The Balanced Scorecard and Corporate Social Responsibility: Aligning Values for Profit

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CSR reporting has grown over the past few years, but the information provided by those reports isn't always used for strategic advantage. Tying values and measures to a Balanced Scorecard could be the way to make good intentions more profitable.

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The corporate social responsibility (CSR) movement has been gathering momentum for the past ten years. This growth has raised questions -- how to define the concept, how to measure it, and how to make good on its promises. The Dow Jones Sustainability Index created a commonly accepted definition of CSR: "a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments." This definition encompasses a broad range of corporate values and concerns, including reputation, transparency, social impact, ethical sourcing, profitability and civil society -- the list goes on. As a result of the interdependent nature of CSR, integration of its values remains a challenge for many organizations.

One of the fundamental opportunities for the CSR movement is how to effectively align consumer and employee values with corporate strategy to generate long-term cognizant benefits -- a better understanding of precisely with whom, what, when, where, how and why an enterprise makes a profit or surplus. CSR requires more holistic strategic thinking and a wider stakeholder perspective. Because the Balanced Scorecard is a recognized and established management tool, it is well positioned to support a knowledge-building effort to help organizations make their values and visions a reality. The Balanced Scorecard enables individuals to make decisions daily based upon values and metrics that can be designed to support these long-term cognizant benefits.

A simple definition of a Balanced Scorecard is "a focused set of key financial and non-financial indicators." These indicators include both leading and lagging measures. The term "balanced" does not mean equivalence among the measures but rather an acknowledgement of other key performance metrics that are not financial. The now classic Balanced Scorecard, as outlined by Robert Kaplan and David Norton, has four quadrants or perspectives -- (i) people and knowledge, (ii) internal, (iii) customer and (iv) financial.

For example, increased training for employees (people and knowledge) can lead to enhanced operations or processes, (internal) which leads to more satisfied customers through either improved delivery time and/or lower prices (customers), which finally leads to higher financial performance for the organization (financial).

As CMA Canada's Management Accounting Guideline Applying the Balanced Scorecard states:

Managers can use the Balanced Scorecard as a means to articulate strategy, communicate its details, motivate people to execute plans, and enable executives to monitor results. Perhaps the prime advantage is that a broad array of indicators can improve the decision making that contributes to strategic success... Non-financial measures enable managers to consider more factors critical to long-term performance.

Cause and Effect: CSR's Competitive Advantage

Bob Willard's book The Next Sustainability Wave outlines a starter set of ten major market forces that are driving the need for organizations to address CSR in a credible manner. Willard's ten major forces are divided between mega-issues and the stakeholders who are demanding change. These forces are motivating companies to change their behavior and use CSR as a strategic instrument. The ten major forces are:

Five Mega-Issues:

1. Climate change
2. Pollution / health
3. Globalization backlash
4. The energy crunch
5. Erosion of trust

Five Demanding Stakeholders:

1. Green" consumers
2. Activist shareholders
3. Civil society / NGOs
4. Governments and regulators
5. Financial sector

Willard goes on to explain how these forces create increased exposure and awareness to business challenges and opportunities. The actual effect of these challenges and opportunities was recently identified in KPMG's International Survey of Corporate (Social) Responsibility Reporting 2005. This report surveyed more than 1,600 companies worldwide and documented the top ten motivators driving corporations to engage in CSR for competitive reasons, which are:

1. Economic considerations
2. Ethical considerations
3. Innovation and learning
4. Employee motivation
5. Risk management or risk reduction
6. Access to capital or increased shareholder value
7. Reputation or brand
8. Market position or share
9. Strengthened supplier relationships
10. Cost savings

By creatively responding to these market forces, and others generated by the CSR movement, organizations can reap considerable benefits.