Corporate Integrity in a Post-Scandal World

Corporate Integrity in a Post-Scandal World

By Sandra Waddock

Executive greed, corporate malfeasance, and accounting misrepresentations seem to be the norm in an era where CEO compensation averages, depending on your source, somewhere between 411 and 475 times that of the average worker. Companies whose readily identifiable brand names are household words find themselves constant targets of investigative reporting about their practices (e.g., Eric Schlosser's Fast Food Nation or Naomi Klein's No Logo), not to mention accusations from child labor, human rights abuses, sweatshop, and environmental activists.

Corporate responses to public outrage about these unethical practices range from the do-nothing-and-maybe-the-problem-will-go-away approach to the development of proactive responsibility management systems. The latter are meant to forestall regulatory action on the part of governments or more targeting by activists. Despite the prevalence of abuses, many corporate managers are well aware that company stakeholders have grown quite sophisticated in their demands for integrity. These demands, which rely on perceptions of company reputation for corporate citizenship, come from social/ethical investors, customers who purchase from companies perceived to be responsible, and talented prospective employees who make job choices based on perceived responsibility.

Demands for corporate integrity have triggered considerable attention to internal practices, resulting in the development of approaches to managing companies' stakeholder and environmental responsibilities similar to quality management systems. Particularly for companies hard hit by anti-corporate activism, responsibility management has become a business imperative that requires active management of the quality of working conditions in manufacturing facilities, environmental management systems, and company-specific codes of conduct. Yet will voluntary approaches to responsibility management be adequate?

Arguably, voluntary responsibility management systems will not suffice to satisfy the general public that corporate integrity has been (re)established, particularly in powerful multinational corporations. A complementary responsibility assurance system, comparable in many respects to financial reporting and assurance systems, is needed. The broad outline of responsibility assurance, which complements the emerging array of responsibility management approaches in large companies, is already beginning to take shape globally.

There are three major ingredients to responsibility assurance. First, responsibility assurance means adoption of widely shared and globally accepted standards of practice, usually codified in codes of conduct or sets of principles. The 1990s experienced an explosion of corporate codes of conduct, and perhaps more importantly, globally agreed standards and principles, among them the OECD Guidelines for Multinational Corporations, the Caux Principles, the CERES (environmental) Principles, and the Global Sullivan Principles.

One set of principles that has garnered public attention internationally is the UN Global Compact, established by UN Secretary General Kofi Annan in 1999. The Global Compact is the simplest of the global standards, since it consists of nine principles on human rights, labor standards, and environment, all of which derive from internationally agreed UN documents. Such agreed principles provide a core set of foundational values that provide a "floor" to corporate practice.

The second element involves the application of credible monitoring, verification and certification systems that ensure that stated values, standards, and principles are in fact being lived by the company. The need for credibility in such assurance systems suggests that even if they are voluntarily adopted, as some companies are currently doing, the monitoring will need to be undertaken by credible external agents, not company employees. Leading examples are the SA 8000 global labor standards issued by Social Accountability International and the AA 1000 stakeholder engagement and audit standards promulgated by the UK's AccountAbility.

Monitoring systems need to be linked to globally-accepted multiple bottom-line audit and reporting guidelines comparable to generally accepted accounting principles (GAAP) within the accounting industry. Meant to provide consistency and comparability across companies, such reporting guidelines typically focus on the traditional financial or economic bottom line of companies, and encompass social and environmental performance as well. Sometimes called triple bottom-line reporting, these reporting guidelines, of which the leading system is called the Global Reporting Initiative (GRI), are increasingly in use by European Union and companies that have adopted the Global Compact's nine principles, among others.

There are good business reasons why companies are turning to responsibility assurance and management approaches. The past few years of scandals, accounting misrepresentation, and malfeasance by corporate executives have highlighted a core reality: The market system, fundamentally, is based on trust. Only by credibly instituting systemic approaches to meeting responsibilities to stakeholders and the natural environment on which our very existence depends, can this trust be restored.

Sandra Waddock, a professor in the Carroll School of Management, is a senior research fellow at the Boston College Center for Corporate Citizenship and co-founder of the Leadership for Change Program.

 

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