Tuesday, March 26, 2019

Wells Fargo. Enron. WorldCom. AIG. Your Company?

Unfortunately, it’s difficult to get through a news cycle without hearing about a corporate scandal or misdeed somewhere in the world. 
Whenever the latest one hits, I wonder how, in a well-established organization of thousands of people, could such flagrantly unethical behavior have gone on for so long? Why wasn’t someone brave enough to question the dubious activities? And what led the perpetrators to make the decisions or take the actions in the first place that would go on to hurt so many?
The answer, according to recent academic research, is that they were working in organizations with very weak or non-existent ethical cultures. Organizations where it was routine for employees to ignore what was right, to achieve what was most beneficial to them. Where people were afraid to speak up, or felt that it would be futile, when they saw unethical behavior. Or when they did, were simply ignored.
In many companies, the risk of misdeeds is on a far lesser scale than the Enron debacle; it could be individual cases of concealing wrongdoing, lying to a supervisor, stealing from the company, or falsifying reports. Nevertheless, they can, and do, cost companies millions in government fines and lost customers, investment and reputations. 
What if there was a way for senior leaders to identify the telltale signs of a weak ethical culture, allowing them to step in and address them before it was too late? 
Now there is thanks to a group of academic social scientists who have come together to form a kind of think tank called Ethical Systems. They believe that traditional corporate approaches to ethics are outdated and there is a need for a smarter, deeper and more holistic approach that addresses the larger challenge of organizational culture. 
“When Ethical Systems formed in 2014 after the financial and banking crises, there were questions on the role of culture in encouraging better behavior in the corporate  world,” said Azish Filabi, Executive Director of Ethical Systems and former Ethics Officer at the Federal Reserve Bank of New York. “An organization could have a great compliance program but if it isn’t affecting the underlying culture, nothing will change.
“No one thought you could actually measure culture, it was too nebulous. But academia has done this for years.” 
Housed at New York University’s Stern School of Business, Ethical Systems has drawn on academic research to create a model for executives and managers to understand their unique organizational context so they can better shape ethical behavior. They use a variety of tools including an employee survey-based cultural assessment, focus groups and 1:1 discussions with senior leaders. They also integrate into their assessment existing non-survey based company data, such as data on employee retention.  From there, they pinpoint the most relevant areas of concern. This may be across the organization or may surface only in certain groups or departments. They then provide guidance to the organization to course correct. 
While some consulting firms also offer surveys that attempt to address ethics risk, Ethical Systems believes its academic-based approach is different, starting with peer-reviewed research for survey items and social science findings on why people are likely to misbehave. Underpinning the model are10 areas, which, based on data collected from pilot culture assessments, have been shown to be highly predictive of unethical behavior. 
Ethical System’s Two Factor Model of Ethical Culture, drafted by Caterina Bulgarella, PhD, Ethics Expert, Culture Architect, and a member of the organization’s research team, divides the 10 areas into two camps:
  1. Disqualifiers: Companies that  score high on the disqualifiers present foundational weaknesses that should be addressed.
  2. Qualifiers: Qualities and dynamics consistent with a robust ethical orientation. Organizations want to score high on these. 
An example of a red flag is inconsistency between how senior leaders and employees perceive the ethical culture of their organization.
“If senior leaders think very highly on many attributes, but the rest of the population has a much less rosy perception, that may mean that the leaders are out of touch or that bad news is traveling up slowly because people are afraid to deliver the truth.”
Another warning sign? If no one is using the internal channels to report ethical violations. “What is it about your internal culture that is preventing this” asks Azish. “That is what the assessment can help pinpoint.” 
To date, the model has been piloted at two U.S. companies (findings are on the Ethical Systems website), and more are in the works for 2019. In addition to the statistical validation process, Azish says they are now looking for more companies with which to work to expand the model, by integrating objective (non-survey) data to strengthen its effectiveness.
The more data we have, the stronger the assessment will be. Ultimately, we’d like to shorten the survey so we can recommend a handful of the best questions that target what’s most important for an organization’s culture. Today, I can’t say what those items are until I have more data.” 
While Ethical Systems has created a free resource portal that summarizes the academic research on ethical cultures, there is a fee for conducting the assessment and analyzing the results. 
“Though ethical cultures are not built overnight, the systematic and methodical application of the guidance and insights the model provides can advance corporate practices in meaningful and remarkable ways,” writes Bulgarella, in a recent whitepaper on the model. “Not only will organizations that heed the advice offered by the model be more likely to build strong ethical assets, but they will be better positioned to achieve sustainable long-term growth.”
To read more, including the white paper describing the assessment approach, visit Ethical Systems. To find out how your organization can participate in a future assessment, contact Azish at afilabi@ethicalsystems.org or Noel Boyland, Corporate Engagement Director, at noel@ethicalsystems.org. 

