Bcu msc cg week 3 accountability

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Corporate governance, Accountability, CSR, Socially Responsible Investment

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Bcu msc cg week 3 accountability

  1. 1. MSC ACCOUNTANCY & FINANCE : CORPORATE GOVERNANCE& OPERATIONS RISK ANALYSIS AND CONTROL CORPORATE GOVERNANCE AND ACCOUNTABILITY Stephen Ong, BSc(Hons) Econs (LSE), MBA International Business(Bradford) MBI/MSc Bioprocessing(UCL) Visiting Professor, Shenzhen University Principal Lecturer/Specialist, TARC chong@mail.tarc.edu.my 24 June 2012
  2. 2. Today’s Overview • Video : Enron 1 • Discussion : Governance & Accountability • Corporate Social 2 Responsibility & Accounting 3 • Case Presentation: AIG
  3. 3. 1. Open Discussion• Niamh M. Brennan, Jill Solomon, (2008),"Corporate governance, accountability and mechanisms of accountability: an overview", Accounting, Auditing & Accountability Journal, Vol. 21 No. 7 pp. 885 – 906
  4. 4. 2. Corporate Social Responsibility & Social Accountability• Reassess the impact of corporate activities on the environment and society at large• Cases of environmental accidents, product failures, etc. impact on the firm’s value and its market share.• Review types of corporate policies of stakeholder management and pay off, including policies that destroy rather than create firm value.• Review the increasing importance of indices of corporate social responsibility as well as socially responsible investment.
  5. 5. Learning Outcomes• By the end of this lecture, you should be able to: 1. Critically review the studies that investigate the impact of corporate social responsibility (CSR) on firm value and vice-versa 2. Describe some of the CSR indices that are available from commercial providers and evaluate their usefulness 3. Discuss the definitions of CSR and socially responsible investment (SRI) and how these may change with an investor’s set of values 4. Assess the evidence on whether investors pay a price for SRI.
  6. 6. Introduction Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked? Edward, First Baron Thurlow 1731-1806 Lord Chancellor during King George III’s reign.
  7. 7. Introduction (Continued)• Craig Carter, Rahul Kale and Curtis Grimm define corporate social responsibility as follows – “*Corporate] social responsibility deals with the managerial consideration of non-market forces or social aspects of corporate activity outside of a market or regulatory framework and includes consideration of issues such as employee welfare, community programs, charitable donations, and environmental
  8. 8. Introduction (Continued)• While CSR may be in the interest of the targeted recipients, it is less clear a priori whether it is in the interest of the company’s shareholders.• At worst, CSR may just be a reflection of the principal–agent problem.• Let’s attempt to answer the question whether CSR is in the interest of the shareholders.• Also look at the investor side by reviewing socially responsible investment (SRI).
  9. 9. Introduction (Continued)• SRI is “an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis”.
  10. 10. Perrier and Benzene• Benzene is a chemical which occurs naturally in crude oil – In laboratory tests on animals, it has been found to cause cancer – It is also believed to cause cancer in humans.• Perrier was the number one mineral water, charging premium prices based on its reputation of the “champagne of bottled water”.• In early February 1990, traces of benzene were found in Perrier bottles in North Carolina, USA.
  11. 11. Perrier and Benzene (Continued)• Perrier initially wanted to hush up the incident, shifting from explanation to explanation and delaying any action.• It finally recalled 160 million bottles worldwide at a cost of £150m.• By 1995, its market share in the USA had dropped by half.• Its market share in the UK fell from 60% to 9%.
  12. 12. CSR and Financial Performance• As the Perrier case study suggests, a lack of corporate social responsibility or bad stakeholder management can cost a company dearly and may even be exploited by the company’s competitors.
  13. 13. CSR and Financial Performance(Continued)• Early studies have found mixed evidence on the link between financial performance and CSR – Stanley Vance finds a negative link, suggesting that CSR is a net cost to the firm – Jean McGuire et al., and Richard Wokutch and Barbara Spencer find a positive link – Gordon Alexander and Rogene Buchholz find no relationship between the two.• However, apart from McGuire et al., none of the above studies raises the issue as to the direction of causality between the two.
  14. 14. CSR and Financial Performance (Continued)• Sandra Waddock and Samuel Graves acknowledge this issue – Higher levels of CSR may cause higher levels of financial performance and vice- versa – Better performing firms have more funds to spend on CSR.
