How should you measure Corporate Social Responsibility

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CSR is a container concept which encompasses many different ecological, social and economic issues. The common thread that weaves through the various definitions of "Corporate Social Responsibility " is the voluntary nature of the good practices referenced.

In order to give a more specific interpretation to the concept CSR Frame of Reference needs to be developed.

CSR among businesses are no longer "nice to have" ideologies. However taking actionable steps to become a sustainable and socially responsible company typically requires a significant amount of capital and resources investment. Therefore, it's critical to be able to demonstrate the value and ROI that putting environmental and CSR reforms into practice will provide.

Report studies the current measures of CSR, the issues they are facing and proposes a model which may be able to address some of them.

In the end the report indicates the recent trends of CSR accounting.

What is CSR

The World Business Council for Sustainable-Development defines CSR as follows: "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."

CSR is a container concept which encompasses many different ecological, social and economic issues. The common thread that weaves through the various definitions of "Corporate Social Responsibility" is the voluntary nature of the good practices referenced. CSR is also described as the corporate "triple bottom line"-the totality of the corporation's financial, social, and environmental performance in conducting its business.

Thus, beyond making profits, companies are responsible for the totality of their impact on people and the planet. "People" constitute the company's stakeholders: its employees, customers, business partners, investors, suppliers and vendors, the government, and the community. In the business community, CSR is alternatively referred to as "corporate citizenship," which essentially means that a company should be a "good neighbor" within its host community.

Redefining CSR

Each company differs in how it implements corporate social responsibility, if at all. The differences depend on such factors as the specific company's size, the particular industry involved, the firm's business culture, stakeholder demands, and how historically progressive the company is in engaging CSR.

For successful implementation, it is crucial that the CSR principles are part of the corporations values and strategic planning, and that both management and employees are committed to them. Furthermore, it is important that the CSR strategy is aligned with the company's specific corporate objectives and core competencies.

In order to give a more specific interpretation to the concept CSR Frame of Reference needs to be developed. The Frame of Reference will be mainly based on international treaties, guidelines and instruments enjoying broad international support that are relevant for business, such as human rights, labor rights, environmental protection, consumer protection, socio-economic development, corruption and other aspects of CSR. It may include some fundamental operational aspects of CSR like supply chain responsibility, stakeholder involvement, transparency and reporting and independent verification.

What is the need for companies to get involved in CSR

Environmental-sustainability and CSR among businesses are no longer "nice-to-have" ideologies. They are important parts of a company's overall growth strategy.

A recent PricewaterhouseCoopers study documented ways in which companies that report their sustainability efforts get better returns on their assets than companies that do not. Also according to a TIME poll conducted in 2009, 40 percent of consumers said they bought products or services because they liked the social or political values of the company. Nearly half of Americans in the poll said protecting the environment should be given priority over economic growth, and this comes in the midst of a recession.

Every action does not only lead to one consequence of action, but it also influences future conditions of action and thus also the relevant alternatives in the future.

Organizations today face an unprecedented level of scrutiny and rising expectations from their various stakeholders - customers, employees, investors, communities and governments - regarding the way in which they conduct business. As a result, companies throughout the world are recognizing CSR as a key aspect of best business practice and are making it a priority by formalizing it within their organization.

Some of the obvious benefits of CSR are increased customer loyalty, more supportive communities, the recruitment and retention of more talented employees, improved quality and productivity and the avoidance of potential risks related to reputation, which may arise from environmental incidents.

Why measurement of CSR is important

Taking actionable steps to become a sustainable and socially responsible company also typically requires a significant amount of capital and resources investment. Therefore, it's critical to be able to demonstrate the value and return on investment (ROI) that putting environmental and CSR reforms into practice will provide to effectively convince senior management. So investigating best ways to measure the ROI of a company's sustainability and CSR efforts is worth the investment.

