The role of business in society is a debate that is well worn. There are those who espouse Milton Friedman’s position that “the role of business is business”—in other words, its role is to create shareholder value and ignore social issues.
On the other side of the argument are those who are proponents of a greater corporate responsibility, the environmental, social and corporate governance policies (often referred to as ESG) that foster sustainability.
In the past, social responsibility was centred on socially responsible policies. These were often the domain of charities, religious and other socially minded organizations, and universities. Policies were established to avoid investing in companies that undertook debatable activities such as deforesting, strip mining, production of nuclear weapons or other weaponry, and production of goods that some considered “sinful” (alcohol and tobacco). More recently, the idea of sustainability has broadened and, along with it, investors’ appetite to more actively engage companies vis-à-vis their corporate behaviour in an effort to effect change.
To some degree, this has been influenced by some of the excesses we have witnessed over the past few years in the corporate world. Headlines such as “Top CEOs got 189 times the average worker’s pay in 2010” have not endeared corporations to the average worker, who, in many cases, had not had a salary increase in several years.
In the U.S. and the U.K., shareholder action related to “say on pay” has galvanized investors’ attention in the past few weeks. Recently, shareholders of Citigroup refused to approve its CEO Vikram Pandit’s $15-million pay package. Apparently, he was surprised that more than 50% of shareholder votes were against the pay package or withheld, despite the fact that the share price has fallen by 90% over the past decade.
A similar situation was experienced in the U.K., where a proposal that would have given Bob Diamond (CEO of Barclays) a tax equalization payment of £5.75 million, among other goodies, was withdrawn. The question that is being asked by boards is whether these two events are anomalous or whether they signal a more assertive stance by investors that is here to stay.
The Nordic countries have generally had robust ESG policies that have been used to evaluate investment opportunities. The Government Pension Fund (GPF) of Norway, for example, focuses on six main areas when evaluating the worth of an investment opportunity:
- equal treatment of shareholders;
- board accountability;
- well-functioning financial markets;
- children’s rights;
- climate change; and
- water management.
The GPF has been very active in engaging corporations, including making proposals on the separation of chair of the board and CEO, holding conversations with companies to prevent child labour at any stage of the production chain and asking companies to address new business strategies, practices and risk management systems to better handle climate change.
In Canada, we have only to look to the recent fight on Research In Motion’s board to see how investors are more actively engaging companies in their business practices. It took years before RIM management bowed to public and shareholder pressure to separate the board chair and CEO positions, and to appoint an independent board member. Such proposals were made as far back as 2007.
In March, Goldman Sachs was forced by the pension fund American Federation of State, County and Municipal Employees to appoint a lead director in return for withdrawing a resolution to split the roles of CEO and chair, both of which are held by Lloyd Blankfein.
It will be interesting to see how the concept of sustainability develops over time. Increasingly, large asset pools (pension, sovereign wealth and stabilization funds) are influencing how we invest. While this started with the UN Principles on Responsible Investing, ESG policies are taking this one step further. However, all these policies are quite Western-based and embody our Western value systems. In fact, they are increasingly being incorporated into the core decision-making process by many managers rather than as an afterthought. Many large pools of money are sponsored by more “Eastern” countries and organizations, whose value systems may be quite different from their Western counterparts.
Does this create investment opportunity? Does it mean that there will be greater divergence in the value that investors place on a given opportunity? In this age of instant information, what we do know is that the evolution will be played out in a very public arena.