  15. 15. CSR and Financial Performance (Continued)• A reason why the direction of causality flows from financial performance to CSR is given by Jensen’s free cash flow problem – Managers who have access to significant free cash flow may divert some of this to social causes.• The reason why the direction of causality should flow from CSR to financial performance is that CSR is part of good management and part of having good relationships with the firm’s stakeholders.
  16. 16. CSR and Financial Performance (Continued)• Waddock and Graves’s measure of CSR is based on the Kinder, Lydenberg and Domini (KLD) index which rates US firms according to several aspects of CSR (e.g. community relations and workforce relations.
  17. 17. CSR and Financial Performance (Continued)• They first regress the level of CSR for each firm in 1990 on the financial performance for the previous year – They find that there is apositive link for each of their three measures of performance (ROA, ROE and return on sales) – This suggests that the free cash flow hypothesis is valid in the context of CSR.• They also regress financial performance for 1991 on CSR for 1990 – They find a positive link for ROA and return on sales – This gives support to the hypothesis of good management.
  18. 18. CSR and Financial Performance (Continued)• Hence, Waddock and Graves find that the direction of causality between CSR and performance flows both ways – Firms with better past performance have more funds to spend on CSR – Firms with higher levels of CSR perform better.
  19. 19. CSR and Financial Performance (Continued)• Amy Hillman and Gerald Keim develop a model of CSR and financial performance.• They argue that there are two components of CSR 1. One component relates to improving the firm’s relationships with its primary stakeholders They call this stakeholder management (SM) SM has a positive impact on firm performance 2. The other component relates to social issues that do not improve the relationships of the firm with its primary stakeholders They call this social issue participation (SIP) This component reduces financial performance.
  20. 20. CSR and Financial Performance (Continued)• Hillman and Keim’s SM and SIP are equivalent to Waddock and Graves’s good management and free cash flow hypotheses.• They find that financial performance depends positively on SM and negatively on SIP.• However, they do not find that the levels of SM and SIP depend on financial performance.
  21. 21. CSR and Financial Performance (Continued)• To summarise, recent empirical research suggests that it is important to distinguish between the two types of CSR – CSR that targets a company’s direct stakeholders, such as its customers and employees, has a positive effect on profitability –CSR that targets wider social issues has a negative effect.
  22. 22. CSR Indices• CSR indices (e.g., FTSE Kinder, Lydenberg and Domini (KLD) 400 Social Index) tend to be based on – Exclusionary screens – Strengths along the lines of a series of attributes.• Exclusionary screens consist of excluding firms from the index with significant involvement in e.g. – alcohol, – gambling, – tobacco, – fire arms, and – military weapons.
  23. 23. CSR Indices (Continued)• Attributes include e.g. – Community relations • Support for education, social housing, … – Diversity • The firm has policies in place to promote women and minorities, … – Employee relations • Relationships with trade unions, employee profit sharing schemes, …
  24. 24. CSR Indices (Continued)–Environment • Policies aiming to reduce or prevent pollution, carbon neutrality, recycling, …–Product • Quality, innovation, product safety, antitrust, policies enabling socially disadvantaged groups to benefit from the firm’s products and services, …–Corporate governance
  25. 25. CSR Indices (Continued)• There are now indices which cater for investors concerned about e.g. – Catholic values (KLD) – Sustainability (KLD) – Islamic values (Dow Jones).
  26. 26. Socially Responsible Investment• SRI funds apply a set of exclusionary and/or inclusionary screens to select their investments.• However, the definition of SRI and the choice of exclusionary and/or inclusionary screens may change depending on the values of the investor or index.• E.g., the FTSE KLD Catholic Values 400 Index excludes companies that are involved in or support – abortion, – contraceptive products, and – the use of embryonic stem cells and foetal tissue.
  27. 27. Socially Responsible Investment(Continued)• SRI has ancient roots – The teachings of Judaism had strict rules on how to invest money – Until the middle ages, there were restrictions on loans and investments for Christians – In the 17th century, Quakers (“Society of Friends”) who settled in America refused to benefit from the weapons and slave trade.• The Pioneer Fund, which was set up in 1928, refused to invest in alcohol and tobacco.
