efficiency
The World Business Council for Sustainable Development (WBCSD) defines eco-efficiency as being
achieved by the delivery of competitively priced goods and services that satisfy human needs and bring
quality of life, while progressively reducing ecological impacts and resource intensity throughout the life
cycle, to a level at least in line with the Earths estimated carrying capacity.

45

Best of breed, Kotler, P., and Lee, N., Stanford Social Innovation Review, 14-23, 2004.

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The Council has identified the following four aspects that can make eco-efficiency a strategic element in
todays knowledge-based economy:
a) de-materialisation: developing ways of substituting material flows with knowledge flows;
b) closing production loops: learning from the biological designs of nature which provide a role model
for sustainability;
c) service extension: moving from a supply-driven economy to a demand-driven economy;
d) functional extension: manufacturing smarter products with new and enhanced functionality and
selling services to enhance the products functional value.

Fair globalisation
Globalisation has set in motion a process of growing interdependence in economic relations (trade,
investment and global production) and in social and political interactions among Organisations and
individuals across the world.
Despite the potential benefits, it is recognised that the current process of globalisation is generating
unbalanced outcomes both between and within countries.
The World Commission on the Social Dimension of Globalisation (WCSDG) was established by the
International Labour Organisation (ILO) in February 2002 and produced a final report in February 2004.
Recommendations were based on six broad policy themes for detailed reflection:
a) national policies to address globalisation;
b) decent work in global production systems;
c) global policy coherence for growth;
d) investment and employment;
e) constructing a socio-economic floor;
f)

the global economy and the cross-border movement of people;

g) strengthening the international labour standards system.


According to WCSD fair globalisation means:
a) A focus on people. The cornerstone of a fairer globalisation lies in meeting the demands of all
people for respect of their rights, cultural identity and autonomy, decent work and empowerment of
the local communities they live in;
b) A democratic and effective State. The State must have the capability to manage integration into
the global economy and to provide social and economic opportunity and security.
c) Sustainable development. The quest for a fair globalisation must be underpinned by the
interdependent and mutually reinforcing pillars of economic development, social development and
environmental protection at the local, national, regional and global levels.
d) Productive and equitable markets. This requires sound institutions to promote opportunity and
enterprise in a well-functioning market economy.
e) Fair rules. The rules of the global economy must offer equitable opportunity and access for all
countries and recognize the diversity in national capacities and developmental needs.
f)

Globalisation with solidarity:

there is a shared responsibility to assist countries and people excluded from or disadvantaged by
Globalisation helping to overcome inequality and contribute to the elimination of poverty;

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greater accountability to people by public and private actors at all levels with power to influence
the outcomes of Globalisation.
g) Deeper partnerships:

dialogue and partnership among all stakeholders is an essential democratic instrument to create
a better world;

an effective United Nations. A stronger and more efficient multilateral system is the key
instrument to create a democratic, legitimate and coherent framework for Globalisation.

Performance instability
Performance instability is a problem that has affected almost every company during the last two
decades sometimes with devastating effects on local communities; and the situation is deteriorating. In
recent years there rarely passes a day without news of restructuring taking place in major corporations
usually accompanied with employee reductions and a redefinition of the corporations relations with its
stakeholders and wider social environment. Down sizing, outsourcing and layoffs are still part of the
traditional response to the unstable economic environment. Patterns of restructuring vary from one
country to another and across sectors.
The European Commission established the European Monitoring Centre on Change in 2001 to help offset
the negative long-term impact of restructuring by examining how best to manage and anticipate social
and economic change in our society. Further, the European Commission's Communication on "The future
of the European Employment Strategy (EES), aims to re-design the EES as a key tool to underpin and
better deliver the Lisbon strategy. The Lisbon strategy, by embracing change as a key factor for
economic and social renewal, further verifies the critical importance of finding innovative solutions to
address restructuring and enhance corporate sustainability.
Solutions to performance instability may require a two prong approach emphasising long term
performance optimisation rather than short term profit maximisation and developing responsiveness
capabilities.
The new global economy is distinguished by its emphasis on early recognition of change triggers and
adaptation, in contrast to the traditional emphasis on optimisation strategies based on prediction of
relevant business patterns.

Organisational responsiveness can be defined in terms of alertness, resilience and adaptability as shown
in the following diagram.

