The Leadership Panel: CRO's Role in the Capital Markets

Eric Fernald, Director of Research, KLD Research & Analytics
John Deosaran, VP Environmental Social and Governance Analyst, ISS
Kevin Thompson, Program Manager, Corporate Citizenship, IBM
Moderator: Jay Whitehead, CEO, The CRO

Mod: I am Jay Whitehead, the CEO of The CRO working with a sore throat so please excuse the frogginess. Let me just introduce our topic here, it is called, “Measuring Corporate Responsibility”, we are going to talk about measuring this topic. Michael Harrison from Timberland this morning reminding us that you get what you measure, but measuring responsibility is less science than art. Some would even call it a messy dog’s dinner of meaningless metrics. And we have heard it called that today. But this panel is all about measuring corporate responsibility because we need good measures to tell our stories better and to make the connection between corporate responsibility and profitability, and to let our selfishly to let our companies measure us so that they can compensate us properly.

Do you agree panelists, starting with you John; do you agree that the CRO’s premise that the Holy Grail and corporate responsibility is to find one or more measures that would directly correlate a companies corporate responsibility behaviors to profit and loss and performance, if so, if so, why or why not?

JD: Sure, I think if I think about what all of you do and the work that you are striving for what we are really looking for is an evolution in the business climate to a point where companies act responsibly meaning your consistently able to deliver value for your shareholders, and do so in a transparent way, and along the way neutralize your environmental impact and better the lives of your employees, and those people who live and work in the communities in which you operate, I think that is probably your brass ring. I think that establishing a connection between corporate responsibility practices and business performance is probably the most important means to that end. It’s really a catalyst and really in two important ways. If you are able to take your corporate responsibility practices and translate that into positive business performance, either through reduced risk, through superior resolves, or through enhancement to your brand, there is no clearer incentive to pursue those types of activities. And similarly on the other side your investors, your shareholders, and potential shareholders, are starting to look at these issues in a much more broad based way. And there is no clear incentive to them to build investment strategies that reward good corporate behavior than a connection to performance.

Mod: Kevin Thompson from IBM is this really the brass ring or do you believe something else is a brass ring?

KT: It’s certainly one of the pieces of jewelry, I don’t know if it is the brass ring, but I think certainly if there was a consistent measure and it was something especially that IBM, if we were doing well it would help me at budget time to get more resources for the coming year. I think it would be really valuable to help this field mature. I sort of look at corporate citizenship and corporate social responsibility as sort of where Marketing was 25, 30 years ago. You know, still trying to establish what it measures, and how it measures it, and how it reports it, and how that whole system works. And right now it’s you know, it’s not a fluid system, it doesn’t go all the way around yet, but it is a system that is growing. I think having some established mechanism would be a great thing, and also I -think it would help us separate out the companies that are really proactive in this space from the companies who really practice cause related marketing and don’t have much behind it. And right now, quite frankly, the consumer doesn’t really have a mechanism to really sort that out. I think there is mutual fund level decisions that get made, but the individual consumer it is kind of hard to do if you look at when you turn on your TV and you see commercials of companies to really understand is there something behind that or not? I don’t think that that is clear yet, and I think that shows that this field is sort of in its infancy and this is something we would all like to see a bit more --

Mod: Eric Fernald from KLD, you crunch these numbers all day long, is the profit, is corporate responsibility and profit and loss the Holy Grail that we are all looking for, is that the connection? Or is there something else?

EF: Well first I want to thank everybody who actually creates these CSR reports and reports on this because that is our life blood, and I think it is important, there are a lot of things that have to be measured and I think what is great about this conference is your bringing together a lot of different people who are measuring different facets of company performance. We actually service the investment community and there certainly is a growing trend within the investment community to mainstream the issue factors. There are a lot of people looking at it to see if they can integrate that and I think Nancy from Pfizer talked about that, you know that is her, that lightening bolt moment with ??. So there is certainly a trend within the investment community. I would stress though, I think Andy said it really well at the luncheon meeting, you know there is a sweet spot for companies that they have to at least almost case by case, I mean you can circle back to this, I do think there is some industry issues, you know that are industry wide companies can focus on, but there is no question it is almost company by company looking at your sweet spot, where are you going to find that. The danger of course is you could be an HP, I mean that was an example that was used before where they have this great reputation frankly within the CSR community and things do happen, and you have to be so I would always push you may have one sweet spot but not look at it only as one criteria you really do have to look at all your stake holders and again kudos to you guys for pulling this together because it is also your ethics program, your compliance program, you have to be looking at best practices because you never know. You got to be prepared for what is going to happen, because something will happen.