Tuesday, March 19, 2019

Bruce Freed’s Quest for Corporate Political Disclosure

This is a follow-up to last week’s blog that examined the 4th Roundtable on Corporate Political Accountability.

The year is 2003. Lance Armstrong has just won his 5th Tour de France while the rest of us are snatching up the newest in the Harry Potter series Harry Potter and the Order of the Phoenix, singing along to BeyoncĂ©’s Crazy in Love, and watching the capture of Saddam Hussein in Iraq on cable news. In Washington, DC, Bruce Freed is starting the latest chapter in his career with the creation of the Center for Political Accountability (CPA).  

His goal, along with co-founder Karl Sandstrom, was to bring transparency and accountability to corporate political spending. Today, CPA remains the only group to directly engage companies to improve disclosure and oversight of their election-related spending. In addition to direct contributions to candidates, this includes soft money contributions and payments to trade associations and other tax-exempt organizations that are used for political purposes.
In the 16 years and three Presidential administrations since its founding, the CPA has made disclosure and accountability the norm. It publishes the annual CPA-Zicklin Index, which benchmarks S&P 500 companies on their disclosure and accountability practices, and created and maintains the TrackYourCompany.org database, which covers the full range of company political spending. This includes “dark money” -- company payments to trade associations used for election-related purposes and contributions to “social welfare” organizations, also known as 501(c)(4) organizations. Today, nearly 300 companies in the S&P 500 disclose some or all their election spending. 
Bruce took a break from his work educating companies on how voluntary disclosure and spending oversight can help them manage risk to talk with me about where CPA has been and where it is going.

MK: Back in 2003, could you have imagined that the Center would have made as much progress as it has? 

BF: Honestly, I didn’t know where we would be when Karl and I started the Center, but we recognized that a different approach to addressing campaign spending was needed. We needed to move outside the political system given the obstacles presented by the opposition to action in Congress and the regulatory agencies. We created the Center when  the K Street Project, an effort to impose a sharp partisanship on the Washington lobbying and business community, was in full swing. 
MK: How did you approach companies in the beginning and when did you sense it was working? 
BF: We started using shareholder resolutions to engage companies. This fit into the risk management approach that companies were required to engage in. We did not approach companies in a hostile way. We always approached companies with a reasonable request and wanted them to see political spending as a risk issue. We were fortunate that companies began to respond. The first to adopt political disclosure was Morgan Stanley in 2004. Then came a key development in the 2006 proxy season when ISS (Institutional Shareholder Services) started to recommend the CPA model resolution on a case-by-case basis. Previously, it had a policy of opposing social resolutions. When its policy changed, the average “yes” vote went from 9% to 20%. This got the serious attention of companies. Each proxy season, the number of companies we were reaching agreements with kept increasing. We knew we were really making an impact when we began to see companies adopt disclosure and accountability policies on their own without CPA and our shareholder partners engaging them. This happened, for example, with Met Life when we undertook the first CPA-Zicklin Index in 2011. 
MK: What did you learn in the early days through your engagement with companies?  
BF: We learned a lot from companies. For example, how they make decisions, how they keep records on their political spending with corporate funds. When in 2006 we expanded our resolution to include disclosure of dues paid to trade associations used for election-related spending and contributions to other tax-exempt associations, we worked with companies to narrow disclosure to those associations that were involved in election-related spending. Those were the ones that posed risks to companies. That is why we developed the threshold to trigger company disclosure of the non-deductible portion of their trade association payments that were used for lobbying and election-related spending so it would not be burdensome and would focus only on those payments that really do pose a risk and that needed to be managed. We also learned what information companies were providing to their boards and whether it was being reviewed by the full board or by a committee. And we learned a lot about how political spending decisions were being made in the company. All of this helped us develop our strategy and refine what we should be asking of companies. 
MK: Were there any surprises from your conversations?  
BF: Yes, the steadily growing number of companies that recognized the need to disclose and adopt board oversight of their political spending with corporate funds. Companies saw disclosure and accountability policies giving them greater control over their spending and protecting them from legal risks, the threat of shakedown or embarrassment. 
MK: What are you most proud of in your work with CPA? 
BF: Today, political disclosure and accountability is the norm, and we are seeing companies adopt it on their own. Companies get in touch with us all the time wanting to know what they need to do to become Trendsetters (on the CPA-Zicklin Index). It’s great to see the credibility that the Index has achieved and recognition by companies that political spending is a risk they need to manage. 
MK: Now that you have made political spending disclosure the norm, what’s next? 
BF: The next step is for companies to take a broader view of the consequences of their political spending and look at it in terms of how the consequences align with their core values and positions. This is what our latest report, Collision Course: The Risks Companies Face When Their Spending and Core Values Conflict and How to Address Them, examined.  It laid out how vulnerable companies are to serious reputational and business risk if political contributions or their outcomes, or both, are perceived to be at odds with company core values and positions. This can affect a company’s relationship with customers, employees and communities. This is especially the case when companies outsource their spending by giving to third party groups such as trade associations, 527 political committees, many of which are active at the state level, or “social welfare” organizations, also known as 501c4s. Companies lose control over how their money is used but they are still associated with the recipients and results and bare the risk. Fortunately, CPA is finding this proxy season that companies are becoming more sensitive to this and are using the policies they have put in place to become more cautious and careful [about spending decisions]. 
MK: Other than greater disclosure, what else has changed since 2003 that continues to make this a critical issue for companies? 
BF: The rise of social media as a force to be reckoned with. Social media has changed the dynamic. Companies have much to fear if they make a misstep or if a contribution is perceived as controversial. Within seconds, it can explode on social media into a corporate crisis.  
MK: What got you interested in political disclosure and develop such a passion for your work? 
BF: I came into Washington during the Watergate scandal. I covered the impeachment debate in the House Judiciary Committee and enactment of the 1974 Federal Election Campaign Act [which forms the basis of current federal campaign finance law] for Congressional Quarterly. I kept an eye on money in politics as a journalist and as chief investigator for the Senate Banking Committee and a senior aide to several House members. In the House, I was fortunate to be involved with leadership politics which gave me insights into how Congress really worked. I also developed a close friendship in the early ‘80s with Karl Sandstrom, then the election counsel in the House, who co-founded the Center with me. Karl was later named a member of the Federal Election Commission.
MK: Any final words?
BF: In the first 16 years of the Center, we have laid a very strong foundation that has made corporate political disclosure and accountability the norm. That is a significant accomplishment. Now we are building on that foundation to get companies to pay much greater attention to the broader risks posed by political spending, their responsibility to address those risks, and the need to adopt policies to carry this out. This is in line with the emphasis many companies are placing today on being responsible corporate citizens.
To learn more about Bruce and the Center for Political Accountability, go to https://politicalaccountability.net/ or follow them on FaceBook.