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Alertness is dependent on the effectiveness of the companys business intelligence system, and it is
recognised that stakeholder engagement can become an important element of such a system.
Resilience effectively denotes the capacity a company has to absorb adverse events (e.g. economic
down turn, negative publicity, etc) and is dependent on the strength of the companys social capital.
Adaptability is mainly associated with knowledge based dynamic capabilities enabling companies to
combine knowledge on change processes with knowledge on market changes to adapt their offerings
and maintain competitive advantage.

7.5 The 4CR Corporate Responsibility Map


The 4CR Corporate Responsibility Map shown diagramatically below illustrates the interelationships
between the main areas of corporate responsibility and associated concepts and the potential for a
common management system.
The main driving forces behind each of the main responsibility areas are drawn in the map indicating
potential tensions and balancing actions. A typical tension example is when corporate competitiveness
related activities conflict with environmental sustainability policies or even short term ethical norms. A
typical balancing example is increased compulsory regulation if CSR and sustainability principles are not
properly practiced by the majority of companies.

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The key issues in each of the Four Corporate Responsibilities are as follows:

Corporate Competitiveness addressed by strategic management is a subject rarely discussed in the


context of corporate responsibility. However, unless all strands of corporate responsibility are
brought together under a common management framework, CSR and sustainability will remain
peripheral activities and their impact is likely to remain well below required levels to achieve the
Millennium and related goals.

Corporate Governance sets the legal framework to protect a companys shareholders and
stakeholders; the relative emphasis being dependent on national models.

CSR is aimed at extending the legal requirements promoting ethics, philanthropy and social
reporting to satisfy stakeholder concerns.

Corporate sustainability focuses on long term economic and social stakeholder expectations both by
optimising their sustainability performance and by participating in networks with governments,
NGOs and other stakeholders that can provide the capacity for the worlds sustainable development.

Business ethics and social accountability create important bridges between CSR and corporate
governance. Investor demands and specifically SRI, philanthropy and corporate citizenship provide a
common ground for CSR and corporate sustainability.
Performance stability and fair globalisation are important aspects both in strategic management and
corporate sustainability. Competition policy and regulation affects strategic management and corporate
governance but has also implications for business ethics and CSR. Similarly, risk management is a key
issue for strategic management and governance and specifically in terms of reputation risks it becomes
a common aspect in all the responsibility areas.
At the centre of the 4CR Corporate Responsibilities Map is stakeholder management which provides the
common link between corporate competitiveness and corporate responsibility and sustainability.

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7.6 The 4CR principles for stakeholder oriented strategic management


The following principles provide the foundations of the 4CR stakeholder oriented strategic management
approach building on Freemans work and developments in the fields of corporate responsibility and
sustainability.

4CR Principles for Stakeholder oriented Strategic Management.


No
1

Principle

Explanation

Single stakeholder

A single stakeholder driven strategic framework incorporating

driven strategic

stakeholder strategy (classification, relations map, indicators) aligned

framework

with business and corporate responsibly and sustainability strategy.


Sustainable competitiveness requires strategic dynamic capabilities

Central concern is

relying on the support of those who can affect the company

sustainable

(stakeholders) and enabling the plotting of the firms direction based

competitiveness

on enhanced understanding of how the environment may affect the


firm and how the firm can affect the environment.

Core values is a key


3

element of strategy and


corporate identity

Company specific
stakeholders

Diverse groups of stakeholders can cooperate effectively only if they


share a set of core values. Thus, for a stakeholder approach to be
successful it must establish and promote shared values and shared
interests as a key element of the strategic management process.
The stakeholder approach is about concrete names and faces for
stakeholders and about establishing and analysing company specific
stakeholder roles facilitating stakeholder engagement.

The set and number of

Stakeholder management that will ensure long-term success entails

stakeholders are

constant monitoring of stakeholder relations and identification and

context and time

management of new ones.

dependent
Integrated approach to
6

strategic
decision making

Successful strategies integrate the perspectives of all stakeholders


rather than offsetting one against another. Both benefits and harms
are distributed in a way that ensures the long-term support of all the
stakeholders
Stakeholder management provides a tool for examining the external

Networking orientation

organizational environment and exploring the strategic options that


can be created through networking.