Mod: John Deosaran from ISS let’s get specific here, these people want specifics. Your measurement guide, continuing with that Holy Grail concept in your opinion John, what combination of specific measures best demonstrates that connection between corporate responsibility and business performance or stock price? Specifics John.

JD: This may be the toughest question I think you can throw out. There is awful lot of research that is going on in this area particularly in corporate governance and now even more we are seeing it in the areas of environmental responsibility and social responsibility. I think in the corporate governance area it is probably a bit more mature. There have been a lot of studies that have suggested that different characteristics of your board compensation packages, the degree of independence, the degree to which you are free from conflict and management [entrenchment] issues correlate very well with a wide basket of performance metrics. In the social and environmental area I think we are still trying to understand what those measures are, and I think Eric just touched on this and that you know that you could apply are going to vary from company to company, from business to business. If we are evaluating a forest products company, biodiversity is a very important criteria upon which to measure that company.

JD: Not so important if we are looking at a financial services firm perhaps so I think this is something that still requires a lot of work, something that a lot of people are looking at.

Mod: Kevin Thompson IBM, get specific with us. What are the most important measures?

KT: I think the measure and I haven’t really seen one yet, I think the measure needs to be focused on value creation. I mean something that really struck me today that if I could rewind back 8 hours and redo today I would like to count the number of times I heard the word compliance. That really kind of scares me for this space, that there is such a focus on compliance. The reason why is that compliance forces companies to play defense. That doesn’t take into consideration and benefit what companies do best, which is, deliver goods and services, that’s why corporations are so successful.

Mod: Compliance guys by the way complain that they are the guys who can’t get anybody to each lunch with them in the cafeteria.

KT: Which guys? Well, if CSR maintains a platform of being predominately compliance oriented it will be a fad, you will see 300,000 person corporations with six people in that office. You won’t see growth. It has to be something where you know, Andy Savtiz pointed to earlier, I think you really need to sort of, you need to marry Milton Freedman, you know the business to business is business with Andy Savitz and have some sort of an offspring there that’s maybe it looks like Yoda or I don’t know but it is.

Mod: Peter Falk with smarts.

KT: It has to be something that demonstrates value creation. It’s strictly just a cost center activity, it is not a keeping score, a looking back, a historical mindset. It is a matter of how do you create value both business value and social value.

Mod: So you haven’t seen the ideal measure yet?

KT: No, no I have not.

Mod: You are still waiting for the brass ring.

KT: I still am.

Mod: Eric Fernald in your mind specifically what is the best measure of measures?

ER: Well I would go back. I think it really does depend as John was alluding to it depends on the sector and then within that, you know, what is best for your company within the sector. You can see examples, I think going forward there will be a lot of focus on this now I am really identifying key indicators for a sector and judge performance on that.

Mod: So it is really sector-by-sector then? There is a not a universal number.

ER: Well that is probably true, whether there is a number or not I don’t want to under emphasize the role of all of CSR indicators, all stakeholders, I mean you still have to pay attention to your community relations, but if you are a utility company you should be also paying attention to the environment, your emission output and that is a huge issue for you. If you don’t measure that one and you don’t perform well on that one, you know you are going to have some issues.

Mod: Let’s fast forward guys. Everybody in this room who is on the corporate practitioners side has gotten these surveys usually put out by companies like Kevin’s, or like Eric’s rather and put out the surveys and answer these 535 questions and you may get a ranking on our ranking. So Kevin Thompson from IBM let’s talk about survey fatigue. What is the deal with all these surveys and what’s IBM’s incentive to fill them out. How many do you have to fill out anyway?

