Corporate governance, Accountability, CSR, Socially Responsible Investment

1. MSC ACCOUNTANCY & FINANCE :
CORPORATE GOVERNANCE
& OPERATIONS RISK ANALYSIS AND CONTROL
CORPORATE GOVERNANCE AND
ACCOUNTABILITY
Stephen Ong, BSc(Hons) Econs
(LSE), MBA International Business(Bradford)
MBI/MSc Bioprocessing(UCL)
Visiting Professor, Shenzhen University
Principal Lecturer/Specialist, TARC
chong@mail.tarc.edu.my
24 June 2012

2. Today’s Overview
• Video : Enron
1 • Discussion : Governance
& Accountability
• Corporate Social
2 Responsibility & Accounting
3 • Case Presentation: AIG

3. 1. Open Discussion
• Niamh M. Brennan, Jill
Solomon, (2008),"Corporate
governance, accountability and mechanisms
of accountability: an
overview", Accounting, Auditing &
Accountability Journal, Vol. 21 No. 7 pp. 885
– 906

5. 2. Corporate Social Responsibility &
Social Accountability
• Reassess the impact of corporate activities on the
environment and society at large
• Cases of environmental accidents, product
failures, etc. impact on the firm’s value and its
market share.
• Review types of corporate policies of stakeholder
management and pay off, including policies that
destroy rather than create firm value.
• Review the increasing importance of indices of
corporate social responsibility as well as socially
responsible investment.

6. Learning Outcomes
• By the end of this lecture, you should be able to:
1. Critically review the studies that investigate the
impact of corporate social responsibility (CSR) on
firm value and vice-versa
2. Describe some of the CSR indices that are available
from commercial providers and evaluate their
usefulness
3. Discuss the definitions of CSR and socially
responsible investment (SRI) and how these may
change with an investor’s set of values
4. Assess the evidence on whether investors pay a price
for SRI.

7. Introduction
Did you ever expect a corporation to have a
conscience, when it has no soul to be
damned, and no body to be kicked?
Edward, First Baron Thurlow 1731-1806
Lord Chancellor during King George III’s reign.

8. Introduction (Continued)
• Craig Carter, Rahul Kale and Curtis Grimm
define corporate social responsibility as
follows
– “*Corporate] social responsibility deals with the
managerial consideration of non-market forces or
social aspects of corporate activity outside of a
market or regulatory framework and includes
consideration of issues such as employee
welfare, community
programs, charitable
donations, and environmental

9. Introduction (Continued)
• While CSR may be in the interest of the targeted
recipients, it is less clear a priori whether it is in
the interest of the company’s shareholders.
• At worst, CSR may just be a reflection of the
principal–agent problem.
• Let’s attempt to answer the question whether
CSR is in the interest of the shareholders.
• Also look at the investor side by reviewing
socially responsible investment
(SRI).

10. Introduction (Continued)
• SRI is “an investment process that considers
the social
and environmental
consequences of investments, both
positive and negative, within the context of
rigorous financial analysis”.

11. Perrier and Benzene
• Benzene is a chemical which occurs
naturally in crude oil
– In laboratory tests on animals, it has
been found to cause cancer
– It is also believed to cause cancer in humans.
• Perrier was the number one mineral
water, charging premium prices based on its
reputation of the “champagne of bottled
water”.
• In early February 1990, traces of benzene were
found in Perrier bottles in North Carolina, USA.

12. Perrier and Benzene (Continued)
• Perrier initially wanted to hush up the
incident, shifting from explanation to
explanation and delaying any action.
• It finally recalled 160 million bottles
worldwide at a cost of £150m.
• By 1995, its market share in the USA had
dropped by half.
• Its market share in the UK fell from 60% to
9%.

13. CSR and Financial Performance
• As the Perrier case study suggests, a
lack of corporate social
responsibility or bad stakeholder
management can cost a company
dearly and may even be exploited by
the company’s competitors.

