But her strong relationship with management and the perception that these requests made sound business sense convinced executives to grant her access to their boards. “Companies today are very interested in trying to be proactive,” Tanner says. “A board that is fully versed in social and environmental risks can better help to minimize conflicts, protect the company’s valuable brand and help the company diminish exposure to criticism.” The end result is an increase to the bottom line and shareholder value, she claims.

Socially motivated fund groups are attuned to the board’s influence, even if the two sides never meet. At one point, a colleague of Tanner’s was involved in talks with Occidental Petroleum about drafting a human rights policy. The company did so—and then submitted the draft to the board for approval. “It’s another example of an indirect way that boards are becoming more aware of social issues that a company is grappling with,” Tanner says.
 
In November 2003, a number of funds, including Christian Brothers and the Connecticut Retirement Plans & Trust Funds, banded together and filed a shareholder resolution with the board of AEP, one of the largest coal burners in the country. The funds requested that the Columbus, Ohio-based company create a committee of independent directors to draw up a report to evaluate the economic impact of climate change. AEP agreed, and director Robert Fri, who served as the first deputy administrator of the Environmental Protection Agency, took the helm. The resulting report reinforced a belief AEP already held—that it will likely face stricter greenhouse gas emission standards in the future, despite the opinions of the Bush administration regarding global warming.

The report also gave AEP specific information on the surprisingly wide range of expenses it could face in updating plants and building new facilities, depending on what energy legislation squeezes through Congress. Though the document made AEP more informed about, and better prepared to deal with, potential legislation, it is not what prompted the company to address its environmental policies. That first began six years ago, at the behest of AEP’s former CEO. Since then, the board has dealt with environmental concerns as part of larger, strategic reviews rather than as issues separate from their operations. One of the criteria the board uses to evaluate management’s performance is based on the company’s environmental policy. AEP has already joined the Chicago Climate Exchange, a voluntary program under which North American energy companies cap and trade emissions allotments. AEP views the project as practice for anticipated future regulations, Fri says. By trimming its emissions, the company believes it will have a leg up on competition when tighter federal regulations take hold. “We won’t have to scramble so much to comply,” he says.

Rooting Out Scandal
While accounting scandals and other episodes of financial malfeasance have put corporate directors on high alert, they have also served to raise the level of distrust harbored by investors, the media and other influential groups when talk turns to corporate citizenship. Nongovernmental organizations (NGOs) and other advocacy groups have become more systematic in pursuing companies they see as social scofflaws and have allied themselves with consumer organizations to target offending brands. According to a report shared by Bain & Co.’s James Allen at the World Economic Forum last winter, 40 percent of the 60 largest global companies have been confronted by NGOs and consumer groups over social concerns. Press coverage of corporations’ social sensitivities has surged since 1999, Allen notes.

The largest, most visible companies make the most attractive targets. Stakeholders vilified Nike for its suppliers’ use of sweatshop labor. They hammered Chiquita for its labor practices. De Beers has been targeted for allegedly selling diamonds mined in war-torn parts of Africa, while consumer groups blamed McDonald’s for a rise in obesity. These same multinationals have fought back by implementing stricter social policies and making detailed disclosures on issues such as worker safety and natural resource use. Many of these companies have shown amazing resiliency in the face of criticism by throwing their substantial weight behind campaigns to bolster brand image. “Bigger companies move more slowly, but nonetheless, they have much greater resources,” points out Suzanne Hopgood, who serves on the board of Acadia Realty Trust and until recently was chairman for Del Global Technologies. Despite their size, or perhaps because of it, these conglomerates have become adroit at responding to customer perceptions, she adds, when it comes to social ills such as child labor policies or obvious pollution problems.

Consumers may actively decry these practices, but few bring their consciences to the cash register by boycotting products, according to Allen’s report. His research, however, does show a correlation between company growth and how enthusiastically consumers recommend it to friends. While customers may shelve their complaints when it is time to buy, the same people likely hesitate to openly endorse its products. This helps explain why today Nike talks frankly about improvements in the conditions of its overseas factories, and Chiquita’s website touches on the safety of its Latin American workers. Meanwhile, De Beers issues guarantees that its diamonds are conflict-free, and McDonald’s Happy Meals now provide the option of apple slices instead of French fries.

Chip maker Intel has become what many activists consider a poster child for corporate social responsibility. Intel has an entire department dedicated to working with social groups. This interaction with shareholders, as well as stakeholders such as governments and NGOs, has reaped a wealth of opportunities for the company, explains Dave Stangis, the director of corporate responsibility who reports both to the head of public affairs and to Intel’s corporate secretary. “When you’re in a community and you’re trusted, and you’re open to communicate, you build up a bank account of reliability,” he says. Because of this trust, Intel has received, with little hassle, permission to expand onto new land and, in some cases, has gotten more flexible permitting, Stangis notes. “There are huge time-to-market advantages.”

While Stangis handles the day-to-day social issues, from community relations in New Mexico to water use in India, the board members keep their eyes on the bigger picture. “It is part of their charter to oversee the company’s stance on those issues,” Stangis says. “We communicate with them often on issues that have the potential to impact our reputation. Our brand value is a huge intrinsic component of the company’s value.”

Informed Consent
To protect their companies, directors of firms must be aware of their operating environment when they interact with the public or governments, says Lenny Mendonca, a director in consulting firm McKinsey & Co.’s San Francisco office. “There are topics that businesses are going to need to engage in, to influence their license to operate,” Mendonca says. “Business has largely been silent on what we’re going to do with the challenges of health care. It’s a very large issue for their employees, and it is an increasing expense overall for their income statement. They’ll have to engage in a thoughtful way.”

A diverse board, knowledgeable and sophisticated in social topics, can help guide a company through social minefields such as oil spills and sexual harassment lawsuits. Directors who have had experience working in the public sector, nonprofit arena or educational settings will be especially helpful when it comes to anticipating the needs and actions of these constituencies, Mendonca suggests. Additionally, most boards fall short on international experience, a potential liability for multinationals because corporate citizenship standards vary widely across the globe. With the Kyoto Protocol entering into force, for example, international energy companies are now confronted with new sets of regulations and public relations hazards and will need to hone the necessary skills to effectively trade emissions.

Last year, social fund group Calvert made it a point to stamp out the homogenous nature in the boardrooms of the companies it invests in. Its funds filed resolutions with nine companies, six of which agreed to adopt a new director nomination charter that stresses the role of diversity in member searches, says Julie Gorte, who leads Calvert’s social research department. As boardrooms continue to diversify, thanks in part to Sarbanes-Oxley, the growing number of independent directors taking seats around the table may increase the focus on social issues. In general, it is the independent directors—who are less beholden to management—who are more likely to speak with socially motivated funds, says Steve Lippman, vice president of social research and advocacy with Trillium Asset Management.

Boards that understand the social risks surrounding a company can ask important questions, Mendonca says, setting a course and helping implement plans in order to troubleshoot or deal with any backlash stemming from questionable corporate citizenship. “Changing a business’ role in society is not incompatible with shareholder value,” Mendonca says. Indeed, “for many companies, the vast bulk of shareholder value is tied with how you interact with society.” 

Amy Braunschweiger has been published in the Wall Street Journal and the Village Voice.