Corporate Governance : Red Lines Needed
The need for better, more transparent, corporate governance has never been greater more than a decade after the financial crisis. In the United Kingdom, in difficult times, we are hearing demands again and again from individuals in the public eye – whether they are politicians, members of civil society who have suddenly found themselves to be climate activists, members of the royal family, or business people - that share one thing – they are founded on a sense that basic ‘red lines’ have been crossed. They are taking a clear stand on issues based on their fundamental ethical values in a bid to do things differently and, as they see it, for a greater common purpose.
A steady spate of business news and the ongoing spectacle of human fallout of corporate failure suggests that we also need to find a way to re-align and bring to life the principles of corporate governance for which the UK is world renown, and which draw investors. To put it simply, we need more clear red lines in our agreed guidance on corporate purpose. The daily lives of all our people depend on it.
Larry Fink’s call for businesses to “make a positive contribution to society” more than 18 months ago resonated across the world. By August 2019, the business roundtable, a group of CEOs of nearly 200 major corporations in the United States issued a statement saying shareholder value was no longer their main objective. The cynics had a field day, there was much analysis and a fair amount of scepticism, and an entire industry based around making money from corporate governance advisory kicked into gear and revved up for something to change.
Against this backdrop, two things are clear. A long-term horizon for leadership is increasingly seen as critical and in the UK, business is in the best position for leadership in terms of inspiring public trust. Two issues that should be high on the agenda in any boardroom are the need to rethink diversity and inclusion beyond box-ticking and numbers, and paying attention to environmental, societal and governance (ESG) issues with a clear focus on climate risk. These are also the issues that have increasingly drawn the attention of regulators interested in a resilient socio-economic environment.
But British business also needs to be much more aware of its future customers, a younger generation. They are not likely to be fobbed off by CSR statements and over-hyped marketing drives. A generation that has responded overwhelmingly to a 16-year-old from Sweden on the climate peril that it is inheriting doesn’t care much about ‘comply or explain.’ It wants to know how a business operates – and that means identifying its red lines. Perhaps it is time that businesses took the lead in spelling them out.
Those that want to show leadership need to be transparent and clear about their purpose, and to put it in writing, to be ready to be challenged on it. Many distinguish themselves already by being part of socially responsible business gatherings that demonstrate a willingness to collaborate on best practice.
In the banking sector, there has been a critical global development with the launch of the Principles of Responsible Banking by the United Nations endorsed by 130 banks from 49 countries, representing more than US$47 trillion in assets, “As society’s expectations change, banks must be transparent and clear about how their products and services create value for their customers, clients, investors, as well as society. The Principles for Responsible Banking help any bank – whatever its starting point – to align its business strategy with society’s goals” states the UNEP Finance Initiative website, with details of the principles and footage of the launch last month.
Looking at who is there and who is missing among the UK players in the banking sector among the founding signatories is instructive. Of course, it is Principle Two, on impact and target-setting, that holds the nitty-gritty for potential change.
We need much more of the same, across industry sectors and in response to very specific issues – from climate impact to employees’ rewards and rights, gender equality and training and skills as jobs are lost and created in the Fourth Industrial revolution. Whether through redefining the corporate governance code that is seen as the basic underpinning for business, or individual business statements of purpose, this is now overdue.
Although there is much talk of the need for long-term thinking by businesses and their boardrooms, there is little evidence to show that it is happening, particularly in the banking sector. The piece about HSBC planning 10,000 job cuts in the FT which I linked to at the start, contains an anonymous quote: "we've known for years that we need to do something about our cost base, the largest component of which is people", pointing to questions again about short-term v long-term perspective in boardrooms.
When Mark Carney, the governor of the Bank of England, spoke about “cognitive dissonance” in a speech he gave around climate risk in April 2018, he was talking about the different aspects of a business being out of sync in their thinking. It was also within the specific context of risk to general insurers from climate change.
Referring to the review of the sector a few years ago by the Prudential Regulation Authority (PRA), he said “insurers need to be wary of cognitive dissonance within their organisations whereby risks that are managed prudently by their underwriters are ignored by the firm’s asset managers, such as in their real estate exposures.”
The risks posed to banks from climate change, he added, “have tended to be beyond their planning horizons. A recent survey by the PRA of banks accounting for around 90% of the UK banking system, found that these horizons averaged four years–before physical and litigation risks would be expected to manifest, and prior to stringent climate policies likely taking effect.”
But what if there is broader “cognitive dissonance” in business across industry sectors on the need to change business models radically to adapt to a fast-changing world? And if the UK’s largest bank by assets, HSBC, has senior individuals happy to be quoted as saying that they have known “for years’ that major job cuts were necessary, what does that say about planning horizons in boardrooms in the financial services sector – one where senior roles can reap large financial rewards?
The UK government is in the process of working out how to deliver on climate leadership when it comes to the stated aim of cutting emissions to net zero by 2050. There have been discussion papers and reports written –Climate Change and Green Finance by the FCA scrutinising the UK's transition to a greener economy and the specific actions by the regulator which might help it along.
A PRA report on the financial impact of climate change for insurers assesses physical climate change risk, with recommendations. In June 2019, the Treasury Committee launched an inquiry entitled Decarbonisation of the UK Economy and Green Finance into the role green finance can play in decarbonising the British economy. How the private sector is embracing sustainable finance and which steps regulators are taking to boost investments in green assets is being considered.
Global green bond issuance is set to surge past $200 billion in 2019 according to Moody’s. But the UK government has so far said it has no plans to issue a sovereign green bond, but continues to monitor the case for doing so.
Businesses were in fact the strongest contributors to overall green bond issuance in the second quarter, with $14.9billion of non-financial corporate issuance and $13.6 billion of financial corporate issuance accounting for 22% and 20% of total volume, respectively.
It was European issuers who accounted for a leading 54% of total issuance, driven by the large debut $6.7 billion sovereign green bond from the Government of the Netherlands, Moody’s reported. Business clearly needs to keep taking the lead on delivering change.
And when you take too long to write a blog post, sometimes events overtake it.
Corporations told to draw up climate rules or have them imposed the Guardian has this evening eported. Speaking in Tokyo at a conference held by the Taskforce on Climate-related Financial Disclosures (TCFD), Mr Carney has warned major corporations that they have two years to agree rules for reporting climate risks before global regulators devise their own and make them compulsory.
The reason given is “an appetite among investors” for businesses that show they understand climate risks. Now we need those same investors to get real about holding businesses to account on their purpose, and how they go about it – because at the end of the day they cannot survive without human capital, and endangering a productive and diverse supply of that is the greatest risk.