  28. 28. Socially Responsible Investment (Continued)• The Pax Fund was created in 1971 in the USA by two Methodists who were opposed to the Vietnam war and militarism in general – It refused to invest in weapons contracting.• The 1980s saw increased awareness by the general public of racism (apartheid regime in South Africa) and environmental issues (Chernobyl and Exxon Valdez).
  29. 29. Socially Responsible Investment (Continued)• So is there a price for socially responsible investment or do SRI funds outperform other funds?• Luc Renneboog, Jenke Ter Horst and Chendi Zhang find that SRI funds from Europe, North America and the Asia-Pacific region – underperform compared to the market by between -2.2% and -6.5% (risk-adjusted returns), but – they do not generally perform worse than conventional funds from the same country.
  30. 30. Conclusions• The link between CSR and firm performance.• The performance of SRI funds.• How do you define SRI?
  31. 31. Appendix 1Environmental, Socialand Governance (ESG)Factors in InstitutionalInvestment
  32. 32. Introduction• Corporate governance is the system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity• Therefore, sustainability reporting, social and environmental reporting and socially responsible investment all contribute to good corporate governance• They represent mechanisms which help companies to discharge a broad accountability and to behave in a socially responsible manner
  33. 33. CSR for whom?• Companies are producing sustainability reports, social and environmental reports, corporate social responsibility reports etc.• BUT to what extent is this being driven by the institutional investment community?• If investment institutions are not interested in this information, it is unlikely that companies will be genuinely interested in producing it
  34. 34. • Institutional investors own almost 80% of shares in UK listed companies• The current value of assets managed by the global institutional investment community is in excess of 42 trillion dollars• US and UK pension fund investments total 7.4 trillion dollars
  35. 35. Investors & EnvironmentDecisions made by these investors have aconsiderable impact on the environmental andon society as a whole“. . . what we need is a means by which we canwield our influence over businesses to actresponsibly . . . Ethical and environmentalinvestment is that means. “(Hancock, 1999, p. 8)
  36. 36. ESG• We explore the extent to which the institutional investment community in the UK, and elsewhere, are becoming increasingly interested in environmental, social and governance information• We consider how socially responsible investment (SRI) has moved very quickly from the periphery to the mainstream of institutional investment
  37. 37. • In 2004 the UK Government endorsed the important role institutional investors have to play in integrating corporate social responsibility into business by their recognition of the impacts of social and environmental factors on long-term business performance• Socially irresponsible behaviour is strongly related to bad financial performance and even corporate failure – Exxon Valdez – Brent Spar – Nike – Huntingdon Life Sciences
  38. 38. Fiduciary Risk• CalPERS (California Public Employees’ Retirement System) stated that:“. . . equity in corporations with poorsocial and ethical records couldrepresent an excessive fiduciary riskbecause such firms courtboycotts, lawsuits, or labor activity. “
  39. 39. Financial interests• Friends Provident chose SRI:“Good corporate practice on humanrights, child labour and environmentalpollution is good for society, but it’s alsogood for shareholders. As a largeinvestor, it is right that we use ourinfluence with companies to encourageresponsible business practices whileserving the financial interests of ourcustomers.”
  40. 40. Terminology and definitions• From ethical investment to SRI• Socially responsible investment combines investors’ financial objectives with their commitment to social concerns such as justice, economic development, peace or a healthy environment.
