0 2 4 6
Social Ethical and Environmental Issue Coverage
Figure 1: Normalised P/E ratio versus SEE issue coverage.
Figure 1 illustrates a weak statistical correlation between P/E ratio and the
coverage of CSR issues. This indicates that those companies having a better
grasp of CSR matters (higher number on the x-axis) will on average show higher
P/E ratios relative to their sectors. While the correlation is somewhat tenuous,
it is indicative that executive teams having the time and confidence to put in
place governance systems for the key issues facing the company will also have
in place sound commercial strategies and have a good understanding of the
companyâ€™s competitive position. In essence it acts as a surrogate for the quality
Chapter 23 â€“ Corporate responsibility, corporate governance and emerging jurisdictions 585
of the executive team, and as such is an indicator that they are doing a compe-
tent job of directing the company.
Bearing in mind the fact that the price relates to the future and earnings
relate to the past performance, it is a useful model to assess the quality of the
hands-on management of the business and therefore its sustainability.
The management tool
It is possible to develop the correlation in Figure 1 more generally into a simple
tool for management. This is illustrated in Figure 2, following the lines of the
well-known Boston Consulting Matrix. Use of the tool requires that the com-
pany assesses its P/E ratio relative to the sector and its peers and also to bench-
mark its governance and reporting systems on CSR-related matters. This would
include social, ethical and environmental matters in so far as they are import-
ant for the delivery of the companyâ€™s strategy and strategic objectives. Whereas
it is evident that more detailed attention to CSR matters will not dig a badly
managed organisation out of a financial hole the summary of issues offers prac-
tical suggestions to balance the organisationâ€™s objectives and to improve per-
formance. This analysis will position the company in one of the four quadrants
of the matrix in Figure 2.
Higher Exposed Resilient
CSR/CR Issues Impacts Relative Coverage
Figure 2: Schematic action diagram on the coverage CSR/CR issues.
Depending on the quadrant that a company falls within will raise different
questions for the company executive team to consider. These are summarised
in the table below.
Part E â€“ Case Studies of Business Risks
Summary of issues relating to Figure 2
Quadrant descriptor Commentary Issues to consider
Resilient Companies are generally Maintain position as market
High relative P/E aware of and taking drivers develop
High relative CSR action on their key CSR Ensure continued consistency
coverage issues and reporting between statements and actions.
on them Ensure all actions and
programmes support delivery
of company strategy
Exposed Likely that company Support position by an appropriate
High relative P/E has suddenly consideration of the key CSR
Lower relative CSR developed in market matters relating to the delivery
coverage cap and not responded of company strategy
appropriately to Report on the issues and actions
expectations on appropriately
Potential Companies seem to have Review the coverage of CSR topics
Low relative P/E coverage of CSR matters and realign to commercial
High relative CSR but not to be achieving objectives
coverage commercial benefits from Ensure all actions support
what they are doing company strategy and leverage the
actions which are being taken
Lethargic Limited evidence that the Ensure that the CSR market
Low relative P/E company appreciates the development implications for the
Low relative CSR key CSR factors and is company are not being over looked
coverage addressing them Set up programmes to cover any
gaps and report appropriately on
the issues and actions being taken
It is important to recognise that whatever quadrant a company finds itself in, it has value to
protect. Programmes that are ill-considered and public statements that are not fully backed up
by actions, programmes and policies will potentially lead to reputational damage, a loss of
management credibility and consequently reduction in company value. If such difficulties
arise other than very infrequently, the depression in share price will be considerable and sus-
tained. This will mean a long-term loss of shareholder sentiment. Reputational issues are play-
ing an increasingly important role in terms of a companyâ€™s brand, its differentiation strategy
and its market positioning. Building the reputation of an organisation is one of the main chal-
lenges facing a CEO and the senior management team. Reputation has become one of a com-
panyâ€™s most significant intangible assets, particularly in the face of recent regulatory demands
such as Sarbanes-Oxley in the US and the debated reporting requirements proposed in the
OFR in the UK, as well as likely developments in the EU and other major trade jurisdictions.
Smaller organisations are impacted as a result of supply chain and other market pressures.
The generic issue is critical and applies equally to all companies, irrespect-
ive of their position within the matrix. This relates to the implications of
general, wide-ranging statements on CSR matters which are not fully supported
by systems, programmes and actions on a day-to-day basis. Great care should be
taken when reporting and using such all-encompassing statements as:
â€˜CSR is central to our strategyâ€™ or â€˜CSR is at the heart of our businessâ€™
Chapter 23 â€“ Corporate responsibility, corporate governance and emerging jurisdictions 587
if they cannot be justified in all respects.
For example, a company may state that â€˜safety is paramountâ€™. This implies
that safety is the pre-eminent consideration in all strategic and operational
decisions, and that among other things the company target setting and remu-
neration systems reinforce this. If there is not this thorough alignment and con-
sistency, this will lead to the potential for investors and other stakeholders to
be misled as to the actual priorities within the company. In the unfortunate cir-
cumstance where a serious safety-related incident arises, shortcomings in pol-
icies, their implementation, or the support systems will reflect badly on the
competence of the executive team, and could end up with legal proceedings
against them either individually or collectively. Unfortunately corporate his-
tory is littered with examples of just such shortcomings.
