Michelle Chan-Fishel Friends of the Earth - US Remarks to the Social Investment Organization annual conference June 1, 2003 It‟s a great honor to be with you today, especially at such an important time for social investing in Canada. I hope that as a cheerleader and ally of social investing – but also as someone with an outsider‟s point of view – I can help spark some discussion as to what the social investing community can do to pave the path towards genuine corporate reform and towards a just and sustainable world. But first, I‟ll begin with a story that starts a long time ago, in a land about 300 miles from here.
The Master of Illusion
For hundreds of years, the Yakama people have lived on the Oregon-Washington border. In the mid-1800s, the Yakama were fighting the U.S. Calvary in defense of their land, and in that historic battle, many of their warriors died. The Yakama carried the bodies of their slain warriors up to the hills to be buried. The Yakama believe that their bodies of these warriors sanctified the land and made it sacred. A century and a half later, in 1990s, a US company bought the rights to build a windfarm on this burial ground. And in response, the Yakama fought to have this project re-sited off their sacred lands.
So three years ago, I accompanied two Yakama elders to their first shareholder meeting to make their case. When we arrived, we were prepared for the worst – sometimes companies play dirty little tricks to try to prevent you from entering an annual meeting, or to minimize your time at the mike. But the company acted very differently. The CEO began the meeting with a special welcome and recognition of the tribal leaders in the room. During the meeting he made a winning presentation that pleased all the shareholders. And afterwards he made a special show of coming down off the stage to individually shake our hands. A few months later, the company revised their code of ethics that included a new policy on human rights. The company during this time was
also very adept at setting up meetings so the Yakama could tell their side of the story – but it was apparent that they didn‟t listen, nor did they heed our messages. They simply knew what it took to create the image of being a responsible company. The company, if you haven‟t already guessed, was the master of illusion itself -Enron. And actually I still have their infamous Code of Ethics, which was waived with astonishing regularity. (Especially page 56 on conflicts of interest) For a while I was thinking that I could have probably made a lot of money auctioning this on E-bay, but I thought it would be better to hold onto it as a cultural relic. A piece of history, if you will, that helped launch a thousand ships – from the scandalous resignation of former SEC Chair Harvey Pitt, to the sweeping reforms of Sarbanes-Oxley. This little book symbolizes the end of an era, which was marked by deep public betrayal. Between the dot-com meltdown and the corporate scandals, the public is asking serious questions about whether they can trust the rosy stories peddled by companies, accountants, and analysts. But the betrayal is goes deeper than just accounting fraud. Companies have laid off workers, destroyed retirement savings and fled to offshore tax havens. Public outrage and towards big business stems from more than just off balance sheet transactions and a lack of separation between CEOs and Board Chairs. It comes from a deeper questioning of companies‟ commitment to society, and whether big business is living up to our collective expectations of decency and social responsibility. It‟s at this deeper level of betrayal where current reforms in corporate governance and corporate accounting are sorely lacking. But it‟s these deeper questions which social investing can help answer.
Corporate governance from an SRI perspective
Corporate governance is certainly the watch-word of the day. But while the NASDQ and the NYSE can promulgate new rules about the composition of audit committees and the independence of directors, the stock exchanges – like most institutional investors – use a relatively narrow definition of corporate governance.
At its core, governance is about how a company makes decisions, and who has influence in and on that decision-making process. But to most investors, corporate governance is all about how to increase the power of shareholders vis-à-vis company management. A shareholder privileging model of governance.
It is based on a corporate structure in which companies are designed to funnel as much wealth as possible into the hands of shareholders, even though there are many stakeholders who help build that wealth and put their capital at stake: towns put their environment at risk, workers put their health risk. But as Marjorie Kelly, in her book The Divine Right of Capital, points out, we don‟t recognize these other stakeholders, they don‟t matter: “We believe stockholders are the corporation. When we say that a corporation did well, we mean that its shareholders did well. The company‟s local community might be devastated by plant closings. Employees might be shouldering a crushing workload. Still we say „The corporation did well.‟”
So social investors need to do the intellectual job of not just jumping blindly onto the governance bandwagon. We need to examine which governance reforms have the best potential to also promote social justice and sustainability. For example what about companies in which the CEO may be more visionary than its shareholders? Would Ray Andersen of Interface been able to commit to making solar-produced carpet tiles if he didn‟t have the power and influence to put that vision into action? In California, I met a CEO of a private company who actually created a separate class of stock that was earmarked for stakeholders so that community groups, environmental interests, and suppliers – and not just shareholders – could have representation at the board level. If the company were publicly traded, I doubt that investors would tolerate this sharing of power. So let‟s critically examine traditional corporate governance measures, and identify those that can help pave the way towards social justice. Let‟s also put new corporate governance proposals on the table. Yes, annual elections are good; and yes transparency in the nominating committee is good, but
beyond that, social investors also believe that responsibility to communities, workers, and the environment is just as important. Maybe board-level CSR committees should be a standard part of the corporate governance agenda.