14. CSR and Financial Performance
(Continued)
• Early studies have found mixed evidence on the
link between financial performance and CSR
– Stanley Vance finds a negative link, suggesting that
CSR is a net cost to the firm
– Jean McGuire et al., and Richard Wokutch and
Barbara Spencer find a positive link
– Gordon Alexander and Rogene Buchholz find no
relationship between the two.
• However, apart from McGuire et al., none of the
above studies raises the issue as to the direction
of causality between the two.

15. CSR and Financial Performance (Continued)
• Sandra Waddock and Samuel Graves
acknowledge this issue
– Higher levels of CSR may cause higher
levels of financial performance and vice-
versa
– Better performing firms have more funds
to spend on CSR.

16. CSR and Financial Performance (Continued)
• A reason why the direction of causality flows
from financial performance to CSR is given by
Jensen’s free cash flow problem
– Managers who have access to significant free cash
flow may divert some of this to social causes.
• The reason why the direction of causality should
flow from CSR to financial performance
is that CSR is part of good management and part
of having good relationships with the firm’s
stakeholders.

17. CSR and Financial Performance (Continued)
• Waddock and Graves’s measure of CSR is
based on the Kinder, Lydenberg and Domini
(KLD) index which rates US firms according to
several aspects of CSR (e.g. community
relations and workforce relations.

18. CSR and Financial Performance (Continued)
• They first regress the level of CSR for each firm in
1990 on the financial performance for the previous
year
– They find that there is apositive link for each
of their three measures of performance (ROA, ROE and
return on sales)
– This suggests that the free cash flow hypothesis is valid in
the context of CSR.
• They also regress financial performance for 1991 on
CSR for 1990
– They find a positive link for ROA and
return on sales
– This gives support to the hypothesis of good
management.

19. CSR and Financial Performance (Continued)
• Hence, Waddock and Graves find that the
direction of causality between CSR and
performance flows both ways
– Firms with better past performance have more
funds to spend on CSR
– Firms with higher levels of CSR perform better.

20. CSR and Financial Performance (Continued)
• Amy Hillman and Gerald Keim develop a model of CSR
and financial performance.
• They argue that there are two components of CSR
1. One component relates to improving the firm’s
relationships with its primary stakeholders
They call this stakeholder management (SM)
SM has a positive impact on firm performance
2. The other component relates to social issues that do not
improve the relationships of the firm with its primary
stakeholders
They call this social issue participation (SIP)
This component reduces financial
performance.

21. CSR and Financial Performance (Continued)
• Hillman and Keim’s SM and SIP are equivalent
to Waddock and Graves’s good management
and free cash flow hypotheses.
• They find that financial performance depends
positively on SM and negatively on SIP.
• However, they do not find that the levels of
SM and SIP depend on financial performance.

22. CSR and Financial Performance (Continued)
• To summarise, recent empirical research
suggests that it is important to distinguish
between the two types of CSR
– CSR that targets a company’s direct
stakeholders, such as its customers and
employees, has a positive effect on
profitability
–CSR that targets wider social issues
has a negative effect.

24. CSR Indices
• CSR indices (e.g., FTSE Kinder, Lydenberg and
Domini (KLD) 400 Social Index) tend to be based
on
– Exclusionary screens
– Strengths along the lines of a series of attributes.
• Exclusionary screens consist of excluding firms
from the index with significant involvement in
e.g.
– alcohol,
– gambling,
– tobacco,
– fire arms, and
– military weapons.

25. CSR Indices (Continued)
• Attributes include e.g.
– Community relations
• Support for education, social housing, …
– Diversity
• The firm has policies in place to promote
women and minorities, …
– Employee relations
• Relationships with trade unions, employee
profit sharing schemes, …

26. CSR Indices (Continued)
–Environment
• Policies aiming to reduce or prevent
pollution, carbon neutrality, recycling, …
–Product
• Quality, innovation, product
safety, antitrust, policies enabling
socially disadvantaged groups to benefit
from the firm’s products and services, …
–Corporate governance

27. CSR Indices (Continued)
• There are now indices which cater for
investors concerned about e.g.
– Catholic values (KLD)
– Sustainability (KLD)
– Islamic values (Dow Jones).

