I have a Big Hairy Audacious Goal proposal to make. But first I have a couple of little secrets to share and I hope my friends and colleagues wont be upset with me for saying this. The way most ESG & corporate governance analysts decide which companies to focus on is a bit ad-hoc. In our defence, it has had to be. It’s much easier to cover a company if they have a CSR report than if they don’t. A company that’s in your market is also easier to engage than one a long way away (even if it happens to be the USA!) Exceptions – where the prioritisation is systematic and strategic – do exist, but these exceptions prove the rule. And this ad-hoc process is sub-optimal in many ways. For example, waiting for companies to blow-up before heavy duty engagement is probably not the best answer! But picking up potential problem companies like BP, Enron, WorldCom, etc BEFORE they blow-up and whilst they are “delivering amazing value” is notoriously hard. Remember how Bernie Ebbers would stride into meetings with investors, his chief ﬁnancial ofﬁcer at his side, put up a graph showing WorldCom’s share price heading north, and smugly ask: “Any questions?” This factor stops most assetowners from picking on such “too good to be true” companies and even more so for money managers who need to chase new pension fund clients and where the CG engagement professional or ESG analyst would have to be extra-ordinarily brave (aka stupid) to get in the way of buy decision by a mainstream analyst who liked the company.
So a new and innovative study by system analysts offers an objective risk based approach for both investors and regulators to take action before any problem happens. The headline conclusions of an innovative system-mapping exercise is that out of 43,000 transnational corporations in the world, less than 1%, or what they termed a “super-entity” of 147 firms, control 40% of global economy. The authors say the companies, mainly banks, may “compete in the market but act together on common interests”. No doubt there are lots of details to be ironed out in the methodology but waiting for the perfect list might be to wait a bit too long. Whatever the exact companies in this 1% list, the level of co-ordinated intent and aggregation of power can’t be addressed by the cottage shop approach to active
stewardship and analysis of ESG/extra-financial risk that we have today. But it doesn’t have to be that way. There are 774 members of UNPRI and over 500 members of the ICGN. Let’s just pretend that 147 volunteer as being reasonably proficient at engagement, e.g. have a professional CG or ESG staff member as most corporate members of ICGN have. What if 5 PRI members, at least one of whom should be at this level of reasonable proficiency, volunteered to “adopt” one of the 147 companies for a deep-dive assessment. PRI’s secretariat could coordinate the process so members got one of the companies they most wanted to engage with. ESG ratingagencies could also split this workload and compete with each other to show the most global coverage and in-depth assessment. Research budgets could also be used to incentivise sell-side and independents to support this work; often when they decide to do it, they can do it very well. And by showing this leadership, it would embarrass regulators to also improve their performance. But silly me, this level of coordination and ambition is quite impossible, right? And yet, in parallel, we want governments to co-ordinate better on regulatory action & bailouts. And we want banks to transform their corporate cultures.
Raj Thamotheram is an Independent Strategic Adviser, Investment at Raj Thamotheram Associates: Contact