KT: Well, it is voluntary so we choose to fill out four last year. We used a tool called One Report it’s very helpful, a little plug for One Report. I will negotiate my next year’s license after giving you this plug. But you know to try and consolidate and remove the repetition questions, but even just responding to Eric’s organization KLD and their sister organization [Seri] the Dow Jones sustainability index and Aries, just those four.

Mod: Repeat those four again?

KT: KLD Analytics, the [Seri], the European equivalent of KLD, and Sustainable Asset Management which is the numbers behind the Dow Jones sustainability index and the fourth is [Aries], Ethical Investment Research.

Mod: Just those four?

KT: Yeah, they feed the [footsie for good index]. Just those four surveys for IBM and again one report removes duplicated questions was 262 data requests. I actually went through yesterday afternoon, I went through and counted the number of questions because some of these data requests are multiple questions, and I think my number is fairly conservative. I counted 793 questions yesterday.

Mod: This is why we got to grow your group.

KT: See that is the other thing is that if you know all these parts, Corporate Citizenship, or CSR parts of organizations are relatively new parts of organizations. They are new business functional areas that don’t have a historical budget that is huge. In order to grow you need to be demonstrating results. If we dedicate all of our resources to responding to just those 793 questions, we haven’t done anything that has a significant ROI that we can point to. That is a challenge for us as a business.

Mod: It is almost reportis interruptis.

KT: It is reportis interruptis, but also it is the questions that are asked. I did not see of those 793 a single question that asked me the most important thing that I would like to report on which is, what do I do that aligns with my corporations business strategy? That aligns with my corporations operations, no single question in any of those four surveys really hit that and asked me what social value growth, it broke down maybe questions in aggregate do that, but again, so I think there needs to be more of a dialogue between the corporations and survey organizations, but we are all in this together and this isn’t going away on either side.

Mod: So talk about that incentive to fill them out, is there is a positive incentive, negative incentive, what’s the?

KT: I wish I had you know to over simplify this you know look at it terms of what is the carrot and what is the stick. I see in this field right now there is a lot of sticks and the carrot is kind of small. A lot of times we hear, “Oh its your brand”, it impacts your brand but brand is incredibly important part of a business but it’s the parking lot for all those things which you can’t define. It’s the place where you put great ideas that can’t really be measured. So to say that filling out surveys impacts our brand that is not good enough. We need to establish, we need a better and stronger business case and I strongly look forward to working with research organizations to help us do that so we can dedicate more resources to this because right now I really do view this as a system with a lot of sticks and not enough carrots.

Mod: John Deosaran ISS let’s go to you. We at the CRO are struggling with something, we are struggling with the apparent subjectivity of social and governance analytics, its, for example just last week we saw companies ranked number one on one scale and lower than 500 on another scale. What’s the deal with all these fuzzy numbers?

JD: Fuzzy math? This is a good observation. There are dozens of entities and organizations out there who are measuring corporate responsibility and the ways in which companies behave. The bad news is that there will probably only will be more in the future, and all of them include varying degrees of [subjectivity] in their research and in the way they compile ratings or rankings. I think what is important for the people who either use those ratings or rankings, or those who are the subject of those ratings or rankings is to really go behind and you really have to understand the intent, the motivation, and any biases built into the organizations who are producing them. I can produce a rating or a ranking, KLD can produce a rating, S&P can rate you, working mother may rate you, the Sierra Club may produce a rating on you, and then they all say something different. That is not necessarily bad if you understand the purpose behind the ratings, what they include in that rating or ranking, and any sort of waiting or emphasis that they apply to the various indicators that they using. We certainly see our institutional clients doing this today. They move or gravitate towards those rating systems which best align with their investment strategy or their investment approach. So the bad news is that probably won’t change. You will continue to see a good degree of subjectivity and a growing number of ratings and ranking out there. You really have to go behind them to understand what makes them up.

EF: I think they live and die by their own success as well. I mean there have been a number of lists that have gone out of existence. So you know you just have to pick and choose which ones you really want to pay attention to.

Mod: Let’s stick with you Eric, Eric Fernald from KLD. You and KLD as we mentioned have been the masterminds behind the 100 Best Corporate Citizens List for the past several years, and the 2007 list were published in CRO magazines first edition of the six editions in 2007 so look for that near the end of the month of February. Now just what is this year’s methodology, and how has it changed from years past? Are we weighing it in any way differently?