Sunday, March 10, 2019

Experts Highlight Risks to Companies of Corporate Political Spending and Share Tips on How They Can Protect Themselves

Earlier this month, I was invited to the 4th Roundtable on Corporate Political Accountability at NYU’s Stern School of Business by Bruce Freed, President of the Center for Political Accountability (CPA). Bruce is a wonderful guy who I met about 10 years ago when I was responsible for ESG disclosure at Merck. 

After engaging with Bruce, I worked with Merck’s Government Affairs team to develop a set of Principles Governing Corporate and Political Action Committee Spending modeled on provisions in the Model Code for Spending, established by CPA.  It was early days for political spending disclosure and the company and its Board learned a lot from Bruce. I am proud to say Merck was named a leader (and still is) by the CPA-Zicklin Index of Corporate Political Disclosure and Accountability. 
It had been several years since I’d seen Bruce, so it was great to find he was still going strong on the
Bruce Freed, President CPA
issue and garnering many fellow advocates of political disclosure and accountability. In fact, speakers at this year’s roundtable argued that stakes have never been greater: “There is a heightened level of risk that political spending poses to companies in today’s hyperpolarized political and social media-driven environment,” Bruce quipped in his opening remarks. “The ramping up of the 2020 campaign further exacerbates this risk.” 
A new report by the Center, “Collision Course: The Risks Companies Face When Their Spending and Core Values Conflict and How to Address Them,” explains that corporations are vulnerable to serious risk if political contributions or their outcomes, or both, are perceived to be at odds with their core values. This can affect a company’s relationship with customers, employees and communities in which it is located.” 
Take, for example, when amid the fallout from the Parkland school massacre, Publix Super Market faced sharp criticism last year over its contribution to a Florida gubernatorial candidate who called himself “an NRA sellout.”  There is also the case of 27 leading companies that re-affirmed their support for the Paris Climate Accord following the U.S. withdrawal and that also contributed more than $3 million to political committees involved in attorneys’ general races. The Center for Public Integrity disclosed that their contributions helped elect attorneys’ general candidates who filed suit against the Environmental Protection Agency’s Clean Power Plan, leading to massive public backlash in social media and risking reputational damage to the companies whose actions seemed to be at odds with their public values. 
“When a company’s political spending undermines their core values and messages around diversity and climate change, for example, we see it as a risk,” said Chris Miller, Associate Vice President at Institutional Shareholder Services. This is especially true when reputational risk can translate into financial risk. 
Speakers, including Constance Bagley from the Yale School of Management, argued that companies can protect their reputations by enacting corporate governance safeguards to align their political activities with their brands, core values and positions. Constance pointed to a guide she co-authored with the Center, “A Board Member’s Guide to Corporate Political Spending,” published by Harvard Business Review. She also hopes investors will continue to push Boards to disclose political spending – something that they successfully did recently with Verizon, General Electric and Hilton, all of which have agreed to strengthen political disclosure and accountability practices. 
One company at the conference named a “Trendsetter” by the CPA-Zicklin Index was Prudential Financial. Theresa Molloy, Vice President of Governance and Shareholder Services at Prudential, explained that the company views political contribution disclosure and accountability as part of its risk management and corporate governance process. Prudential’s Corporate Governance & Business Ethics Board Committee has oversight of all political contributions and lobbying efforts. The company discloses contributions in a twice-yearly report (most companies, if they disclose, disclose only annually), and, based on discussions with the Center, decided recently to disclose all contributions to trade associations $10,000 and above. The threshold had previously been $25,000. Theresa also noted that Prudential does not contribute to Super PACS, which can raise unlimited sums of money from corporations, or to state or local ballet initiatives.
You can learn more about how to become a trendsetter like Prudential and Merck at the Center’s website, and also find where your company ranks in the Index. 
The next step for the Center and its advocates could be pushing for mandatory disclosure. Several panelists pointed out that voluntary disclosure has laid a solid foundation for a mandatory rule, which is critical for making disclosure uniform and universal. Such a rule has been proposed to the U.S. Securities and Exchange Commission. 
Stay tuned for an interview with Bruce Freed later this month on what the future holds and his reflections on 15 years of activism.

