Thursday, July 22, 2010
Canada's Top Performers in CSR: Use of Measures
Following up from my previous two posts on the Corporate Knights rankings, this final blog discusses in finer detail the methodology Corporate Knights uses to measure CSR and sustainability of firms. One could argue that the very methodology and ideology surrounding the measurement system fosters a reductionist approach to sustainability whereby companies receive accolades by focusing on isolated systems or even isolated parts of systems rather than understanding the interconnectivity of social, ecological, and governance systems.
First, let’s consider the measurement criteria they are using. Corporate Knights uses three broad measures for CSR: governance, social, and environmental indicators. Two posts ago, I discussed dangers of limiting a firm’s environmental performance based solely on the energy, carbon, water, and waste of company operations. As expressed in my blog about Loblaw, these measures ignore performance of the broader supply chain that these companies influence. The governance and social indicators Corporate Knights uses are inappropriate proxies for measuring the company’s contribution to the integrity of systems. ‘Sustainability leadership’ is measured based on whether the company has a “sustainability” board committee while ‘sustainability remuneration’ is based on whether one senior executive has a portion of his/her pay linked to sustainability issues. Now, hypothetically speaking, if I wanted to perform well on this exercise, I would arbitrarily create a board committee knowing that there is no due diligence on Corporate Knights’ part to evaluate the integrity of what this committee does and whether it is in the best interests of social, ecological, and governance systems. I would also allocate say 3% of the compensation of one of my senior executives to sustainability issues which would grant me a score of 100% against a company who received a score of 0 for allocating 0% of the compensation of an executive to sustainability issues. Governance is much more than measuring whether a board committee exists or whether there is diversity on the board. Governance is about measuring whether companies have organizational systems and structures that assure social and ecological systems are considered in their decision-making processes.
Social measures used by Corporate Knights are based on employee safety, percentage of tax paid, pension plans and pension funding which unfortunately overlook 99% of the social systems considered relevant to sustainability such as supply chain labour conditions, social equity, poverty, obesity, disease, malnutrition, and health systems. On the transparency measure, half the score is based on how many voluntary metrics are reported (only those Corporate Knights can measure) which on the one hand is the tip of the sustainability iceberg and on the other hand, more importantly, says nothing about the integrity of these measures. The other half of the transparency measure gives points for whether the company uses international standards such as GRI or uses a third party auditor. This doesn’t help much because internationally accepted reporting standards are heavily criticized because they only provide measures companies can use but leave any commitments up to the company.
What this is telling us is that we have a fundamental gap in our ability to measure company contribution to sustainability. On the one hand, I sympathize with Corporate Knights because they are doing what is possible given the tools available. But on the other hand, I criticize Corporate Knights because there is a massive disconnect between what they are claiming to measure (i.e. firm CSR) and what they are in fact measuring. This is misleading to readers who don’t have the time to verify the methods and associated measures and in fact encourages companies to engage in shoddy CSR efforts.
When evaluating the integrity of measurement systems like Corporate Knights, it’s important to consider the ramifications associated with company behaviour when responding to these evaluations. Due to the lack of a comprehensive measurement of systems, their instrument creates tunnel vision because companies are so deeply focused on say the reduction of water use that they fail to consider the fact that reducing water use requires heavy industrial chemicals that negatively impact other systems. This fosters a reductionist approach to sustainability where commitment is meant to be piecemeal rather than part of a company’s culture and way of thinking. This measurement tool also promotes incremental improvements or eco-efficiency which means that companies are encouraged to improve water, waste, carbon and energy within the existing mode of operations rather than reexamining the actual mode of operations itself.
In conclusion, I reiterate that the work that Corporate Knights is doing provides an important service to the business community and to society. But they should refrain from claiming that their work measures a company’s commitment to sustainability or corporate social responsibility. Based on the measures Corporate Knights is using, we should either change the definition of CSR or they should avoid the use of CSR as their dependent variable. To me, this initiative is not measuring CSR, it is measuring waste, carbon, energy, and water intensity, employee pay, safety, and pension, taxes paid, and whether the notion of sustainability is even thought about in an organization. These are either required by law or represent a very trivial voluntary effort. In other words, Corporate Knights needs to revisit what they claim to be measuring. Failure to do so will give an inaccurate depiction of what CSR and sustainability is and more importantly fuel the criticism and skepticism associated with the private sector contributing to a sustainable society.