Until then, we achieve a more stakeholder-based model of governance, use your shareholder power to make room at the table for a marginalized community group. Connect your work to social movements to amplify the voices of other stakeholders struggling against corporate abuses. These are ways social investors can help corporate governance address the deeper level of public distrust in business.
Accounting Reform from an SRI perspective
Another way to address these deeper public concerns is through accounting. Current accounting reforms have tried to shore up public trust in corporations, but they haven‟t worked to actually make corporations themselves more worthy of deserving trust. Why? Because it‟s not just about „why was this contingent liability left off the balance sheet?,‟ it‟s about „why was our company‟s complicity in human rights violations left off the balance sheet? Why was our company‟s contribution to the warming of the earth left off the books?‟ Accounting should be about accountability.
Remember how Enron created hundreds of special purpose entities to stash their various debt obligations, so individually none of them were considered a big deal? Current accounting rules also allow companies to do the same thing for toxic waste clean up: a company may have 30 toxic waste sites, which individually may look insignificant, but aggregate them together and you could have a totally different story. Or a company can indefinitely delay cleaning up these sites, and postpone booking its environmental liabilities. Here‟s a case where accounting tricks not only betray shareholders, they also betray communities whose children are forced to grow up next to those sites.
The same shoddy accounting happens with labor-related data in financial reports. A company usually won‟t provide worker health and safety data such as fatalities and
near-miss accidents. And by leaving this information off the books, and out of mind, its increases companies‟ ability to perpetuate unsafe working conditions; and in the words of a labor song “we just came to work here, we didn‟t come to die.” Companies also provide murky reporting on the quality of labor-management relations…until a strike is called. And then, its far too late: by that time the company, its shareholders and its workers are all suffering. Accounting should be a bout accountability – to all stakeholders.
I offer a concrete step in this direction: the Canadian Institute for Chartered Accountants recently released new guidelines for corporate MD&A reporting, which say companies should provide more environmental and social disclosure in financial reports. These guidelines are only voluntary, but social investors should urge companies to use them, through shareholder dialogue and if possible, by filing shareholder proposals.
Finally, social investors can also lobby for changes in securities disclosure laws. Gil Yaron of SHARE has undoubtedly sat through some pretty boring meetings of the Ontario Securities Commission, but ironically this is where the action is. When binding disclosure rules and official accounting protocols start requiring reporting of a company‟s stakeholder performance – and not just shareholder performance – it actually starts changing the definition of materiality, or what matters in the world of business.
Getting involved in re-writing the rules of the market is one of the most powerful steps that the ethical investing community can take in order to become vitally relevant – in order to help change the course of human events. I challenge you to think of social investing as just that – changing the course of human events. If traditional investing, which leaves the environment and communities off the books, has created the world we live in today, how different can it be if social investors create a new imperative that values people and the planet?
The Unique Voice of the Social Investor
We need to hear the voices of the ethical investing community now more than ever as we struggle with questions of how we can curb the abuses of corporate power.
Social investors have a critical role to play, and must use every tool in our toolbox -- screening, shareholder activism, community investing, public policy work -- in order to counter the social dysfunctions of the market, and thus help restore public confidence in it.
Social investors must work for better corporate governance, but first do the intellectual analysis of which governance reforms have the potential to also solve the social and ecological crises of our time.
Social investors must recognize that they benefit from a shareholder-privileging model of governance, but still exercise that power for the benefit of and in solidarity with the voiceless victims of corporate abuse.
Social investors must enter into the accounting debate with vigor, to help craft disclosure rules that promote corporate responsibility, and help redefine who and what matters to the capital markets.
All this is necessary, and possible. Indeed we are relying on, and we need, the passion and dedication of social investing community to help change the course of human events, and to help forge a path towards a more just and sustainable world.