Hewlett Packard’s Board of Directors demonstrated on Friday (August 6, 2010) that if you violate HP’s Standards of Business Conduct (SBC) you can lose your job, even if you are the chairman and CEO.

Mark Hurd, who had served as HP’s CEO for the last five years (and chairman for four years), resigned at the Board’s request after an investigation concluded he had engaged in inappropriate behavior that violated HP’s SBC. The investigation initially began in response to a sexual harassment complaint by a former marketing contractor who retained Gloria Allred (known for taking on high-profile cases) to represent her. While HP did not find that the facts supported the complaint, they did reveal behavior the Board would not tolerate, paying a big severance package  to end the relationship.

Hurd’s severance agreement is outlined in an SEC filing granting $12.2 million, COBRA benefits, and stock options for a total package estimated to be somewhere between $40 and $50 million.

In a letter to employees August 6, 2010  interim CEO Cathie Lesjak outlined where Hurd had violated the SBC and the reasons for his departure. Lesjak, who also continues as CFO, wrote that Hurd “failed to disclose a close personal relationship he had with the contractor that constituted a conflict of interest, failed to maintain accurate expense reports, and misused company assets.” She indicated that each was a violation of the SBC and “together they demonstrated a profound lack of judgment that significantly undermined Mark’s credibility and his ability to effectively lead HP.”

The letter reminded employees that everyone is expected to adhere strictly to the SBC in all business dealings and relationship and said senior executives should set the highest standards for professional and personal conduct.

Hurd, who has been credited with driving HP’s turnaround, said in HP’s press release that “there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at HP….”  He added that his resignation “is the only decision the board and I could make at this time.”

However, Hurd apparently fought resigning initially offering instead to pay HP back for the disputed funds. The board sent a critical message to HP stakeholders that delivering impressive financial and performance goals, as Hurd had done, wasn’t going to compensate for unethical conduct.

Hurd did get a free pass of sorts in 2006 when HP’s board violated HP’s SBC and “Global Master Privacy Policy” by approving pretexting to try and stop board leaks. The ensuing scandal involved federal and state investigations, a $14 million fine, loss of trust and reputation, and months of negative publicity. Hurd apologized but hid behind his performance role, saying he was focused on the turnaround and expected that others would ensure the compliance issues were handled appropriately.

Just as leaders don’t get a free pass when they miss performance goals, there ultimately isn’t a free pass when ethical standards aren’t met. Trust is essential in sustaining business performance. Leadership without ethical behavior is a failure of leadership.

So when Hurd wrote some time ago in the SBC’s preface that “We want to be a company known for its ethical leadership….” the problem wasn’t that the standard was too high to meet. The issue is Hurd wasn’t engaged in making real what that meant for him.

His message in the preface continued: “Let us commit together, as individuals and as a company, to build trust in everything we do by living our values and conducting business consistent with the high ethical standards embodied within our SBC.”

Tone at the top only counts when leaders use words that they believe in enough to live.

Gael O’Brien is a Business Ethics Magazine columnist. Gael is a thought leader on building leadership, trust, and reputation and writes The Week in Ethics, a weekly column where this article was first published.

We've been following allegations of enrollment abuses and bogus marketing schemes at for-profit schools for some time now, and a report released by the Government Accountability Office this week further highlights some of the questionable recruiting tactics of several for-profit colleges across the country.

Undercover investigators posing as prospective students found that four of 15 for-profit colleges "were encouraged by college personnel to falsify their financial aid forms to qualify for federal aid."

From the report:

A financial aid officer at a privately owned college in Texas told our undercover applicant not to report $250,000 in savings, stating that it was not the government's business how much money the undercover applicant had in a bank account.

...An admissions representative at another college told our undercover applicant that changing the FAFSA to indicate that he supported three dependents instead of being a single-person household might drop his income enough to qualify for a Pell Grant.

All 15 schools made "deceptive or otherwise questionable statements" to the undercover applicants. The schools aren't identified, but they're located in six states and Washington, D.C., and were among those "that the Department of Education reported received 89 percent or more of their revenue from federal student aid." (Read the full report in our document viewer.)

The deceptive statements ranged from students2019 potential salaries after graduation to the school2019s accreditation to the duration or costs of the program, according to the report. Two of the GAO's fictitious prospective students each received around 180 phone calls from for-profit recruiters within a month of filling out forms on websites that purport to match prospective students with colleges offering relevant programs. Our ProPublica Reporting Network volunteers reported having similar experiences on such websites.

An earlier GAO report [PDF] found that students at for-profit colleges were more likely to default on their federal student loans than students at public or private non-profit schools. These defaults leave the government and taxpayers to take care of the costs and 201Cassume nearly all the risk,201D the latest report explained.

It seems the hedge funds that have been betting against the for-profit higher education industry have just been given another point bolstering their criticism of the industry2019s ills. Barron's pointed out yesterday that since news of the report first leaked, for-profit college shares have taken a tumble.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

Criticisms of business seeing value creation only in terms of achieving short-term, unsustainable results and how business schools prepare future leaders predate the financial meltdown. Warren Bennis and Jim O’Toole talked about the need to reform business education several years ago. The crisis simply made it more obvious that business as usual isn’t working, either in the classroom or boardroom.

The piece of management education reform that involves the role of ethics has added importance not only because trust in business has fallen so far, but also because it is tied to how leaders behave and the impact that has on a company culture as well as society.

When students return to campus in coming weeks, dialogue and debate on the purpose of management education and how ethics is handled will continue, impacted by initiatives that seek to help reinforce high ethical standards. Some examples are the MBA Oath project, and programs giving students experience practicing values and integrating ethics into other organizational risk considerations.

While well-regarded companies that have recently suffered reputation meltdown are real-world examples for the classroom, even more important is learning about other models for doing business, like Pepsico, a company that is intentionally setting high ethical standards for itself while still making significant profit.

For many companies ethics has a walk-on part—not much focus beyond the compliance function and website rhetoric about how a company describes its values. If integrating ethical considerations into strategic business decisions was the norm, we wouldn’t keep enduring debilitating crises where consequences of actions apparently aren’t clear to leaders until a regulator shows up or media headlines send stock prices lower.

Performance with Purpose

The reality is that crises at Toyota, Goldman Sachs and BP – to name a few -- involved ethical failures as potent as the business miscalculations and addiction to gaining ever-higher quarterly profits, where choices and shortcuts harmed stakeholders. Just as the ethical debacle of Enron was a wake up call met by additional regulation and beefed up ethics focus in companies, the corporate crises so far this year offer another kind of wake up call that companies and management education would do well to heed. How many more examples do we need of value creation only being about profit at the expense of society?

Indra Nooyi, Pepsico’s chairman and CEO, told students at Yale’s School of Management in May 2010 that “performance with purpose is how we run the company.”  She explained that “Performance with purpose is about how you can intimately link what a company can do with what the needs of society are and together deliver great performance.”