(1) Normative Ideals + (2) Empirical Conditions = (3) Corporate Social Responsibility

Current methods of CSR-Measurement in practice

There are literally hundreds of guidelines and standards available to companies and more and more coming onto the market. The standard ways of measuring the impact and success of CSR have included Dimension analysis, CSP, Balance Scorecard, DEA accounting, perception studies, media tracking and awards. Standardized indicators cannot provide all the answers, due to differences within organizations.

A review of the measurement frameworks of four leading reporters (The Co-operative Bank, Shell, BT and Risk Policy Analysts)

All four companies support a 'learning approach'.

They are focused on identifying important issues regarding their role as influencers of sustainable development.

They are aware that their CSR measurement influences their business strategy.

Their measurement is a driver for accountability; three of the four mention stakeholders when outlining their reason for measuring.

They are each focused on understanding impact and other 'meaning' to the measurement, other than simply data collection.

All four companies have, or are developing indicators. They each use a combination, to a lesser or greater degree, of indicators, targets and objectives. The emphasis depends greatly on the business concerned.

DEA Accounting

DEA is a performance measurement tool that has been extensively studied and used in empirical applications. DEA addresses processes with multiple inputs and outputs developed through a decision-making unit (DMU). DEA is especially appropriate when there is no clear profit-maximization objective for the DMUs under scrutiny. The main purpose of DEA is to construct an index (score) of relative (to the other units) performance.

To obtain this, the first step is to construct a virtual input and a virtual output for each DMU by using a set of (unknown ex ante) weights:

Virtual input = v1x10+…+vmxmo

Virtual output = u1y10+…uzyso,

where v and u are weights and x and y are inputs and outputs, respectively.

The next step is to determine the weights, using linear programming techniques, so as to maximize the ratio (model 1):

If we let yj = (y1j, y1j… y7j) represent the vector of CSR scores (provided by Sustainable Asset Management) for the firm j, j=1… N where N is the number of firms in the sample, then we can write the following optimization problem (model 2):

where i indexes the CSR dimension, k indexes the firms under scrutiny, and λk are the assigned weights for each dimension. This model was proposed and used in Lovell and Pastor (1997) to analyze the operating performance of branch offices of a large financial institution in the context of target setting.

Basic Challenges in the measurement of Corporate Social Responsibility

The methodologies developed by various CSR rating agencies or data providers involve a subjective weighting of the CSR dimensions' importance.

For instance, KLD Research & Analytics, a leading CSR-rating agency, bases its rating criteria on seven qualitative areas. Their ratings do not involve numbers, but rather qualitative descriptions noted with pluses and minuses.

In the presence of opportunities for strategic CSR, a positive correlation between economic performance and CSR should be expected. However, when altruism rather than profit maximization drives CSR, a negative relationship might also be possible. Consequently, the empirical analyst should know beforehand whether displayed CSR is a result of altruism, profit maximization, or a threat by an activist.

The Issues

Companies are at very different stages and levels of learning, measurement practice and CSR involvement.

There is a lack of consensus regarding what should be measured, and why.

There are different motivations of reporting companies, ranging from measuring to record statistics, or measuring as a process to learn and improve.

There is a vast range of different things being measured: outputs, improvements, impact, stakeholder interest-areas.

Local, regional, national and global agendas all have an impact on the ability to arrive at comparable results.

Corporate opinions differ (vastly) regarding the relationship between the company and its stakeholders.

A set of statistics can be taken many ways. It is important to qualify statements made.

It is the detail that counts in reports, particularly with social measurement systems since it is the substance and decision-making behind the stated results that makes the difference.

Proposed Model

A key principle of this bottom-line perspective is remembering that regardless of your industry, there are essentially two ways to create business value: increase revenues or reduce costs. Calculating the business value of a CSR program is, then, the degree to which it contributes to either of these two outcomes. On the revenue side, CSR activities can, for example, help attract or retain customers or enable a company to charge a premium for its goods or services. On the cost side, CSR activities can increase efficiency, for example, by improving recruiting, productivity or retention, or by reducing risk, energy use or waste.

