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Annie Hayes



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CSR and beyond: Playing fair with investors cash?


In this series we have considered corporate responsibility towards stakeholders including employees, customers, suppliers, the community and environment. But we have not discussed corporate responsibility in relation to shareholders.

The idea that shareholders should be included in the corporate responsibility debate might seem strange to some people. But it only takes a moments reflection to think about the underlying causes of many recent scandals to recognise that shareholders are not always treated fairly.

The first important point is to understand the notion of fair treatment for shareholders. In publicly listed companies ordinary shareholders come behind all other creditors if the company is insolvent. In return for a healthy financial return when the company is successful, the ordinary shareholder takes the risk of not getting any money back.

Moreover the shareholder tasks the risk that the company will not achieve what it has set out to achieve. Countless examples exist where shareholders have been reasonably disappointed about the poor performance of the investee company. But in most of these cases, the shareholder has not been treated unfairly or irresponsibly by the company.

In these cases the company may have been poorly managed, external factors intervened or sales failed to materialise. At the heart of the issue is the shareholder who takes a risk. The hope is that the company will execute its plan and deliver on its promises, meeting its forecasts. But if the company, despite its best endeavours fails, then the shareholder cannot demand the investment back.

The GoodCorporation’s Standard, however, argues the case for fairness towards shareholders. The first of these is about accurately telling the shareholders what the company has achieved to date. By setting out accurate accounts and a reasonable description of what it has sold and to whom, it allows the shareholder to form a good understanding of the risk profile of the company and its historical activities. When companies fail to accurately reflect their financial position they make it impossible for the shareholder to form an accurate view about the risk and reward of investing in that company.

The second crucial issue is for the company to inform the shareholder about its intentions for the shareholders’ funds. While the accounts of historical activity may be accurate, it is useless to the shareholder if the company then decides it wants to radically change its strategy. The shareholders at Marconi for example felt very aggrieved that the company changed its strategy in a short space of time without making it clear to the shareholders the risks involved in it.

The provision of useful forward-looking information is however fraught with difficulty. For public companies the information that can be provided to the shareholder is highly constrained by stock market rules and by commercial good sense. There is no point in telling the shareholders that a block-buster drug will be on the market in February, if that is precisely the information that the competitor needs to launch an alternative drug in January. The company therefore has to stick to generalities about how the market may develop and how the company will compete.

The responsible company does, however, make a serious effort to be clear about any changes to the risk profile of the company’s activities. The new operating and financial review in the UK will also help by compelling listed companies to report on risks associated with different stakeholder groups. Imagine what happens when British Airways has to report on its relationships with its suppliers and their potential impact on the company’s financial performance.

The owners of Gate Gourmet would also find it of real interest to understand the quality of the company’s relationship with its employees. Finding an honest view about that relationship might then help the owners to make decisions about their investments. This in itself might then pressure companies to manage relationships well with different stakeholders.

These issues of accurate accounting for past activity and clear information about future prospects apply even more strongly to limited liability companies. In these structures shareholders can be left with little useful information, or find that information comes too late to be useful. Also plans are often poorly described and a large gap emerged between the internal shareholders and the external shareholders in terms of understanding the business and taking a view on its likely future prospects.

The next area of concern for shareholders is about the quality of internal controls and the direct protection of shareholders’ funds. The shareholders lend their money to the company and expect that it will be used to undertake the clear plans set out about it.

The debate about controls in listed companies has intensified since Enron’s collapse. The SOX requirements has taken the implementation of controls and the control of controls to new heights. In fact if I were a shareholder in these types of companies, I would worry that the cost of the controls of the controls was a lot more than the perceived benefit. I’d much rather have an independent body interview the finance team and ask them confidentially to identify any gaps in the controls. But that is a debate about style rather than substance. Overall shareholders need to know that funds are being used properly and the company’s assets protected.

One problem for shareholders is that an increasing part of the value they own in a company comes from its intangible assets. The gap between market value and book value is truly enormous for many listed companies. The challenge for the shareholder is to be convinced that this intangible asset is being protected as well as the tangible aspects. The protection of reputation in the round is therefore important from the shareholder point of view and an important part of responsible business behaviour. Independent evaluations of stakeholder opinions are an important part of this.

The final area of importance for shareholders is corporate governance. This can be seen as a subset of the controls debate, but is important enough to warrant a separate comment. Corporate governance determines the way in which the shareholders’ interests are represented inside the company on a day-to-day basis. The development of fair governance is therefore an essential part of the corporate responsibility agenda.

Overall the company should view its shareholders not just as owners but also as partners in a relationship in which fair and responsible behaviour pays off. Moreover shareholders need not only to be treated fairly themselves, but as part of this, they need to know that other stakeholders are being treated fairly and responsibly as well.

Leo Martin is director and founder of GoodCorporation, the corporate responsibility standard and is the principal character in the BBC’s series, Good Company, Bad Company.

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Annie Hayes


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