“Pepsico wants to be the model of the good company,’ she continued, “an example of how business should be done in the 21^st century.” This sets the bar very high at Pepsico. The business model requires integrating ethical considerations into the mix of business considerations, aligning decisions with purpose, and acting in a manner that inspires employees to do their best work. The result, if made a reality, establishes trust with stakeholders.

It is the inconsistencies that often trip a company up. Simon Webley, Research Director at the Institute of Business Ethics in London, makes a distinction between doing ethical things (like philanthropy and environmental activities) and doing things ethically. Doing the former is no substitute for doing things ethically, he says, mentioning a company in the U.K. known for the wonderful things it does for the community, but yet it doesn’t pay its suppliers on time. “It is easier to do CSR (corporate social reposnibility) than to integrate high ethical standards throughout the organization.”

Adhering to high ethical standards is at the heart of the Oath Project started at Harvard Business School last year as a grassroots movement of students and faculty. The voluntary pledge to “create value responsibly and ethically” seeks to create a community of MBAs (signers are from more than 250 schools) who share a high standard for ethical and professional behavior. Nitin Nohria, who became Dean of Harvard Business School this month, has been a strong supporter of the project.

Role of Values

Will signing a piece of paper change anything? It depends. We should consider how change occurs; it starts with a personal act of intention, followed by action, gaining reality through repetition and reinforcement until it becomes how things are done by an individual, and a collection of individuals. It is too soon to know the success of the movement or its influence on the companies graduates join. However, it is a start. The Oath Project is supported by many organizations, including Aspen Institute’s Business and Society Program (BSP).

Part of expressing high ethical standards is the ability to speak up in support of those values. Over 100 business schools globally are participating in an innovative, cross-disciplinary business curriculum called Giving Voice to Values (GVV) created by Mary Gentile. The program raises different kinds of questions than the case study approach: “Rather than asking ‘what is the right thing to do?’ she says, “we ask ‘how can I get the ‘right thing’ done?’” In GVV, students go on to answer other questions raised including: “What do I say to whom, what will they say back, and then what do I say? What data do I need? What allies do I need, etc.”

In GVV, Gentile says, “we ask students to create and practice literal scripts and action plans so that the program goes beyond awareness building and analysis to action.” The relatively new program was incubated at the Aspen’s BSP and also sponsored by Yale School of Management before moving to Babson College last year.

To help students practice integrating ethics into the decision-making mix, Loyola Marymount University (LMU) has developed an invitational intercollegiate business ethics case competition which attracts international participation. It is also sponsored by the Ethics and Compliance Officer Association, a professional group for corporate compliance officers, whose members serve as judges. MBA and undergraduate teams make presentations showing their understanding of the legal, ethical and financial dimensions of problems.

“Every decision you make in business generally occurs when you are under pressure, without all the information or time you’d like, and in the midst of competing factors – usually financial, legal or ethical issues,” says Thomas White, professor and director of the Center for Ethics and Business, who created the competition. “There needs to be more emphasis on ethics education in MBA programs (however it is done) because individuals need more technical ability in recognizing and resolving ethical issues, which are as sophisticated and complex as any financial problem, and getting more so.”

The success of business education reform has many champions, and is coming up again at a time when there is crisis fatigue as well as examples of successful companies with a value proposition that puts a priority on social good. Will current business leaders support training new leaders in skills and competencies that support new models of business or will we need to endure more business as usual?

Gael O’Brien is a Business Ethics Magazine columnist. Gael is a thought leader on building leadership, trust, and reputation and writes The Week in Ethics, a weekly column at http://theweekinethics.wordpr

It has been fascinating to watch over the last decade as more investors around the world actively embrace the importance of companies acting responsibly on environmental, social and governance (ESG) issues.  And equally, if not more important, we have seen companies globally step up and confirm the importance of being a responsible corporate citizen and its central importance for protecting and building shareholder value.

Walden Asset Management recently conducted research on how companies see their roles in this evolution. The wide ranging quotes compiled below all connect to the premise that being a responsible company is good for the bottom line.  What’s significant about the quotes is that they all come from the companies themselves, drawn from several dozen corporate social responsibility reports (CSR) including a wide range of industries.

Please understand that including a quote from a company does not mean that I or Walden Asset Management automatically think this company is a “living model” for good CSR reporting or performance.  However, these quotes do illustrate the expanding belief that CSR has become vitally important for a company’s business, and that transparent reporting is, as one CEO said, one of “the prices of doing business today.”

Special thanks go to Carly Greenberg, a Summer Associate at Walden, who painstakingly reviewed dozens of CSR reports to gather this information.

Industry: IT

Intel

From the President and CEO statement, Paul S. Otellini

“Corporate responsibility is about doing the right things right.”

“Our approach has created value not only for our stakeholders and society, but also for Intel.  We have reduced costs through energy conservation investments, minimized risks by proactively working with our communities and supply chain, and enhanced our reputation as a leading corporate citizen by building trusted relationships around the world.” (pg. 2)

HP

“As one of HP’s seven corporate objectives, global citizenship has long been integral to the success of our business. We’re responding to pressing issues, such as mitigating climate change, using energy more efficiently, enriching education and improving healthcare, by providing solutions that are transforming how people live, work and connect.” (pg. 3)

Dell

From the Letter from CEO, Michael Dell

“Dell has a full-time commitment to being a responsible corporate citizen. It’s a commitment driven by the types of goals, strategies and accountabilities that characterizes every part of our business.” (pg. 4)

From the Text of the Report

“We live in an increasingly complex world. That reality, combined with the financial downturn of the global economy and the issues facing our planet and our communities, means business as usual is not enough. To make a meaningful difference, we must inspire and innovate….

"During times like these, we must continue to build trust with customers and stakeholders by demonstrating our positive impact on society and the planet and developing meaningful measures for reporting our progress. Corporate responsibility is a critical component of Dell’s overall business. We are committed to being a responsible corporate citizen.” (pg. 6)

Xerox

From the Letter from the CEO, Ursula M. Burns, and Chairman of the Board, Anne M. Mulcahy

“Despite the toll the recession has taken, we are pleased to report that it has not caused us to waiver from our belief in the need to behave responsibly as a good corporate citizen in the communities and countries in which we operate. There are two broad reasons for that – a belief that good citizenship is the right way to behave and an equally important belief that behaving the right way is a good thing for our business.” (pg. 2)

“The more we have integrated sustainability into our business operations, the more it has become a part of our DNA. We like to think of ourselves as a leader, still pushing the boundaries of what is possible.” (pg. 2)

“We were an early leader in the sustainability movement because we thought it was the right thing to do for the environment. But we discovered something else along the way. Every one of our innovations ended up either saving us money or creating new markets and new revenue. We found, in other words, that we don’t have to choose between the environment and profit. We can do both.” (pg. 3)

“Conducting our business with integrity and transparency builds credibility and attracts investors.” (pg. 4)

