Archives For Corporate governance

By James Bonner, independent sustainability consultant

Traditionally, expectations around improving the sustainability and corporate responsibility reporting of businesses has fallen on, and been driven by, governments and external regulators, and furthermore via the influence of other external stakeholders – NGOs, pressure groups and the wider public.

However, more recently, a number of investor groups have become increasingly involved and active in the area and through their role, as a powerful and influential stakeholder group, can have significant impacts on both corporate and investor behaviour with regards to non-financial risks (including wider sustainability issues).  The concept of Socially Responsible Investment (SRI) has become increasingly popular with the ‘USSIF, The Forum for Sustainable and Responsible Investment’ reporting in 2010 that sustainable and responsible investment in the U.S. had been growing at a significantly greater rate than all investments in general – 13% growth compared to 1%.

In addition, there have been a range of efforts to devise international frameworks and principles that aim to further incorporate environmental, social and governance (ESG) issues into the strategies/decisions of investors. By gaining the commitment of investors as signatories to their principles, such frameworks aim to progressively develop the inclusion of sustainability criteria throughout the wider investment landscape. Two of the most widely recognised frameworks that promote ESG considerations by investors are the Equator Principles and the UN Principles for Responsible Investment while the recently launched Natural Capital Declaration (NCD) is evident of investor groups considering their commitment to more specific ESG issues – in this case around the environmental issue of natural capital and biodiversity. To highlight what these principles cover, the following are an overview of their structures:

While such frameworks can be useful in developing the wider investment landscape to encourage organisations to be more accountable for their ESG impacts, there has been some criticism labelled at their effectiveness in practice. Such perspectives argue that they are ‘too weak to work’ and ‘encourage only minor alterations to investment decisions, within commercial constraints, rather than altering the underlying basis of decision-making’. This viewpoint, articulated here via an article by a representative of the International Institute for Environment and Development (IIED), nonetheless advocates strengthening such investment principles to improve their usefulness and effectiveness stating: ‘this should not be used as justification to stop using them [investment principles frameworks] – rather improved transparency, monitoring and measurement of the impact of investment principles is urgently needed.’

To take part in the debate join ACCA’s Accounting for the future conference.

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ACCA’s Accounting for the future conference kicked off this morning with a panel debate on how boards and companies need to consider the needs of their stakeholders. Chairing the session was Professor Andrew Chambers and he was joined by Paul Moxey, ACCA, Tony Hewitt, Imperial College Business School and Catherine Howarth, Fair Pensions. This was an interesting debate watched by over 650 individuals. Key themes included defining and prioritising various stakeholders, identifying where the responsibility lies within organisations when it comes to engaging with stakeholders and how regulation such as corporate governance can have an impact. Detailed below are some of the questions that came in from attendees and the responses from ACCA expert Paul Moxey:

I agree with the enlightened approach. Does the panel think that an approach would be to have a representative stakeholder from various groups to be present on the board in a non-exec director style capacity?

Having stakeholder representatives on boards is an interesting idea but it does not sit comfortably with the legal situation regarding directors in a number of jurisdictions including the UK. In the UK we have unitary boards and, legally, all directors should act in the interests of the company and all directors have an equal responsibility to do so. So, in law, having a director represent the interests of any particular stakeholder could be problematic. In practice, though, it is not uncommon for a director to have a particular affiliation, e.g. they are a member of a family with a large block of shares, they have been appointed by an investor. In theory such directors must put any personal or specific stakeholder interest as secondary to the company interest. The practice may well be rather different. Nevertheless the idea does seem worth exploring.

I note that neither the bank nor the government is mentioned as stakeholders yet I believe they are important?

Clearly banks potentially are important stakeholders as are societies whom governments represent. From a practical point of view, a government can be an important and influential stakeholder for many large companies e.g. as was the case with the US Government and BP after Deepwater Horizon.

How do you unify a multi diverse group of people with different values who happen to hold shares to effect involvement of shareholders in corporate governance?

The answer of course is that you cannot unify all of them. You can hope to unify some of them which is why the effort has gone into the Stewardship Code in the UK. Bodies such as the Asian Corporate Governance Association and International Corporate Governance Network also play an important role in education and encouraging investors to engage more with companies.

Should it be mandatory for Trade Unions have a representative on the board?

The answer probably depends upon your political point of view. In Germany, many boards have employee representatives who in practice are appointed by unions. I have heard very mixed views about the value of this. The danger of course with trade union representatives is that they pursue a political agenda rather than looking at the best interests of the company and its workforce.

Even footballers are fined if they do something which is shown to be contrary to accepted practice. Would directors become more accountable financially and morally if they were fined rather than the shareholders picking up the bill?

I think it is very likely that the propensity for the US authorities to go after high profile corporate wrong doers will have had a salutary effect on senior executives and board members generally. So I think the answer is yes – they would be more accountable. The danger though would be that good people may not want to become directors, this would be OK if other good people came forward. My concern though is that powerful people in a large organisation might choose not to become a director but still manage to have a lot of practical control over what a company does. It would be unwise for anyone to become a director in such a case but in practice many directors would not know what is going on until it was too late.

What about requiring PLCs to hold an Interim General Meeting within one month of release of half-yearly results? Shareholders can ask the Board “any surprises so far or expected”? A good chance to align the thoughts of boards and shareholders.

A nice idea but large shareholders will have access to boards anyway. They prefer one to one meetings to the General Meeting. This is why AGMs are usually very sterile affairs. The situation might be different if small shareholders could get more involved.

There seems to be not enough inter-face and monitoring of the Board with the day to day management. What steps can be taken to affect this?

This problem has been with us for a very long time and successive changes to company law or governance codes does not seem to help. Something is needed to make directors more accountable. Better engagement with shareholders will help but is not a complete solution. Some regulatory and supervisory change may be needed but unfortunately regulation usually has unintended consequences.

What possible challenges are there in achieving good corporate governance in intergovernmental organisations like OPEC?

We are still learning how to make governance work in listed companies in the private sector. The essential problem is how stakeholders can hold boards to account and how can boards hold management to account. The actors involved, and their personal agendas and incentives, are very different in intergovernmental organisations but the underlying problems are the same.

Bankers used to be regarded as safe, respectable, honest individuals. Now they are viewed as reckless, self-interest and dishonest. Is there a danger that accountants, because they didn’t highlight the high leverage of the banks, could be besmirched?

There is a danger but it has not happened except to a very limited extent. I think that what went wrong with banks and the financial system was so complex that very few people understand what happened and why. The media and governments focussed on easy blame targets such as so called greedy bankers, ignorant or supine non-executive directors and absentee shareholders. The role of accountants and auditors is so complicated that few people understand how they helped or hindered.