Keynote Address at 6 th ACCA Malaysia Environmental and Social Reporting Awards (MESRA) 2007
22 May 2008 |   By : YBhg Dato Dr. Nik Ramlah Mahmood, Managing Director, Securities Commission
Keynote Address by

YBhg Dato Dr. Nik Ramlah Mahmood
Managing Director, Securities Commission

at the

6 th ACCA Malaysia Environmental and
Social Reporting Awards (MESRA) 2007
22 May 2008, The Prince Hotel Kuala Lumpur

Yang Berbahagia Dato’ Khalid Ahmad, President of ACCA Malaysia Advisory Committee

Distinguished guests, ladies and gentlemen

1. It is often said that the promotion of CR must be underpinned by the trilogy of encouragement, persuasion and legislation. In this regard, I am proud and privileged to be part of today’s Malaysian Environmental and Social Reporting Awards (MESRA) which play a key role in encouraging and persuading companies to adopt CR. And I’d like to thank ACCA for inviting me to officiate the event today.

2. In fact, the ACCA must be congratulated for its continuous dedication; firstly, in organising the MESRA Awards for the past 6 years and secondly, for its unwavering commitment towards further developing the CR agenda in Malaysia. As I am sure you will all appreciate, the more successful the efforts are at encouragement and persuasion, the less need there will be for legislation, which impose indirect costs to corporations.

3. Modern economics has shown that in an unfettered market economy, private incentives are often not aligned with social costs and benefits. In fact, the mere pursuit of self-interest will not necessarily result in the well-being of the society.

4. Similarly social welfare is not maximised if corporations single-mindedly maximise profits. As we all know, the responsibility of corporations is not only to shareholders but also to other stakeholders. Sadly, we can draw upon the many recent examples of corporations producing well-known and well-accepted consumer good that have learned the hard way that doing bad can bring about devastating consequences for business and ultimately for the shareholders. Simply put, doing good is good for business.

5. In my speech this morning, I will be exploring the many forms of encouragement, persuasion and legislation that have facilitated the adoption of CR in Malaysia. Before I do that though, I would like to share an interesting observation from the book “The New Capitalists – How Citizen Investors are Reshaping the Corporate Agenda” which to me not only provides an appropriate context for the SC’s work in CR, but more interestingly, it provides a compelling reason why so many of us are here today to participate in this year’s MESRA.

Rise of civil economy
6. So, why then are companies increasingly reporting on the social and environmental impact of their actions? The answer to that may very well be linked to the book’s contention that increasingly corporate power will be wielded by the millions and millions of working people who have their pensions and life savings invested in the world’s largest companies. Hence the authors have introduced the term “civil economy”, the business life equivalent of the more well-known “civil society” in the context of political life.

7. While civil society defines the array of institutions needed to maintain democratic governments accountable to public needs such as free press, an independent judiciary, civic groups, political parties and involved citizenry, “civil economy” on the other hand involves a similar range of parallel institutions which are trained on business rather than politics.

8. Therefore, while the civil society deals with accountable governments and informed electorate, the civil economy requires accountable corporations and engaged shareholders. This has propelled the rise of a new species of corporations. Ones which are increasingly skilled at cultivating commercial dynamism in the context of accountability to shareholders and stakeholders.

9. Hence, an increasing number of corporate leaders are realising that recurrent clashes between corporations and social or societal interests will be a severe drain on the competitiveness of their companies. This in turn will impose undue costs on all taxpayers, including the corporations themselves.

10. Therefore, while companies must and do in fact continue to strive to be profitable, the days of the “pathological pursuit of profits” are over. In the civil economy, it no longer makes strategic sense for corporations to profit at the expense of society at large because society at large are the new capitalists, the ones with clout.

11. Management in a civil economy involves corporations pursuing sustainable profitability since such practices match the interest of their new capitalist owners. This not only raises the company’s stock value over time but also reduces a company’s cost of capital.

12. Against this backdrop, it is therefore hardly surprising that CR has gained significant momentum in the last couple of years. We have seen greater awareness, focus and creativity in bringing the spirit of CR into being. More and more companies now realise that CR extends beyond the social or community impact of the business. It is about the policies the company adopts for its ethical practices, continued profitable existence, its employees, its community and its supply chain, among others.