28. Socially Responsible Investment
• SRI funds apply a set of exclusionary and/or
inclusionary screens to select their investments.
• However, the definition of SRI and the choice of
exclusionary and/or inclusionary screens may
change depending on the values of the investor
or index.
• E.g., the FTSE KLD Catholic Values 400 Index
excludes companies that are involved in or
support
– abortion,
– contraceptive products, and
– the use of embryonic stem cells and foetal tissue.

29. Socially Responsible Investment
(Continued)
• SRI has ancient roots
– The teachings of Judaism had strict rules on how to
invest money
– Until the middle ages, there were restrictions on
loans and investments for Christians
– In the 17th century, Quakers (“Society of Friends”)
who settled in America refused to benefit from the
weapons and slave trade.
• The Pioneer Fund, which was set up in
1928, refused to invest in alcohol and tobacco.

30. Socially Responsible Investment (Continued)
• The Pax Fund was created in 1971 in the USA
by two Methodists who were opposed to the
Vietnam war and militarism in general
– It refused to invest in weapons contracting.
• The 1980s saw increased awareness by the
general public of racism (apartheid regime in
South Africa) and environmental issues
(Chernobyl and Exxon Valdez).

31. Socially Responsible Investment (Continued)
• So is there a price for socially responsible
investment or do SRI funds outperform other
funds?
• Luc Renneboog, Jenke Ter Horst and Chendi
Zhang find that SRI funds from Europe, North
America and the Asia-Pacific region
– underperform compared to the market by
between -2.2% and -6.5% (risk-adjusted
returns), but
– they do not generally perform worse than
conventional funds from the same country.

32. Conclusions
• The link between CSR and firm performance.
• The performance of SRI funds.
• How do you define SRI?

33. Appendix 1
Environmental, Social
and Governance (ESG)
Factors in Institutional
Investment

34. Introduction
• Corporate governance is the system of checks and
balances, both internal and external to
companies, which ensures that companies discharge
their accountability to all their stakeholders and act
in a socially responsible way in all areas of their
business activity
• Therefore, sustainability reporting, social and
environmental reporting and socially responsible
investment all contribute to 'good' corporate
governance
• They represent mechanisms which help companies
to discharge a broad accountability and to behave in
a socially responsible manner

35. CSR for whom?
• Companies are producing sustainability
reports, social and environmental
reports, corporate social responsibility
reports etc.
• BUT to what extent is this being driven by the
institutional investment community?
• If investment institutions are not interested
in this information, it is unlikely that
companies will be genuinely interested in
producing it

36. • Institutional investors own almost 80% of
shares in UK listed companies
• The current value of assets managed by the
global institutional investment community is
in excess of 42 trillion dollars
• US and UK pension fund investments total
7.4 trillion dollars

37. Investors & Environment
Decisions made by these investors have a
considerable impact on the environmental and
on society as a whole
“. . . what we need is a means by which we can
wield our influence over businesses to act
responsibly . . . Ethical and environmental
investment is that means. “
(Hancock, 1999, p. 8)

38. ESG
• We explore the extent to which the
institutional investment community in the
UK, and elsewhere, are becoming
increasingly interested in
environmental, social and governance
information
• We consider how socially responsible
investment (SRI) has moved very quickly from
the periphery to the mainstream of
institutional investment

39. • In 2004 the UK Government endorsed the
important role institutional investors have to
play in integrating corporate social
responsibility into business by their
recognition of the impacts of social and
environmental factors on long-term business
performance
• Socially irresponsible behaviour is strongly
related to bad financial performance and
even corporate failure
– Exxon Valdez
– Brent Spar
– Nike
– Huntingdon Life Sciences

40. Fiduciary Risk
• CalPERS (California Public Employees’
Retirement System) stated that:
“. . . equity in corporations with poor
social and ethical records could
represent an excessive fiduciary risk
because such firms court
boycotts, lawsuits, or labor activity. “

41. Financial interests
• Friends Provident chose SRI:
“Good corporate practice on human
rights, child labour and environmental
pollution is good for society, but it’s also
good for shareholders. As a large
investor, it is right that we use our
influence with companies to encourage
responsible business practices while
serving the financial interests of our
customers.”

