As the credit crisis shutters factories, offices, high streets and building sites, financial regulators and company boards are in the front line of criticism. But what about the institutional investors who sit one link up the accountability chain?
Many who had a ringside seat cheering on over- leveraged banks are also coming in for harsh scrutiny for the role they played in exacerbating the bubble and neglecting long-term risks for the sake of short-term gains. As a result, 2009 has seen a chastened investor community pressing companies to be more transparent, flushing out dud board members and tightening up on wayward pay practices. Investors are starting to act as if they have a responsibility to keep companies honest, and are demanding accountability from boards and managers as a means of ensuring that their businesses will be around for longer than the next dividend payment cycle.
A new role for shareholders
While the current crisis has shone a spotlight on the role of investors, in fact a growing number of pension funds and asset managers have, over the last decade, been cultivating an approach to investment that combines an explicit focus on strong governance and sustainable practices with a willingness to use their leverage as capital providers to push for more responsible behavior. This philosophy of “shareholder engagement” requires businesses to recognize the inherent tension between short-term profit and long-term commercial sustainability – and to opt for the latter. “Soft” issues like employee welfare, responsible marketing practices (think sub-prime), sound community relations and environmental management, say these investors, are critical to success in a fast-changing, media-savvy world. (See Dealing with the damage.)
This trend in favor of active ownership has superimposed itself on another, much older phenomenon – that of ethical investment, which has its roots in the 1830s in the United Kingdom and United States, and saw churches and other religiously-inspired investors avoid certain types of investment, usually alcohol, tobacco and armaments. From its origins in ethical investment, responsible and sustainable investment now encompasses more than 500 investment institutions with some $15 trillion of pension, insurance and savings funds that have endorsed the United Nations Principles for Responsible Investment (www.unpri.org).
New challenges for investor relations…
So what does this mean for companies? For a start, it means rather more than producing a good sustainability or corporate responsibility report – important though that is. Investors are looking for evidence that a company’s strategy, governance structure and risk management systems are articulated around the specific aspects of sustainable development that are material to its business. This, in turn, means that what starts out as high-level policy in a board agenda paper has not only been translated into effective policies and systems, but is also reflected in the culture and values of the organization, and is “lived” day to day by the board and executive management who set the “tone at the top”.