Stakeholder supported
innovation

Stakeholder networking and related participation in learning


processes should be designed to optimise social capital development ,
accelerated learning and responsiveness

Balancing and

Stakeholder management is a continuous process of managing

integrating stakeholder

stakeholder contributions and stakeholder satisfaction levels by

contributions and

promoting and supporting stakeholder participation on companys

satisfaction

learning processes.

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Annex1 Comparison of CSR studies using Carrolls pyramid concept


Studies

Mean values
Economic
orientations
3.50

Legal orientations

& Hatfield (1985)


Pinkston & Carroll
(1994)
England
France
Germany
Japan
Sweden
Switzerland
USA
Edmondson

&

Carroll (1999)
Burton, Farh

&

Aupperle,

Carroll

Hegarty (2000)
Hong Kong
USA

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Ethical
orientations
2.22

Philanthropic
orientations
1.30

3.28

3.07

2.45

1.15

3.49
3.60
2.86
3.34
3.27
3.11
3.11
3.16

3.15
3.04
3.21
2.76
3.30
3.04
2.96
2.12

2.29
2.35
2.46
2.42
2.43
2.70
2.48
2.19

0.98
0.98
1.42
1.41
1.00
1.10
1.19
2.04

3.11
2.81

2.32
2.42

2.32
2.51

1.84
1.99

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Annex 2 Key corporate responsibility and sustainability milestones


Corporate responsibility and sustainability in the 60s
Date

Event
OECD Created Convention signed in Paris 14/12/60 which came into force 30/9/61, the
Organisation for Economic Cooperation and Development was created to promote
policies designed:
to achieve the highest sustainable economic growth and employment and a rising standard of living in

1960

Member countries, while maintaining financial stability, and thus to contribute to the development of the
world economy;
to contribute to sound economic expansion in Member as well as non member countries in the process of
economic development; and
to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance
with international obligations
The earliest reference to social auditing is sometime around the early 1960s in a book by George Goyder

1960s

called "The Responsible Company". He refers to various activities in the mid and late 1950s and proposes
that a social audit can act as both a useful management too and offer stakeholders a platform for

challenging and influencing companies.


1961

The World Wildlife Fund WWF, now the World Wide Fund for Nature, is created at Morges, Switzerland; it
will become a leading non-governmental actor in international conservation
Rachel Carson publishes "Silent Spring bringing together research on toxicology, ecology and

1962

epidemiology to suggest that agricultural pesticides are building to catastrophic levels.

1962

environmentalism.
Consumer Bill of Rights - USA

1966

New wave of

International Covenant on Economic, Social and Cultural Rights adopted by the UN


International Covenant on Civil and Political Rights adopted by the UN
In the Sixth General Synod (1967), the Action on Poverty and Economic Justice declared that: "Social
value and social justice ought to be given consideration together with security and yield in the investment

1967

of funds held by religious Organisations. Requests the Instrumentalities with substantial investments to
study the social aspects of policies and practices with respect to investments and to report on such
studies to the Executive Council creating the foundations for SRI.
The Club of Rome, commissions a study of global proportions to model and analyse the dynamic

1968
1968
1969
1969

interactions between industrial production, population, environmental damage, food consumption and
natural resource usage (later published as The Limits to Growth).
The Intergovernmental (UNESCO) provides a forum Conference for Rational Use and Conservation of
Biosphere for early discussions of the concept of ecologically sustainable development.
The US Congress passes the National Environmental Policy Act (NEPA) creating the first national agency
for environmental protection - the EPA.
Commonwealth Arbitration Commission adopts the principle of equal pay for equal work regardless of
gender

Corporate responsibility and sustainability in the 70s


Date
1970

Event
The first Earth Day was held as a national awareness campaign on the environment. An estimated

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1971

twenty million people participate in peaceful demonstrations all across the USA.
The Man and the Biosphere MAB program is founded by Unesco; it will have a major role in
promoting international scientific cooperation on environmental problems
Henderson Poverty Index developed in Australia.
In France, companies with more than 300 employees required by law to produce an employee
report: the Bilan Social.

1970s

Germany engaged in the social model of corporate management.


