Institutional investors will put 60 billion into Danish Infrastructure

The Öresund Bridge from underneath

The Öresund Bridge from underneath (Photo credit: Wikipedia)

It is quite amazing to see and hear what Institutional investors are communicating at the moment. For a long time it was their job to create more wealth for the people who had trusted their hard earned money into a few very well of funds. They invested freely in all kinds of projects and had portfolios that were very diversified (and some would say to diversified).

The first came the raise of the consumer activist who forced these huge investors to put in ethical screens that ensured that there was some form of consistency between the individual wishes and the investment targets. These pension funds have now taken a further step in the direction of creating a more sustainable investment platform by looking into projects that benefit the very society and people own them.

The financial and economic crisis means that public construction projects are on a diet, but now there are signs that there may be a tremendous boost on the way to the Danish infrastructure. A telephone survey done by a independent think tank, shows that the country’s ten largest pension and the state owned, ATP, are willing to invest nearly 60 billion kroner in the Danish infrastructure such as a harbour tunnel in Copenhagen, sewers or a large bridge between some of the main island of the country. According to calculations this will create 7,200 new Danish jobs annually over a period of 10 years when billions are invested in public works projects.

This means that there is cash then the government just need to provide the projects and vision needed to make it a reality.

The ones that really decides – The influence of rating companies on European economics

McGraw-Hill's 1990s logo

McGraw-hill logo

If people did not already know about rating companies like Standards and Poor they will for sure know about them when this crisis ends at some point. The two rating companies are the ones that de-facto decide financial politics in the EU and their influence grows by the days goes by.

We would like to think that it is the democratic elected national governments that take decisions on behalf of their citizens or at least it is the quazi-democratic institutions in the EU that does. But as things stand now there is much doubt about whose hand is really guiding the decision-making process.

If you take standards and Poor who have put all the Euro countries on the “watch” list and by that have initiated a increase in rates on loans that they have to pay you make some interesting findings. Firsts of all is Standards and Poor owned by McGraw-Hill a company that is a listed company on the NY stock exchange. You might know the company from its publishing activities but it is also involved in construction and the subsidiary Platts that is a leading global provider of energy, petrochemicals and metals information, and a premier source of benchmark price assessments for those commodity markets. The major investors in McGraw-Hill and thereby the stakeholders who decides the direction for the decisions that the company makes is and interesting group.

The largest investor in S&P is Capital World Investors, which is chaired by James F. Rothenberg. He is a major player in the capital markets according to Muckety (a site that maps influence) he scores 95 out of 100 on the influence scale, which put him quite high on the scale. One of his major connections is with the US RAND Corporation that is a think tank controlled by the US government and has major ties to the US military and health sectors.

The VANGUARD GROUP, INC. is a privately held investment fund that was build by John C. Bogle. Mr. Bogle has been a critic of the practices in the mutual funds industry and has among other things made a comparison between US capitalism and the fall of Rome.

The STATE STREET CORPORATION has close ties with the Bailout – Money Market Mutual Fund Liquidity that is the fund that helped US banks through the financial crisis in 2008 to 2010. The fund ensured that Citybank, Citygroup, JP Morgan Chase and the state street corporation was kept afloat.

I will not be standing in the queue that shouts conspiracy but it makes more sense when one need to understand the decision making process the S&P is going through when one knows how these decisions are made. In my mind is McGraw-hill and its owners protecting their interests in Europe and the most effective way to do this is through the S&P rating system.

Time for leadership change at Vestas

Windmill 02

Vestas Windmill

The board and management of Vestas Windsystems the biggest windmill producer in the world need to take a real hard look at themselves and how they conduct their business.

For to long the board have clinched to the hope that their CEO, Ditlev Engel, would have some sort of grip on the realities he and the company is facing. Year after year, quarter after quarter he has led the people who have put their trust in his statement down.