Encouragement: Malaysia’s efforts to promote CR
13. Malaysia ’s efforts and achievements thus far in this area are something we can all be proud of. We have made significant progress in raising awareness levels and we are now moving towards proactive internalisation of CR concepts. As consumers become less tolerant of unethical and non-sustainable business practices, our PLCs understand that their “licence to operate” would be revoked by their customers, shareholders and associates if they choose to ignore CR in doing business today.

14. A significant development in Malaysia includes greater government activism in the pursuit of CR. The Government has provided incentives to foster the adoption of CR; from requiring PLCs to report on their initiatives to creating a CSR Fund. Bursa Malaysia has also launched the CSR Framework which is a set of guidelines for Malaysian PLCs to help them with the practice of CSR. Numerous awards such as the Prime Minister’s CSR Awards, the StarBiz-ICR Malaysia Corporate Responsibility Awards and most significantly, the ACCA MESRA have been created to acknowledge champions of CR.

15. The industry is also playing its part with the setting up of the Institute of Corporate Responsibility, Malaysia. ICRM was established with the goal to develop CR in Malaysia through capacity building, information sharing and unique partnership opportunities.

Persuasion: global development of CR
16. We have briefly touched on the many forms of encouragement provided by the regulators and the government for Malaysian companies to undertake CR. So why are we doing this? Why has so much effort been devoted to this area?

17. To answer that, we need to look at the key factors that have contributed to the rapid development of CR around the world. Firstly, the pressure of a deteriorating world is being felt more than ever before. We are seeing the world rising up to the cry of global issues, such as poverty and global warming. This is obvious through the many taglines, advertisements and projects that have touched us through the media. Most of us are only too familiar with “Idol Gives Back” from the famous reality talent show, American Idol and “Earth Day” which was celebrated a few weeks ago.

18. Secondly, there is increasing public sector demand and incentives for the development of CR. Asia has seen progress in this area. In fact, Malaysia is the first in this region to take CR a step further. From a regulatory perspective, we are more advanced than almost all other Asian countries in what we expect companies to do. Companies tendering for government contracts must declare what their CR practices are; public-listed companies are required to make mandatory disclosure of their CR practices in their annual reports. We certainly have done a lot compared to others.

19. Last year, t he Indonesian parliament passed the Company Law on CSR making it mandatory for almost all companies except in the financial, information technology and consulting sectors. Last month, a number of national industrial federations and associations in China issued guidelines for CSR. Industrial corporations and related institutions are urged to shoulder social responsibilities to ensure sustainable development.

20. Thirdly, there is a healthy trend in the level of awareness and demand for environmentally friendly products. The automobile industry has picked up on this trend and is becoming more environmentally conscious. Lately, we see more hybrid and electric cars being produced by companies such as Toyota, Ford and Chevrolet. Supermarkets are also going green by encouraging the use of recyclable bags.

21. Fourthly, the rapid growth of Socially Responsible Investment (SRI). SRI is a distinct feature of CSR in the financial world. The 2007 Report on Socially Responsible Investing Trends in the United States by the Social Investment Forum found that about one out of every nine dollars under professional management in the United States today is involved in SRI. Closer to home, the Association of Sustainable and Responsible Investment in Asia reports that the number of SRI funds in Asia has surged from 158 to 203 funds in 2007.

22. Globally, SRI is gaining more mainstream media coverage with discussions in many new arenas including the now frequent 'Going Green' segments on CNBC. The new UK Ethical Investment Week was launched in May. It was reported that this marks the first occasion on which the financial services industry and grassroots organizations collaborate to encourage people to consider ethical investment.

Legislation: where do we stand?
23. As I have mentioned earlier, companies that strongly embrace CR know that CR makes good business sense. Good CR practices enable companies to attract better quality investors and to better meet the challenges posed by increased competition for markets and capital. This will result in improved reputation and branding.

24. CR reporting also brings about a myriad of benefits for companies. Good CR reporting will communicate commitment and build awareness of the company’s CR initiatives. This way, the company is able to protect and develop its brand and reputation. Customers are becoming more and more sophisticated, thus, giving preference to purchasing from companies that are responsible and sustainable.

25. Internally, communication with employees is also important to create synergy and enhance morale amongst top management and employees. It is easier then, to focus on driving a company’s CR strategy and making it effective.

26. While Malaysia has made significant progress there is still tremendous room for further improvement and a lot more that remains to be done. The findings of Bursa Malaysia’s 2007 Status Report on CSR in Malaysian PLCs published just last month, serves as a wake-up call for us.