Council on Economic Priorities and others in USA began to rate companies publicly on
their social and environmental performance
Social Audit Limited was set up in the UK in 1978 undertakes external audits of a small number of

1970s
1970s

companies
Greenpeace, in the 1970s was the first major NGO to adopt policies which shifted the emphasis
away from governments and more towards direct action on the corporate sector.
The United Nations Code of Practice for Transnational Corporations was an early attempt in the
early 70s to define CSR businesses principles in terms of ethics, product standards, competition,
marketing and disclosure of information.
The United Nations Conference on the Human Environment in Stockholm considers the need for a
common outlook and for common principles to inspire and guide the peoples of the world in the

1972

preservation and enhancement of the human environment. The concept of sustainable development
is cohesively argued to present a satisfactory resolution to the environmental vs. development
dilemma. The conference leads to the establishment of numerous national environmental protection
agencies and the United Nations Environment Programme (UNEP).
An article in The Ecologist magazine, endorsed by a large number of UK scientists, and entitled The

1972

1972

1974

Blueprint for Survival, warns of the "breakdown of society and irreversible disruption of lifesupporting systems on this planet" and proposes the concepts of sustainability and sustainable
development as an alternative to an ethos of expansionism.
The first alternatives to GDP as a measure of economic progress, the Measure of Economic Welfare,
is created by Nordhaus and Tobin; used today for measuring TLB performance.

Rowland and Molina release a seminal work on CFCs in Nature magazine calculating that
if use of CFC gases is to continue at unaltered rate the ozone layer will be depleted by
many percent after few decades.

1979
1979

J. Coomer (ed.) publishes the book Quest for a Sustainable Society. Emphasising that society
must recognise limits of growth and to look for alternative ways of growing.
Chair of Tata Steel (Indias largest integrated private sector steel company) asks audit committee to
report on whether, and the extent to which the company has fulfilled the objectivesregarding the
social and moral responsibilities

Corporate responsibility and sustainability in the 80s

Date

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The World Conservation Strategy is released by IUCN (World Conservation Union) as "the
modification of the biosphere and the application of human, financial, living and non-living resources

1980

to satisfy human needs and improve the quality of human life". The section Towards Sustainable

Development identifies the main agents of habitat destruction as poverty, population pressure,
social inequity and the terms of trade. It calls for a new International Development Strategy with the
aims of redressing inequities, achieving a more dynamic and stable world economy, stimulating
accelerating economic growth and countering the worst impacts of poverty.
The Global 2000 Report to the President, is submitted to US President Jimmy Carter

1980

providing comprehensive projection of global environmental impacts and resource supply issues over
the next 20 years. The Report recognises biodiversity for the first time as a critical characteristic in

1982
1983
1984
1985
1986

1987

the proper functioning of the planetary ecosystem.


Business in the Community is founded by UK based business organisations focussed on corporate
social responsibility.
Australia adopts a National Conservation Strategy to implement the objectives of the World
Conservation Strategy.
CSR becomes part of mainstream management theory at least since the publication of Edward
Freemans 1984 classic, Strategic Management: A Stakeholder Approach
The Antarctic ozone hole is discovered by British and American scientists
The Toxics Release Inventory (TRI) was established under the Emergency Planning and Community
Right-to-Know Act of 1986
The Brundtland Commission, appointed by the United Nations to study the connection between
development and the environment publishes report: Our Common Future".

The report introduces

the term sustainable development defining it as: development that meets the needs of the
present without compromising the ability of future generations to meet their own needs".
An Inter-governmental Panel on Climate Change (IPCC) is established with three working groups to

1988

assess the most up-to-date scientific, technical and socio-economic research in the field of climate
change.
The Co-Operative (UK) publishes its first Social Report.

1988
1989

Ben and Jerrys (Ice Cream Company) in USA produces first Social Performance Assessments.
Establishment of the Resource Assessment Commission to evaluate best use of resources in Australia
Report published for the UK government Blueprint for Green Economy by David Pearce et al.
Introduction of the concept of natural capital and definition of sustainable development as nondeclining per capita human well-being over time.

