Corporate Social Responsibility
Councillor Robert Shaw
Wellington Regional Council
“Councillors cannot avoid responsibility for the companies that councils own. But, care must be taken to use the proper mechanisms to decide the objectives and operating principles for these companies.”
The Wellington Regional Council and the companies it owns will examine the concept of corporate social responsibility. They will consider the range of goals that the Council sets for all the companies that it owns.
This review began because residents expressed concern about the actions, and proposals, of council-owned companies and the council’s rationale for its ownership of particular companies.
WRC has an ownership interest in 9 companies: WRC Holdings Limited (100%), Pringle House Limited (100%), Port Investments Limited (100%), CentrePort Limited (77%), Container Terminals Limited (77%), Port of Wellington (1988) Ltd (77%), Port Wellington Limited (77%), Medical Waste (Wellington) Limited (38%) and CentrePac Limited (38%). The businesses accumulated as the result of the local government reorganization in the 1980s. To manage them better WRC recently established the holding company.
At the council table, Councillors heard complaints from the public about how the companies plan to use land and some possible ongoing environmental impacts. Of particular concern was the commercial use by CentrePort Limited of the Kaiwharawhara reclamation in the Wellington harbour and alleged excessive dioxin emissions from Medical Waste Limited’s facility at Miramar.
When trying to address such issues in an ad hoc manner, Councillors made little headway for two reasons. First, Councillors were reluctant to cross the governance (owners) / management (directors) divide because it sets a precedent of “dabbling”, and entails decision-making in some ignorance. Dabbling is undesirable because it shows insufficient concern for the proper procedures and thus creates uncertainty for downstream directors and managers, and it undervalues the competence of directors and managers. Importantly, dabbling may undermine the legal obligation of Directors.
The Statement of Corporate Intent provides
the mechanism to address these issues. That document sets out the expectations
of both the owners and the company directors. Both WRC Holdings Ltd and
CentrePort provide the Wellington Regional Council with draft Statements
of Corporate Intent in July each year and the council comments on those
drafts so that they may be finalised by the Directors before the end of
September. The
Statement of Corporate Intent is a vital component of the governance framework
and provides company and shareholder buy-in to financial and non-financial
performance.
The Regional Council’s Statement of Corporate intent for the holding company needs to be comprehensive and sufficiently explicit to embrace all the requirements that Councillors have for all the companies. If that document is adequate, the others should cascade from it.
Challenges to the rationale for the Council’s ownership of forests and the Wellington port company appeared this year during consultation on our 10-year financial strategy and annual plan.
For example, speaking on behalf of “the business sector”, the Local Government Forum said “Ownership of port company and forestry assets is not a core role for the WRC. The WRC should immediately appoint advisors to undertake a scoping study and then sell these assets. It should stop making excuses to perpetuate its own role…. We do not believe that the WRC should expose its ratepayers to the investment risks associated with port ownership.”
And a Waikanae ratepayers’ association said “(rates) Relief would be available if you were to exit from your forestry operations, the port company and commercial property”.
Clearly, Council has a responsibility to make clear to everyone its purposes in the ownership of companies.
It is difficult to justify the public ownership of businesses if the sole purpose in owning them is to reduce the level of rates charged because commercial activity is always associated with risk. In WRC’s case, their ownership of companies reduces rates, but for some this will never be a sufficient reason for accepting risk. They argue that our country is a property owning democracy driven by private economic initiative and the risks inherent in imitative should not be accepted by local authorities.
The company format provides a reasonable mechanism to define, and perhaps subsequently justify, council’s purposes in asset holding. You need to be very determined if you are to adequately justify council assets through annual or strategic planning when those assets are not held in company or LATE structures, because there is not the requirement of Statement of Corporate Intent and the exercise of justification can only be but a small part of a much larger decision-making exercise.
The Porirua City Council, about five years ago, did useful work towards justifying its major assets, working through the annual plan process. The public was concerned about property purchases and this lead on to a diffuse criticism of asset ownership.