“Nurturing a greener world through sustainable innovation and development saves money, creates value and helps develop new markets.” (pg. 4)

Industry: Energy

Shell:

From the CEO introduction statement, Peter Voser

“Safety, environmental and social performances are now closer to the core of our business plans and decisions.” (pg. 1)

“I believe sustainable development works best when it is thoroughly integrated in our business decisions at the very earliest opportunity…That is exactly how it must be if we are to meet the complex challenges ahead in the most effective and responsible way.” (pg. 1)

From the interview with CEO Peter Voser, interviewed by Aron Cramer

“Sustainability is central to the way we do business, our business principles and our long-term strategy, so we take a very far-reaching view, not a short-term view.  It means to me that we help to meet the growing energy needs of the world in economically, environmentally, and socially responsible ways.  You can’t have one without the other two” (pg. 7) –Peter Voser

“We wanted to embed sustainable development as deeply into the business as possible” (pg. 7) –Peter Voser

Exxon Mobil:

“It is our view that successful companies are those that see business objectives and sustainability objectives as interlinked.” (pg. 2)

“For a number of years, our business lines have been incorporating sustainability considerations in their operations and sharing the outcomes with stakeholders.” (pg. 2)

“Our disciplined approach and long-standing commitment to corporate governance have contributed to our continued success during the global recession of 2009.” (pg. 15)

“We believe that an unwavering commitment to high ethical standards and business integrity is critical to our competitive advantage and shareholder value.” (pg. 16)

Industry: Utilities

Duke Energy

From the Letter from the Chairman and CEO, Jim Rogers

“In tough economic times, when every aspect of our business is under scrutiny, some might ask whether we can afford to focus on sustainability. To that I respond: Can we afford not to?” (pg. 4)

“Sustainability – operating our business in a way that is good for people, the planet and profits – is, in my opinion, no longer optional. It is the strategic and decision-making approach we are following at Duke Energy to create long-term value.” (pg. 4)

“At Duke Energy, sustainability describes the way we work; it is a competency that leads to improved risk management, efficiency and innovation for today’s complex, resource-constrained and connected world.” (pg. 4)

Industry: Telecommunications

AT&T

“At AT&T, when we talk about 'sustainability,' we’re not just talking about the environment. We’re talking about a broad array of initiatives that will make our business and communities stronger well into the future.” (pg. 13)

Verizon

From the Message from the Chairman and CEO, Ivan Seidenberg

“Our corporate responsibility process helps us assure that our practices keep pace with the evolving needs and expecta­tions of our customers.” (pg. 7)

“We have built a sustainable model for incorporating corporate responsibility into the way we manage our business.” (pg. 7)

Industry: Food & Beverage

The Coca-Cola Company

From the Chairman and CEO Letter, Muhtar Kent

“In the midst of the global financial downturn, the economic, environmental and social implications of business are more important than ever. There’s no question that the world is undergoing a massive resetting of priorities, values and expectations.”

“The strength and sustainability of our brands are directly related to our social license to operate, which we must earn daily by keeping our promises to our customers, consumers, associates, investors, communities and partners. It is an honor, and a responsibility that we take very seriously.”

From the Text of the Report

“LIVE POSITIVELY^™ is our commitment to making a positive difference in the world. Through redesigning the way we work and live, we consider sustainability as part of everything we do. As we act with an eye toward future generations, we will focus on driving business growth and creating a more sustainable world.” (pg. 12)

Kraft

From the Message from the Chairman and CEO, Irene B. Rosenfeld

“To build and sustain brands people love and trust, one must focus—not only on today but also on tomorrow. It’s not easy…but balancing the short and long term is key to delivering sustainable, profitable growth—growth that is good for our shareholders but also good for our consumers, our employees, our business partners, the communities where we live and work, and the planet we inhabit.” (pg. 5)

Industry: Materials

Alcoa

From the Message from the Chairman and CEO, Klaus Kleinfeld

“During these tough economic times, we recommitted ourselves to integrating sustainability as a core value for Alcoa; protecting the health and well-being of our employees and our communities; conducting business with the highest code of ethics; preserving the environment and our natural resources; and earning our license to operate each and every day.”

The Dow Chemical Company

“In short, we are committed – through chemistry – to the betterment of global humanity. And it is this commitment that drives all of our strategies for growth and profitability.” (pg. 3)

From the Letter from Chairman and CEO, Andrew Liveris

““Setting the Standard for Sustainability” is our desire to have corporate citizenship inherent in everything we do as a global corporation, directly supporting our vision of being the largest, most profitable and most respected chemical company in the world.” (pg. 20)

From the Statement from CEO presenting overall vision, Andrew Liveris

“We see sustainable development as an opportunity to tap new markets that create value for our customers, consumers and the planet.” (pg. 23)

” By integrating sustainability elements into every facet of our business – from our product offerings to our energy use – we are creating a better future for our Company and the world.” (pg. 23)

Industry: Consumer Services and Products

Procter & Gamble

From the President and CEO Statement, Bob McDonald

“In fact, our growth strategy for the coming decade is linked tightly to our Purpose. We will grow P&G’s business by touching and improving more consumers’ lives in more parts of the world … more completely.

"To execute this strategy and fulfill the Company’s Purpose, we must grow responsibly and sustainably. As a result, Sustainability is at the heart of P&G’s business model. Keeping Sustainability at the core of our business fuels innovation and strengthens our results.” (pg. 4)

“We’re a company that focuses on growth now and for generations to come, and therefore Sustainability should and will be a focus area for me.” (pg. 4)

Nike

From the Letter from the CEO, Mark Parker

“We saw that doing the right thing was good for business today – and would be an engine for our growth in the near future. With each new discovery and partnership, we willingly gave up old ideas to shift our thinking toward a better, smarter, faster and ultimately more sustainable future – financially, environmentally and socially.” (pg. 4)

“All companies face a direct impact from decreasing natural resources, rising populations and disruption from climate change. And what may be a subtle effect now will only become more intense over the next five to ten years. Never has business had a more crucial call to innovate — not just for the health and growth opportunities for our companies, but for the good of the world.” (pg. 5)

“We see sustainability, both social and environmental, as a powerful path to innovation, and crucial to our growth strategies.” (pg. 5)

“And for all the athletic and cultural and financial successes of the company, believe our work in sustainable business and innovation has equal potential to shape our legacy.” (pg. 5)

“There is now only one path and it leads to greater sustainability, equity, growth and prosperity.” (pg. 5)

Wal-Mart

From the Letter from CEO, Mike Duke

“I meant we would make sustainability a priority throughout our entire company and we would act with a sense of urgency.” (pg. 3)

“It shows that even during the economic crisis, our company does not slow down on sustainability or even just stay the course; we redouble and strengthen our efforts.” (pg. 3)

“When we look at the world today and the trends that will shape the world in the future, we see that sustainability is no doubt one of Wal-Mart’s greatest opportunities to make a difference for our business, our communities, our customers and the planet.”  (pg. 5)

Kimberly-Clark Corporation

From  the “Choices for a Sustainable Future” section

“Put simply, sustainability is critical to our future success. It’s an enormous challenge. But we choose to do it, and to work with those who support positive change, because it’s the right thing to do. That’s one choice that will never change.” (pg. 3)

From the Message from the Chairman and CEO, Tom Falk

“Sustainable business practices are woven into the fabric of our Global Business Plan. We challenge ourselves every day to look for ways to sustain the resources we enjoy today for generations to come. That’s why Kimberly-Clark is focused on setting and achieving sustainability performance metrics for our brands and facilities. And through our resource stewardship, we are demonstrating to our stakeholders that sustainability isn’t just the right thing to do, it’s also good business.” (pg. 4)

Industry: Automotives

Ford

The letter from Executive Chairman and Chairman of the Board, William Clay Ford Jr.

