Ethical Performance
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do-it-yourself approach no longer good enough

January 2003

It’s time for investors who engage with companies to agree core ethical standards, says Craig Mackenzie

Large institutional shareholders are discovering a new willingness to engage with companies on issues of corporate social responsibility. In London alone, there are now about 40 analysts working on this topic in investment institutions, on behalf of around £300bn ($474bn) of assets. But what agenda should shareholder engagement follow?

One solution that has received support from institutional shareholders is the suggestion that investors should hold companies accountable for effective risk management with regard to CSR issues. This approach is embodied in the Association of British Insurers’ guidelines, issued in 2001, which require companies to disclose their most commercially significant social, ethical and environmental risks and opportunities, as well as their approach to risk management in this area. This solution is a step forward, but doesn’t go far enough.

CSR is ultimately about respecting certain basic ethical principles and rights. There is now a large body of legal, quasi-legal and voluntary principles on CSR. These principles – or at least some of them – have sufficient authority and legitimacy to provide the common basis for engagement that shareholders need. I believe, for example, that shareholders can reasonably expect companies to comply with the standards set by the OECD Guidelines for Multinational Enterprises, and with the principles in the Universal Declaration of Human Rights.

In the absence of agreement about basic principles, investor engagement on CSR is driven by an assortment of DIY evaluation models of varying degrees of sophistication and legitimacy, which contributes to energy-sapping ‘questionnaire fatigue’. But if shareholders are to play a meaningful long-term role in supporting, encouraging and, where necessary, challenging companies on CSR, then DIY won’t do. Shareholder engagement on conventional governance issues is relatively successful in the UK because it has a real legitimacy and common purpose derived from its basis in the Combined Code of the Committee on Corporate Governance. A similarly substantive basis for shareholder engagement is needed on CSR issues.

The ABI chose not to base its guidelines on substantive ethical standards because it felt investors lack the moral authority to define the principles of CSR. Quite right too! But without clarity about principles it is hard for firms to manage CSR risks and for shareholders to evaluate compliance.

Many questions remain about what compliance with such principles looks like in practice. But that is the kind of debate shareholders should be having with companies. The greater clarity we can achieve on the principles of CSR, the more surefooted companies will be at managing CSR risks and the easier it will be – for everyone – to evaluate corporate performance.




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