Regulatory trends and voluntary initiatives are not enough

by Mary Sue Schmaltz

Focusing the dialogue only on voluntary actions by corporations and regulatory measures by government, reflects the historical dichotomistic tension between market solutions and government intervention. I understand that the recommended solutions are meant to bridge the two types of initiatives, which I of course can heartily support. Nonetheless, keeping the focus primarily on these top down solutions does not fully address some of the fundamental systemic problems impeding the move towards responsible business practices. refinery 1

Historically, there are many examples of corporations and entire industries being remiss in coming clean on issues as basic as employee and consumer safety. Examples abound where it took crises such as Bhopol, Exxon Valdez, thalydomide; or whistle blowing such as Rachel Carson's Silent Spring for toxins and Upton Sinclair's The Jungle for the meat packing industry, Ralph Nader's Unsafe At Any Speed, to initiate any type of corporate response. The whole consumer movement and much of the environmental movement has been catalyzed around the fact that unsound business practices are usually veiled from the public eye. It is a bit unrealistic to expect critics of corporate malfeasance to accept that voluntary measures will represent anything but the lowest minimum of acceptable behavior. Examples are rare that voluntary measures of responsible practices have emerged prior to external pressure, and when they have it was often due to the personal integrity of an individual CEO or some other well placed decision maker.

Regulations are also frequently the result of pressure from civic society groups and less often driven by government or industry leadership, save in times of national urgency. For regulations to be effective, they have to be widely accepted as being relevant and enforceable, and are therefore usually not put into law unless an improper practice has become pervasively evident. Even then, the regulatory commissions created to oversee industry are generally populated with people from the very industry being monitored who commonly have a pro-industry stance. Furthermore, regulations to solve one problem often create unintended consequences - such as the emergence of SUV's, categorized as "light trucks" being the result of automotive companies circumventing regulations on vehicles designated as "cars"; the evolution of derivatives was to a great extent the result of regulation avoidance. Additionally, regulations move slower than commercial advancements and rarely keep pace with new market developments. Regulations are costly to implement as adherence requires cumbersome reporting and oversight, and they lack the flexibility to address diverse organizational situations and changing circumstances.

The common thread here is that both voluntary and regulatory initiatives represent an end product of some type of broad consensus relative to specific standards or guidelines; and tend to address piecemeal elements of commercial activities rather than the true disconnects within the system itself. In this sense, they are both chasing the tail of the problems rather than proactively working to transform a system, which pits values, determined by narrowly framed monetary measures against the more qualitative values which improve environmental and social conditions.

Peter Kinder of KLD has touched upon the need to address the very nature of the corporation and issues surrounding limited liability. Mr. Kinder's comments point to the need to consider not only the inherent structure of corporations, but also how this structure ties into the larger society creating self-reinforcing feedback loops. Unless social and environmental considerations are directly embedded into the design of corporate activities as much as financial concerns, they will be continually viewed as costs drains on economic wealth rather than being recognized as the qualitative values they represent.

In its essence, the approach I am proposing is geared toward creating an enabling environment for corporations to become socially responsible. Just as it is unreasonable for corporations to profit by externalizing costs of harmful activities onto society; it is equally unreasonable that individual corporations should be expected to resort to costly heroism as they attempt to do the right thing for which they may be penalized by financial markets. The underlying public culture and institutional structures frame the context within which business operates. Attempts to develop the business case for implementing more sustainable practices must include raising the consciousness of this broader constituency. In effect, current assumptions about the proper role of the corporation in society needs to be challenged in order to make it unprofitable for a company not pursuing socially and environmentally responsible policies.

The public is primed to hear this at the moment, since corporate accounting tactics have proven inadequate even in evaluating sound economic fundamentals much less any broader social values. It's not a far stretch to demonstrate that the new metrics now being developed by the Global Reporting Initiative and others which link social and environmental criteria; will add that extra dimension currently lacking in present appraisals of corporate valuations. The voluntary and regulatory frameworks are likely to be strengthened by building demand for these practices.

Strategically, this process should begin by challenging the preeminence of share price. Experts from various disciplines have discussed the impact of the elevation of share price as the primary task of the corporation. Management expert Peter Drucker makes a strong case for how the defined task of an organization informs its behavior. If this singular measurement is how performance is determined, corporate activities expand out from this narrowly framed goal. When the general populace tacitly accepts that this is the primary corporate function and themselves pursue stock market investments en masse with an expectation of high returns, this reinforces the importance of boosting up share price at all costs. Concurrently, financial markets assume more prominence and take on a life of their own. Investment managers churn shares at high speeds and develop complex financial instruments in order to maximize short term gains and improve quarterly performance, thus impacting the overall level of the market without creating any fundamental long term productive economic value beyond speculative gains. In this scenario, the market can penalize a company pursuing socially or environmentally responsible practices if no relative value is attributable to such qualitative considerations. The intervention point in this instance, is to bring to light the disconnects that result from elevating financial markets and using the criteria of share price as the definer of a specific corporation's contribution to societal wealth. Financial gains, which do not enhance - and indeed are sometimes derived from diminishing—quality of life should be revealed as the artificial values they truly are.

The system is not integrated enough. Abraham Maslow wrote: "Good management and good products and good communities and good states are all conditions of one another and of good mutual relations. If an improvement in the community does not have an ultimate effect on the goodness of the product, then something is wrong someplace." Maslow recommended that the question to be put forward is: "Under what conditions does enlightened selfishness work for the good of the whole society?" or "Under what conditions is it true that what is good for General Motors is good for the U.S.?" Asking the questions in this way leads
us closer to what type of design will best align corporate activities to the enhancement of quality of life and the promotion of human potential. This requires a multi-faceted approach with includes building a larger coalition and complementary supports from all of our institutional structures.