“We continue to aggressively search for new ways, both big and small, to improve our economic and environmental sustainability. Often the actions we take accomplish both goals.”

“Creating a strong business and building a better world are not conflicting goals – they are both essential ingredients for long-term success.”

From the Letter from President and CEO, Alan Mulally

“We also know that the successful companies of the 21st century will be those that understand global sustainability issues and offer viable solutions. Through a decade of work and a disciplined reinvention of our Company, we have built sustainability into our business model.”

Industry: Pharmaceuticals

Pfizer

From the Letter from the Chairman of the Board and CEO, Jeff Kindler

“In times like these, some companies might choose to focus simply on running their businesses and think of their corporate responsibility work as a luxury that can wait for better times. Not Pfizer. We believe successful companies can’t do one without the other.” (pg. 5)

Industry: Capitol Goods

Caterpillar

From the CEO and Chairman’s Message, Jim Owens

“We’re making sustainable development part of how we do business. In 2007, in the midst of our growth period, we set bold aspirational goals for 2020, and abandoning those goals, in the face of dramatic economic challenges, was simply not an option. This isn’t a passing fad that we only care about during prosperous times. It’s a serious commitment. And it’s a real business opportunity, now and in the future.”  (pg. 2)

“Good things happen when we integrate sustainability into our products, services and solutions. We improve our competitiveness and create and capture customer value. We save money, reduce our environmental impact and improve employee satisfaction. And by partnering with others, we can help ensure sound policies that promote sustainable development and innovation.” (pg. 2)

“In the next decade, the most successful companies will be those that integrate sustainability into their core businesses. That’s what we’re doing at Caterpillar, and we are also helping our customers do the same.” (pg. 3)

“Some of Caterpillar’s fastest-growing businesses are those focused on the sustainability of materials and resources.” (pg. 3)

“In fact, the economic downturn has helped secure sustainability’s place at the core of our strategy. It’s not something extra that we do during good times. It’s something that creates and captures value for the company, our customers, investors, employees, suppliers – and really, the world.”  (pg. 4)

Industry: Industrials

General Electric Company

From the Letter from the Chairman of the Board and CEO, Jeff Immelt

“Successful companies can only create solutions to some of the world’s toughest problems by working collaboratively. Business must engage — with communities, governments, customers and each other — because the status quo is not an option. It is not only possible for a global business leader to be a good citizen, but a requirement.” (pg. 4)

“Based on a commitment to integrity, a commitment to performance and a commitment to learn and grow stronger, GE is creating a better company coming out of this reset — a renewed focus that is better for GE, and also better for our world.” (pg. 4)

Trade Associations and Consultants

BSR Report 2009: Innovating for Sustainability

From the Letter from the President and CEO, Aron Cramer

“2009 presented numerous challenges for the entire world, not least for all of us dedicated to sustainable business. At the start of the year, many observers thought companies would consider corporate responsibility to be an expendable luxury that could be cut along with other discretionary budgets. 'Sustainability,' they predicted, would be redefined as 'basic economic survival.'  Fortunately, these predictions did not play out. Rather, 2009 showed us that sustainability can—as we had argued—help pull business out of the recession.” (pg. 1)

“Despite the difficulties presented by the economic conditions, it is clear that sustainability remains as important to business—and to the world—as ever before.” (pg. 1)

From the Text of the Report

“What’s more, revived economic growth is again exacerbating existing challenges related to climate, water, and biodiversity.  Long after the recession passes into history, these trends will be shaping economic conditions. They are the reference points that business should consider in shaping their strategies.

More and more companies recognize this. As a result, they are making sustainability not just a program, but, in fact, the defining feature of success in a fast-changing world.” (pg. 5-6)

“While calmer economic conditions have returned, the road to tomorrow’s prosperity is not the same as what came before. The businesses that assert leadership, take a comprehensive approach, use sustainability as a driver for innovation, and champion sustainable consumption will not only become the sustainability champions, but also the most successful companies in the years ahead.” (pg. 11)

Accenture Report: “A New Era of Sustainability”

This report summarizes findings from a survey of CEO’s globally

From the Forward by Georg Kell, Executive Director UN Global Compact, and  Bruno Berthon, Managing Director Accenture Sustainability Services

“It is a decade that, CEOs believe, could usher in a new era where sustainability issues are fully integrated into all elements of business and market forces are truly aligned with sustainability outcomes.” (pg. 2)

“Today’s CEOs are more convinced than ever of the need to embed environmental, social and corporate governance issues within core business. But they are also convinced that good performance on sustainability amounts to good business overall: The imperative to act has shifted from a moral to a business case.” (pg. 2)

From the Text of the Report

“93 percent of CEOs see sustainability as important to their company’s future success.” (pg. 10)

“Demonstrating a visible and authentic commitment to sustainability is especially important to CEOs because it is part of an urgent need to regain and build trust from the public and other key stakeholders, such as consumers and governments—trust that was shaken by the recent global financial crisis. Strengthening brand, trust and reputation is the strongest motivator for taking action on sustainability issues.” (pg. 10)

“Our survey found widespread agreement among CEOs about what the next era of sustainability will look like: It is one where sustainability is not only a separate strategic initiative, but something fully integrated into the strategy and operations of a company.” (pg. 11)

“96% of CEOs believe that sustainability issues should be fully integrated into the strategy and operations of a company (up from 72% in 2007).” (pg. 14)

“80 percent of CEOs believe that the economic downturn has raised the importance of sustainability as an issue for top management.” (pg. 16)

“74 percent say that the downturn has led their company to align sustainability more closely with core business.” (pg. 16)

“Also bolstering the continued commitment to sustainability during the economic downturn has been demand for sustainable products and services.” (pg. 18)

From “Industry perspectives: Belief in the importance of sustainability varies considerably by industry”

“Fully 100 percent of automotive CEOs identify sustainability issues as important or very important to their future success. This finding reflects how environmental concerns present both a challenge to the industry and an opportunity to serve a new market with low carbon alternatives such as e-vehicles.” (pg. 19)