42. Terminology and definitions
• From ethical investment to SRI
• Socially responsible investment combines
investors’ financial objectives with their
commitment to social concerns such as
justice, economic development, peace or a
healthy environment.

43. Issues of traditional importance to the ethical
investor
Alcohol Military/MOD Poor
contracts workplace
conditions
Animal Arms exports to Third World
testing oppressive concerns
regimes
Gambling Nuclear power Tobacco
Greenhouse Ozone depletion Water
gases pollution
Health and Pesticides Tropical
safety hardwoods
breaches
Human Pornography Genetically
rights abuses and adult films modified
food
Intensive Road Gene
farming use/construction patenting

44. Ethical Profile
• How to achieve consensus?
• Individuals have different ethical profiles
• Ask pension fund members for example
• Ethical relativism

45. From SEE/SRI to ESG
• Early SRI (2000+)
• Institutional investors interested in
social, ethical and environmental (SEE)
factors
• NOW
• Environmental, social and governance
• (ESG) factors
• Shows SEE issues now central to governance
issues

46. Mercer Investment Consulting (2006)
Issues Associated with ESG Investment
Climate Environmental Sustainability
change management
Corporate Globalization Terrorism
conventions
Corporate Health issues Water
governance in emerging
markets
Employee Human rights
relations

47. Impact on Investment
• Mercer Investment Consulting (2006) found that
globalization and corporate governance were the
ESG factors viewed as most relevant to mainstream
institutional investment analysis
• BUT they also found that a high proportion of fund
managers expect clean water, climate change and
environmental management to have a material
impact on investment performance over the next
five years

48. Universal Ownership
• Emerging concept of 'universal ownership' has
encouraged the integration of ESG issues into
mainstream institutional investment
• Universal owners:
• "large investors who hold a wide range of
investments in different listed companies as well as
other assets and therefore tied to the performance
of markets of whole economies, rather than to the
performance of individual assets"
• They are therefore forced to be concerned about
long-term economic prosperity, and must consider
ESG issues

49. Statistics on Growth of SRI and ESG
• In the UK £4 billion was invested in ‘ethical’ funds in
August 2001
• SRI now an overarching investment criterion for ALL
investment institutions
• 77% of the British public would like their pension
funds to be invested in a socially responsible
way, provided this did not harm financial returns
• 80% of pension scheme members require their
schemes to operate an socially responsible
investment policy

50. ESG screening
• Mercer Investment Consulting surveyed 195 fund
managers around the world
• 70% of fund managers believe that the integration
of environmental, social and ethical factors into
investment analysis will become mainstream in
investment management within the next three to
ten years
• 60% of fund managers consider that screening for
social, ethical and environmental factors will be
mainstream within the next three to ten years

51. SRI & ESG
• Mercer Investment (2006) canvassed 157
international institutional investors
• Confirmed that socially responsible
investment is continuing to expand at a
global level
• 38% of fund managers surveyed anticipated
increased client demand for the integration
of ESG analysis in mainstream institutional
investment over the next three years.

52. Socially responsible investment
strategies
• Screening
• Best in sector -
engagement and dialogue

53. The financial performance of socially responsible
investment funds
John Maynard Keynes (1936):
“There is no clear evidence from experience
that the investment policy which is socially
advantageous coincides with that which is most
profitable . . . “

54. Essential question:
• Is it possible to be ethical and still to make a
profit?
• Few people are prepared to accept a lower
return to investment from investing in a
socially responsible manner

55. SRI & Financial Returns
• Solomon and Solomon (2002) found
strong evidence of a growing perception
among the institutional investment
community that SRI enhances financial
returns in the long term
• Drexhage (1998) considered that
investors and fund managers believe it is
possible to make a difference while
making a profit.

