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.