“CEOs from the energy and utilities sectors also see sustainability issues as critical to their future success.” (pg. 19)

“Wolfgang J. Ruttenstorfer, CEO and Chairman of European oil and gas company OMV, said, ‘I regard these issues as bringing competitive advantage in the long term; a transparent approach clearly oriented toward values, human rights and environmental objectives is the only right approach that will be  appreciated in the long term.’” (pg. 19)

“Support is especially high in the banking industry, for example: 68 percent of CEOs note that sustainability is “very important” to their success…a commitment to environmental and social issues may be a prominent part of restoring brand value as the financial industry struggles to regain the trust of consumers.” (pg. 19)

“CEOs in the communications and electronics & high-tech sectors are the least likely to identify sustainability issues as critical to their future success— just 22 percent and 31 percent of those industries’ CEOs, respectively, cite sustainability as very important to their future success…leading companies in these sectors are beginning to think beyond the direct physical impacts of their business on sustainability issues, and are looking to shape a vision of the role that they can play in society by driving sustainable development…providing companies around the world with new technologies and ways of working that will help them achieve their own environmental objectives.” (pg. 19)

KPMG

This report published every 3 years; following statements are from the 2008 report.

From the Forward

Message from Global Head of Citizenship and Diversity, KPMG International, Lord Michael Hastings of Scarisbrick CBE

“As you will see in the results, there has been an important shift in this direction with CSR reporting becoming the norm instead of the exception within the world’s largest companies. Three years ago only 50 percent of companies surveyed included CSR in their reporting, in this survey the number jumped to 80 percent. More companies report the information as it relates to specific objectives and more companies include this information in their annual reports.” (pg. 5)

Message from Global Head, KPMG Sustainability Services Partner, KPMG in the Netherlands, Wim Bartels

“But would these reports pass the “greenwash” test? For the first time in the 15 years we have been doing this survey, we think they just might. Nearly all of the Global 250 companies that report also publish a corporate responsibility strategy with defined objectives.” (pg. 5)

From Text of the Report

“One of the most significant findings of the 2008 survey is that corporate responsibility reporting has gone mainstream - nearly 80 percent of the largest 250 companies worldwide issued reports, up from about 50 percent in 2005.

National trends - National level companies trail the G250 with only 45 percent of the total sample issuing reports, but numbers vary from less than 20 percent in Mexico to more than 90 percent in Japan.” (pg. 7)

“Now that some of the world’s largest companies have been able to quantify the business case for corporate responsibility and reporting, it is likely that the practice will spread through countries and sectors to the smaller players.” (pg. 7)

“Reporting is necessity if companies are to know and understand their social and environmental impacts, and how to minimize the dangers and maximize the opportunities associated with new and emerging challenges.” (pg. 10)

““In these challenging times it is now perhaps more crucial than ever for companies to show their commitment to transparency through sustainability reporting. Effective public disclosure of economic, environmental, and social performance can enable a company to rise above the rest and take advantage of the opportunity to position itself as a forward-thinking leader among an increasingly sophisticated constituency of stakeholders. No longer is publishing a sustainability report merely a matter of mitigating risk to reputation and costs. More than ever, employees, investors, and consumers are looking to the companies from which they buy, invest in, and work for to join them in addressing the critical sustainability issues of the day in innovative ways.” (pg. 17)--Judy Henderson Board of Directors, Global Reporting Initiative

Last December, a $500 donation could buy a ticket to a fundraiser that, the invitation said, would feature "Bojangles' Fried Chicken, Krispy Kreme Doughnuts, And Mel Watt, of course!" Two days later, Watt, a Democratic congressman from North Carolina, withdrew a provision from the House's financial reform bill that would have regulated loans from car dealers.

This event and several others have come under scrutiny by the Office of Congressional Ethics, The New York Times reported today. The ethics office sent donors and party hosts a formal request for documents relating to a number of fundraisers for members of Congress in the run-up to the House vote on financial reform last December.

The Times singled out certain events that raised red flags, and the Sunlight Foundation's Party Time site, which collects fundraising invites, has the details for Watt's event and several others in its database.

There's New York Democrat Joseph Crowley's "Holiday Cocktail Reception," which he ducked into while debates were continuing on the Hill. "After collecting thousands of dollars in checks, Mr. Crowley returned to the floor of the House just in time to vote against a series of amendments that would have imposed tougher restrictions on Wall Street," the Times reported.

Three days before the vote, Frank Lucas, R-Okla., held a "'Last Call' Breakfast," and John Campbell, R-Calif., hosted a "California Wine Tasting." Two days before the vote, there was a "Financial Services Luncheon" for Georgia Republican Tom Price. The same day, North Dakota Democrat Earl Pomeroy had a "Fundraising Breakfast" at the offices of Davis & Harman, which billed over $2 million in lobbying fees last year to companies and organizations that could be affected by financial reform, according to lobbyist disclosures.

Watt and other congressmen defended their fundraising, saying contributions did not sway their votes.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

The allegation that BP put profits ahead of the environment shouldn’t be a surprise. In fact, BP’s failure to stop the worst oil spill in U.S. history is indicative of a much larger problem with companies that have embraced one of the central ideas in management today: stakeholder theory. The idea that companies can meet the needs of “stakeholders” leaves them open to moral abuse without normative principles at its core.

It was R. Edward Freeman’s 1980 book Strategic Management: A Stakeholder Approach that developed stakeholder theory into management practice arguing for a widening of managerial focus away from the exclusivity of stockholders to include any individual or group having an interest or is affected by organizational activity. In its broadest terms, stakeholder theory helps managers create organizational mechanisms and procedures for dealing with social issues in a proactive, rather than a reactive, way of achieving economic gains.

Stakeholder theory includes environmental stewardship under its rubric, since the environment can be affected by corporate activity. And many companies pay homage to the environment as stakeholder in their glossy reports. BP does likewise. In their 2009 sustainability report they state, “At BP we define sustainability as the capacity to endure as a group: by renewing assets; creating and delivering better products and services that meet the evolving needs of society; attracting successive generations of employees; contributing to a sustainable environment; and retaining the trust and support of our customers, shareholders and the communities in which we operate.”

Stakeholder theory is massively popular but without strong normative principles as its foundation, it can be usurped by short-sighted self-interested initiatives leaving ethical considerations excluded from managerial analysis. The oil spill in the Gulf of Mexico by British Petroleum is one such example.

Preliminary results into the cause of the Gulf spill, according to BP, reveal significant failures of equipment designed to prevent a blowout. To what extent and when BP knew of this equipment failure is unclear, but eyewitness evidence from rig workers claim that BP knew weeks before the blowout that equipment was malfunctioning. Despite BP being unaware of the technological malfunction, according to stakeholder theory, they would have still had to weigh potential equipment failure and environmental harm against cost and profit. From a strategic management approach, BP would have to consider the natural environment as a stakeholder and take steps to incorporate environmental components into their goals, strategies, and structures as a way of achieving an overall company approach.

