LONDON, 26 April 2004 — Following the major corporate accounting scandals, management shenanigans bordering on fraud, pension funds shortfalls, the deliberate mis-selling of insurance products, the lack of effective regulation and the increasing blurring of business and politics over the last few years, it is perhaps not surprising that shareholder power, especially that of institutional shareholders, has come to the fore.
So much so, that last week, institutional shareholders such as Calpers, a major American pension fund, vetoed the appointment of Warren Buffet, the billionaire investment guru, and Sandy Weill, the chairman of Citigroup, to the board of soft drinks giant Coca-Cola. The objection was primarily on the ground of corporate governance, in that both hold senior posts in other major corporates, and therefore their independence on both boards is considered questionable because of potential conflict of interest.
In contrast, the latest corporate scandal to hit the news is that involving the Royal Dutch & Shell Transport and Trading Company, the beleaguered Anglo-Dutch oil giant, simply known as Shell to you and me, and one of the top three oil companies in the world.
A damning report last week by Davis Polk & Wardwell suggested that senior executives including Chairman Sir Phillip Watts and Judy Boynton, chief financial officer, and others not only lied about the companies oil reserves to investors, but also initiated a cover-up.
A series of revealing e-mails by Walter van de Vijver, Shell director of exploration, to Sir Phillip and Ms Boynton, showed a corporate reporting culture bordering on the corrupt and van de Vijver complaining bitterly that he was “getting sick and tired about lying” about the overstated reserves. These were allegedly overstated by 25 percent. All three have since resigned from Shell.
There is no question that Shell failed to provide accurate figures to the market. Whether this was done deliberately by senior managers, or was the result of an inefficient management culture, will perhaps be eventually revealed by the investigations formally launched this week by the US Securities & Exchange Commission, the American securities regulator; and the UK’s Financial Services Authority (FSA).
How ironic that it should surface at a time when “ethical investment is now firmly entrenched in Europe, and there are clear signs that it is influencing the decisions of investors well beyond the ethical investment fund community,” according to the Ethical Investment Research Service (EIRIS), the UK-based organization which is “dedicated to helping people invest according to their ethical principles”.
Perhaps, the ethics of good business somehow eluded the senior management of the likes of Shell; Parmalat; and those motley of mis-selling insurance and pension firms in the UK and Europe.
Perhaps ethical investment should not be confined to merely socially-responsible environmental practices including environmental impact assessment (EIA) criteria, recycling, and rehabilitation of habitat; company policies and practices which mitigate the effects of social risks such as HIV/AIDS, which has become a key test of company commitment in Asia, Africa, and Latin America; and shareholder activism.
Some European countries are also going down the legislation route. Britain, for instance, has recently introduced regulations which require companies to report on any social and environmental risks material to their operations, although what exactly constitutes “material risks” is still being debated by lawyers, politicians, and activists. Belgium on the other hand has introduced a law requiring the country’s 250-or-so pension funds to disclose their social, environmental, and ethical criteria when selecting investments and picking stocks of companies in which they plan to invest in.
It is unlikely that such corporate governance scandals will abate, despite the seemingly tough measures being brought in by the Group of Seven (G-7) industrialized countries to clean up corporate governance; to pre-empt sophisticated tax avoidance schemes; to counter money laundering from drug proceeds, corruption, and latterly to finance terrorism.
Corporate governance is perhaps also a reflection of the nature of capitalism and the emergence of “biz-democracy.” Capitalism with its profit maximization and shareholder value ethic has succumbed to the greed culture of today. One manifestation is the corporate fat cat salaries, where even executives of failing companies are rewarded with huge bonuses and share options, irrespective of performance.
Very often the spaces become blurred. That is why US presidents can appoint the heads of energy firms as energy secretaries to push through vital environmental legislation relating to the sector. The fact that these firms are also major party donors seem to be unimportant.
A famous British newspaper once claimed in the 1970’s that it was the tabloid that won an election for Margaret Thatcher, the then Conservative prime minister.
I wonder how far we are from one of the major corporates claiming that it was it (or at least its donation) that won an election in the so-called liberal democracies for this president or that prime minister. Who knows they may already have done so in this or that banana republic