The important first step towards the justification of assets at Porirua was work on their classification. Classification was important in work on reserves and major assets.
Councillors were concerned about the list of reserve accounts that had accumulated over the years. Some buildings had money for maintenance and others had none, some suburbs had money for development and other had none. There was money for various specific purposes but projects that were more important had to be a charge on rates. Council classified the reserves and developed the justification for each group. The longer-term purpose was to work into our having fewer reserves and greater flexibility in their use. Much of the need for this project came from antiquated legislation and the accumulation of small reserves through statutory processes.
Having classified the reserves, it was natural to classify other assets when a sceptical public looked at the assets council held when rates were high.
In contrast, the public never complained about Council’s property purchases that were a part of the Landscape Strategy. This document formalised after consultation with the public, sets out possible land purchases to enhance the city environment. Often purchases are to provide green links between areas of the city or to protect features of the landscape. Council historically funded the landscape strategy at a rate of $200,000 per year and thus useful sums become available every few years. Today, the annual funding is at $629,000 and includes new provision for walkways.
However, large projects that required the acquisition or holding of assets and that were outside of the Landscape Strategy required considerable justification. Examples included the purchase of land to advance private commercial developments such as the North City Plaza and the Porirua Mega Centre, the buildings used by the council itself, and other investments.
As a first step towards the justification of ownership, Council classified its major assets. The categories adopted were: (A) Investments, which consisted of cash and shares (B) Investment Properties, where are held purely to generate income and (C) Fixed Assets, which consisted of (i) Infra-structural Assets, (ii) Operational Assets, and (iii) Restricted Assets.
It becomes easier to develop the arguments for and against Council’s ownership of assets once the classification of the assets was in place. The most interesting justificatory arguments were those based on a social philosophy.
The definitive statement on what WRC seeks to achieve from its ownership of companies is set out in the current Statement of Corporate Intent for the holding company. Two sections set out the goals and strategic direction for the company: section 1. Objectives for the Group, and, section 6. Performance Targets .
1. “The Primary Objectives for the Group shall be :
(a) To operate as a successful business.
(b) To own and operate the Wellington Regional Council’s headquarters at 142-146 Wakefield Street, Wellington (known as the “Regional Council Centre”) on a cost effective basis.
(c) To own the Wellington Regional Council’s interest in CentrePort Ltd and to maximise the commercial value to the shareholders and to protect the shareholders’ investment.
2 The second level of definition in the Statement of Corporate Intent is the Performance Targets. These are all financial targets: Net Profit Before Tax, Net Profit After Tax, Return on Total Assets, Return on Shareholders Equity, Dividend Stream.
Hence, the council leaves it to the directors to
decide:
(a) what, if anything, the term “successful business” means beyond the financial targets. For example, they may, or may not, adopt social or environmental goals.
(b) what, if any, performance indicators are to be used to report to the owners on matters other than the financial targets.
(c) the strategic direction for the group or individual companies.
(d) operating principles apart from that which is cast as an objective: “to operate in an environmentally responsible manner”
(e) what “enviornmenally responsible” means.
As CentrePort is legally required (section 5 of the Port Companies Act 1988) to operate a successful business as its primary objective, the current Statement of Corporate Intent has a strong financial emphasis. Since 1988, management philosophy and Council’s purposes have altered. There appears to be nothing in the legislation to preclude Councils developing the objectives to take account of altered circumstances. Indeed, CentrePort managers have already done this to a considerable extent.
One of the most hotly debated issues of the last two decades is the social responsibility of companies. Opinions about business’s social responsibilities lie mainly between two extremes. At the one extreme is the view that business is an economic institution directed towards profit whose only responsibility to society is to provide goods and services and to return maximum benefits to shareholders. The Nobel Prize winning economist Milton Friedman endorsed this classical view. He said the responsibility of business is “to use its resources to engage in activities designed to increase its profit so long as it stays with the rules of the game, which is to say, engage in open and free completion without deception or fraud.”