But what is lacking is the ethical content within BP’s strategic environmental management system. Stakeholder theory would correctly identify the environment as a stakeholder but it provides no guidance regarding the ethics of how or what we ought to do in order to protect the environment. From a moral point of view, BP ought to have stopped drilling and fixed the blowout preventer before continuing even if it meant losing money. After all, morality tells us the “right thing to do” often requires us to forgo our own self-interest for the good of others. However, from a stakeholder perspective, nothing requires BP to stop drilling so long as they consider the interests of all stakeholders relative to their own interests. A moral point of view would require a manager to look at other sources for inspiration, such as philosophical arguments, to determine if polluting the ocean with oil is ethically legitimate.

Stakeholder theory has many advantages; it allows managers great flexibility to “balance” the “interests” of various groups, individuals, or even the natural environment for mutual gain; it also provides managers clear strategies for dealing proactively with potential negative issues. However, it is still fraught with problems. First, balancing stakeholders is difficult. Determining who is a stakeholder with legitimate interests, given the countless groups and individuals monitoring a firm’s activity, requires a level of analysis that most managers don’t have time for.

Second, assessing stakeholders is often based on descriptive, not normative, assumptions. Who is a stakeholder and who ought to be a stakeholder need not be the same; self-interested biases often blind managers to who they ought to include in their analysis but don’t.

Third, individuals are often members of more than one stakeholder group and it is unclear how this is to be included into the calculation.

Fourth, “balanced” is an especially vague term, falling outside of an objective decision-making methodology. Consider BP, once again. The investigation into the Deepwater Horizon drill rig explosion is accusing BP executives of putting drilling costs ahead of well safety in order to save time and money. Executives agreed to give more weight to cost saving and future profits than environmental considerations, the wholesale loss of the seafood industry, and decades of decimated oceans for future generations. But we shouldn’t be surprised. Given the financial pressures on employees and executives, it is difficult to assume that they will make “balanced”, let alone ethical, decisions under stakeholder theory. The justification of one stakeholder over another usually favours the shareholder, thus creating an unrealistic attempt to “balance” with any success.

But we shouldn’t be pessimistic. Stakeholder theory is not inimical to ethics; establishing an ethical culture within organizations with strong ethical leadership must be at the center of any stakeholder assessment. Merck’s helping cure river blindness and its more recent voluntary withdrawal of Vioxx; Johnson & Johnson’s removal of Tylenol capsules after some were tampered with cyanide; Interface’s environmental sustainability; Home Depot’s work with the Forestry Stewardship Council; and Nike’s commitment to improving labor standards overseas, are just a few examples of how normative standards can play a role in dealing with stakeholders and the ethical issues they present.

Perhaps the greatest advantage of stakeholder theory, once normative principles are incorporated into organizational decision-making, is that it allows managers to give an unbalanced or biased weighting of issues in order to preserve ethical integrity. That is, it gives managers permission to put other stakeholder interests ahead of shareholders as a way of making the ethical choice for long-term, not short-term, gain. BP should have heeded this advice. Putting the environment ahead of well-costs could have saved BP billions and potentially the company itself.

Stakeholder theory can help managers solving ethical problems, such as the environment, and gives managers a practical framework for assessing and balancing interests so long as normative principles are the foundation upon which decisions are made. If only BP had taken this advice to heart.

Dr. David Ohreen is an Assistant Professor at the Bissett School of Business, Mount Royal University, Calgary, Alberta.

Photo: Copyright BP.

Poorly managed corporate risk all too often becomes risk that stakeholders unwittingly end up assuming. The consequences can be dire: Think deaths and accidents from unintended acceleration in now-recalled Toyota vehicles, the shocking demise of Lehman Bros. that fueled the global economic meltdown, or the deaths of oil platform workers in the explosion that started BP’s environmental catastrophe in the Gulf of Mexico.

Scandal affecting public figures also continually demonstrates the high costs of poorly managed risk. Estimates are, for example, that Tiger Woods lost between $23 to $30 million in endorsement deals last year, even though according to Forbes, he still topped other sports icons’ endorsements.  Finance professors at University of California at Davis estimated that shareholders of companies sponsoring Woods lost between $5 billion to $12 billion  in market value from November 17, 2009, when the scandals around his private life broke, to December 17, 2009.

Especially troubling here is that no matter how many examples establish irrevocably the very high human and financial consequences of reputation damage, and no matter how often leaders talk about the importance of having or regaining trust and reputation, the examples keep happening in different companies, with different leaders, with harm inflicted in different ways. It is almost a perverse corporate version of the movie “Groundhog Day” in which a calamitous day keeps repeating itself until the hero figures out what he has to do differently to find a way out.

Risk Management and Ethics

When will it be the right time for corporate leaders to do things differently? Mediator extraordinaire Kenneth Feinberg can’t be everywhere. His newest assignment is administering BP’s $20 billion oil damages fund; his intervention deemed necessary because there was little trust in BP’s handling of the claims.

A recent supplemental research report by the Ethics Resource Center observes that companies are put at risk when leaders fail to see that ethical leadership  is a vital component of effective and responsible management.

Companies that put themselves at risk and whose behavior is also considered to have contributed to the financial meltdown have been required to appear at so many hearings, they’ve worn a virtual path to Washington DC. On June 30 and July 1, 2010, Goldman Sachs and AIG face questions from the Financial Crisis Inquiry Commission on The Role of Derivatives in the Financial Crisis.  In that venue, companies are seen as the problem, not part of the solution; so the public relations hits to reputation are high.

The jury is out on what it will take to convince corporate leaders to build into their risk management strategies the capacity to ask crucial questions about ethical liability, as is done with legal liability. Such a step, hardly radical, would have the objective of putting ethical conduct on the table as a deliberate outcome; evaluating business strategies and actions to assess the potential for unintended consequences that could harm credibility, trust, reputation, and their stakeholders.

Getting on the Bandwagon

An easier way to court public favor seems to be on the sustainability bandwagon. A recently-released UN Global Compact/Accenture Survey (PDF) states, “Demonstrating a visible and authentic commitment to sustainability is especially important to CEOs because it is part of an urgent need to regain and rebuild trust from the public and key stakeholders...trust that was shaken by the recent global financial crisis.” Of the 766 global CEOs surveyed, 72 percent say “strengthening brand, trust and reputation is the strongest motivator for taking action on sustainability issues.”

One of the disconnects pointed out in the survey is that CEOs often assume their own company is more respected and trusted than their industry. This can fuel arrogance and lead to miscalculations. However, even having more trust and respect than accorded others in your industry can evaporate fast as we saw when Toyota’s gold standard of quality fell like a house of cards. Another disconnect is that while 92 percent of CEOs say sustainability should be embedded throughout the organization, only 59 percent are actually doing that. So, how much weight do we give here for intentions?