  41. 41. Issues of traditional importance to the ethicalinvestor Alcohol Military/MOD Poor contracts workplace conditions Animal Arms exports to Third World testing oppressive concerns regimes Gambling Nuclear power Tobacco Greenhouse Ozone depletion Water gases pollution Health and Pesticides Tropical safety hardwoods breaches Human Pornography Genetically rights abuses and adult films modified food Intensive Road Gene farming use/construction patenting
  42. 42. Ethical Profile• How to achieve consensus?• Individuals have different ethical profiles• Ask pension fund members for example• Ethical relativism
  43. 43. From SEE/SRI to ESG• Early SRI (2000+)• Institutional investors interested in social, ethical and environmental (SEE) factors• NOW• Environmental, social and governance• (ESG) factors• Shows SEE issues now central to governance issues
  44. 44. Mercer Investment Consulting (2006) Issues Associated with ESG InvestmentClimate Environmental Sustainabilitychange managementCorporate Globalization TerrorismconventionsCorporate Health issues Watergovernance in emerging marketsEmployee Human rightsrelations
  45. 45. Impact on Investment• Mercer Investment Consulting (2006) found that globalization and corporate governance were the ESG factors viewed as most relevant to mainstream institutional investment analysis• BUT they also found that a high proportion of fund managers expect clean water, climate change and environmental management to have a material impact on investment performance over the next five years
  46. 46. Universal Ownership• Emerging concept of universal ownership has encouraged the integration of ESG issues into mainstream institutional investment• Universal owners:• "large investors who hold a wide range of investments in different listed companies as well as other assets and therefore tied to the performance of markets of whole economies, rather than to the performance of individual assets"• They are therefore forced to be concerned about long-term economic prosperity, and must consider ESG issues
  47. 47. Statistics on Growth of SRI and ESG• In the UK £4 billion was invested in ‘ethical’ funds in August 2001• SRI now an overarching investment criterion for ALL investment institutions• 77% of the British public would like their pension funds to be invested in a socially responsible way, provided this did not harm financial returns• 80% of pension scheme members require their schemes to operate an socially responsible investment policy
  48. 48. ESG screening• Mercer Investment Consulting surveyed 195 fund managers around the world• 70% of fund managers believe that the integration of environmental, social and ethical factors into investment analysis will become mainstream in investment management within the next three to ten years• 60% of fund managers consider that screening for social, ethical and environmental factors will be mainstream within the next three to ten years
  49. 49. SRI & ESG• Mercer Investment (2006) canvassed 157 international institutional investors• Confirmed that socially responsible investment is continuing to expand at a global level• 38% of fund managers surveyed anticipated increased client demand for the integration of ESG analysis in mainstream institutional investment over the next three years.
  50. 50. Socially responsible investmentstrategies• Screening• Best in sector - engagement and dialogue
  51. 51. The financial performance of socially responsibleinvestment fundsJohn Maynard Keynes (1936):“There is no clear evidence from experiencethat the investment policy which is sociallyadvantageous coincides with that which is mostprofitable . . . “
  52. 52. Essential question:• Is it possible to be ethical and still to make a profit?• Few people are prepared to accept a lower return to investment from investing in a socially responsible manner
  53. 53. SRI & Financial Returns• Solomon and Solomon (2002) found strong evidence of a growing perception among the institutional investment community that SRI enhances financial returns in the long term• Drexhage (1998) considered that investors and fund managers believe it is possible to make a difference while making a profit.
  54. 54. Existing academic empirical research has produced mixed results• Luther et al. (1992) found half of the trusts studied outperformed the market and half underperformed• Mallin et al. (1995) found that both socially responsible and non-socially responsible trusts seemed to underperform the market• Gregory et al. (1997) showed that both socially responsible and non-socially responsible trusts underperformed the market but that underperformance was worse for socially responsible trusts
  55. 55. SRI Benchmark• Development of SRI benchmark indices is clarifying this issue• Williams (1999) predicted growth in SRI performance benchmarks which should “. . . explode the myth that green and ethical investors have to accept that their investment performance will be disappointing.”
  56. 56. Cobb, Collison, Power and Stevenson(2005)• Examined the financial performance of the FTSE4Good, and concluded that• Investors are unlikely to be worse off by restricting their investment universe, and may well be better off• Their interviews and questionnaires suggested that inclusion in the FTSE4Good indices was contributing significantly to stakeholder relations, as well as to internal processes such as reporting and management systems on social and environmental issues
  57. 57. The drivers of SRI• Solomon et al. (2002) Questionnaire survey• Internal drivers: • - fund managers • - clients of the institutional investors • - trustees• External drivers: • - lobby groups • - Government • - society’s interest in CSR • - NAPF, ABI, etc
  58. 58. Rank I believe that the development of Mean SRI policy by pension funds is motivated by1 The impact of environmental and Agreement social lobby groups2 A general increase in interest in Some social responsibility in society in agreement general3 Political parties competing for Some power agreement4 Companies seeking to improve Some their reputation and corporate agreement identity5 The actions of the NAPF Weak agreement6 European Union legislation Disagreement7 The social dimension of Disagreement European Union membership8 The growing interest of pension Disagreement fund trustees in SRI issues9 The growing interest of pension Disagreement fund managers10 A demand from active pension Disagreement fund members11 A demand from retired pension Disagreement fund members12 The religious beliefs of the Strong general public disagreement
  59. 59. A growing demand for social, ethical and environmental disclosure• ABI guidelines on SEE disclosure (2001)• They would like company boards to state in their annual reports whether or not they:• take regular account of the significance of SEE matters to the business of the company;• have identified and assessed the significant risks to the company’s short and long-term value arising from SEE matters, as well as the opportunities to enhance value that may arise from an appropriate response;• have received adequate information to make this assessment and that account is taken of SEE matters in the training of directors;• have ensured that the company has in place effective systems for managing significant risks, which where relevant incorporate performance management systems and appropriate remuneration incentives.
