Analysis: A perfect storm for the US business ethics community

September 2002

by Jon Entine

In the light of recent revelations, a great opportunity is being missed by corporate social and ethical campaigners, writes Jon Entine

This should be the best of times for the corporate social responsibility movement. For more than a decade its proponents have been inveighing against the evils of corporate excess, waiting for a popular backlash that would finally legitimise their crusade for ethical business behaviour and open the floodgates of investment dollars to more socially attuned companies.

And then suddenly, in the United States, the moment comes! An unprecedented series of business scandals threatens to overwhelm the most corporate administration in history, whose senior members, including the President and Vice-President, are trying to distance themselves from their own past scandals. As investors clamour for the kind of ethical leadership and corporate governance that have become buzzwords in triple bottom line land, this should be the perfect storm for the corporate social responsibility community.

Yet, in the United States at least, social and ethical investment advocates have got almost no traction from these scandals and have been almost invisible as the political process for reform has unfolded. Why?

It’s now abundantly clear that the movement does not engage the day’s most critical issue: what makes a corporation responsible and responsive to its broad-range of stakeholders including customers, employees, vendors, and investors. The central tenets of so-called ethical investing – an opposition to arms manufacturers, tobacco production, animal testing and bio-engineering, as well as other ideologically-loaded notions of social propriety – have nothing to do with corporate responsibility or ethics. There is no understanding of the importance of accounting standards, which have devastated the lives of so many American workers (yes, feeding one’s family is a key dimension of social responsibility). There is only the dimmest appreciation of corporate governance issues.

How out of touch are ethical investors? Just the other day, Julie Gorte, the director of social research at Washington-based The Calvert Group, which oversees the largest stable of SRI funds in the US, was asked why Calvert has never screened for accounting or governance issues. “This is a meteor,” she said, clearly bewildered by the scandals. “We’re still measuring the depth of the crater.”

Wake up call to Calvert, KLD (Kinder, Lyndenberg, Domini), Citizens, and other firms that purport to research and rate the ethics of major corporations: meteors have been hitting regularly for fifteen years. Did the SRI community miss the huge hole left by the savings and loan debacle of the late 1980s that devastated the lives of hundreds of thousands of employees and investors? Or the decades-long trend of corporations shifting assets to offshore accounts to avoid taxes? What about the insider trading scandals that sent CEOs to jail and shook Wall Street and led to the sentencing guideline reforms that are the major basis for sending miscreant executives to jail?

None of those past scandals seemed to matter during the casino stock market, least of all to the SRI community, which rode high tech and telecom stocks to bubble gains. For years, CSR screens had focused on social issues, what might be called “one level” screens. For example, Levi Strauss, the jeans and clothing company, basked in a tremendous amount of good press in the 1980s and 90s because of its ethical pronouncements on a variety of trendy issues. Yet it made increasingly shoddy products, treated piece workers poorly, and eventually saw its CEO mismanage the company into the ground. It was ultimately forced to retrench, shutter its American facilities and flee to low-wage havens. Thousands of Levi Strauss employees no longer have jobs and the company still has not recovered. In essence, Levi Strauss’ high-minded ethical stands were worthless in real terms – which demonstrates the superficiality of many SRI measures.

CSR obsessed on social notions over screens for corporate governance and basic financial and operating performance standards. As a result, as the bubble burst, the SRI community is not in position to reap the political benefits and the increased clout to force positive social change from the current crisis.

If you want to play a role in corporate reform, you have to do more than posture about corporate ethics. For the business ethics community, that will necessitate a sharp turn away from superficial one level social issues to a focus on the second level of social responsibility: the real impact of corporations on the lives and fortunes of its stakeholders, with transparency and governance practices as the centerpiece. That means dumping hard screens for arms manufacturing, tobacco, animal testing, bioengineering and the like.

As long as the ethical investing movement is in the hands of social ideologues rather than reformers, don’t expect this radical rethinking to happen any time soon. Consider the recent article in Ethical Corporation by Deborah Doane of the New Economics Foundation bewailing the attempt by some SRI advocates to judge companies as “best of the baddies” as she mockingly writes – in other words, to go beyond social scorecards to actually judge the impact of corporate behaviour. What a radical idea: a screen that actually encourages reform! But by Doane’s measure, even holding one’s nose to examine the business practices of the world’s major corporations (“Do we need oil?” she writes. “Unfortunately yes.”) threatens to “undermin[e] [SRI’s] own principles.”

Maybe the SRI world’s increasingly reactionary principles need to be undermined. Its advocates appear ideologically resistant to the reality that a tiny improvement in the environmental and social practices of corporate behemoths like British Petroleum or Unilever would improve the lot of far more stakeholders than the creation of hundreds of new firms that meet vague standards of ideological propriety. Do we really want to support “principles” that demonise companies that are critical for maintaining and improving the infrastructure of the world economy?

By implicitly assuming that the intentions of a business can be judged in isolation from the economic impact of a company, social and ethical investing may promote corporate behaviour that is neither progressive nor ethical, and may result in adverse consequences to stakeholders. Despite problematic methodology and practice, social investing could be an important tool for social change. After all, it has proved a durable brand marketing concept, attracting attention far beyond its tiny financial footprint. With higher quality research and refined criteria, and with the introduction of corporate disclosure and accountability standards, ethical investing could contribute to its stated goal of identifying more ethical companies and encouraging responsive and responsible corporate behaviour.

Jon Entine is scholar-in-residence at Miami University (Ohio) and adjunct fellow with the American Enterprise Institute in Washington, DC. Jon is also an award-winning freelance journalist.

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