Monday, March 4, 2019

What to Do When There are More ESG Ratings than Professional Soccer Teams

Professional soccer teams in the world: 234
Ways to cook an egg: >100
Dog breeds in the world: 202
Languages spoken in China: 299
Environmental, Social and Governance (ESG) ratings: >600
600? “Are you kidding me?” was my initial response when I read the introduction to the just-released Rate the Raters 2019:  Expert Survey Results this past weekend. And then I harkened back to the not-so-distant days when I was completing these ratings (and rankings and surveys, etc.) for the pharmaceutical giant Merck and recalled the dread I would feel every time a new, unexpected one would pop up in my in-box.
The 2019 report follows the first Rate the Raters survey published by SustainAbility almost a decade ago. Like the original, it polled thousands of sustainability/ESG/CR professionals (the majority from companies but also some from academia, NGOs and government) to assess views on what makes a good sustainability rating and which professionals see as being the highest value and usefulness.
If you have limited resources (and what ESG/CR team doesn’t?), here is assistance to help you prioritize.
Out of 600 rating tools, Rate the Raters found four rose to the top: RobecoSAM (which is what the Dow Jones Sustainability Index is based on), CDP (Carbon Disclosure Project), MSCI and Sustainalytics.
Survey respondents chose these four based on their trustworthiness and the ratings’ transparency of data sources, and the robustness of their methodologies. Another factor was experience and competence of the research team. I was never so frustrated as when I spent days completing a rating survey only to speak with an analyst who clearly knew next to nothing about my industry and had not taken the time to even review the information on our corporate website and published materials.
A second aspect of Rate the Raters was surveying ESG/CR professionals on the usefulness of the ratings. On this dimension, usefulness to the organizations completing the surveys scored lower than quality of the ratings themselves.  That’s not to imply, of course, that respondents find them completely useless. CR professionals responded that they use them to inform decision-making such as what data to disclose, to identify trends, and to support stakeholder engagement.
Respondents also had the chance to turn the table on the rating agencies and offer their feedback and recommendations. Their advice?
·       Make your ratings easier for us to respond to and make it easier for us to engage with you.
·       Tie ratings to sustainability thresholds and systemic changes. One respondent offered that he/she would “like to see a threshold for contributing/undermining the future we want (e.g., future fitness and/or emitting vs. drawing down more CO2).”
·       Move toward industry-specific materiality and normalization within industries.
But, by far, my favorite recommendation was to move away from ratings all together. One comment summed it up perfectly: “I would actually like to see these ratings become irrelevant and replaced by higher engagement between companies and investors – the ratings are never going to accurately capture sustainability performance.”
True as this statement may be, as ESG professionals we recognize that ratings are an efficient tool for asset managers and other stakeholders to inform their decision making about companies, especially when  their resources are limited as well. And, the need for ratings will only increase as more mainstream investors such as Vanguard, Blackrock and State Street begin to integrate ESG data into their products and investment decision making (which is a good thing).
So, I guess the ratings will be a little like going to the dentist twice a year. You don’t really love going, but you know you must. Let’s just find as efficient and painless a way as possible to extract the data and make the engagement as enjoyable as possible.