Shareholder Scrutiny


Shareholder Scrutiny

It is not simply the rise of NGOs and media pressure, however, that has forced companies to focus on the poor labor or environmental activities of their overseas business partners . With the rapid expansion of the Internet in the late 1990s came also an expansion of share ownership, not only among Americans, but also among the general public in developed economies around the world. Today more than 100 million Americans have invested either directly or institutionally in shares. Many are acutely sensitive to a collapse in share price, and are among the first to react to news from an NGO, the Securities and Exchange Commission (SEC), or the media that might damage a company s reputation. Even if these investors take no particular ethical position on human rights issues or environmental violations in the supply chain, the slightest hint of a scandal can trigger a rapid sell-off. Institutional investors, too, though usually less influenced by short- term issues, have become increasingly sensitive to sudden and devastating share price declines with the announcement of an SEC investigation or an environmental spill.

Even more important, many of these investors have begun to avoid investing in companies that have a reputation for permitting unacceptable social or environmental activities in their supply chain in the first place. A simpler and more stable investment policy, of course, is not to have to monitor the activities of a risky company but instead to invest in a more dependable and stable company ”one that has strict and transparent policies with regard to activities (including those of its suppliers) that could potentially damage its reputation and stock price.

Of course, the development of the Socially Responsible Investment (SRI) movement reflects these types of investment concerns. Over the past 10 years , socially responsible investing ” investing in listed companies that can demonstrate that they adhere to higher standards of ethical, social, or environmental performance ” has continued to provide another compelling reason for companies to demonstrate their commitment to good behavior in these areas.

Once considered a marginal set of indices in the world s major stock exchanges, socially responsible investment has expanded in the United States to $2.34 trillion in 2001. In the summer of 2002, partly no doubt as a reaction against the wave of corporate scandal, ethical funds had a net investment gain of $200 million even while equities had a net redemption of $3.4 billion. [22 ] Today, nearly one out of every eight dollars under professional investment is invested in companies that have been screened for these higher levels of social and environmental responsibility. Calvert, the fund managers, has estimated that by the end of the decade socially responsible investment will account for 10 percent of all investment in the United States. Similarly, Britain now has more than 60 ethical trusts, a leap of 36 percent between 1999 and 2001.

The United States has a dedicated ethical index (the Dow Jones Sustainable Asset Management Index), as does Canada (the Jantsi social investment index) and Britain (FTSE4 Good), each of which monitors companies according to their policies concerning corporate governance, environmental reporting, corruption, human rights issues, and environmental product design and disposal policies. Some, such as the FTSE4 Good (which rates more than 300 major British companies, including around three quarters of the FTSE 100) now require companies to produce publicly available reports on their approach to social and environmental management. [23 ]

These socially responsible indices are not without teeth. In 2002 the FTSE4 Good index dropped several prominent companies including Abbot (oil and gas services group ) and Heywood Williams (building materials) for failing to meet required human rights and stakeholder criteria. [24 ] Such an ignominious release from a major ethical index is, of course, quickly trumpeted loudly in the business and investment press.

An increasing number of fund managers also offer these types of SRI portfolios. Calvert, for example, offers 18 socially screened funds, and completes research on 1,000 domestic and international companies each year, looking at various nonfinancial criteria including ethical, social, and environmental performance. Many institutional pension fund holders, such as the State of California or the AFL/CIO, also screen companies in which they invest for superior social and environmental performance. One of the most active funds in this area, the California Public Employees Retirement System (Calpers), with $150 billion in managed assets, is the world s largest pension fund, and one of the most vociferous advocates of socially and environmentally conscious investment. [25 ]

And of course, as recent accounting scandals have brought into question-the legitimacy of company financial reports, many asset managers have adopted broader criteria for investing in companies, focusing on the transparency of corporate activities, the ethical policies adopted by management, and often, the company s willingness to adhere to newly emerging labor and environmental standards, and to publish the company s performance against those standards.

