Why is corporate social responsibility (CSR) hot in investor relations (IR)? Because it has to be, given the state of public trust. Key challenges that organizations face include creating transparency, obtaining measurable data on accountability and improving the policing of subcontractors and vendors. Aiding in these efforts, blockchain reporting offers a way to verify and enforce agreements and contracts, deliver data and provide tools for governance and IR professionals to more effectively do their jobs and communicate facts to investors.
Although blockchain reporting has much to offer, there are also significant challenges to its adoption in CSR. Now is the perfect time to learn about the technology while remembering that true transparency and ethical operations always involve the human element.
Why CSR is necessary
In a world where on-demand access to information is the norm, the public may interpret silence as having something to hide. This perception has not been helped by a string of high-profile PR disasters by companies over the past few years. Issues such as poor working conditions, harm to consumer health, human rights abuses, environmental damage and poor corporate governance are weights on IR and corporate communications. Even when companies develop standards for these and other areas, monitoring and enforcing them is difficult.
Audits of direct contractors and suppliers may be insufficient to curb breaches. Then there are the secondary and tertiary levels of subcontracting, where accountability becomes like trying to navigate in a dense fog.
Traditional contractual arrangements — the mechanisms currently used to enforce CSR requirements — depend on a hierarchy of control and execution: A company enters into a contract with a contractor or vendor. Clauses include CSR requirements. One of the demands is typically to enforce the conditions down the supply chain. But companies generally don't have access to this web of additional contracts. Even if they did, no one would have the time to learn the foreign languages and legal systems to ensure that things were being done correctly.
Arrangements become opaque after the first level. If true transparency is all but impossible to achieve even for major companies, it is beyond consideration for smaller ones, partners, the distribution chain, advocacy groups and investors and their advisory services, not to mention the public at large. Enforcement can require legal action that is both expensive and lengthy.
How blockchain reporting can help
Blockchain technology takes a different approach to contractual arrangements. And while the technology is frequently associated with so-called cryptocurrencies like bitcoin, blockchain has far broader implications.
It refers to a decentralized smart contract embedded in software and protected by advanced encryption. All transactions under a given contract are stored in multiple places. Each transaction is signed, and the existence of all transactions is available for verification. At the same time, the contents of each transaction are open only to those with the appropriate encryption key. A consensus process by the different partners involved provides the authority to recognize a transaction as valid.
The flexible nature of these smart contracts has broad implications for CSR. Contractual rules can be as complex as parties require. For example, they could require a subcontractor to enforce the entire set of CSR requirements for a purchase to be considered valid. Or, the contract might require the release of a regular report on working conditions. Business partners could agree to give third parties, like consumers or nongovernmental organizations, the ability to verify the CSR conditions.
Blockchain technology alone is not a foolproof system. As the financial industry has learned, programming errors and other technical flaws can lead to unauthorized access to a smart contract by outsiders, which can result in tampering with contract conditions or results. Time lapses can cause a transaction to appear valid, only later to be reversed. Smart or not, contracts cover what should be done. Individuals and organizations can always agree in bad faith and shirk responsibilities.
Nevertheless, the increased transparency and clarity that blockchain can provide could be useful for CSR initiatives. Investors want to know that companies are following through on their promises. Blockchain is one way your organization could help ensure CSR is lived, not just talked about. If your organization decides to implement blockchain relative to CSR, make sure investors know what you've done and how this will benefit the organization and its values.
While it could take years to see widespread blockchain adoption, organizations that take steps to understand the technology now will be the ones best prepared for the future.
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