For quoted companies the P/E ratio is a matter of fact, being quoted in numer-
ous sources of financial information. Establishing the sector average can either
be taken from the published information in such sources as the Financial
Times, or can be derived if the company considers that their sector peers are
The assessment of the companyâ€™s relative position on CSR governance and
reporting is more subjective. There is a wide range of methodologies available
on the market, though there is often little consistency between them. It is rela-
tively common to find a company as the sector leader in one index but towards
the bottom in another. This is to be expected since they frequently take a â€˜one
size fits allâ€™ approach assuming that all issues are equally as important to all
companies in all sectors. While this situation is improving, progress is slow. In
these circumstances companies should assess the key social, ethical and envir-
onmental risks to the sector and the company, and use these to benchmark the
relative position of the company using publicly available data. This will ensure
a like-for-like comparison. Any other basis is likely to produce spurious results.
The company can then position itself on the matrix and begin examining the
questions and their implications.
Application to non-quoted companies, especially the larger ones, requires
an assessment of the P/E ratio. This can be established from the company earn-
ings, and the value from an assessment of the discounted cash flow of future
earnings â€“ essentially the enterprise value of the company. Such companies
will have peer comparisons on CSR issue coverage in the range of publicly
quoted companies. It will then be possible to provide a rough estimate of the
position of the company on the matrix.
For small and medium-sized companies a similar procedure can be fol-
lowed. However, the key factor here is to use the matrix to look at the issues
which follow, rather than seeking necessarily to report on them. Reporting
should be judged on the basis of what could be judged to be either â€˜necessary
and sufficientâ€™ and/or â€˜minimum and adequateâ€™. In this context economic and
Part E â€“ Case Studies of Business Risks
market pressures such as the supply chain will also again be relevant. It is gen-
erally not necessary for SMEs to expend resources in reporting their issues and
progress on CSR matters unless commercially necessary.
Overall then the matrix can provide some insights into the actions a com-
pany needs to consider protecting and enhancing its commercial value.
Necessarily the answers will raise potentially complex issues to be addressed,
specific to the company and its sector.
The value-added model
The discussion of self-regulation by organisations remains controversial in con-
sidering the responsibilities of the board, regardless of the legal duties imposed
on company directors. The main issue facing directors, both individually and
collectively, is whether it is in their best interests as a director to ensure that
they carry out their duty of care to the highest degree possible within the board
structure. As this book demonstrates risk cannot be factored out of business
life, it can be managed more effectively. The aim is to add value, rather than
merely to go through the hoops of a compliance exercise, as pointed out by Sir
Brian Jenkins in his Foreword to Implementing Turnbull: A Boardroom Briefing
by Martyn E Jones and Gillian Sutherland (available from www.icaew.co.uk).
By taking a realistic view of the risks faced by the company, the members of the
board can improve practices, procedures and planning in many aspects of
strategic business planning.
The case for CSR
CSR addresses the nature of the linkage between the activities inside a
firm and the activities outside it. Social and environmental impacts flow
in one direction (from the firm to the outside world), while business value
is enhanced by benefits that flow in the other direction (retention of cus-
tomers, attraction of high-calibre employees, a licence to operate, etc.).
The conduit is called â€˜The Business Caseâ€™, the engine for exchange is a
companyâ€™s vision and values, and the benefits accrue for shareholders and
the public. In todayâ€™s business climate the dichotomy that Vanderbilt iden-
tified has collapsed: serving the public and stockholders can actually bene-
The impact on corporate governance
This difference in approach of the UK and the US regarding a companyâ€™s
responsibility towards society and environment has a major impact on the sys-
tems of corporate governance and the way companies are run in the two coun-
tries. This is because the disclosure on the information about the activities of
Chapter 23 â€“ Corporate responsibility, corporate governance and emerging jurisdictions 589
the company in its surroundings make it responsible for its acts to society at
large and also, in return, makes the public aware and cautious of the actions of
the company. With the requirement in the UK for companies to identify and
disclose to society their behaviour affecting the surroundings of the company
no doubt this has made companies behave more responsibly than companies in
the US. The UK approach of balancing shareholder interest and stakeholder
interest is better for society at large (Williams and Conley, â€˜An emerging third
way? The erosion of the anglo-American shareholder value constructâ€™, Cornell
International Law Journal (2005) 38 CNLILJ 493).
Corporate governance and emerging jurisdictions
Every country, of course, has its own particular set of circumstances. It would
be unwise to make comparisons based on general perceptions without taking
into account whether that system is working efficiently for that country. For
instance, the UK approach of comply and explain is very different from that of
the US which is legislative.
As discussed in Chapter 21 in the UK the â€˜comply and explainâ€™ approach
has worked well and there have been fewer major corporate disasters compared
with the US. This may be attributed to the methodical and systematic response
to earlier corporate failures in the early 1990s by way of setting up committees
and acting on the recommendations made by them. Moreover, as indicated, the
response of the UK to the collapse of Enron has been thoughtful and logical. It
has been a well-balanced reaction of comply or explain and legislative compli-
ance. For example, the Revised Code 2003 stuck to the comply or explain
approach whereas through the Audit, Investigations and Community Enterprise
Act 2004 legislative reforms were brought about.
The SOX debate
The Sarbanes-Oxley Act of 2002 (SOX) contained the most sweeping revi-
sions to United States securities laws since they were enacted in the 1930s.
The revisions, aimed at protecting investors by improving the accuracy and