  60. 60. ABI Guidelines 2007• Modification of 2001 Guidelines• In 2007 the ABI published a set of guidelines on responsible investment disclosure (ABI, 2007)• These guidelines represent a modification of those launched in 2001. One of the main reasons for their updating was the progress in narrative reporting since 2001, including the EU Accounts Modernisation Directive (resulting as we saw earlier in the Business Review) and the new UK Companies Act. Although the new guidelines are similar they emphasise certain aspects of narrative reporting which institutional risks in order to decide what information should be included in the annual report.
  61. 61. Investors are especially interested in reporting which: – addresses ESG risks, within the companys entire framework of risk management and disclosures – adopts a forward-looking approach to ESG risks – addresses board action in managing ESG risksIt is also notable that the ABI have changed their terminology from SEE (in 2001) to ESG (in 2007) The Guidelines also contain an appendix which lists a series of questions for companies to interrogate themselves in relation to ESG
  62. 62. Investors and SEE Issues• Friedman and Miles (2001) found the City of London was taking SEE issues far more seriously• Interviews with institutional investors found they are dissatisfied with the level of social and environmental reporting (Solomon 2007)• Public disclosure is inadequate and therefore private disclosure channels are developing
  63. 63. Private social andenvironmental reporting• Sparkes (2002) highlighted the growth in SEE engagement as a main indicator that socially responsible investment is moving away from the margin and into mainstream investment• Solomon and Solomon (2006) found from interviews that engagement in this area has become formalized• It is evolving into a two-way process, with companies asking institutional fund managers questions as well as questions being directed toward companies by shareholders
  64. 64. Legal perspective : ESG reporting• Freshfields Bruckhaus Deringer (2005) concluded that shareholder engagement on ESG issues would be considered prudent from a legal perspective, as long as it is properly motivated, transparent, informed and objective“… targeted and constructive engagementwould be acceptable (and in some casesmandatory) where it is aimed atimproving the financial performance of aninvestment over the relevant timehorizon, for example by encouragingbetter environmental accountability ormore forward-thinking management”
  65. 65. Private Social and Environmental Reporting:Mythisising or Demythologising Reality?• Solomon and Darby (2005) explored whether the dialogue between companies and their institutional investors breaking down barriers and misconceptions about social and environmental risks and impacts by businessOR• was it simply helping companies to create a green myth about their attitudes to the environment and society?
  66. 66. The Green Myth• Interviews showed that both that companies and investors were creating and disseminating a green myth, which suggested to society that both companies and investors were proactively working toward improvements in social and environmental management
  67. 67. Pension fund trustees and sociallyresponsible investmentPension fund investment is complicated• Pension fund members• Investment analysts• Fund managers• TRUSTEES• ConsultantsDo trustees have a responsibility to adopt an SRI policy for their pension funds?
  68. 68. Trustees ResponsibilityTrustees are concerned about breaching their fiduciary duties• Under the rubric of ‘fiduciary duty’ much is justified. The unexceptionable fiduciary requirement that trustees may consider ‘solely’ the interests of beneficiaries is adduced to justify non- involvement in ‘social’ or ‘political’ investments. Activism is dismissed as being unrelated to adding long-term value to the trust portfolio.Cowan v Scargill legal case spread fear in the hearts of trustees on SRI
  69. 69. Duty of TrusteesJudge Sir Robert Megarry concluded :‘. . . It is the duty of trustees, in the interest ofbeneficiaries, to take advantage of the fullrange of investments authorised by the termsof the trust, instead of resolving to narrow thatrange.’