At the other extreme, there is the view that business is a part of the larger society and, therefore, it has responsibilities other than simply maximising profits. Some proponents of this view also contend that it is often in a company’s financial self-interest to be socially responsible. Friedman lost the debate.
In the case of companies owned by the public, arguments in support of social responsibility must carry even greater weight than is usual because the owners are already committed to act in the public interest.
This thinking about company philosophy and how it relates to the submissions from the public suggests that it would be sensible to make more explicit what we require from WRC Holdings Ltd.
It is unlikely that any requirements that WRC could consider will be new to the directors, or managers, of their council owned companies.
Several papers given to Councillors recently indicate the companies do take positive initiatives in the community and act in a responsible manner. Some appear to have taken upon themselves the model of “corporate citizen”. For example, CentrePort Ltd has consistently made submissions to local Councils as plans have been developed, and they meet with community groups. They pursue environmental protection and sustainability through ongoing programmes and have made significant decisions in the interests of the community. CentrePort employ environmental management systems that are subject to independent audit.
Equally, the recent response from Medical Waste Ltd concerning dioxin was rapid and showed a good level of concern for their fellow citizens.
Hence, the development of the Statements of Corporate Intent can be seen as a ‘catch-up and tidy-up” exercise. The one area most outstanding of attention appears to be that which relates to the owners establishing a method to respond to the public.
There are two sets of requirements that the owners might convey to a company to indicate how they want the company to perform:
(a) objectives, consistent with a stated strategic direction and supported by performance indicators, and
(b) operating principles that guide the directors and managers as they seek to achieve the objectives.
WRC should develop the objectives for WRC Holdings Ltd and set out some operating principles. The debate that will advance this will inevitably develop the philosophical justification for the council’s ownership of companies.
Objectives need be carefully defined and have performance indicators that will enable us to measure achievement. The suggestions below are cast as topics for debate rather than as developed objectives. Some of the suggestions are based on the Ministry for the Environment’s publication “Company Environmental Policies”.
Objectives to consider include to:
· advance the economic well-being of the region
· be model employers
· contribute to the public’s understanding of economic infrastructure
· contribute to the development of technology in areas relevant to the companies’ operations
· provide local government entities with soundly researched submissions on their annual and strategic plans
· make submissions to Parliament Select Committees and Ministers of the Crown on matters that relate to the company’s expertise
The following principles may be considered. Some could appear in a charter of ethics and social responsibility. Our Council owned companies will:
· be known and respected for the manner in which they pursue financial objectives with exceptional regard for social, environmental and heritage values
· behave in an ethical manner in all dealings, where compliance with the law, regulations and statutory plans is the minimum acceptable behaviour
· set the standard in the Wellington region for good corporate behaviour, particularly taking a long-term view of the impacts of key decisions
· act to eliminate pollutants that damage the air, water or soil
· minimise and safely dispose of hazardous wastes
· disclose environmental impact of products and services when marketing
· consult with all affected parties before making any key decisions with significant impacts on those affected parties and report on that consultation
· disclose accidents and hazards and protect employees who report them
· restore damaged environments and compensate for human injury
· report on enviromental and social performance as well as financial performance
· use energy efficient prducts and processes
· publish regular environmental audits
· name a senior executive as being the person responsible for environmental affairs
· appoint at least one director who has expertise in environmental management.
The above suggestions, particularly those cast as objectives, make it clear that the purpose of council owning companies is not the mere making of money. The risks associated with commercial activity can only be borne if the council through its ownership of companies pursues a raft of social and environmental goals.
I am confident that the Council, after consulting the public and all interested parties, will develop a Statement of Corporate Intent that is a model of its kind.
Robert Shaw JP BSc BA MPubPol MPhil(Hons) is a senior lecturer in business management at the Open Polytechnic of New Zealand and a member of the Wellington Regional Council. From 1992 to 1998 he was a Porirua City Councillor.