EF: No major changes, there were bigger changes last year than this year so it is still a sort of a peer comparison scoring system that’s equally weighted, stay colder model so you can do really well on your environment performance, but if you are underperforming in another area it is going to affect your overall ranking. There are some issues that have cropped up. It think for example political accountability that is an issue that is getting a lot more attention and companies are being rated on that. We also did a lot more I think this year on environmental management systems, and how active companies were on that issue. You know year to year there always are some issues that come to the floor that we really focus on.

Mod: Okay now let’s go back to Kevin Thompson from IBM. Kevin, now you come to this field because you are a Peace Corps Volunteer in the past as we mentioned, you are proud of your Peace Corps history I heard. So you are passionate and your willing to get sun burned for your ideals and not get paid for very much if any. And, you work for one of the true legends in corporate responsibility, Stan Litow, who runs your operation. Let me ask you this question. Has corporate responsibility gone from a guilt and innocence driven discipline to a competitiveness driven disciple? In other words, is corporate responsibility no longer defensive, but really an offensive.

KT: Well we are certainly trying to make it that way, absolutely. When Stan hired me that is my job description right there in a nutshell. Going forward I came from the business side, yes I was a Peace Corps volunteer and before that a musician so I really carried the free spirit flag for a long time. But I think that you know Stan envisioned, and a number envisioned again for this space to move forward and move defense to offense, move from a periphery external sort of do gooder thing into a core business function, it absolutely has to be aligned and embedded with business strategy. When you do programs you have to have very clear social value deliverables as well as business value deliverables. I think that it understands leadership, we are moving in that direction absolutely. I think you see a number of companies doing that. I think the number of companies is fairly short. You know, you don’t have to go to too many of these conferences until you hear the [Prias] example and [Eco Imagination] and a few of these others over and over again because it is roughly about this many examples. But I believe that is changing, there’s market forces that are at play here and that is really what is driving this, and it is a fascinating place to be because it is still in its infancy. But again, I think that companies need to pay attention to what they do well from a business perspective, figure out how they can address a poor social problem with what they do well for IBM, that is information technology, and then go out there and do things and find innovative ways to reach new customers and build relationships, with things that have business impact.

Mod: Cover for our audience if you will, IBM has set up a unique reporting structure for your corporate citizenship program. Tell the audience where you report into in the organization, and how you fit in.

KT: Yeah, and I think this is another way when you can tell which companies are really serious about this, is look at the organizational structures its very revealing. We used to report into marketing. About 15 months ago, we switched and we now report into the Chief Innovation Officer for the company, the same organization that R&D reports into. The same organization that Environmental Affairs reports into to, and we are one degree of separation from the CEO, and that communicates hopefully externally how serious the IBM Company takes this stuff, that it isn’t just a PR function, it isn’t just a communications function, it isn’t just a Marketing function. It’s a Business Value function.

Mod: Let’s go back to you Eric, I am going to put you on the spot here, Eric of KLD, I’m going to put you on the spot. Now what would you say Eric to those critics who say your methodology, the KLD methodology unfairly is weighted in favor of smaller firms and against larger multinationals especially when it comes to the controversy research component of your indexes? Address that.

EF: Sure, well first from a straight statistical standpoint, if you compare like the Business Ethics 100 to its benchmark which would be the rest of 1000, the medium markup is actually higher in the Business Ethics 100.

Mod: So it tends to be bigger companies in Business Ethics 100 than the rest of 1000 overall.

EF: Right and the other thing I think, its true, and I think that you know larger companies become targets for NGOs, and get involved in controversies in that sense, or they, I mean large companies are no different than other companies in as far as they can run a foul of you know compliance and regulatory issues, but it is also true and this speaks to, Kevin was saying that there they had more resources at their disposal actually to balance whatever controversies they get involved with.

Mod: So you are saying the bigger companies have more resources?

EF: Yes exactly.

Mod: They are not more vulnerable because they are more googleable and they are more [Inaudible]?

