How do shareholder votes enhance a company's CSR performance?
A new study shines a light on the importance of CSR committees and reveals how shareholder votes play an influential role in improving CSR performance
Over the past year, the Australian Securities and Investments Commission (ASIC) has increased its interest in sustainability disclosures. Meanwhile, the Australian Securities Exchange Limited (ASX) has also begun a crackdown on greenwashing to ensure companies accurately portray their business or products' environmental and social aspects. These developments show that to meet the changing information demands by regulators and an increasing number of investors, businesses must provide credible corporate social responsibility (CSR) information. The Global Reporting Initiative (GRI) is considered to be the gold standard for Corporate Social Responsibility (CSR). Some 80 per cent of the world's 250 largest companies report CSR as per the GRI Standards.
Shareholder voting in director elections and the responsibilities of the board in overseeing a firm's CSR practices will only become more critical. For example, last year, Mike Cannon-Brookes, Co-Founder of Atlassian, succeeded in taking over the board at AGL, with all four of his proposed new directors securing seats on the board of Australia’s largest carbon emitter. This is one example of where a significant shareholder has used their power through voting rights to change the behaviour of a company. But increasingly, these sorts of changes are being driven by elected directors of a CSR committee.
According to UNSW Business School’s Professor Gary Monroe from the School of Accounting, Auditing and Taxation, it is becoming increasingly common for companies to utilise CSR committees to oversee and ensure responsible practices that balance economic, environmental, and social objectives. Shareholder votes appoint these CSR committees to align with the expectations of shareholders and stakeholders while addressing the implications of the company's activities.
But does the shareholder election of CSR committee members actually boost CSR performance? And how do shareholders know who to select? This is the research question of a recent study co-authored by Prof. Monroe and his co-authors Lily Chen, Senior Lecturer at the University of Auckland, and Eunice Khoo, Lecturer at The Australian National University. Their paper, Shareholder Election of CSR Committee Members and its Effects on CSR Performance, examines the role of shareholders in electing members of the CSR committee and how this helps to drive better CSR outcomes.
Read more: Four ways COVID-19 affects CSR reporting (and what to do about it)
Understanding the growing role of CSR committees
In their paper, the authors explain that the CSR committee assumes responsibility for creating and implementing social and environmental policies and procedures, developing CSR-related performance metrics and reporting, integrating CSR strategies and risk management and coordinating and monitoring CSR-related issues. In addition, the CSR committee oversees the interests of various stakeholder groups, including the community, employees, customers and the environment, thus developing opportunities to create and protect shareholder value and avoiding the adverse effects of irresponsible firm behaviour.
Past research suggests these committees are effective in improving CSR performance. But what do shareholders think of these committees, and what factors affect how they cast their votes? The study finds that CSR committee members receive higher shareholder support than any other directors. Those with CSR-related skills and experience gain the most votes among CSR committee members. This suggests that senior business leaders may benefit from taking on some upskilling when it comes to CSR. The research also shows that when a firm's CSR performance is poor, CSR committee members receive lower shareholder support than other directors. This shows that shareholder votes go a long way to revealing the efficacy of a company's CSR performance.
Why is shareholder voting important for CSR?
“Our study shows that shareholders only support directors on the CSR committee if the CSR performance is good, not bad,” explained Prof. Monroe. What happens if CSR performance is bad? Will the directors get voted out by shareholders? According to the findings, CSR committees in firms with negative CSR-related news receive lower votes.
With approximately 25 per cent of Fortune 500 companies having a specialised board committee for CSR by 2012, up from less than 5 per cent 15 years previously, the study offers important insights for both shareholders and corporations operating in this era of change, says Dr Khoo.
So which is more effective for CSR performance, a powerful, influential shareholder like Mike Canon Brookes or a dedicated CSR committee? The authors say that both help provide powerful shareholder views of CSR.
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“It’s become more generally accepted that corporations have a degree of responsibility for the economic consequences of their activities and the social and environmental implications,” says Dr Khoo. “Many companies voluntarily appoint CSR committees to show they take CSR seriously. And the point of such a committee is to balance the economic, environmental and social imperatives while addressing the expectations of shareholders and stakeholders,” she says.
Overall, the findings of this study reinforce the role of such committees in balancing the economic, environmental and social imperatives while addressing shareholder expectations. And this will only become more prevalent as more investors increasingly vote against corporate directors over climate change.
Shareholder votes are critical in enhancing CSR performance, and shareholders value CSR committee members with relevant experience and skills, conclude the authors.
UNSW Business School’s Gary Monroe is a Professor in the School of Accounting, Auditing and Taxation, Lily Chen is a Senior Lecturer at the University of Auckland, and Eunice Khoo is a Lecturer at The Australian National University. Their paper, Shareholder Election of CSR Committee Members and its Effects on CSR Performance, examines the role of shareholders in electing members of the CSR committee and the impact on the committee's effectiveness and CSR performance.