New Corporation Evaluation Standard to Revitalize Private Companies

Yotaro KOBAYASHI (Chairman of the Board, Fuji Xerox Co., Ltd.)

"Corporate Social Responsibility (CSR)" is increasingly becoming a subject of popular conversation among the business community. It may sound like a method of some sort to prevent scandals, since a number of them have popped up recently. However, CSR, as being discussed in the U.S. and Europe, is not a scheme for companies to merely observe legal requirements. Rather, it is considered a strategy for businesses and society to mutually achieve their sustainable development, as well as a key concept in planning for the 21st century econo-society.

In fact, CSR is reported to be a suggested agenda item for this year's G-8 summit, which indicates that the concept is considered not only as a means to prevent corporate mishaps but also as an effort to create a new model for society where a balance between economy and society would be established.

The basic concept of CSR is not necessarily new. Such a traditional family creed maintained by merchants from the Ohmi area in Japan, for example, incorporates ideas akin to CSR. Keizai Doyukai (Japan Association of Corporate Executives) has maintained its position since the end of WWII that a company is a member of society, and it should perform as such. Opinion papers published in the early days of Keizai Doyukai along these lines have won high praise.

Recently, however, there have been cases where corporations are not able to fulfill even the minimum level of responsibility, such as observing the law and generating profits. There are still corporate executives who claim that there is no time to consider such a thing as CSR in this harsh economy. In fact, this readily indicates that the essence of CSR is still being misunderstood.

Last month, Keizai Doyukai issued an opinion paper titled "Market Evolution and CSR Management." Based upon the results from a research trip to Europe and answers to questionnaires by Japan's corporate executives, the paper concludes that CSR is effective in building trust and enhancing competitiveness of businesses, while it would also be beneficial in creating a better society and vitalizing the economy.

At the same time, realizing that CSR is something that needs to be implemented quickly, Keizai Doyukai has proposed a new "Corporation Evaluation Standard" for each company to adopt in the process of realizing CSR management.

Getting Clear on CSR
The concept of CSR is neither just adhering to laws and rules nor making donations and contributions. It requires active participation in the social affairs where the needs of every stakeholder--customers, shareholders, employees, communities, and so on – are to be considered in respect to the economy, the environment and society, and then associating them to create new values and new markets. The concept strongly suggests that even for certain social needs which may not result in immediate profit, efforts to meet these needs by innovation would result in strengthening corporations and therefore benefiting them in the long run.

For example, companies used to approach the issue of environmental conservation from the viewpoint of it being a cost factor. It could, however, be transformed into an investment instead of a cost if products and services to meet environmental needs are developed which would then create a new market for such products. It would also benefit society as a whole by contributing to building a recycle-based community.

As a background to the increasing importance of CSR, there is a change in people's view toward the market induced by a maturing society and a shift in people's sense of value.

Keizai Doyukai, back in 2000, expressed its view, as a concept called "market evolution", that if market participants are to share not only economic value but also social and human values, corporations and society could prosper through synergetic interactions utilizing market mechanisms. Events since have indicated that this trend is in fact materializing.

In capital markets, investments focused on companies that practice CSR, called "Socially Responsible Investment (SRI)", have been proliferating. In the U.S., SRIs have surpassed the 15% mark and in the U.K., supported by legislative actions, close to 80% of pension funds have SRIs in their portfolios.

CSR Benefits to Japanese Companies
Increasing numbers of companies, especially those in Europe, have begun to avoid dealings with businesses that do not fulfill social responsibility criteria, and Japanese firms are beginning to be required to cope with it. Consumers in choosing products and services, and graduates from business schools in choosing their jobs, have begun to consider CSR as an item in their list of criteria.

What is important here is for corporations to not consider these changes in a passive manner but to actively encourage this market evolution, and to not merely follow Europeans and Americans but to transmit globally what CSR means in the Japanese context.

Many Japanese companies that have enjoyed good management already know and have implemented CSR in a sense without recognizing such terminology. The traditional family creed referred to above is proof that CSR is not a fad but the core of healthy business and the management that brought it.

Japanese companies need to exercise CSR in the real business world to recapture trust and regain dynamism that will lead to the creation of a new and vibrant econo-society. The new "Corporations Evaluation Standard" we are proposing is aimed at inducing such actions by corporations.

The Push for CSR Standardization
With the progress of SRI, analysts are now using CSR as one of standards to evaluate corporations when they make investment decisions. Standardization of CSR is now in progress at the International Organization for Standardization (ISO).

"Corporate Evaluation Standard" that Keizai Doyukai proposes is intended to encourage managers of corporations to plan for concrete action agendas based upon their assessments on the current status of CSR and corporate governance at their corporations, to find and acknowledge actual examples already generating positive results, and by utilizing the same criteria to promote CSR in Japan through active and mutual benchmarking processes.

In this context, the standard forms a working model that should be tested and analyzed, perhaps for a year or so. When the model's effectiveness and universality is confirmed, it could be incorporated in credit rating assessments for investment purposes.

The standard is composed of five areas (market, environment, people, society, and corporate governance), with 110 specific items. In four of the areas related to CSR (market, environment, people, and society), there are questions with regard to "process" and "achievement" where in "achievement", management is expected to express its commitment to realize the set objectives in the range of about three years.

The initial phase of implementation would be soliciting member corporations to adopt this standard. Then their results and replies will be collected and analyzed to determine the average among the various types and sizes of corporations. As for items not easily quantified, a qualitative approach of collecting and assessing examples would be utilized.

The standard would constantly be reviewed and refined so that they would perform as an indicator for Japanese companies to pursue CSR, so that corporations and society through synergetic effect could both enjoy growth.

(The original Japanese article appeared in the April 18, 2003 issue of Nikkei Shimbun and has been translated by JIGlocom)