Financial Services Research Forum

Financial Services Research Forum January 2007

Acknowledgement Corporate Social Responsibility (CSR) We are grateful for financial support from the Financial Services Research Forum and for helpful comments in Financial Services from individual Forum members and particularly from Nigel Waite. We also acknowledge support with data collection from the International Institute of Banking and Financial Services (IIBFS) at the University of Leeds, Catrina Alferoff and David Knights and research assistance from Karen D’Souza. School of Economics and Management Studies University of Keele, ST5 5BG, UK.

For futher information contact David Knights: [email protected] References Notes 1 ABI (2001) Investing in Social Responsibility: Risks and Opportunities. Of course, Friedman might not have been so absolute in his views today since he could not deny that the cultural and environmental climate has changed since he wrote but yet only 2 Association of British Insurers. years ago Peter Drucker (2004) expressed almost identical views when he argued that CSR “is a dangerous distortion of business principles. If you find an executive who wants to take on social Abstract Commission of the European Communities (2001) Communication from responsibilities, fire him. Fast”. In this monograph it is argued that CSR has yet to become fully embedded into legacies of 18th century Enlightenment philosophy and are socially sustained the Commission Concerning Corporate Social Responsibility: A business 2 We acknowledge Crouch (2006) for this insight. the cultures and corporate goals of the financial services industry. While much by economic theory, market exchange and government policy. Yet market and, contribution to Sustainable Development, COM: 366. 3 Other social conditions, and not least asceticism, accumulation and the work ethic associated equivocation exists with regard to the compatibility of CSR principles with long- even less capitalist economies, have not always existed or been so universally Crouch, C (2006) ‘Modelling the Firm in its Market and Organizational with Calvinism and the protestant religion played their part but many other factors too numerous to mention were important. term financial performance, it is contended here that the broader context has accepted as if they were merely institutionalised reflections of ‘human nature’. Environment: Methodologies for studying Corporate Social Responsibility’, 4 For example, some of the most proactive CSR companies have been found wanting on changed, making CSR fundamental to business strategy. Moreover at a range Their organizations and institutions are fully embedded in social life and cannot Organization Studies, 27/10 pp. 1533-1551. environmental protection and human rights issues when pursuing investment projects in developing countries. of levels of seniority, staff have a readiness for, and expectation of, clearer be seen as independent of society and politics nor, therefore, free of social CSR Europe, Deloitte Touche Tohmatsu, and Euronext (2003) Investing in 5 This is occurring despite a common view that the City is a laggard in this regard. In our Forum leadership regarding the place and role of CSR. responsibilities. Responsible Business”, cited in CSR Influence on Investment Decisions discussions, many thought that fund managers and investors were a constraint on CSR but Expected to Grow, Business Environment. the situtation is changing rapidly as concern for the environment and ethical practice becomes Second, how would Friedman’s theory deal with the fact that corporations embedded in our culture. Drucker, P. F (2004) The Daily Drucker: 366 Days of Insight and Motivation Introduction engage in political lobbying2 to secure favourable conditions in which to for Getting the Right Things Done, London: Elsevier. operate? Presumably such behaviour would have to be proscribed but then organizations that violated the norm would secure a strategic advantage. But it Friedman, M (1970) The social responsibility of business is to increase its is unrealistic to think that corporations would rely entirely on the marketplace profits’, New York Times Magazine, 13th September. “Firms have no duty or mandate to go to secure their sustainability when government is continually intervening to Henriques, I and P.Sadorsky (1999) The Relationship Between Environmental beyond maximising shareholder value” change the economic conditions in which they operate. Assuming that they do Commitment and Managerial Perceptions of Stakeholder Importance, (Milton Friedman, 1970). participate like ordinary members of the population in the political institutions, Academy of Management Journal, 42(1) 87-99. is it not reasonable to think of businesses as corporate citizens? If that is Institutional Investors Group on Climate Change (2004) Managing the risks so, then they have a similar responsibility as ordinary citizens to secure the and profiting from the shift to a low carbon economy, www.iigcc.org Why should corporations be interested in anything other than their legal sustainability of society. responsibility to maximise shareholder value? Surely it is other institutions including the state that have responsibilities towards society, human rights Third, Friedman’s theory seems historically frozen in the past since it takes no and the environment. If firms pursue goals other than financial profit or account of cultural, social, and political changes that impact upon contemporary Financial Services Research