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May 22, 2002
The Matrix: a New Tool for Assessing Corporate Social Responsibility
    by William Baue

Each of two new initiatives employs a matrix to graphically represent the variables inherent in socially and environmentally responsible corporate practices.

Recently, the business community has utilized the diagrammatic functionality of the matrix to advance understanding of sustainable corporate practices. Last week, London-based Morley Fund Management introduced its Sustainability Matrix, which ranks companies listed on the FTSE 100 index based on their social and environmental performance. And the March 2002 issue of the Harvard Business Review included an article that introduced the virtue matrix, which categorizes corporate "virtue," or a company's social and environmental practices.

A matrix typically presents a grid upon which users can graph variables. For example, Morley's Sustainability Matrix rates management vision and strategy from one to five (best to worst) on the x axis and business sustainability from A to E (like school grades) on the y axis. The matrix thus does not generate a ranking, as some companies, such as BP (ticker: BP) and Shell (RD), score well in management vision and strategy (each scored a 2) while performing poorly in business sustainability (each received a D grade). Morley performed the matrix-based research itself over the past year, and uses the results to select companies for inclusion in its Morley Sustainable Future Funds.

Roger Martin is the dean and professor of strategy at the University of Toronto's Rotman School of Management. He conceived of the virtue matrix at the July 2001 Business Leaders Dialogue of the Aspen Institute's Initiative for Social Innovation through Business (ISIB). In order to help executives analyze the effects of incorporating socially and environmentally responsible practices into their businesses, he created a graphic representation of the variables at play when companies implement corporate social responsibility (CSR) initiatives.

"The framework itself gives a context to contain the discussion [about CSR] and think about it in a new way," said Nancy McGaw, associate director of Aspen ISIB, which organized a panel discussion on the virtue matrix last month at the New York City Harvard Club.

The virtue matrix consists of four quadrants. The bottom pair of quadrants makes up the "civil foundation," or the pre-existing observance of CSR. The left quadrant represents voluntary actions that follow norms and customs, and the right quadrant signifies compliance with regulations and laws. Professor Martin labels the top pair of quadrants the "frontier." Corporations take risks in these quadrants because they have faith in the "intrinsic" value of their actions, which may or may not generate financial, social, or environmental returns. These risks may help explain why some companies remain reluctant to incorporate socially and environmentally responsible practices.

However, Professor Martin cites numerous examples of how such risk can pay greater-than-expected returns. Henry Ford, notwithstanding his anti-Semitism and lethal strike-breaking tactics, risked the loss of competitive advantage by paying wages above market value. However, he ultimately gained worker loyalty while benefiting society by raising the bar for sector-wide employment practices. In the early 1990s, Prudential inspired the rest of the insurance industry to follow its example of offering policy holders suffering from AIDS contracts that tapped death benefits to pay for medical expenses.

Perhaps the most significant benefit of the virtue matrix is that it helps transform corporate responsibility from a subjective concept into a more objective entity.

"You'll notice that I refer to corporate responsibility in this article as if it were a product or service. That is no accident," writes Professor Martin. "It's my contention that, by treating corporate responsibility as an artifact subject to market pressures, the virtue matrix reveals the forces that limit its supply and defines measures likely to increase it."

Morley's Sustainability Matrix similarly promotes the raising of corporate social and environmental consciousness by correlating it to shareowner value.

"Morley increasingly believes that companies operating in a socially and environmentally responsible manner will be most likely to succeed over time," said Morley CEO Keith Jones. "Our Sustainability Matrix breaks new ground in promoting improved performance. It focuses on engagement with management and provides transparent information for investors. By encouraging companies to improve their sustainability rating, we aim to protect and enhance shareholder value."


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