That is why even asset managers that do not deal specifically in SRI funds are now examining proxy statements when selecting stocks. As investors increasingly turn to these types of indices for information concerning a company s social and environmental approach and risk and reputation management framework in order to judge a company s likely stability and growth, companies are scrambling to at least show that they are aware of the importance of these issues to investors.

In fact, there are many indications that the market is moving toward integrating these types of minimum standards ” corporate governance methods and strong compliance with good social and environmental standards ” into the vast majority of indices, as a response to the fact that too many investors are wary of the reputation damage that indifferent corporate policies in these areas can invite.

In what some are heralding as a significant step toward forcing corporations globally to accept a uniform human rights policy, for example, the Globalizing the Principles Network, a group of religious investors and activists with representatives from 22 countries , published in May 2003 new Principles for Global Corporate Responsibility: Bench Marks for Measuring Business Performance, which reflects the Universal Declaration of Human Rights and the core labor rights set out by the International Labor Organization (ILO). These Global Bench Marks provide a variety of standards and criteria for corporations, including guidelines on issues such as workplace conditions, pollution control, contract supplier guidelines, stakeholder involvement in corporate decision making, and public reporting.

The Bench Marks provide an economic imperative for investment managers from affluent nations, says Helga Birgden, Chair of the Christian Center for Socially Responsible Investment, to assess the sustainability of their portfolios in terms of management of financial, environmental, social and governance risks. . . . The Bench Marks challenge the all too prevalent practice of corporate social responsibility, which does little for social change and justice , instead it calls on companies to aspire to global sustainability. [26 ]

Similarly, in the United Kingdom, the association of British Insurers ” representing corporations that control 20 percent of the UK stock market ” have now published guidelines for companies that include a requirement for reporting on their policies for managing risks in social and environmental policy. As we will see in the next chapter, the United Kingdom and other European nations are moving rapidly toward incorporating these requirements into law. Britain already requires pension fund trustees to declare in annual reports how they use social, environmental, and ethical issues when making their investment decisions. Similarly, Australia passed a requirement under their Financial Services Reform Act that took effect in March 2003, whereby all investment firms are required to disclose the extent to which labor standards or environmental, social or ethical considerations are taken into account. [27 ]

What all of this reveals is that there is a growing appreciation by institutional investors that the social and environmental policies that are pursued by a company s management team ” through the company s extended supply chain ” represent important criteria for judging the future stability of a company s share value.

At the end of the day, contends Hewitt Roberts of Entropy International, a UK-based social and environmental consulting and software provider, CSR (corporate social responsibility) and good corporate governance will become the normal way of doing business ” there will be no funds other than ethical funds ” because they are not sustainable in the long run if they do not provide the necessary kind of investment governance and investment guarantees . [28 ]

Whatever its limitations, the SRI movement is another powerful reason why companies need to begin to take the activities of their suppliers more seriously, and to manage the ethical, social, and environmental aspects of their supply chain in a more coherent way.

[22 ] Sarah Murray, The Financial Times , October 2, 2002.

[23 ] 2001 Report on Socially Responsible Investing Trends in the United States, SIF Industry Research Program , November 28, 2001, at www.socialinvest.org; and Rupert Jones, Jobs & Money: Money: Ethical investment: A bad year for FTSE4Good, The Guardian, July 27, 2002.

[24 ] Terry Macalister, Abbot kicked off good-guys index, The Guardian, September 17, 2002.

[25 ] Alison Maitland, Scandals Draw Attention to ˜Superficial Measures, The Financial Times, December 10, 2002, p. IV; and see also Calvert Social Responsibility Criteria, Calvert Asset Management .

[26 ] Religious Investors, Advocacy Groups Issue First Global Bench Marks for Corporate Behavior, The Interfaith Center on Corporate Responsibility , May 20, 2003, at www.iccr.org/news/press_releases/GP_pressconf/pr_gp_release.htm.

[27 ] William Baue, Australia to Require Investment Firms to Disclose How They Take SRI into Account, Social Funds.com, January 3, 2003, at www.socialfunds.com/news/print.cgi?sfArticleId _998 .

[28 ] Interview with Hewitt Roberts, February 13, 2003.