While 54 percent of CEOs say sustainability will be fully integrated in core business in another 10 years, the qualifiers are based on a number of factors coming into play, including creating a viable market for sustainable products and services. So bets are hedged. Also problematic is the 72 percent of CEOs who say brand, trust and reputation (essentially intangibles) are their biggest motivators for sustainability; standard drivers for business decisions like revenue growth, cost reduction, personal motivation and customer demand are motivators for less than half the CEOs.

This begs the question: Will CEO commitment for sustainability have the enduring motivation to do the hard work of building ethical and responsible corporate policies and practices? Or is it a public relations placeholder until something else comes along?  Commitment to making sustainability real would be a big step forward in ethical leadership. So too would consciously looking at potential ethical liabilities, before taking a course of action. Continuing with business as usual and expecting different outcomes is my definition of insanity. The lessons of the past several months offer ample reason to ensure that ethical considerations are paramount in corporate risk assessment.

Gael O’Brien is a Business Ethics Magazine columnist. Gael is a thought leader on building leadership, trust, and reputation and writes The Week in Ethics, a weekly column at http://theweekinethics.wordpress.com

Countrywide Home Loans Inc. will pay $108 million to settle Federal Trade Commission charges that it collected excessive fees from borrowers who were struggling to keep their homes.

Countrywide, which was acquired by Bank of America in 2008, was the top mortgage servicer in the United States at the time of that acquisition, with a balance of more than $1.4 trillion in its servicing portfolio.

FTC Chairman Jon Liebowitz said the $108 million represents one of the largest judgments imposed in an FTC case, and the largest mortgage servicing case.  He said it will be used to reimburse overcharged homeowners whose loans were serviced by Countrywide.

The FTC’s announcement made it clear that the practices pre-dated Countrywide’s acquisition by Bank of America.   Bank of America said in a statement that it agreed to settle the charges “to avoid the expense and distraction associated with litigating the case,” which also resolves litigation by bankruptcy trustees.  The settlement contains no admission of wrongdoing and “allows us to put all of these matters behind us,” the company said.

Bank of America added that in its current home loan business “our commitment to transparency and fair and responsible customer treatment is carried through in provisions of the settlement with the FTC, particularly additional disclosure of affiliate relationships and fees for default-related services.”

“Life is hard enough for homeowners who are having trouble paying their mortgage. To have a major loan servicer like Countrywide piling on illegal and excessive fees is indefensible,” said the FTC’s Mr. Leibowitz. “We’re very pleased that homeowners will be reimbursed as a result of our settlement.”

The FTC said that when homeowners fell behind on their payments and were in default on their loans, Countrywide ordered property inspections, lawn mowing, and other services meant to protect the lender’s interest in the property.  But rather than simply hire third-party vendors to perform the services, Countrywide created subsidiaries to hire the vendors.

“The subsidiaries marked up the price of the services charged by the vendors – often by 100% or more – and Countrywide then charged the homeowners the marked-up fees” as part of a strategy to increase profits from default-related services in bad economic times, the FTC said. “As a result, even as the mortgage market collapsed and more homeowners fell into delinquency, Countrywide earned substantial profits by funneling default-related services through subsidiaries that it created solely to generate revenue.”

According to the FTC, under most mortgage contracts, homeowners must pay for necessary default-related services, but mortgage servicers may not mark up the cost to make a profit or charge homeowners for services that are not reasonable or appropriate to protect the mortgage holder’s interest in the property.

The FTC also charged that in servicing loans for borrowers trying to save their homes in Chapter 13 bankruptcy proceedings, Countrywide made false or unsupported claims to borrowers about amounts owed or the status of their loans.

Photo by TheTruthAbout, courtesy Flickr

Diebold Inc. agreed to pay $25 million to settle Securities and Exchange Commission charges that it manipulated its earnings from at least 2002 through 2007 to meet financial performance forecasts, misstating the company's reported pre-tax earnings by at least $127 million.

The SEC also filed and settled a separate “enforcement action” against former Diebold chief executive officer Walden O’Dell, who was not charged with any fraud.  In an application of the “clawback” provisions of the Sarbanes-Oxley Act of 2002, O’Dell agreed to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.

SEC civil charges were filed, and remain outstanding, against three former financial managers at the Ohio-based maker of ATMs, bank security systems and voting machines: former CFO Gregory Geswein, former Controller and later CFO Kevin Krakora, and former Director of Corporate Accounting Sandra Miller.

According to the government, Diebold’s financial management received "flash reports" — sometimes on a daily basis — comparing the company's actual earnings to analyst earnings forecasts. Diebold's financial management prepared "opportunity lists" of ways to close the gap between the company's actual financial results and analyst forecasts.  Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold's financial performance.

The list of fraudulent practices cited by the SEC included improper use of "bill and hold" accounting; recognition of revenue on a lease agreement subject to a side buy-back agreement; manipulating reserves and accruals; improperly delaying and capitalizing expenses; and writing up the value of used inventory.

"Diebold's financial executives borrowed from many different chapters of the deceptive accounting playbook to fraudulently boost the company's bottom line," said Robert Khuzami, Director of the SEC's Division of Enforcement. "When executives disregard their professional obligations to investors, both they and their companies face significant legal consequences."

Scott W. Friestad, Associate Director of the SEC's Division of Enforcement, added, "Section 304 of Sarbanes-Oxley is an important investor protection provision because it encourages senior management to proactively take steps to prevent fraudulent schemes from happening on their watch. We will continue to seek reimbursement of bonuses and other incentive compensation from CEOs and CFOs in appropriate cases."

In a statement, Diebold confirmed the SEC settlement and said it had been informed by the U.S. Attorney’s Office for the Northern District of Ohio that no criminal charges will be brought against the company.

Photo by andresmh, courtesy of Flickr.

by James Hyatt

Proxy advisory services -- the firms that handle the chore of voting shareholder proxies for institutional investors, and at the same time provide stiff appraisals of corporate conduct – may be about to start receiving their own report cards for a change.

A lot of Corporate America thinks it's about time.

The services' influence has certainly been growing in the wake of corporate scandals and ever more heated debates over ethical behavior and attention to social responsibility issues.

The proxy services play a key role because institutional holders turn to them for advice when voting billions of shares at annual meetings. The services get paid to help manage the actual proxy voting process and they also weigh in on management-vs-shareholder debates over such hot button issues as compensation, the makeup of boards of directors, and proposals on corporate disclosures and behaviors.

For almost a decade, academics, corporate officials, regulators and shareholder activists have kicked around the issues of proxy advisory service behavior and performance: do they exercise too much influence; does their advisory business influence their voting recommendations; is more formal oversight needed?

The Advisory Industry

A lot of the conversation, of course, is aimed either in a veiled way or implicitly at the 800-pound gorilla in the room, RiskMetrics Group and its influential proxy advisory unit ISS Governance – which, by some estimates, advises half the world’s common stock.  RiskMetrics had $303 million of revenues in 2009; of that, almost half or $145 million came from the ISS segment. The company last year issued proxy and vote recommendations for more than 37,000 shareholder meetings in 108 countries and voted 7.6 million ballots representing over 1.3 trillion shares.

