There is a crisis in capitalism but, contrary to what all the evidence from corporate collapses here and abroad might have led you think, the danger comes from a surfeit of ethical urges rather than a lack of them.
That, at least, seems to be the penetrating analysis of the Institute of Public Affairs, which, in a corporate landscape dotted with the carcasses of companies brought down by out-of-touch, greedy management, rallies to the management flag of shareholder value and cries out in horror at increasing business acceptance of the notion of Corporate Social Responsibility (CSR) and the related concept of the Triple Bottom Line (TBL), by which companies seek to measure and account for their social and environmental performance in addition to financial outcomes.
On the face of it, the proposition that businesses take responsibility for their social and environmental impacts hardly seems a matter for great controversy. Indeed, what is perhaps the most universally accepted protocol relating to CSR uptake, the Global Compact (www.unglobalcompact.org), advances nine principles not only hard to disagree with (e.g., ensure your organisation is not complicit in human rights abuses) but in most cases exceeded by the obligations in Australian law (e.g., eliminate discrimination in respect of employment and occupation).
Yet because CSR implies an acceptance that companies have core responsibilities somewhat wider than maximising profits for shareholders, and because TBL suggests profits aren’t the only thing worth measuring, defenders of the free market are aghast.
IPA senior fellow Gary Johns has labelled CSR an assault on the interests and rights of shareholders as well as of the electorate, since it “undermines the formal democratic consensus as to what constitutes reasonable business behaviour”.
He warns of a brave new world being ushered in via the auspices of the Financial Services Reform Act, which requires managed investment products to disclose the extent, if any, to which labour standards, environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment.
His IPA colleagues Jim Hoggett and Mike Nahan have denounced the FSRA as “a threat to the future of the majority of Australian investors”, a judgment endorsed by the normally sensible Max Walsh in The Bulletin. Despite admitting to being ignorant of laws in force since March and agreed to last September, Walsh felt certain enough, after absorbing Hoggett and Nahan’s line just a week before, to predict that “the impact of this act will be to further reduce the retirement benefits going to Australians through compulsory super”.
Hogget even goes so far as to say the act is “a poor piece of legislation when seen in the context of recent corporate scandals” – an attempt to link CSR to corporate failure that has echoes of The Australian‘s economics editor Alan Wood’s misbranding of Enron as the “US’s triple bottom line company par excellence”.
In support of their argument that CSR suppresses the interests of shareholders, a number of these folk cite a recent study by Paul Ali and Martin Gold of the Centre for Corporate Law and Securities Regulations at the University of Melbourne. Ali and Gold hived off the “sinful” industries of alcohol, armament, gaming, pornography and tobacco from the ASX All Ordinaries Index and then compared the performance of the residual “ethical ASX All Ordinaries” against the standard index: Result: excluding sinful industries between 1994 and 2001 would have resulted in a performance shortfall of 0.7 per cent per year, reducing the broad market return from 12.7 per cent to 12 per cent.
These results tell us very little about ethical investment, since in real life ethical fund managers use not only negative but also best-of-sector and positive screens that preference leading performance and innovative enterprise. They can, as a result, point to returns that match or outperform the market benchmark.
More to the point, these results tell us nothing about Corporate Social Responsibility. CSR is a completely different issue to the use of negative screens against certain industries. CSR is simply about good business, in all its senses.
The World Business Council for Sustainable Development, which comprises some 150 international corporations and whose executive committee includes WMC chief Hugh Morgan, says the pursuit of sustainable development is not only good for the planet and its people but makes companies “more competitive, more resilient to shocks, nimbler in a fast-changing world, more unified in purposes, more likely to attract and hold and the best employees, and more at ease with regulators, banks, insurers and financial markets”.
If the IPA and its fellow travellers are unable to acknowledge this, it seems to be because they are in thrall to two misguided beliefs: that seeking to do the right thing by other stakeholders is necessarily antagonistic to doing the right thing by shareholders; and more fundamentally, that shareholder value is so inviolable a principle that companies should measure and report only on financial outcomes.
Where does this genuflection to the owners of capital – an understanding buttressed by the corporations law, which places fiduciary duties to shareholders above all other callings on a director’s heart – come from exactly?
It might be noted that modern corporations prosper because they are extended carte blanche what was once a special legal privilege: limited liability. Nowhere in the writings of the great philosophers of the Enlightenment will you find them listing the right to be protected from paying debts alongside life, liberty and the pursuit of happiness. Indeed the state initially only extended the privilege to companies engaged in activities it perceived in the public interest.
But over the course of almost 300 years, as Ralph Este, an accounting professor and former Arthur Andersen auditor, writes in Tyranny of the Bottom Line: Why corporations make good people do bad things, we gradually turned from “an understanding that the corporation is chartered to serve the public interest and the public purpose toward a belief that it exists to serve stockholders – not the other stakeholders”.
The virtue of CSR is it demonstrates the interests of shareholders and other stakeholders are not as irreconciliable as the gloom merchants think. Most of the evidence suggests excellent environmental and social practice is generally allied to excellence in management and performance overall.
Curiously the disclosure provisions in the Financial Services Reform Act have caused less than a kerfuffle in the financial services industry. The Association of Superannuation Funds of Australia, whose members manage a third of the capital on the Australian Stock Exchange, has in fact welcomed the requirement, on the grounds the more information consumers have the better.
Can greater disclosure be anything other than a good thing? Johns says it is reasonable only “if objective standards comparable with those for financial reporting, where auditors are sued for incompetence and gaoled for malfeasance, existed”. It might simply be noted that the current debate over accounting standards indicates that even financial reporting is a work in progress.
Our society is only at the beginning of an accounting odyssey to put a financial value on things we historically never thought of putting a price on, simply because they are, at the end of the day, priceless. You can’t trade off being able to breathe the air, for instance, against having an extra $100,000 in your savings account. Universal standards take time to emerge, but if nurtured they will come.
A revolution in corporate culture is scarcely around the corner, however, so the IPA might desist tolling the town bell to alert shareholding folk of impending doom.
Patterns of investment will change slowly and cautiously, for at least two reasons. As a Challenger/ASSIRT investment sentiment survey last year showed, up to half of Australians have little practical knowledge of their superannuation scheme. I’m one of them. Don’t expect us to be effecting investment decisions on ethical grounds any time soon.
As for the rest of you, the UK Co-operative Bank has identified what it calls the 30:3 syndrome: a third of consumers say they care about environmental and social issues yet the ethical market so far only translates into about 3 per cent of sales. So though the IPA might feel that greed is imperilled, it can take solace in the dampening effects of inattention and inaction.
- Tim Wallace