Corporate responsibility and sustainability in the 90s


Date

Event
IUCN/UNEP/WWF publish Caring for the Earth: 2nd World Conservation Strategy focusing on

1991

sustainable society, sustainable living and sustainability itself

1992

'Earth Summit' in Rio de Janeiro with 180 country delegations addressed ways to halt the destruction
of irreplaceable natural resources and pollution of the planet twenty years after the first global
environment conference. The Summit agrees the Rio Declaration on Environment and Development
which sets out 27 principles supporting sustainable development. Also agreed is a plan of action,
Agenda 21, and a recommendation that all countries should produce national sustainable

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development strategies. The Earth Summit also establishes the UN Commission on Sustainable
Development, which meets every year, as well as important UN bodies - the Framework Convention
on Climate Change and the Convention on Biological Diversity.
The Earth Summit influenced all subsequent UN conferences, which have examined the relationship
between human rights, population, social development, and the need for environmentally sustainable

1992

development.
A USA based business led membership organisation, Business for Social Responsibility BSR is
founded

1992

FairTrade is founded with mission to improve the position of the disadvantaged producers in the
developing world, by setting the Fairtrade standards and supporting their interests.
The European Union (EU) announced a framework of environmental policies applicable to the EU and
its member states for the period 1993 2000.
The World Conference on Human Rights, held in Vienna, underscored the right of people to a healthy

1993
1993

1994

environment and the right to development, controversial demands that had met with resistance from
some Member States until Rio.
US President Bill Clinton announces (Oct 20th) an ambitious plan to combat global warming through
over 50 initiatives affecting all sectors of the economy.
European Universities Charter for Sustainable Development agreed ; promoting university education
for the training of decision-makers and teachers, oriented towards sustainable development and
fostering

environmentally aware attitudes, skills and behaviour patterns, as well as a sense of

ethical responsibility.
Caux Round Table Principles for Business adopted The Caux Round Table (CRT) was established as

1995

an international network of principled business leaders advocating implementation of the CRT


Principles for Business through which principled capitalism can flourish and sustainable and socially
responsible prosperity can become the foundation for a fair, free and transparent global society.
The World Business Council for Sustainable Development (WBCSD) sets a permanent base in Geneva

1995
1995

to provide business leadership as a catalyst for change toward sustainable development, and to
promote the role of eco-efficiency, innovation and corporate social responsibility.
Formation of the World Trade Organisation replacing GATT as the Organisation overseeing the
multilateral trading system. Key functions include: handling trade disputes and technical assistance
and training for developing countries.
COP I in Berlin, Germany-Each year, the countries that ratified the Rio Convention held a Conference

1995
1996

of Parties (COP). The first of these happened in 1995 and reviewed the adequacy of the Rio
Convention's goal of stabilizing greenhouse gas emissions.
The OECD, introduced the concept of environmentally sustainable transportation (EST); Pollution
Prevention and Control, Environmental Criteria for Sustainable Transport
In January 1996 a group of 57 European companies signed the European declaration of businesses
against social exclusion, and established CSR Europe with the support of Jacques Delors President of

1996

the European Commission at that time.

CSR Europe mission is to help companies achieve

profitability, sustainable growth and human progress by placing corporate social responsibility in the
mainstream of business practice.
The Kyoto Protocol for the implementation of the Framework Convention on Climate Change is
negotiated. After reviewing the original targets of the Rio Convention and finding them to be too

1997

weak, the countries came up with new targets. Now, 1990 greenhouse gas emissions would be cut
by 5% between 2008 and 2012.Though 5% is a global target, different countries have different
targets. The European Union's target is a 8% cut (Germany committed to a 25% cut and the U.K. to

1997
1997

15%). The United States had a target of 7%, while Canada had a target of 6%.)
SA8000 launched by Social Accountability International SAI a U.S.-based, non-profit Organisation
dedicated to the development, implementation and oversight of voluntary verifiable social
accountability standards.
A special UN conference is held to review the implementation of Agenda 21 (Rio+5). This repeats the
call for all countries to have sustainable development strategies in place - in particular by the time of
the next review of Agenda 21 in 2002 (Rio+10).
In Europe, changes to Articles 2 to 6 of the Treaty establishing the European Community are agreed

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1997
1997
1998

in the Treaty of Amsterdam, give sustainable development a much greater prominence.


John Elkington publishes Cannibals with Forks in it he coins the term Triple Bottom Line.
The Global Reporting Initiative launched to develop Sustainability reporting guidelines.
November - Around 170 nations gather at the United Nations global warming conference
in Buenos Aires to discuss ways of cutting emissions of greenhouse gases by 20082012. - Specialists from the US and Canada tell the summit that global warming is killing the world's
coral reefs, and with them the swarming sea life they shelter and support. 100
The UK Government launches its new strategy (May), A better quality of life - A strategy for

1999

sustainable development for the UK.