Forum economic growth, they will become inefficient but also they have no right to economic relations. As suggested, the Enlightenment was one such significant do so since their very incorporation constitutes them as agents of their owners transformation without which the capitalist enterprise as we know it, may as principals. Of course, these principals or capital owners can mandate their not have arisen and thrived3. However, we would seem to be currently in a corporation to pursue CSR goals but should they do so then they must be situation of dramatic cultural, social and political transformation as a result of Professor Nigel Waite Mrs Jane Aston Further Information aware of the implications for economic efficiency. If we accept these arguments, climate change, globalisation, and the development of a post-modern culture. Executive Director FSRF I do hope you have found this publication interesting and informative. If you then it would be impossible for our research to establish the business case The sense in which Friedman’s theory is entrapped in a time warp prevents FSRF The University of Nottingham its advocates from seeing how these changes impact on business in the 21st 87 Canford Cliffs Road Nottingham University Business School would like to know more about The Forum and how to become involved in our for Corporate Social Responsibility (CSR). However, there are some flaws in 1 century. How do these transformations impact on business and is CSR the Poole Jubilee Campus work it would be great to hear from you. Please get in touch with me through Friedman’s neo-liberal economic theory . mechanism through which business can respond? Dorset Wollaton Road either our office in Nottingham or Poole, full contact details are given opposite. BH13 7EW Nottingham First, it fails to acknowledge how corporations historically were constituted Professor Nigel Waite Finally, the theory simply neglects to consider how behaving responsibly may UK NG8 1BB and continue to be sustained as legal entities through Royal Charters, limited Executive Director UK liability legislation, and various fiscal privileges and protection. In the case of actually be a necessary condition of securing shareholder value particularly Tel: +44 (0) 1202 700003 financial services, these privileges and protections are considerable and without in the medium to longer term. Given these weaknesses in the neo-liberal e-mail: [email protected] Tel: +44 (0) 115 951 5099 them there would be insufficient institutional and public confidence and trust economic model, a business case for CSR can be made. The report begins from Fax: + 44 (0) 115 846 6667 for them to operate. Even the notion of economic self-interest and individual this position but demonstrates that there is still a tendency to slip back into e-mail: [email protected] www.nottingham.ac.uk/business/forum/ rationality as the fundamental ground of neo-liberal economics are historical seeing a conflict rather than compatibility between CSR and shareholder value.

4 1 Nottingham University Business School | Financial Services Research Forum Corporate Social Responsibility (CSR) in Financial Services | Catrina Alferoff and David Knights | January 2007

CSR and its rationale Communicating Performance CSR is defined as the integration of ‘social and environmental concerns in their Validation - securing validation through one or more of the following indices: The opinions of spokesmen from two consumer representative groups suggest The Forum for the Future works in partnership with Royal Bank of Scotland, business operations and in their interaction with stakeholders on a voluntary Dow Jones, FTSE4Good, Business in the Community, Business in the Environment that this may not be enough of a change: Royal and Sun Alliance, Nationwide and Prudential amongst others. In 2003, HBOS joined forces with WWF to work on the WWF’s One Million Sustainable basis’ (Commission of the European Communities 2001:3). For financial service appears to advantage listed companies. This can serve both ethical and “The majority of developments are forced on the industry by regulation, other Homes campaign, with the objective of encouraging the construction of a million organisations, demonstrating some level or commitment to social, ethical and instrumental ends, since it sends out a message to investors about the company’s external factors such as Ombudsman decisions.” environmental principles is obligatory given the environment in which they trustworthiness as a safe investment prospect. Whilst the Dow Jones and new energy and resource-efficient homes by 2012. operate. Instrumental, ethical and systemic pressures are factors leading to the FTSE4Good are regarded as valuable measures of an organisation’s commitment to “CSR is no guarantee of fair customer treatment – hence the FSA intervention.” adoption of a formalised CSR policy. In terms of investor relations, instrumental CSR, there are at least four problems with these indices for they: “There are few examples of CSR leading to positive developments in the market” reasons include risk management, rebuilding reputation and brand value, • represent an assessment only of the organisation’s reporting; “The focus tends to be on good deeds, not the way consumers access and The Power of Investors competition and differentiation. Companies comply with regulation and seek to use products”. treat customers fairly as ethical commitments, and respond to a changing societal • may not be easily adaptable to the needs of