By being to optimistic he has again and again showed that he is unable to set realistic targets and even when nobody else has any doubt, which way the market is going. Vestas keep on insisting on unrealistic targets. Take for example the target of firm and unconditional orders for 7000-8000 MW and an EBIT margin of 7%. But until date the intake is only around 5200 MW very far from the and when the average announced intake is only around 80MW per order it is hard to imagine that the company will reach its targets in 2011. The investors have already taken the necessary steps and have punished the stock so that the change in stock price from last year is -58%. With the fall in the last 6 months of 53% it is clear that investors wants to see real change especially when it comes to realistic communication by management.

Investors like to know what they are buying and at the moment they do not trust the communication coming from Veatsa and when a company have lost the trust of their investors it is a true sign that change have to happen and happen fast. For the past three or four years there have been hopes that Ditlev Engel would start to deliver as he promised and time and time again he has been unable. I do not think that it is a loss of confidence in the product or the way that Vesats have put their business model together. Rather investors do not believe a word that Ditlev Engel is speaking and that is a real problem for the company as a whole.

As I see it is Vestas at the moment really undervalued and would be a good target for a takeover for a smaller windmill producer that could put in effective management.

The board need to step in and find a replacement that can build confidence with the market there is CEOs out there who have the necessary experience and competencies to bring Vestas back on track.

Has the CSR movement really won the battle or have they lost the war?

Bank of America Tower

Image via Wikipedia

In the article from the Economist from 2005 Clive Cook argued that the CSR movement have won the battle for ideas about the virtues company and not least the harts and minds of executives around the world.

As Cook put it in 2005 “CSR commands the attention of executives everywhere—if their public statements are to be believed—and especially that of the managers of multinational companies headquartered in Europe or the United States. Today corporate social responsibility, if it is nothing else, is the tribute that capitalism everywhere pays to virtue.”

And there is no doubt that CSR have made its way into almost every crack of the business process from Human Resources and employee benefits to product development and production. These seem to be no escape from CSR everywhere one goes there seem to be a big sign that boasts about how corporations in some obscure way bring good to the world. Reports are being issued, social media are bring utilized and campaigns are being run just to boast about how this company is creating shared value or is leading the fight against green house gasses.

It would seem that the CSR movement have not only got the a good grip in the tail of the business beast but that it is also able to make a good buck for itself along the way.

“The winners are the charities, non-government organisations and other elements of what is called civil society that pushed for CSR in the first place. These well-intentioned groups certainly did not invent the idea of good corporate citizenship, which goes back a long way. But they dressed the notion in its new CSR garb and moved it much higher up the corporate agenda.”

But now six years down the road and one maybe two economic crisis’s down the road it the effects have not been what Cook describes. Companies have not flogged around the charities, the NGOs or CSOs in order to create a new type of development system in the face of government cut downs. In fact there have been a tendency to streamline efforts into the main business process to search for the ever-elusive business case.

While the CSR movement had hoped that companies would come to them because they had to power to publicly humiliate them through exposure in the press and other media this has not happened. Instead business have initialised CSR as part of the conditions of doing business like it has done with marketing, lobbying, employee benefits, supply chain management, etc. One could say that in public-relations terms, their victory is total but the war on ideas was not really won by the CSR moment in the end. CSR did not change the face of corporations in any significant way. So when Cook argues that “…their opponents never turned up. Unopposed, the CSR movement has distilled a widespread suspicion of capitalism into a set of demands for action.” It is a truth with modifications it would be more accurate to say that corporations reorganised.

One can just take a quick look at some of the so-called “green” companies that have been hailed by the CSR

moment as frontrunners. Companies like BP that even adopted a green logo but ended up with a huge crisis on their hands in the Gulf of Mexico. Novo Nordisk that have been instrumental in the CSR reporting scene and the fight against diabetes that seem to go from one bribery scandal to the next on a almost continues basis or Bank of America who were in the centre of the financial crisis creating bank products that they themselves had a hard time understanding and in the end lead to the fall of several major financial institutions around the world.

