Article 43

 

Thursday, July 05, 2007

Aspen Principles

Responsible Business: ‘We want regulation’

By Alison Maitland
Financial Times
July 3, 2007

Regulation is usually a dirty word in the business world. The default position of business lobbies is to argue for less of it.

So, when a group of prominent corporate leaders calls for more, and better, regulation to reward environmentally and socially responsible companies, it invites attention.

Just such a call came last month at the launch of the findings of an 18-month inquiry into the challenges and choices facing global companies.

“There are serious failures in the frameworks of law, regulations and agreements that frustrate many efforts to deal with some of the global issues both companies and societies face,” said the international inquiry team, which includes chairmen and senior executives of Alcan, Anglo American, BP, Ford, Infosys, Standard Chartered and Suez.

“Fiscal systems often do not drive the market in sustainable directions and subsidies are frequently perverse.”

Companies should use their power, not to resist, but to help create better international agreements and national laws, they said.

“The full creative potential of the market can only be realised if governments, supported by companies and others, put in place effective frameworks of regulation and incentives in the short-term.”

Speaking at the launch event, Wolfgang Schneider, vice-president for legal, governmental and environmental affairs at Ford’s European division, went further.

When governments stepped in to regulate - for example, to try to address climate change, they set minimum conditions for business to meet.

If responsible global companies were to thrive, governments had to do more.

“You need to go to ambitious maximum conditions and enforce them worldwide.”

Why are multinationals speaking out on regulation now? It is partly because of the unprecedented combination of pressures that led the think-tank, Tomorrow’s Company, to initiate the inquiry.

Not only do governments, social activists and consumers expect companies to play an ever bigger role in addressing problems such as climate change, poverty and Aids, companies face serious challenges to their existence and way of operating from competitors in the emerging powerhouses of China, India and Russia, and - closer to home - from the rapid growth of private equity.

But progressive businesses are also speaking out because they sense a widening gulf between themselves and the rest, and they want to reap the benefits rather than be hit over the head for their efforts.

Those that take their responsibilities most seriously - and are most open about what they do - often find themselves under greatest scrutiny from pressure groups and the media, while their silent and possibly less scrupulous competitors stay out of the spotlight.

Further, when they talk to investors about the positive steps they are taking, they meet doubt and incomprehension. The risks and opportunities associated with social and environmental issues often seem too far off for the short-term focus of stock markets.

“We have had to educate shareholders about our approach to sustainability,” says Mervyn Davies, chairman of Standard Chartered, a bank with 60,000 employees operating largely in emerging economies.

Such companies are therefore seeking tougher international regulation to try to ensure that rivals, unburdened by the costs of environmental or social investment, do not undercut them. It is a case of enlightened self-interest.

Their call is part of a wider debate on the future of corporate responsibility in a year of milestones.

It is the 25th anniversary of Business in the Community in the UK, 20 years since the Brundtland Report defined “sustainable development”, and 20 years since the creation of SustainAbility, a think-tank and strategic consultancy that has been at the forefront of developments.

It is also seven years this month since the launch of the United Nations Global Compact, a manifesto for business to address human rights and environmental responsibilities. To concentrate minds further, the final part of the most authoritative scientific assessment of global warming to date, published by the UN’s Intergovernmental Panel on Climate Change, warned in May that the world had until 2020 to reverse rising greenhouse gas emissions and avoid the most dangerous effects of climate change.

Events such as these raise questions about how much has been achieved by big business, and what remains to be done.

Against this background, leading companies are seeking ways to maintain their “licence to operate” and increase their positive impact. As the Tomorrow’s Company report stresses: “This is not about philanthropy or companies being seen to be ‘doing good’. These are actions that serve the long-term interests of any company.”

It seems to be a far cry from the unfettered capitalism expounded by Milton Friedman, the Nobel prize-winning American economist, in the 1970s.

The vast majority of business executives today accept, at least on paper, the need for a balance between generating high returns for investors and contributing to the broader public good.

Only one in six executives questioned in a global survey by McKinsey Quarterly last year agreed with the Friedman notion that the sole responsibility of business was to increase profits.

The same survey, however, revealed that these executives were unsure how to make the most of this broader social role. It said “most view their engagement with the corporate social contract as a risk, not an opportunity, and frankly admit that they are ineffective at managing this wider social and political issue.”

This underlines how there is still no consensus about what those wider responsibilities are, how far they extend, or how companies can best respond.

This gap between “the best and the rest” helps explain the disparities between the rhetoric and the reality of corporate responsibility that feed public cynicism about business.

Despite talk of companies reducing their “carbon footprint”, a recent survey of executives of big UK companies found that only 14 per cent had a clear strategy for addressing climate change.

A third saw initiatives as more about managing reputation than mitigating global warming, and most gave a higher priority to brand awareness and marketing.

A simultaneous report by Headland, a communications consultancy, found that fund managers, too, paid little attention to climate change when deciding on investments because the effects were too long-term for their time-scale. For the investment community, three years was long-term, it said.

Global companies that want to be responsible have their work cut out. Not only do they have to persuade governments and consumers of their credentials, they have to educate investors and other businesses about why corporate responsibility is good for the bottom line.

There are the beginnings of a shift in focus from short-term performance to longer-term investments. Growing numbers of institutional investors are starting to factor social and environmental impacts into their decisions.

Corporate responsibility-watchers seized on the publication last month of the so-called Aspen principles, a set of guidelines drawn up by a US coalition that included multinationals, trade unions and institutional investors.

The principles call for quarterly earnings guidance to be scrapped in favour of longer-term measures of performance. They also say that executives’ and fund managers’ compensation should be based on meeting long-term objectives.

The main motive behind the principles is to create better conditions for US companies to compete with rivals in fast-growing, low-cost economies by allowing them to focus on the horizon instead of nervously watching their backs. If taken up widely, however, they should also encourage mainstream institutional shareholders to see value in companies’longer-term social andenvironmental investments.

These developments, and calls for better regulation, are about changing the conditions under which capitalism operates. That is a tall order. At the launch event, John Elkington, founder of SustainAbility, asked: “Is system change best ensured by getting the current incumbents to push for it, or should it come from outside the current system?”

The corporate leaders calling for change say they want to “expand the space” in which business operates and to adopt a stronger and more proactive role in society.

They also stress they will work with other companies, governments, NGOs and international organisations. But critics who see business as already all-powerful - and not necessarily a force for good - may revolt at the thought of it expanding its influence further.

Reforming businesses will have to tread carefully as they seek to push out the boundaries of corporate responsibility.

Tomorrow’s Global Company: Challenges and Choices is available by e-mail from or by telephone on +44 (0)20 7222 7443

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