56. Existing academic empirical research has produced
mixed results
• Luther et al. (1992) found half of the trusts studied
outperformed the market and half underperformed
• Mallin et al. (1995) found that both socially
responsible and non-socially responsible trusts
seemed to underperform the market
• Gregory et al. (1997) showed that both socially
responsible and non-socially responsible trusts
underperformed the market but that
underperformance was worse for socially
responsible trusts

57. SRI Benchmark
• Development of SRI benchmark indices is
clarifying this issue
• Williams (1999) predicted growth in SRI
performance benchmarks which should
“. . . explode the myth that green
and ethical investors have to accept
that their investment performance
will be disappointing.”

58. Cobb, Collison, Power and Stevenson
(2005)
• Examined the financial performance of the
FTSE4Good, and concluded that
• Investors are unlikely to be worse off by restricting
their investment universe, and may well be better
off
• Their interviews and questionnaires suggested that
inclusion in the FTSE4Good indices was contributing
significantly to stakeholder relations, as well as to
internal processes such as reporting and
management systems on social and environmental
issues

59. The drivers of SRI
• Solomon et al. (2002) Questionnaire survey
• Internal drivers:
• - fund managers
• - clients of the institutional investors
• - trustees
• External drivers:
• - lobby groups
• - Government
• - society’s interest in CSR
• - NAPF, ABI, etc

60. Rank I believe that the development of Mean
SRI policy by pension funds is
motivated by
1 The impact of environmental and Agreement
social lobby groups
2 A general increase in interest in Some
social responsibility in society in agreement
general
3 Political parties competing for Some
power agreement
4 Companies seeking to improve Some
their reputation and corporate agreement
identity
5 The actions of the NAPF Weak
agreement
6 European Union legislation Disagreement
7 The social dimension of Disagreement
European Union membership
8 The growing interest of pension Disagreement
fund trustees in SRI issues
9 The growing interest of pension Disagreement
fund managers
10 A demand from active pension Disagreement
fund members
11 A demand from retired pension Disagreement
fund members
12 The religious beliefs of the Strong
general public disagreement

61. A growing demand for social, ethical and
environmental disclosure
• ABI guidelines on SEE disclosure (2001)
• They would like company boards to state in their annual
reports whether or not they:
• take regular account of the significance of SEE matters to the
business of the company;
• have identified and assessed the significant risks to the
company’s short and long-term value arising from SEE
matters, as well as the opportunities to enhance value that
may arise from an appropriate response;
• have received adequate information to make this
assessment and that account is taken of SEE matters in the
training of directors;
• have ensured that the company has in place effective
systems for managing significant risks, which where relevant
incorporate performance management systems and
appropriate remuneration incentives.

62. ABI Guidelines 2007
• Modification of 2001 Guidelines
• In 2007 the ABI published a set of guidelines on
responsible investment disclosure (ABI, 2007)
• These guidelines represent a modification of those
launched in 2001. One of the main reasons for their
updating was the progress in narrative reporting
since 2001, including the EU Accounts
Modernisation Directive (resulting as we saw earlier
in the Business Review) and the new UK Companies
Act. Although the new guidelines are similar they
emphasise certain aspects of narrative reporting
which institutional risks in order to decide what
information should be included in the annual
report.