smaller organisations or A recent survey by the ABI found that 52 per cent of fund managers/analysts agenda and external pressures from Government and NGOs as systemic issues. mutual organisations; Certainly, the rhetoric of CSR can be at odds with the following examples of less and 47 per cent of investment relations officers believed that social and • ignore the differential power relations between the organisation and those than satisfactory practice, which are currently under review by the regulator, or environmental concerns would become a significant aspect of mainstream In this report we cover the process of introducing CSR and the systemic, ethical with whom it transacts business, its employees, shareholders, the investment the Ombudsman’s office. investment decisions over the following two years. Good practice in these and communicative challenges that this poses for CSR managers. We have community, regulatory bodies, governments and society at large. • High overdraft charges; areas has a positive impact not only on the company’s reputation, but also on focused on the ‘people’ issues – employees, customers and business partners the company’s long-term value, but no impact in the short-term (CSR Europe, • reward and therefore tend to encourage reporting just as a bureaucratic exercise. • Mishandling of complaints; before moving on to sustainability and long-term thinking on investments. • Payment protection insurance; Deloitte Touche Tohmatsu and Euronext 2003). Interviews with fund managers • High mortgage exit charges; and a CSR consultant confirmed that this is their experience. Increasingly, • Irresponsible lending. members of the Socially Responsible Investments teams are asked to participate Systemic Challenges to the introduction of in meetings with investors. Morley Fund management now publishes its voting “What is not defensible is when an record on social, environmental and governance issues, as does Co-operative CSR As one of our respondents argued, “ Treating Customers Fairly, for example, you organisation says, “here’s our values could just do what you need to do to satisfy the FSA that you’re being fair. You Financial Services. • The operating environment. Including suppliers, business partners, and might not be doing as much as you can, are you playing fair to everybody?” investors. Companies have to meet the expectations of a variety of actors and principles and then goes off and (CSR manager, Life Company). Yet we did find some examples of forward looking, in terms of the compatibility of their social, environmental, ethical policies sustainable and innovative products: Summary with those of individuals and organisations with whom they do business. does something else.” • Flood mapping and providing information for customer, planners • The business case for Corporate Social Responsibility (CSR) can only be Whilst supplier relations are now relatively established in terms of shared CSR consultant and government; made if we challenge the neo-liberal economic model that rejects any CSR/governance, distribution routes would appear to be less so. IFAs have not • Linking health and fitness to the cost of medical insurance; corporate objectives outside of shareholder value. Through pointing to the tended to get involved except, in some instances, into the tender process. The legal, social, and political genesis and continued sustainability of the difficulty is an important one for reputation because the bill for correcting • Energy efficiency audit with mortgage survey. corporation and the current increasing demands for corporate social and things ends up with the company, since the IFA who has mis-sold a product environmental responsibility, CSR and shareholder value have to be seen as may not be in business by the time that the problem arises. One life and The Social in Corporate Social Responsibility mutually compatible; pensions company offers in-house training on CSR to IFAs. Most organisations meet CSR expectations in terms of flexible working, Approaches to Sustainability and • CSR policies, in some of the largest companies go beyond mere PR, since there job-sharing, training etc. and many listed companies have signed up to one or • Organisational rigidities. Often CSR managers have only been in place for Environmental Management is often a link between strategy, a sustainable approach to innovative products, another human rights index for their overseas employees. However, there has 2-3 years. We found that our respondents had received only days of training in and investments; been little improvement in terms of equal opportunities and diversity – for some Attention given to environmental matters has been climbing the agenda in the area, bolstered by attending conferences, desk research and participating in organizations year-on-year figures show minor changes at best and reversals in most companies but it is only the large PLCs that have become pro-active. The • Pressure from investors, fund managers5 and peers have enforced a level of best practice networks. Gaining credibility with other functional areas is not others. On the other hand, all CSR managers were eager to tell us about their organizations researched were quite evenly spread throughout the following levels conformity and the financial services company that neglects environmental and easily accomplished. Middle managers appear to be the stumbling block, for community and charitable activities. Where the media is concerned these are the of CSR development: social