EF: They, I mean you know Coca Cola gathers its share of attention because it is Coca Cola, but it has vast resources actually to do all of the positive things in all the measures we look at, and it has vast opportunities to improve its overall score as far as our rating system so that is my point. I mean I think you see that it measures up that way. A common issue with reporting is well if I’m going to do a great job in being transparent, and one of my competitors isn’t being transparent aren’t we penalizing ourselves? The fact is though generally speaking that the more transparent you are, you are also transparent with all the great things you are doing, all the initiatives you have, and that weighs heavily in ratings methodology.

Mod: You know Kevin you are rated by KLD every year, do you have anything to input into that, into Eric’s explanation?

KT: I don’t want to go too far, I mean it over a six year period we were number one twice, number five twice, number twelve once, and then we completely dropped off the list.

Mod: Bad year.

KT: But again can anyone remember any one specific huge thing in 2005 which really changed? I think for us and again this is where the opportunity to work together with research organizations like Eric’s really plays in because once we did, you know we never criticized the messenger because we were number one; we didn’t really open up the report and see what the survey said. Certainly the controversies research was an area where we felt like they were glaring irregularities and inconsistencies, and questionable sources.

EF: I jumped in on that one.

KT: I know that you guys outsourced that, but I mean we get criticized for our whole supply chain practices and the same can be said for where you guys get your information.

EF: There is a good general point there because I had a number of meetings with Stan and it benefits companies so much to reach out to ratings organizations like myself and mine and John’s and others, because otherwise, there are stories out there, there NGOs out there, there are medias out there, and they get picked up and we analyze them, and we don’t get the company perspective that is what we have to work with. So it is really crucial to reach out in fact just with the IBM example, we had sort of lapsed in our communication for awhile and I think that really had an affect on our understanding of what was going on at the company so communication is crucial in this field.

Mod: So stay engaged in other words.

EF: Stay engaged, absolutely, absolutely.

Mod: Okay good, be advised, stay engaged with KLD

EF: That’s right if the data freezes for the Business Ethics at the end of the year.

Mod: That’s right answer those bloody questionnaires no matter how painful because there is a big stick at the end. So let’s keep with you Eric and John Deosaran from ISS. Now since you are both in the business of collecting measurements and selling them to us for a living our audience wants to know the answer to the pressing question what’s the one corporate responsibility related thing you wish you could measure but you can’t?

EF: All of these folks, people.

Mod: How so? What do you mean?

EF: We deal with about 1700 institutional investors and this is among the top things that we regularly get requested to attempt to measure. All of corporate behavior, all of your policies and practices spring from people to people that inhabit the Board Room, and inhabit the Executive Suite. You know, so to really understand an organization, its past, present, and future you really have to understand the people that make, and drive, and execute on corporate policy. Now I can’t think of anything that would be more difficult to measure and how do you measure integrity, competence, drive, the degree to which people are engaged in the process or corporate responsibility, defining it, and executing on it. So if there were one thing we would love to try to measure that would be it. I predict somebody eventually will, and I predict it will be extremely controversial.

EF: I am just following up on that because I think one of the most difficult things that we find, and it is great having Kevin here is actually finding the right person to talk to. We find often the companies, often find, when we talk to them they don’t know who to talk to within the company so again this conference is great that way the whole idea of getting people out of there silos. You know the investor relations person who we come to talk to and we give them our profile of the company or a huge questionnaire, and they are like what do I do with this? I will tell you our response rate from when we send a company our analysis of them, even if it is an S&P 500 Company, which you would think would have the resources unless you really follow up with them, and the response rate is a 20% response rate, and that is a good day.

JW: So let’s go back to you Kevin Thompson from IBM. In your opinion Kevin what measurement organizations, I’m going to put you on the spot here, with these two measurement organizations sitting here right next to you within an arms reach, what measurement organizations are doing the best job communicating whose corporate responsibility behaviors are producing bottom line results and why?

KT: Remember what I was going to give you afterwards. To be totally honest I can’t think of any one that I think really nails it. I appreciate what’s sustainable asset management is now doing to sustainability in its group. What they do, they are very transparent and after we provide them with the information, they share with us how they weigh the variable, they share with us their calculating algorithm, they share with us where, if we didn’t meet expectations where’s that gap come from?

