Responsible Management

Until the late 1980s, companies measured their performance almost strictly in financial terms with the focus being on whether management had made the correct strategic and operational decisions to enhance shareholder value.  Since then, however, as globalization has advanced and criticism of business, particularly large multinational companies, has increased, there has been a decided shift toward an emphasis on the responsibilities that business has to the environment and to the society in which they operate.  This shift has been aligned with the drive toward sustainable development, a concept which includes financial, environmental and social sustainability.  In order for the world to make progress toward sustainable development, businesses need to abandon the traditional concept of shareholder value as being too narrow and instead pursue strategies that deliver value for a wider range of constituencies referred to as “stakeholders”.  Shareholders are but one of many stakeholder groups and others include employees, customers, value chain partners, regulators, nongovernmental organizations, the communities in which a company is operating, the environment and society in general.  Businesses have a responsibility to the environment and society, as well as to their shareholders and investors, and management must act “responsibly”.  While proponents of shareholder value have been critical of responsible management and its emphasis on issues other than the financial “bottom line”, the weight of evidence is that responsible management can and does deliver increased shareholder value.

Finnish Textile & Fashion, the central organization for textile, clothing and fashion companies in Finland (“FTF”), also suggested a simplified model for responsible management that began with identifying company values, pledges and commitments with respect to corporate responsibility and establishing the strategy and management principles that are intended to steer corporate responsibility; creating annual action plans for various sub-areas of corporate responsibility (e.g. financial, governance, environmental, human resources and societal responsibility as well as value chain management, particularly human rights issues); measurement of the realization of pledges, commitments and actions against indicators of performance; the use of performance indicators to present and report results to internal and external stakeholders; and the use of the results of the measurement process to set new commitments and goals, update strategies and action plans and start the cycle over again.

FTF acknowledged that when companies are launching their corporate responsibility initiatives they are likely to treat it as a separate project, which is reasonable given the need to do so many things that may be relatively new to the company and its way of operating and conducting business: adoption of corporate responsibility principles and commitments, selecting actions to be taken and creating corresponding action plans, identifying performance indicators and ensuring that measurements against those indicators can be carried out efficiently and accurately and setting up reporting procedures to communicate beyond directors and shareholders to include a broader group of internal and external stakeholders. However, FTF reminded that the skills and processes that are required to do all of this are not that different from normal management activities and that once leadership and management techniques have been applied to corporate responsibility the company should move to integrate them into the existing planning, monitoring and reporting activities that apply to all aspects of the company’s operations. 

Integration, including ensuring that corporate responsibility is placed squarely at the top of the work agenda of everyone in the company, should be assigned to a member of the company’s leadership team who works with a steering group composed of senior representatives from all business units and functional groups (e.g., finance, production, purchasing, marketing, human resources etc.) to ensure that all perspectives on corporate responsibility and the associated commitments and actions are taken into account and that decisions are broadly communicated.  As necessary, the company should tap into expertise from external sources on activities that are somewhat unique to corporate responsibility, such as stakeholder engagement and sustainability reporting.  Guidance on the integration process is available from various sources including ISO 26000, which is the standard developed by the International Organization for Standardization that goes through the key matters related to social responsibility including concepts, terms and definitions related to social responsibility; the background, trends and characteristics of social responsibility; principles and practices relating to social responsibility; the core subjects and issues of social responsibility (e.g., governance, workplace conditions, human rights, the environment, fair operating matters, consumer matters etc.); integrating, implementing and promoting socially responsible behavior throughout the organization and, through its policies and practices, within its sphere of influence; identifying and engaging with stakeholders; and communicating commitments, performance and other information related to social responsibility.

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance. and an excerpt from Board Oversight of Sustainability by Alan S. Gutterman, which is available for purchase at various online booksellers.  Readers may also enjoy the author’s book on Sustainability and Corporate Governance.