Corporate Responsibility Audits: Doing Well by Doing Good

Many companies spend significant time and effort developing a mission statement — complete with vision, values, goals, and strategies. Ask managers whether their firm’s mission statement lives in the company day-to-day or whether it lies neglected in someone’s desk drawer. In too many instances, the truthful answer is: “The vision is more rhetoric than real.”

This is not because the company’s managers are neglectful or “bad people.” Indeed, most managers would say they are doing their best to exemplify the values in these documents and achieve the vision. However, in-depth investigations of company practices, even in the best of firms, frequently reveal large gaps between stated values and daily practices.

We propose that auditing a company’s core operating practices by using a responsibility audit may help to bridge this rhetoric-reality gap. Such an audit assesses a company’s overall performance against its core values, ethics policy, internal operating practices, management systems, and, most importantly, the expectations of key stakeholders — owners, employees, suppliers, customers, and local communities. Such audits alert companies to responsible business practices that will help them simultaneously “do well (financially) and do good (socially).”

Vision versus Practice

As part of a recent beta test of a responsibility audit process, eight companies assessed those operating practices that related to implementing their stated vision, values, and mission. All eight had award-winning environmental, health, and safety (EHS); human resources; or corporate giving practices. However, they all discovered significant gaps in four operating areas: employee relations, quality systems, community relations, and environmental practices. When comparing their corporate core values with employees’ core values, they uncovered organizational cultures that inadvertently contributed to the rhetoric-reality disconnect.

The eight audits consistently revealed that when a company adopted proactive, responsible practices, it reaped measurable improvements in efficiency and productivity, lowered legal exposure and risks to the company reputation, and reduced direct and overhead costs.

Responsibility auditing, also called social auditing, can help corporations uncover these gaps and proactively improve their management practices. Consider the following:

  • A leading regional insurer had a higher-than-industry-average employee turnover in competitively paid, highly demanding, and stressful customer service positions. An assessment and cost-benefit analysis of employee policies, practices, and the quality management system estimated that recovering just half of the turnover costs of employee overtime, temporary help, and outsourcing due to turnover would increase the insurer’s annual profit by 7 percent.

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References

1. R. Edward Freeman popularized the stakeholder concept in his 1984 book. See:

R.E. Freeman, Strategic Management: A Stakeholder Approach (New York: Basic Books, 1984).

2. Collins and Porras highlight this theme of “both/and” versus an “either/or” orientation in their book. See:

J.C. Collins and J.I. Porras, Built to Last: Successful Habits of Visionary Companies (New York: HarperCollins, 1997).

3. For some current research, see:

J.B. Guerard Jr., “Is There a Cost to Being Socially Responsible in Investing?” Journal of Investing, volume 6, Summer 1997, pp. 11–18;

J.B. Guerard Jr., “Additional Evidence on the Cost of Being Socially Responsible in Investing,” Journal of Investing, volume 6, Winter 1997, pp. 31–36;

J.J. Angel and P. Rivoli, “Does Ethical Investing Impose a Cost upon the Firm? A Theoretical Examination?” Journal of Investing, volume 6, Winter 1997, pp. 57–61;

S.A. Waddock and S.B. Graves, “The Corporate Social Performance-Financial Performance Link,” Strategic Management Journal, volume 18, number 4, 1997a, pp. 303–319;

S.A. Waddock and S.B. Graves, “Quality of Management and Quality of Stakeholder Relations: Are They Synonymous?” Business and Society, volume 36, September 1997, pp. 250–279; and

L. Kurtz, “No Effect, or No Net Effect? Studies on Socially Responsible Investing,” Journal of Investing, volume 6, Winter 1997, pp. 37–49.

For summaries of research, see:

M.L. Pava and J. Krausz, “The Association Between Corporate Social-Responsibility and Financial Performance: The Paradox of Social Cost,” Journal of Business Ethics, volume 15, 1996, pp. 321–357; and

D.J. Wood and R.E. Jones, “Stakeholder Mismatching: A Theoretical Problem in Empirical Research on Corporate Social Performance,” International Journal of Organizational Analysis, volume 3, July 1995, pp. 229–267; and

J. Frooman, “Socially Irresponsible and Illegal Behavior and Shareholder Wealth: A Meta-Analysis of Event Studies,” Business and Society, volume 3, 1997, pp. 221–249.