KT: They scheduled a 30-minute call with me to talk about that, I really appreciate that feedback because what is painful for us sometimes is when we get back from an organization that we partially satisfy criteria or something like that. Well why? Because why and I can’t ever get an answer? That is very frustrating, so I think just as we are asked to be transparent, I think the same needs to be requested of the research organizations and I think that having more of these dialogues and more of these discussions will help us feel more confident in any one particular rating, but I mean to be totally honest I don’t look at any one list feel like that is really [Inaudible]. Certainly there is lots of great companies out there, they are usually on these lists, but in terms of the rank order and how it is calculated, I don’t have a super high degree of confidence.

Mod: So I appreciate you guys for dealing with the creative friction we created which is marvelous, there were no fists or cuffs, let the record show. Final question for all panelists. Okay we are going to start with you John Buesarin at ISS. Admittedly, we in the media are obsessed with rankings and numerology, the top 15 ways to tighten your butt. You know the top 20 list this, and the top 20 that. Because they are big box office those numerology lists, but in corporate responsibility we are, are we in danger gentleman of making so many rankings that none of them have any value John?

JD: I don’t think so and for a couple of reasons. I think as I said before there will more and more I think ranking systems. I think as Eric pointed out some of these sort of go by the wayside if they can’t sort of demonstrate some sort of relevance to either to you all or to your shareholders. This is really probably for you a good news bad news sort of thing. The good news is that your shareholder base will tend to do a good job of gravitating toward one or a few rating systems that align best with their overall outlook, their investment approach and philosophy or perhaps to satisfy some client mandates. You on the other hand what that means, the bad news of course is that depending how diverse your shareholder base is you may have to pay attention to an awful lot of these because one of the things we are certainly saying is that institutions are becoming more activist. Sometimes that means as little as just becoming more involved in the engagement process. So you are probably seeing, or if you haven’t seen it yet, you probably will see soon more of your shareholders coming in and wanting to talk about things while you are ranked or rated a certain way on somebody’s report and expect you to be able to address that. So the bad news for you is that you probably do have to pay attention to a good number of these, your shareholders are whittling that list down to those that are most relevant to them.

Mod: Kevin are we in danger of scope creeping ourselves out of ranking relevance?

KT: Yes, I think that invariably you get dilution period. Now the question is that a good thing or a bad thing? I think the good research organizations, the good rankings are going to rise to the surface as reputable. They are going to be reputable because you are going to see companies on those lists that don’t have some big blow up the next year like you know what was Enron? How many top ten lists was Enron on before they imploded? Fannie Mae recently was number three on a prominent one. They haven’t certified their financial results in over two years, you know so at some point you know I think you will see a sifting out of the rookies from the professionals, and I think we are already beginning to see that. But overall yeah I don’t think you can argue the more surveys the more diluted it gets. Any one survey looses relevance or looses dominance when every week there is a new one coming out. As you said you do have so much variable and this survey somebody is number one and on this survey they are 500. This survey has 40% turnover year on year you know. There is a lot of inconsistencies.

Mod: Eric, are we just working ourselves out of a job here? No more rankings, no more us?

EF: Well companies tell me all the time that they have just started to pick and choose which ones they want to respond to and that is one way the various lists are out. There is also on the other end, there are these movements for standardization with the GRI for example and that could lead to a little improvement on which lists survive and how they reference a GRI. The bottom line I think is that companies just have to decide you know how they are going to perform across these various stake holder issues and the rest really will take care of itself, you just have to come to conferences like this, look for best practices, see what fits the best for your company, for your industry, and then pick and choose which surveys you want to respond to and which lists you really care about, which indexes you really care about.

Mod: Let the market decide.

EF: Let the market decide.

Mod: Well thank you for all your patience and your attention today. Thank you for attending the first CRO Conference, and I want to thank our panelists John Deosaran from ISS, Kevin Thompson from IBM, and Eric Fernald from KLD. Give yourselves a big hand and I will see you on May 14th and 18th, in San Francisco at the CRO Conference. Thank you very much.