The impacts of CSR practices on brand, employee satisfaction, professional development and reputation can all be valuable, but only to the degree they "drive" reduced costs and increased revenues.

The methodology consists of three distinct stages:

Analysis, Execution and Performance-Evaluation. The framework includes weighted performance indicators relating to a company's impact on different areas of activity such as the environment, the community, the human capital, the shareholders and the marketplace (customers and suppliers).

The second stage includes the social actions that have been decided to be undertaken by the corporation. Based on an extensive literature review as well as on the corporate practices identified worldwide, the following basic categories of CSR initiatives have been recognized:

For each one of the above categories, specific CSR plans and practices are formulated and executed.

This evaluation aims at the measurement of the objectives' achievement, and the investigation of suitability of the policies deployed. The proposed methodology suggests the evaluation of companies with the use of multicriteria analysis.

The final score is expressed as the product of the selection score in each criterion multiplied by the weight of this criterion. Assuming that we have n alternative selections (companies) {a1, a2, … ,an,} and m selected criteria {c1, c2, … cm} with corresponding weights {w1, w2, … wm}, then, if the score of the criteria for selection ai is {s i1, s i2, … s im}, the total score of criterion i is given by the formula:

Sai = w1 si1 + w2 si2 + ... + wn sij = Σ wj sij j=1 to m

Scores are provided for the five categories (criteria) that were analyzed in the second stage of the proposed model (m=5). Each category is decomposed into sub-categories with related quantitative and qualitative performance indicators in order to enable easier scoring. The weight of each criterion is determined by a thorough analysis of existing companies on a sector level. For example, the environmental aspect is more important to a manufacturing company compared to a service company such as a bank.

The scores of each criterion for the CSR evaluation follow a 5-degree scale, which corresponds to the following meanings:

The proposed scale does not include an 'Excellent' CSR conformance because such a classification would be against the concept of CSR which supports voluntary participation of organizations and their effort for continuous improvement in CSR issues.

Top Three Priorities

• Companies need to increase their focus on what performance data is actually saying; articulating its meaning rather than simply recording facts.

• Companies need to ensure that their measurement practices are embedded within a company's

Operational structure, not just left at 'head office' level.

• Guidelines, standards, measurement management systems all need to remain mindful of the balance between what can be standardized and what needs to remain flexible.

Separate non-profit arms: Edelweiss case

Organizations are developing separate nonprofit arms to keep social-accounting easy. EdelGive Foundation is the strategic philanthropic-arm of the Edelweiss Group, one of India's leading financial-services firms headed by ex CFO, Edelweiss. They seek to enrich and broaden the impact of the entrepreneurial activities of nonprofits in India through leveraging Edelweiss' human, financial and intellectual resources. Their investments in nonprofits, which are evaluated through an intensive due-diligence process, are in the form of financial support and, more importantly, capacity building support.

The future

It will soon be mandatory for companies to report measures taken to prevent environmental damage in India. In an effort to boost CSR, the government is working out a comprehensive accounting standard on environmental reporting.

If the proposal is approved, based on performance over the last three financial years (up to March 2010), 3,434 companies would have to set aside nearly US$1 billion for CSR.

In March 2010, the EU's new 2020 strategy reaffirmed CSR principles, setting out long-term goals for "smart, sustainable and inclusive growth" in the EU27.

European Commission's largest ever research and knowledge development initiative on CSR, supported by € 2.6 million in funding under the EU's 7th Framework Programme for Research.

With continued and increased corporate power greater importance will be placed on the development of comparable indicators.

There will be a further widening of what is being measured, incorporating intangible assets and intellectual capital.

There will be a strengthened relationship between business and its stakeholders.

The relationship between integrated CSR measurement and sustainable development indicators will become stronger.

"It takes 20 years to build a reputation and five minutes to ruin it" -Warren Buffet

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