4. For some interesting critiques of the modern corporation, see:

C. Derber, Corporation Nation (New York: St. Martin’s Press, 1998);

W. Greider, One World, Ready or Not: The Manic Logic of Global Capitalism (New York: Touchstone Books, 1998); and

David Korten, When Corporations Rule the World (San Francisco: Berrett-Koehler Publishers, 1995).

5. For extensive discussion about the concept of mental models or stereotypes, see:

P. Senge, The Fifth Discipline: The Art and Practice of the Learning Organization (New York: Doubleday, 1991). Also, see:

Collins and Porras (1997).

6. Fisher and Torbert discussed how continuous and continual improvement differ in: D. Fisher and W.R. Torbert, Personal and Organizational Transformations: The True Challenge of Continual Quality Improvement (London: McGraw Hill, 1995).

7. The term used for such positive and proactive community relations is “neighbor of choice.” See: E.M. Burke, Corporate Community Relations: The Principle of the Neighbor of Choice (Westport, Connecticut: Praeger, 1999).

8. Lydenberg and Paul argue that such risks are perceived to be “incalculable” by certain investors, and hence they will avoid investing in companies producing such risks. See:

S. Lydenberg and K. Paul, “Stakeholder Theory and Socially Responsible Investing: Toward a Convergence of Theory and Practice,” in 1997 Proceedings of the International Association for Business and Society, J. Weber and K. Rehbein, eds. (Destin, Florida: International Association of Business and Society, 1997), pp. 208–213.

9. For the history of social auditing, see:

K. Davenport, “Social Auditing: The Quest for Corporate Social Responsibility,” in J. Weber and K. Rehbein, eds., 1997 Proceedings of the International Association of Business and Society (Destin, Florida: International Association of Business and Society, 1997), pp. 197–207; and

T.J. Kreps, Measurement of the Social Performance of Business. Monograph No. 7: An Investigation of the Concentration of Economic Power for the Temporary National Economic Committee (Washington, D.C.: U.S. Government Printing Office, 1940).

10. In the past, people were less aware of how dumping chemical wastes might affect public health and the environment. On thousands of properties where such practices were intensive or continuous, the result was uncontrolled or abandoned hazardous waste sites, such as abandoned warehouses and landfills. Citizen concern about this problem led the U.S. Congress to establish the U.S. Environmental Protection Agency Superfund Program in 1980 to locate, investigate, and clean up the worst sites nationwide.

11. For example, CEP’s database covers 320 companies that produce consumer goods, some large and some small. KLD’s database covers all 500 Standard & Poor’s companies, plus another 150 or so that are included in the Domini Social Fund, which has passed KLD screening.

12. Cited in Davenport (1997), see:

H.R. Bowen, Social Responsibilities of the Businessman (New York: Harper, 1953).

13. Companies whose strategies depend on social responsibility are at significant risk of notoriety if their performance is questioned, as investigative reporter Jon Entine’s continuing commentary on Ben & Jerry’s and The Body Shop highlights. He has critiqued The Body Shop for ethical and environmental practices that appeared to contradict the company’s stated policy and image. More recently, Entine has criticized Ben & Jerry’s in a series of articles about the company’s marketing claim that Rain Forest Crunch and other products benefit indigenous peoples. See:

J. Entine, “The Body Shop: Truth or Consequences,” Drug & Cosmetic Industry, volume 156, February 1995, pp. 54–59.

The New Economics Foundation conducted The Body Shop’s social audit. For an overiew of the audits that NEF conducts, see: www.neweconomics.org/main/tools/social.htm

14. Davenport (1997), p. 199.

15. For current information on reputation management, see:

www.reputations.org/

See also:

C. Fombrun, Reputation: Realizing Value from the Corporate Image (Boston: Harvard Business School Press, 1996).

16. Collins and Porras (1997).