In December, Quality of life counts - Indicators for a strategy for sustainable development for the

1999
1999
1999

1999
1999

United Kingdom: a baseline assessment is published.


Paul Hawken and Amory and Hunter Lovins publish Natural Capitalism: The next
industrial revolution
The Global Sullivan Principles launched
In an address to The World Economic Forum on 31 January 1999, United Nation Secretary-General
Kofi Annan challenged business leaders to join an international initiative the Global Compact that
would bring companies together with UN agencies, labour and civil society to support ten principles
in the areas of human rights, labour and the environment..
Creation of the Dow Jones Sustainability Indexes as the first global indexes tracking the financial
performance of the leading sustainability-driven companies worldwide
UK Corporations Disclosure Legislation passed. The Turnbull Report on corporate governance added
reputation, probity and other non-financial risks to the necessary criteria for reporting risk to
shareholders ( September 1999)
Environment ministers from 173 countries meeting in Bonn (Nov 4th) to discuss the Kyoto

1999

Agreement, end talks without any breakthroughs and with many difficult issues remaining
unresolved. One involves the penalties payable if nations do not meet their pollution targets. Another
is the extent to which nations will be able to pay others to reduce pollution on their behalf

Corporate responsibility and sustainability in the 2000s


2000

2001
2001
2001
2001

UK Pension Act amended to require the trustees of occupational pension schemes to disclose their
policy on socially responsible investment in their Statement of Investment Principles.
In the UK the government appointed the worlds first minister for CSR-Spring 2000
Transparency International increases its activities. Anti Bribery Legislation with extra-territoriality
clauses tabled in 8 nations. The 10th IACC Anti-Corruption Conference took place in Prague.
The UK Government publishes its first review of progress towards sustainable development,
Achieving a better quality of life, Government annual report 2000.
Launch of the FTSE4Good index.
Japanese Environment Minister Yoriko Kawaguchi says there seems to be no
likelihood of a breakthrough at the next round of talks but suggests the deadline for final
agreement on the rules of the Kyoto pact should be late October when a United Nations
conference on climate change is to start in Marrakech, Morocco
The World Summit on Sustainable Development Johannesburg 26 August - 4 September 23002, in
the face of growing poverty and increasing environmental degradation, succeeded in generating a

2002

sense of urgency, commitments for action, and partnerships to achieve measurable results. More
than 220 partnerships, representing $235 million in resources, were identified during the Summit
process to complement the government commitments. Report of the World Summit on Sustainable

2002
2002
2003

Development.
Business in the Community celebrated its 20th anniversary with a 2 day A Better Way of Doing
Business conference on corporate responsibility- July 2002
Business in the Community launches first Corporate Responsibility Index- October 2002
The Commission on Sustainable Development, 11th Session, New York, 28 April - 9 May 2003,

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adopts

new work programme for the Commission on Sustainable Development (CSD), based on

two-year cycles with a clear set of thematic issues, provides the global community with a unique
opportunity to focus in-depth attention on specific issues. Building on the outcomes of the twelfth
session of CSDs (CSD-12) focus on water, sanitation and human settlements, the thirteenth session
of CSD (CSD-13) will strive to be forward looking and action oriented
There over 60 UK Government initiatives of relevance for CSR. The UK parliament has two all-party

2004

groups on corporate citizenship: the All-Party Parliamentary Group on Corporate Social Responsibility
and the All-Party Parliamentary Group on Social Responsible Investment-mid 2004

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Annex 3 Environmental Sustainability Index


Components of Environmental Sustainability
Environmental sustainability is presented as a function of five phenomena:
(1) the state of the environmental systems, such as air, soil, ecosystems and water;
(2) the stresses on those systems, in the form of pollution and exploitation levels;
(3) the human vulnerability to environmental change in the form of loss of food resources or exposure
to environmental diseases;
(4) the social and institutional capacity to cope with environmental challenges;
(5) the ability to respond to the demands of global stewardship by cooperating in collective efforts to
conserve international environmental resources such as the atmosphere.
Environmental sustainability is defined as the ability to produce high levels of performance on each of
these dimensions in a lasting manner. These five dimensions are referred to as the core components of
environmental sustainability defined as follows:
Environmental Systems: a country is environmentally sustainable to the extent that its vital
environmental systems are maintained at healthy levels, and to the extent to which levels are improving
rather than deteriorating.
Reducing

