The RSA’s inquiry brings together business leaders from manufacturing, retail, service and knowledge-based companies and offers a challenge to all those involved in business. One of its most significant features is that it spans two groups which often appear to be talking past each other – chief executives of businesses and representatives of the investment community.
Interim Inquiry report
The interim report describes a changing world. Individuals are becoming more demanding; economic growth continues to put pressure on finite resources; companies are under intense and accelerating pressure on finite global competition, and work is changing radically in its nature and organisation.
The impact of these changes is being felt by companies in all their relationships. Customers become more critical of products and policies and expect to be treated like individuals. Companies need higher commitment and creativity from their people, and yet they can offer them less security. Supplier partnerships are becoming an indispensable source of competitive edge.
The Inquiry’s Interim Report advocates an inclusive approach. This means that the company:
knows and makes clear its purpose and values
communicates these in a clear and consistent manner, giving a clear lead in all relationships
develops reciprocal rather than power-based relationships
seeks to strengthen each of these relationships, to reinforce the commonality of interest between them and to improve its “licence to operate”
thoroughly measures its success and its progress in each relationship and continuously improves the measures themselves and performance through the measures.
The importance of ensuring chief executives and the investment community to communicate effectively was recently highlighted by the controversy arising from an article about the Body Shop’s ethical practices in the USA. It questioned the substance of the Body Shop’s reputation on key issues ranging from animal testing to Third World trade. The controversy highlights the interdependence of the various groups which influence the company.
The company management had to mount a vigorous defence by rejecting the accusations to protect their hard-won reputation. However much of the press appeared to have passed judgement on the situation and on the reputation of the company and took the opportunity to vent their feeling on Anita and Gordon Roddick, the founders. Role models are always likely to be challenged in a crisis. Customers too were quizzed, stopped in the street by TV news reporters and asked for their views about the Body Shop.
City institutions which invest in the Body Shop had to assess the scale of the threat to the Body Shop’s earnings posed by the report. When EIRIS, the UK-based ethical investment researchers, stepped in with supportive comments, the crisis seemed to abate temporarily. Analysts are now saying that there will be no significant effect on sales and predict growth of 15% to 20% over the next five years.
Does the controversy tell us anything about the investment relationship between City and companies? Is this changing fast enough to meet the competitive needs of companies? Probably not. And what part is the ethical investment movement playing in the change process? Not enough.
Possible steps to improve the relationship can be categorised under three headings: fiduciary duty, voice versus exit, and product versus process.
Often the ethical investment movement appears willing to be cast in the role of official opposition to economic efficiency. It puts the brakes on the company’s profitability by stopping unethical products or employment practices. And the investors who are being asked to be ethical resist by saying that their fiduciary duty to their beneficiaries forces them to maximise their economic returns rather than “do the right thing”.
But this notion of fiduciary duty represents a false antithesis. A company which ignores its ethical obligations is putting at risk its licence to operate; look at the impact on Exxon. And look at the court judgement following Shell’s Mersey spillage where the company’s responsible stance and environmental programme influenced the judge to reduce its penalty.
Sustainable competitive advantage comes from maximising the value to the company by positive action in all its relationships: in the short term there are always conflicts between shortage of cash and desirable investments, and to make the right trade-offs companies need radically better measures of the value they derive from each relationship.
Voice versus exit
It is arguable that more will be changed by a policy of active engagement – taking a stake in a company whose practices need improvement in order to influence its behaviour – than by a policy of negative screening, where the investor has the warm feeling of being kept away from, say, anything to do with the arms industry, but where nothing changes as a result of this “clean hands” approach. Why doesn’t the ethical and social investment movement use voice more and exit less? It could contribute to the development of a more intelligent dialogue between CEOs and investors by insisting that a wider set of performance measures is used in the dialogue between the two – a new language for business success which reflects the underlying sources of business success, and not simply the recent financial performance which merely reflects those fundamentals.
Product versus process
To take an example of one environmental fund, once the screening has taken place, the fund is simply handed over to the investment manager. For the investment manager success is all to do with beating the average. He does not see it as part of his job to take account of the effect of a “trading” rather than “patient” investment policy upon the economic performance of companies generally. If asked “Would you rather be an average performer in a high performance UK economy or a high performer in a lousily performing UK economy?” success would undoubtedly be in the second. This is an irrational way to incentivise and motivate investment managers. It has little to do with ethical investment, which should be about how the fund manager influences the core processes of the business as opposed to simply the products with which the investor happens to be associating.
Perhaps if the ethical investment movement spent more time on demanding that companies measure the right things and report on their progress towards being inclusive companies they would achieve more than is being achieve by their current emphasis on particular products and practices.
Body Shop in perspective
There is a high level of emotion attached to the Body Shop story and therefore, the situation is perhaps best reviewed from one step removed. A recent inter-faith declaration on business ethics agreed under the patronage of His Royal Highness the Duke of Edinburgh, the Crown Prince of Jordan and Sir Evelyn de Rothschild brings together principles which cover the Anglican, Muslim and Jewish religions. The declaration points out that ethical issues in business fall under three general headings:
the morality of the economic system in which business activity takes place
the policies and strategies of organisations which engage in business
the behaviour of individual employees in the context of their work
The danger is that the Body Shop will be dismissed as a special case when, as the inter-faith declaration shows, the situation is universal. The reality is that all companies need to produce good financial performance, behave ethically and be true to their purpose in all their relationships. Equally, it is not only at the Body Shop where superior financial and competitive performance is dependent on the integrity of the company’s relationships. In truth all companies put themselves at risk if they allow words to depart too far from actions.
Mark Goyder is Programme Director of the RSA and of its Tomorrow’s Company Inquiry. A copy of the RSA Inquiry Interim Report is available from Catherine Barry on 071 930 5115
Corporate Citizenship Briefing, issue no: 18 – October, 1994