Ethical Performance
inside intelligence for responsible business


why US companies are a blot on FTSE4Good's landscape

September 2005

Many US companies are failing to meet the criteria necessary for inclusion in one of the world's best-known SRI indexes. EP looks at the reasons - and the excuses

It has its critics, but the FTSE4Good index has been one of the success stories of corporate responsibility. Since it was launched in 2001, a further 400 companies have been added to the index as they have begun complying with human rights, labour standards and other criteria. There are now 900 constituent companies.

There is, however, one less-than-bright spot. In the US, the level of compliance with some criteria has been low, even though these are being introduced gradually. As a result, FTSE Group, which runs the index, has been obliged to give companies more time to meet the criteria - in some cases as much as two years.

Of the 200-odd US companies in the index, about half still do not meet environmental criteria, compared with less than ten per cent in other regions. Only about a quarter of US listed companies have even responded to initial contact from FTSE4Good about its human rights criteria, compared with a response rate of 65 per cent elsewhere. And only one in five of the US companies have met the index's requirements on collective bargaining, compared with 60 per cent worldwide.

In other words, while most companies in most countries have virtually finished implementing the FTSE4Good criteria that currently apply, US companies are not even close to doing this. With a plethora of new criteria being brought in over the next two years, the fear is US companies will fall further and further behind.

FTSE is so concerned it has set up a US committee to look into the matter. Will Oulton, strategic adviser on socially responsible investment to FTSE, says one of the main difficulties identified by the committee is the parochial approach of those US companies catering largely for their domestic market. 'The multinationals comply with our criteria at around the same level as their European and Asia-Pacific peers,' says Oulton. 'But for domestically-focused US companies, the figures change dramatically. That's where we find the bulk of the companies that are difficult to engage with.'

FTSE complains that many US companies do not even have an environment or CSR department, 'which means that simply making contact with a company representative who is prepared to discuss such issues poses significant difficulties'. But there is, in any case, a general reluctance to divulge. 'Disclosure in a litigious culture is a problem,' says Oulton. 'It's a perceived risk in the US to put too much information in the public domain, though there's a view from our US committee that there is little case law to support such a fear.'

Poor disclosure, however, is not the whole story. FTSE says domestic companies are simply lagging behind on CSR issues. While the multinationals are pushed into action in other parts of the world by pressure from consumers, campaigners and government, domestic US companies are not feeling the same pressures.

Craig MacKenzie, head of investor responsibility at Insight Investment and deputy chair of the FTSE4Good policy committee, believes US chief executives 'are focused on the practice of their domestic peers rather than international corporate norms', and ironically notes that 'US multinationals seem to find it relatively easy to meet the criteria despite operating in the same jurisdiction as the national companies who offer us legal excuses'.

There are also cultural differences, with domestic companies less inclined to appreciate the need for action on trade union recognition and other issues, and more likely to focus solely on legal compliance. FTSE argues that one of the main barriers to US companies meeting its environmental criteria is that many have management systems designed to comply only with the country's Environmental Protection Act, rather than continuous improvement systems such as ISO14001.

Matters are not helped by the Sarbanes Oxley Act, intended to raise corporate governance standards in the US. 'We've found a lot of senior management time has gone into Sarbanes Oxley-related issues, with a loss of focus on some related areas,' he says.

Given that the US' poor performance against FTSE4Good criteria is not an isolated failure - US companies have been slow to support the Global Reporting Initiative's guidelines (EP6, issue 3, p6) and the UN Global Compact - FTSE is trying to maintain a tolerant approach. But its willingness to talk publicly about its frustrations tells its own story. At the recent launch of FTSE's plans for the index, group chief executive Mark Makepeace did not mince his words. 'There is now a dialogue, which is an improvement from 18 months ago,' he said. 'But we need to see action.'

The addition this month of two indexes covering US companies to the Dow Jones family of sustainability indexes may prompt companies to further action. It will be interesting to see whether an SRI index bearing a name indelibly associated with Wall Street can overcome the scepticism of some US companies.

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