Defining Corporate Social Responsibility As A Norm Of Corporate Behavior

Tuesday, December 1, 2009 - 01:00

Editor: Please define corporate social responsibility for our readers.

Jaffe: Broadly speaking, it is a matter of corporate self-regulation, concern for law, ethics, international norms, environment, the public sphere - for all the stakeholders in the business. At its best, it is a top down and bottom up way of doing business that includes risk management, and attempts to deal with all of the issues that affect not only profit in the short run, but also keeps the workforce, the customers and the community loyal to the corporation.

Editor: The late George Lodge, of Harvard Business School, once said that shareholders have the option of voting with their feet but the other stakeholders don't have the same option.

Jaffe: That is true to a point, but in today's environment, in a world where there is a much heightened expectation of how companies do business and relate to the community, businesses are compelled to operate under both laws and broadly defined standards of conduct. In the United States it started with the antitrust movement and the labor movement and grew with the FDA, the SEC, the FTC, the Foreign Corrupt Practices Act and a host of other regulations. Now, with the OECD and the UN, among other conventions, there are growing restrictions worldwide on the way corporations may operate, especially if they are U.S. registered. There are now actively enforced requirements and restrictions for workers' rights, anti-corruption laws, and publicized standards set by non-governmental actors, such as Transparency International. So how you do business has changed to the point where it is not just the shareholder who can walk away. Years ago exporting production to a developing country meant you bought at the least amount you could pay, with no regard to labor or social conditions. Companies can no longer afford to do business that way and the manufacturing and apparel business made that very clear. Good corporate governance keeps the government away; good corporate governance keeps the profits high; lack of turnover in the workforce keeps the cost of doing business low; satisfying and keeping customers and clients is a more effective way to keep your business profitable.

Editor: Looking at corporate social responsibility, as the concept is evolving, can a business outsource it?

Jaffe: That really presents two different questions. How you implement your policy can, as with internal audit or other functions, be outsourced to an external provider. However the tone that has to be generated, the buy-in to the mores , the top down and bottom up buy-in cannot be outsourced. The board really should be setting the policy. If Sarbanes-Oxley has effectively done one thing well, it is to get many of the board functions back on track. Whether you favor the European or the American board model, the point is that the board must first set the tone, management must buy-in and then you can have people from the outside involved in the implementation. However, you cannot just outsource a way of life. You cannot effectively inculcate values to your people unless you demonstrate to them that you believe in them.

Editor: Please talk more about the role of the board in terms of setting the tone, setting the standards and how to reach into the organization without micromanaging. I seem to recall that former Justice Arthur Goldberg left Texaco's board when his request to have a staff and direct access to operating levels was denied.

Jaffe: Well, for example, let's deal with the audit committee of the board of a registered company and how it relates to the responsibilities of the CEO and CFO. There's been a real change, in that some companies have separated the function of Chairman from the CEO. The board sets policy, oversees management. Does the board need a staff? Ten or 12 years ago, there were many boards where the information packets came on the day of the board meeting and everybody voted yes. Management really controlled the board and that may have been to what the former Justice was alluding. If you look at the way audit committees function now (e.g., internal investigations, oversight, the certifications that the CFO and others have to make to comply with SOX, the audit committee's responsibility to front run as well as to resolve key issues, the right of the board and the audit committees now to hire their own external counsel, accounting firms and others, boards today are much more involved than the boards of the past. We have seen this in companies who have engaged my firm for internal investigations, as well as those which we have been assigned to monitor. The boards are much more well informed; the directors participate together: they are given information much more in advance of meetings; they have documented and thorough discussions, and they have meetings with outside auditors and other consultants without management present. All of this puts effective control of management and of the company policies in the hands of the board and its committees. There is constant review of the tone at the top. The board sets the policy; management has to implement it; the board monitors management.

Editor: And the expense?

Jaffe: Can oversight or compliance be expensive at times? Yes. Has SOX implementation changed since its inception? Yes, but all of this is also part of corporate social responsibility because, if you're going to run a corporation well and profitably, the risk assessment you have to do is not only to determine whether people will commit crimes or steal or violate the Foreign Corrupt Practices Act. The operational risks include: Do we have a supply chain? What happens if we close a particular plant? How do we safeguard our information? Is the information available operationally? Will it be available if there is a government or other investigation? What is our succession plan? What if a market fails? What if there is product contamination? All that risk analysis is part of good corporate governance and good corporate social responsibility. I don't think it is fair to equate corporate social responsibility with the concept of just "perceptive doing good." It is functioning well for the benefit of all stakeholders. If a corporation functions well, the profit margins go up, the risks of doing business go down, and the acceptance by the community, the consumers, the clients, the supply chain and the employees all get advanced, as well as that of the stockholders.