63. Investors are especially interested in
reporting which:
– addresses ESG risks, within the company's
entire framework of risk management and
disclosures
– adopts a forward-looking approach to ESG
risks
– addresses board action in managing ESG
risks
It is also notable that the ABI have changed their
terminology from SEE (in 2001) to ESG (in 2007)
The Guidelines also contain an appendix which lists a
series of questions for companies to interrogate
themselves in relation to ESG

64. Investors and SEE Issues
• Friedman and Miles (2001) found the City of
London was taking SEE issues far more
seriously
• Interviews with institutional investors found
they are dissatisfied with the level of social
and environmental reporting (Solomon 2007)
• Public disclosure is inadequate and therefore
private disclosure channels are developing

65. Private social and
environmental reporting
• Sparkes (2002) highlighted the growth in SEE
engagement as a main indicator that socially
responsible investment is moving away from
the margin and into mainstream investment
• Solomon and Solomon (2006) found from
interviews that engagement in this area has
become formalized
• It is evolving into a two-way process, with
companies asking institutional fund managers
questions as well as questions being directed
toward companies by shareholders

66. Legal perspective : ESG reporting
• Freshfields Bruckhaus Deringer (2005) concluded
that shareholder engagement on ESG issues would
be considered prudent from a legal perspective, as
long as it is properly
motivated, transparent, informed and objective
“… targeted and constructive engagement
would be acceptable (and in some cases
mandatory) where it is aimed at
improving the financial performance of an
investment over the relevant time
horizon, for example by encouraging
better environmental accountability or
more forward-thinking management”

67. Private Social and Environmental Reporting:
Mythisising or Demythologising Reality?
• Solomon and Darby (2005) explored whether
the dialogue between companies and their
institutional investors breaking down barriers
and misconceptions about social and
environmental risks and impacts by business
OR
• was it simply helping companies to create a
green myth about their attitudes to the
environment and society?

68. The Green Myth
• Interviews showed that both that companies
and investors were creating and
disseminating a 'green' myth, which
suggested to society that both companies
and investors were proactively working
toward improvements in social and
environmental management

69. Pension fund trustees and socially
responsible investment
Pension fund investment is complicated
• Pension fund members
• Investment analysts
• Fund managers
• TRUSTEES
• Consultants
Do trustees have a responsibility to adopt an
SRI policy for their pension funds?

70. Trustees Responsibility
Trustees are concerned about breaching their
fiduciary duties
• Under the rubric of ‘fiduciary duty’ much is
justified. The unexceptionable fiduciary
requirement that trustees may consider ‘solely’ the
interests of beneficiaries is adduced to justify non-
involvement in ‘social’ or ‘political’ investments.
Activism is dismissed as being unrelated to adding
long-term value to the trust portfolio.
Cowan v Scargill legal case spread fear in the hearts of
trustees on SRI

71. Duty of Trustees
Judge Sir Robert Megarry concluded :
‘. . . It is the duty of trustees, in the interest of
beneficiaries, to take advantage of the full
range of investments authorised by the terms
of the trust, instead of resolving to narrow that
range.’

72. Purpose of Trust
• Freshfields Bruckhaus Deringer (2005) considers that the
Cowan v Scargill case has had a misguided impact on trustee
behaviour
“… Cowan v Scargill cannot be relied upon to support
the single-minded pursuit of profit maximization, or
indeed any general rule governing investment
decision-making … Megarry's decision has been
distorted by commentators over time to support the
view that it is unlawful for pension fund trustees to do
anything but seek to maximize profits for their
beneficiaries… Read carefully, his decision stands for
an uncontroversial position that trustees must act for
the proper purpose of the trust, and not for
extraneous purposes. “

73. Profit Maximisation?
• Megarry, revisited his own judgement in 1989
• He said his decision did not support the view
that the fiduciary duties of pension fund
trustees were only consistent with profit
maximisation

74. Two instances where ESG considerations MUST be
included in fiduciary responsibility:
• consensus among the fund beneficiaries that
ESG factors should be taken into account
• if ESG considerations are reasonably
expected to have a material impact on the
financial performance of the investment

75. Why not profit maximisation?
Freshfields Bruckhaus Deringer (2005) gave powerful
reasons why Cowan v Scargill case does not
support sole pursuit of financial return
maximisation:
– case focused on a narrow issue
– Scargill represented himself
– Technical legal points were not made - Scargill was not
a lawyer
– no proper discussion of the case
– trustees involved had an ulterior motive for their
actions, supporting the failing coal industry.
– Scargill was thought not to have acted with integrity.
– The investment plan concerned had nothing in
common with a modern ESG strategy

