common standards are needed for engagement to be effectiveDecember 2002
More companies are facing questions from investors about their social, environmental and ethical performance than ever before. Gone are the days when only a few companies, such as Barclays in the early 1980s over its interests in South Africa under apartheid, were the subject of attention. In a time of cost cutting, engagement continues to expand, driven partly by interest in corporate governance and partly by the general trend towards holding companies to greater account for their social and environmental performance.
Engagement has three aims – to improve corporate reporting, to reform management procedures and to redirect research and investment. It is hard to see how any of these can be met if investors do not jointly develop common standards which would apply when they engage with companies. Much existing practice is ad hoc and confused, and it is understandable that some companies listen politely and then ignore what has been said.
But they will find it increasingly hard to do so. Engagement will become more rather than less coherent. Already, the trend is towards investors forming alliances to press their case. Around a third of all engagement activity by investors on social and environmental matters is thought to be collaborative, and this proportion is likely to increase. Practitioners know size matters, they have a vested interest in making engagement more effective, and costs are shared.
But in any alliance, ground rules are needed. There are plenty to choose from. Insight Investment’s proposals to use the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises and the Universal Declaration of Human Rights are a good start, being focused enough to satisfy SRI investors and broad enough to interest mainstream investors. They offer the prospect of companies having, for the first time, a clear set of ethical standards sanctioned by investors. Basic agreed standards of operational behaviour would target laggard companies rather than the usual suspects. And that can only be a good thing.
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