Editor: The bottom line is long term sustainability.

Jaffe: It is long term sustainability; it is long term planning and profit against short term gain. You can always cut a corner to make a quick dollar but you are going to pay for it at some point.

Editor: When you use the term monitoring can you give us an example of the kind of assignments your firm undertakes from a board?

Jaffe: We undertake investigative and forensic accounting assignments from both boards and management, and we also have been assigned as an independent monitor of companies by government entities, such as the SEC, the courts and prosecutors offices under settlement, non-prosecution or rehabilitation agreements. In the latter the issue is whether a company that has been accused of wrongdoing will be able to demonstrate it has the integrity, accountability and reliability going forward, to do business with government or with the public, when it otherwise may have been debarred or prohibited from so doing. In some of those situations when we were engaged, we have written codes of ethics and codes of conduct, as well as procedure manuals. The monitoring includes specific targets and milestones to give us the ability to plug in and test performance as we monitor, so we can report to the board or to the authority that appointed us.

Editor: So your client, in those assignments, is external to the board and the management and your relationship is to the appointing authority?

Jaffe: Depending on the situation, it can be to the board and/or the audit or other committee of the company who engages us and is the client, with our reporting obligation to the external authority. We usually have the right to communicate with and to meet with the external authority, ex parte , without also having to divulge that to the monitored entity. It depends on what it is that is being prevented or remediated.

Editor: That may present complex questions of attorney/client privilege.

Jaffe: We have to be careful about that issue when going into one of these assignments. For monitorships, the regulatory authority frequently compels waiver of attorney/client privilege with regard to what the monitored party may tell you. Outside counsel will first advise them how to proceed. This has to be set forth in the monitoring agreement. However, monitors have to respect and protect corporate secrecy, IP and trade secrets. All of those issues get set forth in advance, in detail. Investigations frequently will be done in conjunction with counsel to assure attorney-client and work product privilege.

Editor: Let's turn briefly to cases under the Alien Tort Statute, ATCA, and talk about the advice and services UHY offers and what you see happening with the awakening of the tort bar to this statute.

Jaffe: The Alien Tort Statute has been around since the Judiciary Act of 1789, and although the plaintiffs' bar is always front-running the statutes, the standard under the ATCA seems incredibly high to prevail on cases to date. On the other hand, supply chains issues and conduct in overseas developing countries raise new concerns. There has been a hue and cry about the supply chain in clothing, manufacturing, reclamation and other products in developing countries, in part brought on by various trade organizations and by others. Notwithstanding that the alleged practices may not yet have risen to the level that will sustain a case under the Statute, many companies have undertaken to ensure, through use of external consultants and others, that what goes on in those overseas countries and affecting their supply chains in fact is "correct." This is not only because they want to avoid a possible lawsuit. They cannot afford the consumer backlash and negative publicity that comes from being perceived as an "Ugly American" company, doing wrong. The bottom line is that if businesses do not use their supply chain in a way that follows the evolving standards that are perceived to be correct, they are going to pay for it eventually. So why not prevent the negative in advance? If businesses do not plan in advance, if they avoid risk assessments and compliance programs to save in the short run, they are subjecting themselves to very costly preventable problems.

Editor: There is a distinction between a code of ethics and a code of conduct, and corporate social responsibility involves both.

Jaffe: Right. The first is the high standard, the second is what it requires and the third incorporates both and then some. Following the first and the second is part of the third, and can work to a company's advantage. Example: Johnson & Johnson. What lesson do you learn from Johnson & Johnson and the Tylenol tampering case? Johnson & Johnson in the Tylenol incident learned from its earlier incident and planned. It did an instant recall, pulled the product off the market, came up with a new device to secure the product and wound up reclaiming a huge amount of the market. Was this gamesmanship to advance the corporate profit margin or do you view it as corporate social responsibility? It doesn't matter how you frame it; they did the right thing, at the right time and it came out as an absolute win-win for them.

Editor: How we teach ethics is one of the hot questions in business schools these days.

Jaffe: You can "teach" almost anything, but if a board and the management do not really believe the ethical standards that they espouse, they will never be able to pass it to or inculcate it in anybody else. As we said, top down and bottom up, board, management, employees, agents and supply chains. If it isn't both ways it won't exist.

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