Regulators all around the world are now increasingly holding the corporate sector ‘responsible’ for its impact on society, the economy and the environment. This is being seen through increased regulatory behavior to guide companies in driving corporate social responsibility. Keeping with global best practices, the Securities and Exchange Commission of Pakistan has recently released ‘Voluntary Guidelines for Social Responsibility’.
Shareholder value and reputational risk have increasingly become associated with managing impacts and performance in the triple bottom-line. Most companies listed on international stock exchanges today are choosing to adopt policies that that embed CSR in their business practices and disclose related information in annual reports. These efforts are recognized on many levels from the Dow Jones Sustainability Index to Corporate Register as stakeholders choose to judge a company in terms of environmental performance and impact on society.
The corporate community in Pakistan through its philanthropic contributions and donations has a historical background of being socially responsible. As the understanding of an organization’s responsibility moved towards sustainable development, the concept of sustainability evolved. In the recent past, many listed companies have begun to develop policies and practices to realize the social, economic and environmental impacts of its business practices as part of understanding business sustainability in the long term.
The current management of CSR by the corporate sector varies from company to company and sector to sector. A growing number of companies have chosen to treat CSR as an investment, choosing to follow international best practices of management and reporting, going beyond the requirements of local legislation. Others give CSR token recognition; thus disclosing on CSR performance is simplistic as compared to sophisticated reporting of financial figures. As both content and methodology of disclosures varies across companies, it is difficult for stakeholders to understand the company’s CSR performance related data.
Voluntary Guidelines for Public Companies
The recently released ‘Voluntary Guidelines for Corporate Social Responsibility’ by the Securities and Exchange Commission of Pakistan (SECP) strives to make CSR performance more congruent amongst companies. The Guidelines, SECP’s second regulatory input related to CSR, follow on from the mandatory CSR General Order in November 2009 that stated listed companies were to include monetary and descriptive disclosures in their Directors Report.
The guidelines are targeted towards all public companies and although voluntary, are expected to increase the number of companies which consider CSR to be a part of their business practice. Through implementation, it will lead to a process of accountability and transparency in the commitments made by management to key CSR issues.
The guidelines, focus on promoting a CSR culture in the company by identifying key aspects of establishing CSR processes in the company – placing emphasis on various stages of how CSR should be integrated in business practice, mainly focusing on identifying a CSR consultative committee, on developing a CSR Policy, identifying goals and achievements, and related disclosure and reporting, and independent assurance of CSR performance.
The SECP has placed emphasis on expectation of the board of directors to play an active role in formulating CSR policy. The significance of making CSR a priority of the top management is that it places CSR in the roles and responsibilities of the top management. It also sends a message to all departments that targets set for CSR will be reviewed in the same manner as other business targets. The guidelines identify a top-down approach for practicing CSR, focusing on commitment of top management to include CSR into strategic business decisions.
Companies to Choose their own CSR Interests
The guidelines, whilst giving the company a direction in managing CSR, give the company freedom to develop its own understanding of CSR. This can be tricky if companies still understand ‘CSR’ to be charitable donations. It does suggest a number of areas of interests which can a company can focus its CSR activities on. This includes climate change, governance and product responsibility. These are important focus areas in a company’s corporate responsibility – and the nature of the guidelines leave the company free to develop their own understanding of these terms.
The advantage of this freedom is that the company is left free to decide which interests are material issues – an impact of which could influence the decisions and behavior of stakeholders. The disadvantage in leaving an open field for a company to choose from might result in a company continuing to focus only on charitable donations.
Other regulatory guidelines in the region have chosen to be specific in defining what constitutes corporate social responsibility. In India ‘National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business’ (2011) released by the Ministry of Corporate Affairs encourage businesses to implement all ‘nine key principles in their entirety rather than picking and choosing what might suit them’. The principles cover all aspects of corporate responsibility including governance, environmental protection, human rights and product responsibility from cradle to grave.
Similarly Bursa Malaysia’s ‘Guide to Directors’ identifies ‘A company’s sustainability focus as being dependent on the business impact of their operations on the community, environment, marketplace and the workplace as well as stakeholder expectations and corporate strategy’. It gives a detailed description of common sustainability issues in terms of a company’s value chain. The statement leaves no ambiguity to the company in determining the scope and focus of its areas of interests.
The Stepping Stone to Further Legislation?
As stakeholder focus increases on sustainable business practices, regulators in most countries have now introduced reporting and disclosure requirements. This shows the growing value given to socially responsible behavior of the corporate sector. As understanding of national sustainability issues increases, regulators now hold the corporate sector ‘responsible’ for shaping a country’s future development. The SECP’s Guidelines are a step in the right direction. The guidelines in its present form can be regarded as a preliminary step to further legislation if it wants to be compared to other global regulators.
Key practices adopted in other countries include:
Moving towards mandatory legislation. A number of countries have moved towards mandatory legislation related to reporting and disclosure of a company’s performance in terms of both its environmental and social responsibilities. This shows that regulators have now begun to view sustainability performance at par with financial performance.
Integrating sustainability performance with national development goals. Qatar has recently made reporting on sustainability performance mandatory for Industry. Here, mandatory reporting will ensure that companies strive to align their aims and objectives with Qatar’s National Vision 2030.
Sector based legislation. Indonesia has implemented sector based mandatory legislation related to CSR. Presently, only those companies with business activities in and or related to natural resources are required to implement CSR (Waagstein, 2011).
Mandatory reporting in key sustainability focus areas. Some countries are going a step ahead and are now moving towards making certain aspects of corporate responsibility mandatory. Most mandatory regulation is linked to national goals and strategies. This includes specific regulatory impacts for reporting on carbon disclosures etc made by United States, Australia, the UK and France. This measure will increase monitoring and perhaps work as an incentive for working towards reduced carbon emissions.
Obligatory allocation of profits towards CSR. India has recently introduced a bill that requires companies that have a high net profit ($920,000 or more) to spend 2% of the profit on CSR activities. It is also mandatory to disclose the expenditure amount. The objective behind the bill is to increase transparency which will attract foreign investment.
In releasing the Guidelines, Pakistan’s regulators have begun to hold the corporate sector ‘responsible’ for their actions. As CSR processes mature in the corporate sector, evaluation of progress in CSR disclosures will pave the way for more sophisticated measures which can be linked to aims of national development and foreign investment.
Viewing the Guidelines as Insurance for managing risks
Businesses face a number of strategic risks as consumers demand for responsible practices and future strategic investments need to be considered in terms of environment and society. The risks related to regulatory compliance is growing as international trade demands stricter regulatory measures related to labor and environmental compliance. SECP’s guidelines will encourage the corporate sector to develop an understanding of where the company’s responsibility lies towards society and environment. Public companies interested in adopting best practice to manage risks will benefit from investing in implementing the guidelines.