27. The Survey revealed that while leading PLCs are integrating CSR across their businesses, most PLCs however are lagging behind. Where does that leave us? We have an uphill task ahead. Lagging PLCs need to come up to par with leading Malaysian PLCs in CSR, while leading PLCs can look further into global best practices.

28. CR disclosure remains high on our “to-do” list. On their part, PLCs have to get their information out to the public through comprehensive reporting, via the proper channels.

Striking a Balance
29. Before I conclude my speech, I would like us to consider four dichotomies in undertaking CR. First, corporate philanthropy and sustainable development. Today, the linkage between business and charity is very common. However, there are companies that treat corporate philanthropy as part of their CSR strategy. There is greater acknowledgement that CR goes far beyond philanthropy so one should not confuse one with the other.

30. Companies can still carry out their charity drives but the expectations of society for businesses to be more responsible have heightened in the past couple of years. The trend is moving away from short term solutions to societal needs. Instead, we now look at long term solutions, as depicted by the word “sustainable”. The key is for companies to balance the two in order to attain optimal benefits.

31. Secondly, return on investment and social goals. Allow me to refresh your memories on the obligation of Malaysian PLCs. The Finance Committee Report on Corporate Governance states that :-

“Corporate Governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long term shareholder value, whilst taking into account the interests of other stakeholders”.

32. I believe that many companies face difficulties in making a case for CR if there is no evidence that it would benefit financially from such undertaking. Most companies are willing to practice CR because the costs involved can eventually be recovered. Initial costs that were well invested may lead to huge savings for the company in the future. In the business world, it does not make sense to fulfil social goals but risk the entire value of the company.

33. Companies need to balance these areas, i.e. to do business with a social conscience and at the same time, to sustain a healthy balance sheet. Recently, an article in the Wall Street Journal entitled “Does Being Ethical Pay” highlighted that consumers were willing to pay more for ethical goods than unethical ones. We need to take note that both ROI and fulfilled social goals are desirable elements by shareholders and stakeholders.

34. Thirdly, quantitative and qualitative reports. The reporting style of a company very much depends on the culture and type of company. When it comes to reporting on CR, reports that include colourful graphics of trees and smiling children may be attractive as it appeals to the “human” side of the reader. But, it may be misconstrued as a marketing gimmick of the company.

35. A different approach to CR reporting is by using numbers. Some may argue that the reader wants to see figures that can prove the benefits reaped from CR. However, reports that contain too many figures may be overwhelming to the man on the street. The CR report may seem cold and it may lose the “softer” side of CR.

36. Ultimately, companies are given the choice whether or not to undertake a qualitative or quantitative CR report. As mentioned earlier, it all depends on each company. Whichever way CR is reported, a good report must be one that is realistic, honest and transparent.

37. Finally, I would like to talk briefly on mandatory reporting and company initiative. Much has been said on whether CR reporting should be made mandatory or not. In Malaysia, no prescribed format has been given so as to not stifle creativity and enthusiasm. Companies are encouraged to not just “walk the talk” but “talk the walk” by extending more information in the report; reporting beyond the requirements of law.

38. As opposed to other areas in the annual report where “creativity” is not desirable, CR is an area where companies can infuse innovation and creativity in reporting. At this juncture, I would like to acknowledge the winners of the 2007 MESRA Awards for having set an example to Malaysia in the area of social and environmental reporting. I am sure your reports have set new benchmarks for CR reporting for Malaysian companies.

39. In closing, I would like to say that the SC’s foresight and commitment in driving the CR agenda has borne fruit. In the course of our journey, we have worked closely with professional bodies and non-governmental organisations. And we will certainly continue with our role to facilitate the advancement of CR in Malaysia.

40. But, a lot more needs to be done. And a lot more can be done. By “more” I mean companies that already have CR strategies can look to international best practices while companies who have yet to embrace CR should start making that leap now.

41. We constantly talk about being a global citizen, but let us not forget, we are first and foremost citizens of Malaysia. The pressures of society for sustainable businesses are stronger now than ever before as Malaysian society becomes increasingly aware of CR. Therefore, let us ask ourselves, are we doing enough to meet these expectations?

42. On that note, I once again congratulate the winners of the 2007 Mesra Awards. Keep up the good work.

Thank you.
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