RiskMetrics in 2009 had 3,500 clients in 53 countries, including 70 of the 100 largest investment managers, 43 of the 50 largest mutual fund companies, and 42 of the 50 largest hedge funds.

(RiskMetrics in March said it would be acquired by MSCI Inc. for about $1.55 billion in cash and stock, subject to various approvals.  MSCI calculates more than 120,000 indices daily and its Barra unit provides risk models and portfolio analytics.)

In addition to RiskMetrics, other major proxy advisors include Glass Lewis & Co.; Egan-Jones Proxy Services; Marco Consulting Group; Proxy Governance, Inc.; Governance Metrics International; and CtW Investment Group.  (RiskMetrics, Marco Consulting and Proxy Governance are also registered with the SEC as investment advisers.)

New Scrutiny

Questions about proxy advisors have been raised in the past. The Government Accountability Office, the audit arm of the U.S. Congress, took a look at proxy service providers in 2007 and an SEC Compliance Alert in mid-2008 addressed some proxy voting issues as well.

Nonetheless, questions about the performance and role of proxy advisory services continue to simmer.  SEC Chair Mary Schapiro told the Practising Law Institute last November:

“...we'll be asking about the role of proxy advisory firms in corporate voting.  Given the influence that these firms' recommendations have on corporate voting outcomes, we'll probe the need for rules to ensure that advisory firms are basing their research and recommendations on accurate and reliable information.  And, that they are providing adequate disclosure of any conflicts of interest they may have in providing voting recommendations. “

Given the pressures surrounding the new financial services legislation, the SEC may find such steps pretty far down on its agenda.   But regulators are being pressed for action by members of the "Shareholder Communications Coalition," comprised of the Business Roundtable, the National Association of Corporate Directors, the Society of Corporate Secretaries and Governance Professionals, the National Investor Relations Institute, and the Securities Transfer Association, whose members often find themselves the object of proxy service criticism.

In March 2010, the Coalition distributed a “discussion draft” on” proxy advisory services: “The Need for More Regulatory Oversight and Transparency”. Among its criticisms: institutional investors that hire third-party proxy advisory firms often find that firm guidelines “do not evaluate the facts and circumstances of each public company with respect to the matters to be voted on; instead, these guidelines encourage a “one-size-fits-all” or “check the box” methodology.”

RiskMetrics, it notes, provides corporate governance and executive compensation consulting services as well as voting recommendations on proposals at shareholder elections – which, the study suggests, “may create conflicts of interest”.  Moreover, all proxy advisory firms may face conflicts when an institutional client is backing a specific ballot proposal or has instigated a “vote no” campaign against directors.  The SEC, the draft suggests, should examine such situations for conflicts.

The draft report recommends that proxy advisory firms:

--be subject to more robust oversight by the SEC;
--be required to register as investment advisers;
--be subject to conflicts of interest disclosure; and
--have “a complete and total separation” of the proxy advisory business from all other business including consulting and research services.

It also calls for public disclosure of procedures, guidelines and assumptions for making voting recommendations and voting decisions, calls for institutional investors to exercise more due diligence concerning delegation of decisions to proxy advisory firms, and calls on the firms to maintain a public record of all their voting recommendations and voting decisions.

The report concludes: “We believe that proxy advisory services have an oversized impact on the proxy process. Despite their large role, proxy advisory firms generally remain unregulated and unsupervised and often are not transparent with regard to their standards, procedures, methodologies, and conflicts of interest.”

Dual Roles

RiskMetrics’ 2009 annual report acknowledges the “perceived conflict of interest between the services we provide to institutional clients and the services, including our Compensation Advisory Services, provided to certain corporate clients.”  It concedes that “in the event that we fail to adequately manage these perceived conflicts of interest, we could incur reputational damage.”  RiskMetrics spells out its policies regarding conflicts and disclosures here.

Asked for comment on the recent proxy advisory discussions, a RiskMetrics spokesman said the company is awaiting the substance of the SEC’s concept draft “and will refrain from making  any comment before it is available.”

One of the testier critics, Tamara C. Belinfanti, an associate professor at the New York Law School, in a legal studies research paper in 2009 argued “The Case for Increased Oversight and Control” over the proxy advisory and corporate governance industry.

She builds her argument around “agency theory,” or situations where one party uses another party to act on his behalf but where the parties’ “incentives are misaligned” – classically, in the case of corporations, the separation of ownership and control.

Ms. Belinfanti declares: “From an agency theory perspective, ISS presents a lethal combination – significant power and virtually no accountability.” And, she says, “ISS bears minimal residual risk of a poor voting decision vis-à-vis company shareholders.”

She argues for the SEC to regulate the proxy advisory industry “similar to the regulation it is currently contemplating for registered credit rating agencies,” for an oversight board for the industry similar to the Public Company Accounting Oversight Board, and for the mutual fund industry to pay more attention to proxy advisor decisions “and not simply follow the vote recommendations of these advisors.”

In March this year, Ms. Belinfanti posted a more acerbic comment about RiskMetrics on The Huffington Post, prompted by the MSCI acquisition announcement:  “ISS is incompetent and it is only a matter of time before markets and regulators realize ISS…is a ticking time bomb waiting to explode.” She noted that ISS had given high governance ratings to Lehman Brothers and AIG before their financial woes.  And she said MSCI’s governance rating was “in the bottom 2.5% of all S&P 400 companies in terms of corporate governance,” declaring the merger agreement “belies the reliability of its own corporate governance ratings system.”

"Prudent Man" Standards

A recent posting at the Harvard Law School Forum on Corporate Governance and Financial Regulation by attorneys at Latham & Watkins LLP raises other issues, commenting on “The Parallel Universes of Institutional Investing and Institutional Voting”.

SEC and Labor Department ERISA rulings, they note, require that institutional investors vote portfolio shares under “prudent man” standards, which often has resulted in outsourcing voting mechanics and recommendations to the proxy advisory firms. (The burden is huge; there are more than 10,000 public U.S. companies.)  Other investment managers have created an internal “corporate governance” staff to vote portfolio shares.

The result, the authors argue, is that voting policies are often applied in a one-size-fits-all fashion that doesn’t take into account a company’s particular circumstances. And, they declare, “economic ownership and economic decision making have been effectively decoupled from voting decisions throughout most of the investment management world.”

The separate interests of the investment community and the governance community, they argue, mean that public companies “need to engage in constructive and separate dialogues with each constituency. “Too often, corporate governance issues are seen as a distraction from a company’s goal of creating economic value for its shareowners. Although this may be true, it is also somewhat beside the point because voting decision makers at the company’s institutional shareowners demand otherwise.”

James Hyatt, a retired reporter and editor for The Wall Street Journal, has been writing about business ethics and social responsibility issues since 2005.