76. Pension Funds & SRI
• Since July 2000 all UK pension fund trustees have had to
disclose the extent to which (if at all) they practise SRI
• This requirement [the new SRI disclosure requirement] has
had a significant and wide-ranging impact on the investment
community. The majority of trustees have incorporated
reference to social, ethical and environmental (SEE) issues in
their annual statements in 2001. Most of them have
delegated responsibility for implementing this to fund
managers which has added significantly to the growing
Socially Responsible Investment (socially responsible
investment) movement.

77. UK Pension Fund Trustees and Climate
Change
• “Financial Services
Accountability:
How Are Pension Fund Trustees
Dealing with Climate Change?”
• Research supported by ACCA /
ESRC / UKSIF / PMI / NAPF
• Preliminary Findings

78. Climate Change Predictions
• The Intergovernmental Panel on Climate Change
(IPCC) state by end of C21st global temperatures
will rise by 1.5 to 5.8 degrees centigrade resulting
in:
– thawing of permafrost
– declines in biodiversity
– rising sea levels
– extreme weather patterns
– flooding, droughts and storms
– direct, unpredictable and possibly
devastating consequences on human
civilisation

79. Stern Review (2006): Insurance Companies and
Climate Change
• "The insurance sector will face both
higher risks and broader
opportunities, but will require much
greater access to long-term capital
funding to be able to underwrite the
increased risks and costs of extreme
weather events" (Stern, 2006, p.304).

80. Pension Funds and
Climate Change
• "Considering that both the physical and
mitigation-related policy impacts of climate
change will influence the ability for
companies to create and maintain wealth for
shareholders … pension trustees will want to
ensure that these risks … are being addressed
in relation to the funds in their care"
(IPCC, 2005).

81. Climate Change Impact
• Innovest Strategic Value Advisors have
estimated that up to 5.1% (and perhaps
more) of market capitalisation may be at risk
from climate change
• Climate change has been identified as a
central issue for institutional investment
strategy (Mercer Investment
Consulting, 2006).

82. The Global Growth of SRI
• Socially responsible investment in the USA
• USA is a strong advocate of SRI
• More than $2 trillion (about 13%) of all US
investment follows SRI criteria
• Freshfields Bruckhaus Detinger (2005) explain that
given the US legal framework, ESG considerations
may be incorporated into investment
strategy, provided that they are pursued for genuine
reasons and that they do not compromise the
return to investment

83. Socially responsible investment in
Canada
• Jantzi Social Index
• Freshfields Bruckhaus Deringer (2005)
• No legislation encouraging trustees to take ESG
issues into account
• BUT some pension funds have included these issues
within the context of profit maximization
• Ontario Municipal Employees Retirement System
(OMERS)
• Ontario Teachers' Pension Plan Board
• The state of Manitoba has amended pension fund
law to specify that pursuit of ESG factors in
investment strategy does not represent a breach of
fiduciary duty

84. Socially responsible investment in
Australia
• Traditionally, Australian fund managers have
considered that SRI is incompatible with fiduciary
duty
• Freshfields Bruckhaus Deringer (2005) indicated
that Australia has been slower than the US in
integrating ESG issues
• Factors which have hindered SRI:
– confusion over what constitutes ESG factors
– a perception that SRI leads to underperformance
– confusion as to whether ESG investment is consistent
with fiduciary duty
– lack of demand from fund beneficiaries.