  70. 70. Purpose of Trust• Freshfields Bruckhaus Deringer (2005) considers that the Cowan v Scargill case has had a misguided impact on trustee behaviour“… Cowan v Scargill cannot be relied upon to supportthe single-minded pursuit of profit maximization, orindeed any general rule governing investmentdecision-making … Megarrys decision has beendistorted by commentators over time to support theview that it is unlawful for pension fund trustees to doanything but seek to maximize profits for theirbeneficiaries… Read carefully, his decision stands foran uncontroversial position that trustees must act forthe proper purpose of the trust, and not forextraneous purposes. “
  71. 71. Profit Maximisation?• Megarry, revisited his own judgement in 1989• He said his decision did not support the view that the fiduciary duties of pension fund trustees were only consistent with profit maximisation
  72. 72. Two instances where ESG considerations MUST beincluded in fiduciary responsibility:• consensus among the fund beneficiaries that ESG factors should be taken into account• if ESG considerations are reasonably expected to have a material impact on the financial performance of the investment
  73. 73. Why not profit maximisation?Freshfields Bruckhaus Deringer (2005) gave powerful reasons why Cowan v Scargill case does not support sole pursuit of financial return maximisation: – case focused on a narrow issue – Scargill represented himself – Technical legal points were not made - Scargill was not a lawyer – no proper discussion of the case – trustees involved had an ulterior motive for their actions, supporting the failing coal industry. – Scargill was thought not to have acted with integrity. – The investment plan concerned had nothing in common with a modern ESG strategy
  74. 74. Pension Funds & SRI• Since July 2000 all UK pension fund trustees have had to disclose the extent to which (if at all) they practise SRI• This requirement [the new SRI disclosure requirement] has had a significant and wide-ranging impact on the investment community. The majority of trustees have incorporated reference to social, ethical and environmental (SEE) issues in their annual statements in 2001. Most of them have delegated responsibility for implementing this to fund managers which has added significantly to the growing Socially Responsible Investment (socially responsible investment) movement.
  75. 75. UK Pension Fund Trustees and ClimateChange• “Financial Services Accountability: How Are Pension Fund Trustees Dealing with Climate Change?”• Research supported by ACCA / ESRC / UKSIF / PMI / NAPF• Preliminary Findings
  76. 76. Climate Change Predictions• The Intergovernmental Panel on Climate Change (IPCC) state by end of C21st global temperatures will rise by 1.5 to 5.8 degrees centigrade resulting in: – thawing of permafrost – declines in biodiversity – rising sea levels – extreme weather patterns – flooding, droughts and storms – direct, unpredictable and possibly devastating consequences on human civilisation
  77. 77. Stern Review (2006): Insurance Companies andClimate Change• "The insurance sector will face both higher risks and broader opportunities, but will require much greater access to long-term capital funding to be able to underwrite the increased risks and costs of extreme weather events" (Stern, 2006, p.304).
  78. 78. Pension Funds andClimate Change• "Considering that both the physical and mitigation-related policy impacts of climate change will influence the ability for companies to create and maintain wealth for shareholders … pension trustees will want to ensure that these risks … are being addressed in relation to the funds in their care" (IPCC, 2005).
  79. 79. Climate Change Impact• Innovest Strategic Value Advisors have estimated that up to 5.1% (and perhaps more) of market capitalisation may be at risk from climate change• Climate change has been identified as a central issue for institutional investment strategy (Mercer Investment Consulting, 2006).
  80. 80. The Global Growth of SRI• Socially responsible investment in the USA• USA is a strong advocate of SRI• More than $2 trillion (about 13%) of all US investment follows SRI criteria• Freshfields Bruckhaus Detinger (2005) explain that given the US legal framework, ESG considerations may be incorporated into investment strategy, provided that they are pursued for genuine reasons and that they do not compromise the return to investment
  81. 81. Socially responsible investment inCanada• Jantzi Social Index• Freshfields Bruckhaus Deringer (2005)• No legislation encouraging trustees to take ESG issues into account• BUT some pension funds have included these issues within the context of profit maximization• Ontario Municipal Employees Retirement System (OMERS)• Ontario Teachers Pension Plan Board• The state of Manitoba has amended pension fund law to specify that pursuit of ESG factors in investment strategy does not represent a breach of fiduciary duty
  82. 82. Socially responsible investment inAustralia• Traditionally, Australian fund managers have considered that SRI is incompatible with fiduciary duty• Freshfields Bruckhaus Deringer (2005) indicated that Australia has been slower than the US in integrating ESG issues• Factors which have hindered SRI: – confusion over what constitutes ESG factors – a perception that SRI leads to underperformance – confusion as to whether ESG investment is consistent with fiduciary duty – lack of demand from fund beneficiaries.