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	Regulatory trends and voluntary initiatives are not enough by Mary Sue Schmaltz Focusing the dialogue only on voluntary actions by corporations and regulatory measures by government, reflects the historical dichotomistic tension between market solutions and government intervention. I understand that the recommended solutions are meant to bridge the two types of initiatives, which I of course can heartily support. Nonetheless, keeping the focus primarily on these top down solutions does not fully address some of the fundamental systemic problems impeding the move towards responsible business practices. Historically, there are many examples of corporations and entire industries being remiss in coming clean on issues as basic as employee and consumer safety. Examples abound where it took crises such as Bhopol, Exxon Valdez, thalydomide; or whistle blowing such as Rachel Carson's Silent Spring for toxins and Upton Sinclair's The Jungle for the meat packing industry, Ralph Nader's Unsafe At Any Speed, to initiate any type of corporate response. The whole consumer movement and much of the environmental movement has been catalyzed around the fact that unsound business practices are usually veiled from the public eye. It is a bit unrealistic to expect critics of corporate malfeasance to accept that voluntary measures will represent anything but the lowest minimum of acceptable behavior. Examples are rare that voluntary measures of responsible practices have emerged prior to external pressure, and when they have it was often due to the personal integrity of an individual CEO or some other well placed decision maker. Regulations are also frequently the result of pressure from civic society groups and less often driven by government or industry leadership, save in times of national urgency. For regulations to be effective, they have to be widely accepted as being relevant and enforceable, and are therefore usually not put into law unless an improper practice has become pervasively evident. Even then, the regulatory commissions created to oversee industry are generally populated with people from the very industry being monitored who commonly have a pro-industry stance. Furthermore, regulations to solve one problem often create unintended consequences - such as the emergence of SUV's, categorized as "light trucks" being the result of automotive companies circumventing regulations on vehicles designated as "cars"; the evolution of derivatives was to a great extent the result of regulation avoidance. Additionally, regulations move slower than commercial advancements and rarely keep pace with new market developments. Regulations are costly to implement as adherence requires cumbersome reporting and oversight, and they lack the flexibility to address diverse organizational situations and changing circumstances. The common thread here is that both voluntary and regulatory initiatives represent an end product of some type of broad consensus relative to specific standards or guidelines; and tend to address piecemeal elements of commercial activities rather than the true disconnects within the system itself. In this sense, they are both chasing the tail of the problems rather than proactively working to transform a system, which pits values, determined by narrowly framed monetary measures against the more qualitative values which improve environmental and social conditions. Peter Kinder of KLD has touched upon the need to address the very nature of the corporation and issues surrounding limited liability. Mr. Kinder's comments point to the need to consider not only the inherent structure of corporations, but also how this structure ties into the larger society creating self-reinforcing feedback loops. Unless social and environmental considerations are directly embedded into the design of corporate activities as much as financial concerns, they will be continually viewed as costs drains on economic wealth rather than being recognized as the qualitative values they represent. In its essence, the approach I am proposing is geared toward creating an enabling environment for corporations to become socially responsible. Just as it is unreasonable for corporations to profit by externalizing costs of harmful activities onto society; it is equally unreasonable that individual corporations should be expected to resort to costly heroism as they attempt to do the right thing for which they may be penalized by financial markets. The underlying public culture and institutional structures frame the context within which business operates. Attempts to develop the business case for implementing more sustainable practices must include raising the consciousness of this broader constituency. In effect, current assumptions about the proper role of the corporation in society needs to be challenged in order to make it unprofitable for a company not pursuing socially and environmentally responsible policies. The public is primed to hear this at the moment, since corporate accounting tactics have proven inadequate even in evaluating sound economic fundamentals much less any broader social values. It's not a far stretch to demonstrate that the new metrics now being developed by the Global Reporting Initiative and others which link social and environmental criteria; will add that extra dimension currently lacking in present appraisals of corporate valuations. The voluntary and regulatory frameworks are likely to be strengthened by building demand for these practices. Strategically, this process should begin by challenging the preeminence of share price. Experts from various disciplines have discussed the impact of the elevation of share price as the primary task of the corporation. Management expert Peter Drucker makes a strong case for how the defined task of an organization informs its behavior. If this singular measurement is how performance is determined, corporate activities expand out from this narrowly framed goal. When the general populace tacitly accepts that this is the primary corporate function and themselves pursue stock market investments en masse with an expectation of high returns, this reinforces the importance of boosting up share price at all costs. Concurrently, financial markets assume more prominence and take on a life of their own. Investment managers churn shares at high speeds and develop complex financial instruments in order to maximize short term gains and improve quarterly performance, thus impacting the overall level of the market without creating any fundamental long term productive economic value beyond speculative gains. In this scenario, the market can penalize a company pursuing socially or environmentally responsible practices if no relative value is attributable to such qualitative considerations. The intervention point in this instance, is to bring to light the disconnects that result from elevating financial markets and using the criteria of share price as the definer of a specific corporation's contribution to societal wealth. Financial gains, which do not enhance - and indeed are sometimes derived from diminishing—quality of life should be revealed as the artificial values they truly are. The system is not integrated enough. Abraham Maslow wrote: "Good management and good products and good communities and good states are all conditions of one another and of good mutual relations. If an improvement in the community does not have an ultimate effect on the goodness of the product, then something is wrong someplace." Maslow recommended that the question to be put forward is: "Under what conditions does enlightened selfishness work for the good of the whole society?" or "Under what conditions is it true that what is good for General Motors is good for the U.S.?" Asking the questions in this way leads us closer to what type of design will best align corporate activities to the enhancement of quality of life and the promotion of human potential. This requires a multi-faceted approach with includes building a larger coalition and complementary supports from all of our institutional structures. Return to top
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