85. Socially responsible investment in continental
Europe
• European Commission has endorsed
SRI as an important instrument for
encouraging corporate social
responsibility
• European Social Investment Forum
(Eurosif) has helped to promote SRI

86. Socially responsible investment in
Japan
• Solomon et al. showed SRI has grown recently in
Japan
• Japan is a civil law country
• Law does not depend on cases
• Trust law in Japan stipulates that trustees have a
'duty of loyalty' to carry out their responsibilities in
good faith on behalf of their beneficiaries and to
avoid conflicts of interest
• No current legislation encouraging ESG issues to be
integrated into institutional investment
• Legal framework is an obstacle to SRI in Japan
• Freshfields Bruckhaus Deringer (2005) concludes
that ESG in Japan is in its very early stages

87. Casestudy 2 : General Motors
1. Read and prepare the Casestudy on General
Motors (Monks & Minow (2011)) for
discussion next class. Identify the corporate
governance issues faced.

88. Further Reading
• Solomon, Jill (2010) Corporate Governance
and Accountability 3rd Edition, Wiley, UK.
Ch.9-11
• Goergen, Marc (2012) International
Corporate Governance, Pearson. Ch.8
• Gary, Owen & Adams (1996) Ch.2-4
• CIMA - Performance Strategy: Study Text
(2011) BPP Learning Media Ltd. Part B : 4

89. Additional Readings (1)
• Mallin, C. A., Saadouni, B. and Briston, R. J. (1995) ‘The financial
performance of ethical investment funds’, Journal of Business Finance
and Accounting, 22, 483–96.
• Gregory, A., Matatko, J. and Luther, R. (1997) ‘Ethical unit trust financial
performance: small company effects and fund size effects’, Journal of
Business Finance and Accounting, 24(5), June, 705–725.
• Drexhage, G. (1998) ‘There’s money in ethics’, Global Investor, 109, 56.
• Williams, S. (1999) ‘UK ethical investment: A coming of age’, Journal of
Investing, summer, 58–75.
• Hancock, J. (1999) Making Gains with Values: The Ethical
Investor, Financial Times/Prentice Hall, London.
• Friedman, A. L. and Miles, S. (2001) ‘Socially responsible investment and
corporate social and environmental reporting in the UK: An exploratory
study’, British Accounting Review, 33, 523–548.
• Sparkes, R. (2002) Socially Responsible Investment: A Global
Revolution, John Wiley & Sons, Chichester, UK.
• Solomon, J. F., Solomon, A. and Norton, S. D. (2002) ‘Socially responsible
investment in the UK: Drivers and current issues’, Journal of General
Management, November 2001.

90. Additional Readings (2)
• Mercer Investment Consulting (2005) SRI: What Do Investment
Managers Think? 12st March, Mercer Human Resource Consulting
LLC and Investment Consulting Inc., New York, USA.
• Cobb, G., Collison, D., Power, D. and L. Stevenson (2005)
FTSE4Good: Perceptions and Performance, ACCA Research Report
No.88, Certified Accountants Educational Trust, London, UK.
• Freshfields Bruckhaus Deringer (2005) A Legal Framework for the
Integration of Environmental, Social and Governance Issues into
Institutional Investment, UNEP Finance Initiative, produced for the
Asset Management Working Group of the UNEP Finance
Initiative, October.
• Solomon, J. F. and L. Darby (2005) "Is Private Social, Ethical and
Environmental Disclosure Mythicizing or Demythologizing
Reality?", Accounting Forum, Vol.29, pp.27-47.
• Mercer Investment Consulting (2006) 2006 Fearless Forecast:
What Do Investment Managers Think About Responsible
Investment? March, Mercer Human Resource Consulting LLC and
Investment Consulting Inc., New York, USA.
• Solomon, J. F. and A. Solomon (2006) "Private Social, Ethical and
Environmental Disclosure", Accounting, Auditing and
Accountability Journal.
• Solomon J. F. (2008) Preliminary Report on Pension Fund Trustees
and Climate Change, ACCA (on blackboard).

91. NEXT Ideas for Discussion
• Carcello, Joseph
V., Hermanson, Dana R. &
Ye, Zhongxia (Shelly) (2011)
Corporate Governance Research in
Accounting and Auditing:
Insights, Practice Implications, and
Future Research
Directions, Auditing30. 3 (Aug

92. QUESTIONS?