And maybe it was because that they did not really believed in the idea of corporate social responsibility that they were lead astray. That “they were starting to suspect that they have been conned. Civil-society advocates of CSR increasingly accuse firms of merely paying lip-service to the idea of good corporate citizenship.” So corporate executives started to think how to make the best of it, how can I “conn” everybody back, so that was what the executives did. They might have called it something different but in reality they started to dress their unsustainable products in a think “green” coating just think of the three companies I just mentioned and the companies they have been running while at the same time doing some of the most unethical acts in corporate history.

We should not blame the companies for being what they have always been. All companies are in some way or another born out of the basic idea of greed that the owner somewhere along they way would make a buck or two from what the

company was doing. So companies continue to be build around the idea that the main interest should be to make some kind of profit from its activities. “When commercial interests and broader social welfare collide, profit comes first.” And we seemed to forget that when everything went fine and that there would be a price to pay when markets started to go downhill.

As Cook so rightful said but might not have fully realised the corporations have not changed their DNA they are still the same beast that they have always been. What we need to learn is that the state, society, the environment and business need to co-exist like everything else in the world but that we will never live in perfect harmony with each other but constantly need to keep each other accountable for our actions no matter what role we play. So when Cook says “Capitalism does not need the fundamental reform that many CSR advocates wish for. If CSR really were altering the bones behind the face of capitalism—sawing its jaws, removing its teeth and reducing its bite—that would be bad: not just for the owners of capital, who collect the company’s profits, but also for society at large.” I think that this is even more true now that it was when the word were spoken in 2005 when we really did not fear the big fundamental chang

 

es that we soon after experienced.

Private business on a leash

Business needs frames and structures that they can relate to not given control over and it is the role of the state and society to constantly provide and negotiate these in order for business to strive. Like a cage in a zoo business need to be reminded that not all animals can be give the same level of freedom no matter how cute or well dressed they appear to be. A tiger however cute is still a very deadly beast and it is the same with business no matter how well one dresses up a oil company it is still producing a product which eventually will dry out and pollute atmosphere. “Private enterprise requires a supporting infrastructure of laws and permissions, and more generally the consent of electorates, to pursue its business goals, whatever they may be.” The last thing they need to be given the key to the cage under the pretence of CSR and corporate sustainability reporting and then be left to govern themselves.

Governments and interstate institutions like the federal government in the US and European union should realise that they play an important art in creating these structures that by hindering the movement of business that actually help business being sustainable. For fare too long have governments give over power to private business for them to control and decide what was good and what was not. This has only resulted in agony and pain for the populations of the world creating huge scandals, systems without transparency and business who does not realise the consequences of their actions.

Back to the Why of CSR – Its the story that matters

From time to time it can be difficult to establish what it is all good for why is it that we are so focused on the business case, brand value, if we are listed on the FTSE4Good or not etc. We tend to be preoccupied with the technicalities or the How of CSR and not as much on the Why. The Why tend to be taken for granted because there is so much pressure on showing that we can be transparent, accountable or that we have a effective plan for our work. But when we are forced to think about and explain why corporations are engaging actively in CSR and goes beyond the mere management of stakeholders we come back to the basics of telling the story of doing good.

I have never met manager or business leaders who have not taken a stand on their business impact on the society they are part of. Some would claim that paying tax would be sufficient others have a broader perspective on the thinking, but common for them all is that they have taken a stand and that they have a personal story to tell that explain that standpoint. They like all of us have focused on the Why while we might disagree or agree on the standpoint they do have a personal story to tell that have shaped their opinion and convinced them why their standpoint is the best solution to business role in society.

