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Making companies behave

About the author
David Lascelles is co-director of the Centre for the Study of Financial Innovation (CSFI), a City of London think tank. He was Banking Editor and Resources Editor of the Financial Times, and observed the clash between environmental and financial priorities. He has made a special study of the link between ethics and company performance.
Globalisation is a good thing, of that there is little doubt because it spreads wealth more widely. But it contains risks – one of the main ones being that it gives large corporations an even bigger playground in which to misbehave, if they are that way inclined.

Actually, multinationals are much better behaved than people generally give them credit for. However we have to recognise that they are driven by commercial pressures. Everything they do must, in essence, be justified as good for business. This applies to so-called “corporate social responsibility”, (or CSR), as to other aspects of their businesses.

One of the major challenges behind globalisation, therefore – and one not alluded to by either Peter Sutherland or Maria Cattaui in their interviews with openDemocracy – is to be clear about what drives corporate behaviour.

The conditions of good behaviour

If we want companies to behave responsibly – for example by becoming socially, ethically or environmentally sustainable – then in all probability this will only happen in one of two circumstances. It either delivers measurable value to the shareholders, or it is forced on them by regulation. What will definitely not happen – even though many NGOs seem to wish that it would – is that companies will become socially ethical in their attitudes and sustainable in their business practices simply for the sake of it.

There is already a fair amount of regulation, particularly on the pollution side, which forces companies to behave in “better” ways. But it is not very effective at generating the moral commitment that campaigners are looking for. For a start, the penalties for infringement are usually quite small, and no deterrent. For another, this sort of approach encourages minimalist action: the least needed to comply with the law.

There is also evidence of ethical commitment by large companies. Shell and BP, for example, document their work in this area quite closely. But this commitment is heavily circumscribed. For a start, it is odd for companies that are among the largest producers of polluting substances in the world to describe themselves as green. Eventually the contradictions in their position will bring them down. For another, they cannot pursue any such commitment to the point where it starts affecting their profits in a measurable way because the shareholders will rebel.

This brings us closer to the real issue. Campaigners argue that making a long-term commitment to moral goals (protecting the environment, saving resources) is good for business because it enhances reputation and creates more stable companies. It might not deliver extra profits in the short term, but it will over time, they say. Plenty of companies echo that view, and have instituted ethical policies or signed up to international compacts. But it is an uncomfortable position. I advise a number of companies in this area, and while I don’t doubt their commitment, it is all being done with nervous glances over the shoulder at the shareholders. The concern is that a cynical stock market might think the company had gone soft, or taken its eye off the ball. And if it came to the crunch, there’s little doubt which side would win.

The costs of sustainability

The problem is that there is very little evidence that “sustainable companies” perform markedly better than so-called “unsustainable” ones. The reality is that many forms of “moral behaviour” are costly: they mean taking on extra expense, like buying premium goods or installing anti-pollution equipment, or forgoing profits, as pharmaceutical companies do when they distribute medicines free or at low cost in the Third World.

Much research is currently going on in this area to find out what the net effect is. The results are mixed. Some companies do better, some do worse. A number of green funds or sustainability indices have been created to track selected shares. Sometimes they do better, sometimes worse.

There are a number of examples of companies which made a big commitment to sustainability and came unstuck. NatWest, the leader among the UK clearing banks in the environmental area, succumbed to takeover because its management was deemed to have lost its way. Laing Construction, whose chairman Sir Martin Laing was a key figure in the business environmental movement, recently went bust. Anita Roddick’s Body Shop is having to be bought out. Ben and Jerry’s has already been bought out – by Unilever. Monsanto, probably the most ethically aware of the large US chemical companies, was badly hit by the GM furore.

I’m laying it on quite thick because there is a lot of wishfulness in this area which needs to be blown away: people who want to think that value is being created even though there is little evidence of it, people who argue that value will be created because it’s all so obvious, consultants who hint at “hidden treasure” yet to be uncovered. Fine. But the market will believe it when it sees it, and rightly so.

There’s a further wrinkle to this. Green campaigners talk about corporate sustainability as though it were a virtue. Actually, the opposite may be true. The last thing a company wants to feel is that it’s locked into a long term strategy. The skill of managing companies these days lies in getting in and out of things. Nokia started out as a timber company and expanded into sanitary ware before moving into mobile phones, and it has been much more successful than if it stayed in the wood business. Although the stock market says it likes predictable returns, it actually thrives on volatility because you can only make money when share prices go up and down. The sustainability agenda therefore runs smack into the realities of business life.

Setting the rules

So what is the answer? Part of it will lie in the people who inhabit the world I have been describing. There is no doubt that the corporate community is increasingly taking on board its wider social responsibilities, and building business cases to support them. Few, if any, would subscribe to Victorian values that exploited child labour, for example, even though that would cut their wage bills in half. Over time, more and more shareholders will doubtless come to accept this, and change will be achieved. But there will be limits for the reasons I have mentioned: contradictions, scepticism, failures.

The main impact will have to come from government. I say this with regret because we have enough red tape. But we are looking at an area where the interests of the corporate world (nakedly put: commercial exploitation) clash with society’s mounting concern with ethical issues. And the crunch can only be avoided if rules are created that force companies to behave socially, rather like individuals are expected to, or if incentives such as tax breaks are put in place to influence behaviour.

It’s a very big agenda, make no mistake. The building blocks are piling up, but the building itself is still a long way from completion. An essential part of the architecture has to be the framework for regulating the behaviour of multi-national corporations.

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