issues may have to explain its position to investors in addition to CSR issues do not come high on their time-scarce agendas. Therefore, a CSR suppliers and business partners, potential employees and consumers; good stories and can more easily translate into building brand and reputation with • The Beginner - moving very slowly to Fire-fighter – typical here was programme that has been parachuted in by the senior management may be the public. However, although there were many examples of staff volunteering and a mutual, which encouraged voluntary activities among staff to improve • When it comes to the actual policy and practice, however, proclamations difficult to implement and embed in practice. carrying out fund-raising activities, we found little evidence of this type of activity morale after large numbers had been made redundant. After two years, this on the organisation’s values in relation to those it deems to be significant for translating into formal performance and reward structures for employees. organisation has progressed to having a specialist conduct a ‘gap analysis’. stakeholders made on web pages and in the early pages of CSR or • Resource and time. CSR teams are small, for the largest organisation they may sustainability reports may not be borne out by data that is presented later on comprise four or five individuals, but often the CSR manager works alone and • The Fire-fighter - typically the larger mutual which considers it might in these same reports; is in competition with other operating functional areas for resources. become uncompetitive by rushing too fast into CSR and would prefer merely CSR and Customers to be compliant with the law. • Interviews with CSR managers demonstrated that, although they may have the best of intentions, they are often under-resourced and there is often Financial services, especially long-term business products such as insurance, • The Concerned Citizen is the comfort zone for many organisations – the insufficient integration of the principles embedded in the CSR policy with The Ethical Dimension pensions and mortgages are distinct from many other consumer goods and building society that has a comprehensive report, but appears to have failed product development, service delivery and overseas project funding and this services not only in being intangible but also committing the customer and the to integrate the programme internally. Often CSR policy is seen by front-line • Compliance. Although, as yet there is no legislation affecting CSR beyond threatens the whole endeavour; firm to a long quasi-permanent relationship, the success of which is based on employees just as a bit of fund-raising, recycling paper cups and energy saving. existing measures on UK Company law, on the sale of goods, advertising, events that occur over the lifetime of the product. Payment protection insurance, • That there have been recent instances where the regulator, or ombudsman employment, the FSA handbook and health and safety at work – adhering to • The Proactive organisation – there are well known examples such as Barclays, pensions or mortgages are not easily open to the ‘rate tart’ [sic] flitting that has had to take action to protect the consumer demonstrates that there are the various voluntary codes of conduct are a prerequisite for any organisation HSBC, Aviva, Co-operative Financial Services. These organisations work closely characterises credit cards. Even so, attempting to treat customers on a par with still deficiencies in this area and consumer representative groups are cynical with any claim to be serious about CSR. Thus, even though the Operating and with bodies such as the Carbon Disclosure Project, have developed the Equator employees or shareholders creates problems for those responsible for CSR in the about the dedication of financial services companies to CSR in relation Financial Review did not reach the legislative slate, many respondents told principles and are signatories of the Universal Declaration on Human Rights company and this is evident in CSR reports and interviews. They have dealt with to customers; us that they proposed to implement the principles. For companies operating in and United Nations Environment Programme Finance Initiative and observe this, in the main, by tying the marketing model to service quality and compliance the US – the Sarbanes-Oxley measures have informed their global operations in the principles set down by the International Labour Organisation. Even so, • Overall whether consciously or not, corporations have a tendency to slip with industry tools such as ‘Forge’ and codes of conduct such as the FSA’s addition to local legislation within the countries they operate. practice may not fully meet the rhetoric, as disclosed data in company reports into the neo-liberal economic view of seeing CSR as marginal to maximising ‘Treating Customers Fairly’, and the ABI’s ‘Raising Standards.’ demonstrates4. shareholder value; • Statements concerning long-term strategic goals should include explicit Rather than sniping from the sidelines, some NGOs have formed partnerships reference to how CSR has informed their development. with financial service organisations to advise on integrating CSR into the company strategy. Abbey works with The Work Foundation, a not-for-profit organisation that brings all sides of working organisations together to find the best ways of improving both economic performance and quality of working life.

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