Now I could leap into a greater discussion on the different discourses of CSR explaining the pros and cons of Friedman or Porter and Kramers standpoints or maybe explain why Ruggie is such a proponent of political CR. But I will refrain from this discussion and just conclude that we have different perspective on the role of business and even though one manager might be reluctant and sceptical towards CSR in general, most large business are in some way engaged in the subject anyway. So even though management might be pretending not to be religious about CSR when they fold their hands they are still praying.

So back to the first question and the Why of CSR. In my opinion it is all about the story about the journey the corporation describes and the willingness to share this with the rest of the world. Basically explaining to the world about your individual Why. At the Global Compact website there are hundreds of stories about the Why of CSR some from companies that have integrated CSR in all parts and corners of their business others have only focused on a very narrow part of the CSR spectrum.

One of the places were one can find stories about the corporate CSR journey is in the Global Compact (GC) case story archive. The story being told are of cause about the ten focus areas of the GC and how different organisations work with each of these elements individually. The idea is that best practice can be shared among the participants and beyond. But the story behind the story is about how some stories are told better or have a greater appeal than others. For example have most of the storytellers a real and definite focus on environmental issues and especially their carbon footprint, but almost no one have a story to tell about their anti-corruption work. This differences in corporate attention gives a real picture of the Why organisation engage in CSR activities.

The same picture is evident when one examines the Communication on Progress, which is a precondition for continued membership of the GC. Corporation just seems to focus more on the areas were their most salient stakeholders have their main attention. In research done by Ralf Barkemeyer on CSR in the context of international development he found that the main focus was on environmental issues followed Human rights and Labour rights and last to come was anti-corruption. Another interesting thing that came out of the survey was that a very large proportion of the issues addressed by EU companies were directed at the home country and not as one might think at the countries were the corporation was most active.

This tells us that the Why of CSR should be found not in the effort top do well by doing good but rather as a way for companies to confront some of the issues that their most salient stakeholders have with the company. These can be customers who demand specific actions, but more likely it is home country media who highlight specific issues, which have the possibility of threatening to companies’ ability to operate efficiently. In resent years the majority of this pressure have been channelled through institutional investors who have a increased stake in ethical investments. While individual shareholders might not be influenced by corporate decisions the case is not the same for larger investors such as pension funds or large unions.  The reason why we make this distinction is based on some of the characteristics of these two investor groups.

Individual investors tend not to know their investments portfolio ethical performance. While they might know a great deal about the economic performance they have little or no knowledge or for that matter interest in the CSR work that the company is involved in. The reason is that most investors (excluding shareholder activists) have a very limited view on corporate performance stretching for a short period of time where they expect their stock to perform. This strategy encourages companies to focus on indicators, which they can influence with relative ease compared with larger problems one can find with the area of ethics and culture.

Institutional investors have a clear interest in long-term engagement meaning more than five years. First of all because institutional investors are normally able to invest relative large sums of money in a company and by that have a opportunity to influence its strategic development. Second, as a institutional investor you are under constant scrutiny by the press and other media on how you put together your investment portfolio. There have been several instances were investors have been forced first by the press and later one by their own stakeholders to change their investment strategy. Just take the Norwegian oil-fund, which I have blogged about some months ago and their engagement in Burma.

The lesson is that the Why of CSR is about the tory one tells or let other tell about the organisation. That organisations ethical performance is much more normative that we would like to think and that if we like stories about Ecology or Human rights there will also build a pressure for corporation to act within these areas. And that if we are enough that think the same way about a issue we will change corporate behaviour even though it is against the monetary logic of the moment.

There is no such thing as a “New economy” there is just understanding the old one

Faced with information overload, we have no al...

Image via Wikipedia

There seem to be a grown consensus among certain parts of the sustainability debate that CSR is a new way of perceiving economics. The debaters claim that the way we have been thinking about finance is somehow to be discarded or rejected as not good enough or are just tainted by the financial crisis and therefor should be discarded like waste. One of the proponents of the so-called new Economy claims that:

“The Old Economy fails us because it concentrates power in unaccountable corporations and financial markets that value money more than life.” David Korten in CSRwire Talkback.