Environmental

Stresses:

country

is

environmentally

sustainable

if

the

levels

of

anthropogenic stress are low enough to engender no demonstrable harm to its environmental systems.
Reducing Human Vulnerability: a country is environmentally sustainable to the extent that people and
social systems are not vulnerable (in the way of basic needs such as health and nutrition) to
environmental disturbances; becoming less vulnerable is a sign that a society is on a track to greater
sustainability.
Social and Institutional Capacity: a country is environmentally sustainable to the extent that it has in
place institutions and underlying social patterns of skills, attitudes and networks that foster effective
responses to environmental challenges.
Global Stewardship: a country is environmentally sustainable if it cooperates with other countries to
manage common environmental problems, and if it reduces negative extra-territorial environmental
impacts on other countries to levels that cause no serious harm.

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Environmental Performance Index Framework


Indicators

Policy Categories

Broad Objectives

Overall
Performance

Child Mortality
Indoor Air Pollution

Environmental Health

Drinking Water

Environmental Health

Adequate Sanitation
Urban Particulates
Regional Ozone
Nitrogen Loading

Air Quality
Water Resources

Water Consumption
Wilderness Protection

Environmental

Eco-region Protection

Performance Index

Timber Harvest Rate

Biodiversity and Habitat

Agricultural Subsidies
Over-fishing
Energy Efficiency

Ecosystem Vitality
Productive Natural
Resources

Renewable Energy
CO2 Per GDP

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Annex 4 FTSE4Good Indexes Sector Classification


FTSE4Good Indexes Sector Classification 46
Companies are assigned a high, medium or low impact weighting according to their industry sector. The higher
the environmental impact of the companys operations, the more stringent the inclusion criteria.

High Impact Sectors

Medium Impact Sectors

Low Impact Sectors

Agriculture

DIY & Building Supplies

Information Technology

Air Transport

Electronic and Electrical equipment

Media

Airports

Energy and Fuel Distribution

Consumer / Mortgage Finance

Engineering and Machinery

Property Investors

Building

Materials

(includes

Quarrying)

Financials not elsewhere classified

Research & Development

Chemicals and Pharmaceuticals

Hotels,

Leisure

Construction

Management

Major Systems Engineering

Manufacturers

Fast Food Chains

classified

Telecoms

Food, Beverages and Tobacco

Ports

Wholesale Distribution

Forestry and Paper

Printing & Newspaper Publishing

Mining & Metals

Property Developers

Oil and Gas

Retailers not elsewhere classified

Power Generation

Vehicle Hire

Road Distribution and Shipping

Public Transport

Catering

and

Facilities

not

elsewhere

classified

(Gyms and Gaming)


not

elsewhere

Support Services

Supermarkets
Vehicle Manufacture
Waste
Water
Pest Control

46

http://www.ftse.com/ftse4good/index

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Annex 5 Stakeholder classifications

Different lists of stakeholders arranged according to category


Empel et
al.2003

Clarkson
1995

Preston
1990
GE Co. early
1930s

Preston
1990
Johnson &
Johnson
1947

Preston
1990
Sears 1950

Kaptein &
Wempe
2002
KPN 1998

Graafland & ADES


Eijffinger
Management
2003
Consulting
2002

employees

employees

employees

employees

employees

employees

employees

employees

company
managers
shareholders shareholders shareholders shareholders shareholders shareholders shareholders shareholders
sponsors
customers

customers

customers

customers

customers

customers

customers
Target groups

suppliers

suppliers
business
partners
competitors

suppliers
business
partners

competitors

unions
NGOs

NGOs
special
interest
groups

interest
groups

communities

communities
the general
public

citizens

society

society

society

The media
CSR
organisations
The
environment
government

government

government

Source: Circles of Stakeholders


Rob Maessen, Paul van Seters & Eleonore van Rijckevorsel
Globus, Institute for Globalization and Sustainable Development
Tilburg University, the Netherlands

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