  83. 83. Socially responsible investment in continentalEurope• European Commission has endorsed SRI as an important instrument for encouraging corporate social responsibility• European Social Investment Forum (Eurosif) has helped to promote SRI
  84. 84. Socially responsible investment inJapan• Solomon et al. showed SRI has grown recently in Japan• Japan is a civil law country• Law does not depend on cases• Trust law in Japan stipulates that trustees have a duty of loyalty to carry out their responsibilities in good faith on behalf of their beneficiaries and to avoid conflicts of interest• No current legislation encouraging ESG issues to be integrated into institutional investment• Legal framework is an obstacle to SRI in Japan• Freshfields Bruckhaus Deringer (2005) concludes that ESG in Japan is in its very early stages
  85. 85. Casestudy 2 : General Motors1. Read and prepare the Casestudy on General Motors (Monks & Minow (2011)) for discussion next class. Identify the corporate governance issues faced.
  86. 86. Further Reading• Solomon, Jill (2010) Corporate Governance and Accountability 3rd Edition, Wiley, UK. Ch.9-11• Goergen, Marc (2012) International Corporate Governance, Pearson. Ch.8• Gary, Owen & Adams (1996) Ch.2-4• CIMA - Performance Strategy: Study Text (2011) BPP Learning Media Ltd. Part B : 4
  87. 87. Additional Readings (1)• Mallin, C. A., Saadouni, B. and Briston, R. J. (1995) ‘The financial performance of ethical investment funds’, Journal of Business Finance and Accounting, 22, 483–96.• Gregory, A., Matatko, J. and Luther, R. (1997) ‘Ethical unit trust financial performance: small company effects and fund size effects’, Journal of Business Finance and Accounting, 24(5), June, 705–725.• Drexhage, G. (1998) ‘There’s money in ethics’, Global Investor, 109, 56.• Williams, S. (1999) ‘UK ethical investment: A coming of age’, Journal of Investing, summer, 58–75.• Hancock, J. (1999) Making Gains with Values: The Ethical Investor, Financial Times/Prentice Hall, London.• Friedman, A. L. and Miles, S. (2001) ‘Socially responsible investment and corporate social and environmental reporting in the UK: An exploratory study’, British Accounting Review, 33, 523–548.• Sparkes, R. (2002) Socially Responsible Investment: A Global Revolution, John Wiley & Sons, Chichester, UK.• Solomon, J. F., Solomon, A. and Norton, S. D. (2002) ‘Socially responsible investment in the UK: Drivers and current issues’, Journal of General Management, November 2001.
  88. 88. Additional Readings (2)• Mercer Investment Consulting (2005) SRI: What Do Investment Managers Think? 12st March, Mercer Human Resource Consulting LLC and Investment Consulting Inc., New York, USA.• Cobb, G., Collison, D., Power, D. and L. Stevenson (2005) FTSE4Good: Perceptions and Performance, ACCA Research Report No.88, Certified Accountants Educational Trust, London, UK.• Freshfields Bruckhaus Deringer (2005) A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment, UNEP Finance Initiative, produced for the Asset Management Working Group of the UNEP Finance Initiative, October.• Solomon, J. F. and L. Darby (2005) "Is Private Social, Ethical and Environmental Disclosure Mythicizing or Demythologizing Reality?", Accounting Forum, Vol.29, pp.27-47.• Mercer Investment Consulting (2006) 2006 Fearless Forecast: What Do Investment Managers Think About Responsible Investment? March, Mercer Human Resource Consulting LLC and Investment Consulting Inc., New York, USA.• Solomon, J. F. and A. Solomon (2006) "Private Social, Ethical and Environmental Disclosure", Accounting, Auditing and Accountability Journal.• Solomon J. F. (2008) Preliminary Report on Pension Fund Trustees and Climate Change, ACCA (on blackboard).
  89. 89. NEXT Ideas for Discussion• Carcello, Joseph V., Hermanson, Dana R. & Ye, Zhongxia (Shelly) (2011) Corporate Governance Research in Accounting and Auditing: Insights, Practice Implications, and Future Research Directions, Auditing30. 3 (Aug
  90. 90. QUESTIONS?

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