By this statement and others like it, experts claim that the market somehow have feelings and “it” will do evil if it is not caged up or tamed in some way (just to remain in the animal analogy).

David continues listing a series of what he claims are failures of the old economy (which are to a large extend true), but then he comes up with solutions, which at least to me are closer to fairytale than reality. For instance take the problem of financial indicators, which have seen an exponential increase in the last few decades, just look at the IFRS manual and you will find out how comprehensive this work actually is. The problem becomes information overload, I know that some would argue that you cant get enough information but lets face it we need to have some kind of filter or system of selection which creates real corporate transparency and not just massive availability of more or less accurate information.

This problem is a real issue for people who are interested in understanding and dissecting (yes, I understand the irony of the animal comparison) corporate disclosed information. It is the role of these people to convey information into communication that “real” people can understand and take decision upon.

But according to Korten and others the solution seem to be more systems; “Optimize sustainable human well-being by evaluating economic performance against indicators of human- and natural-systems health. The Bhutan experiment with a happiness index is an excellent start.”

Having interviewed a MBA student from Bhutan that came to my university to study economics and management there is no doubt that the people of the country are proud of there unique way of measuring GDP. But they do not believe that this is a new way of measuring economic performance. Rather they see this is a supplement and a way for the nation to stand together and protect their unique heritage and culture.

So what should we do?

Well as individuals interested in corporate performance we all need different types of information, at different times and with different degrees of accuracy. So what we need is rather to focus on the receiver rather than the sender of information.

If I’m a critical NGO I would like to have information on ethical performance, which I have a possibility to objectively evaluate while the accounting firm might need the same degree of accuracy but just in another area. For the business student or analyst it might be more useful to have information, which can be easily compared with other companies in the same field of business or in business in general. And from time to time the roles might be reversed and information that one normally would think was interesting to a shareholder might be really important to a more distant stakeholder.

Instead of inventing one reporting systems after another as the new economists suggests, we should make systems that are inline with the multitude of different stakeholders which the corporation encounter.

So the solution, at least to me, is that we need systems of systems instead of information overload on already strained financial reporting frameworks. These systems should access the corporate reporting framework from its most basic suppliers to their accounting books gathering and channeling information to the people who wants and needs it.

This approach would mean that corporations would produce customized quarterly and annual reports, which in essence is orchestrated by the receiver. This would also make it possible to know more about what the receiver is actually interested in when investigating the company. One could say that this approach would mean the entry of social media to the corporate financial and non-financial reporting platform. Giving the power back to the stakeholder who wants to exercise it like David Korten and a lot of others would like to see.

Portfolio management

SRI strategies entails that you create a portfolio made up of assets which in some way have been screened for the ethical behavior. I have been researching different alternatives in order to “spice” up my own ideas for screening and this is the list I came up with.

  1. Ethical Negative Screening: Avoiding Companies based on ethics, moral or religious grounds
  2. Environmental/social negative screening: Avoiding companies based on their damage to the environment or due to social issues. 
  3. Positive Screening: The active inclusion of companies based on their environmental or social benefit.
  4. Community and social investing: Allocation to capital to companies whos mission is to produce social returns.
  5. Best in class: Invest in companies that show bet is class capabilities in their industry in relation to environmental and social issues.
  6. Financial weighted best in class: Actively inclusion of companies who outperform their peers on financially material environmental and social criteria.
  7. Sustainability themes: Investing in companies who have a “green” product.
  8. Constructive engagement: Invest and encurage dialouge with companies to include more ESG issues.
  9. Shareholder activism: Use shareholder rights to pressure companies to change environmental, social and governance issues.
  10. Intergrated analysis: Actively include ESG criteria within conventional fund management.
  11. Norms-based Screening: Avidong companies who do not subscribe to international standards and norms such as Global compact and OECD guidelines for governance etc.