Against the business case

One of the things that I find most depressing about the responsible investment movement, if it can be described as such, is the enthusiam for 'business case' arguments to address a particular issue/company/whatever. I understand why this happens, and I recognise that some very smart people have done some great work showing how issues that might have previously been seen as 'soft' are actually financially material.

But, personally, I find it problematic for a number of reasons. First, it's a bit of a lock in. Once you've committed to applying a test of financial materiality to whether or not an issue matters, how do you deal with issues that aren't material but would seem to deserve attention from any investor who considers themself responsible? Being a labour-oriented person, this is a particular concern as essentially I believe the share of wealth generated by a firm that goes to labour has declined too far and this should be reversed. It's difficult to make a business case type argument for this - you can talk about staff morale, turnover etc but most asset managers will just be thinking of increased labour costs.

Secondly, in practice this leads to the kind of decisions that seem inexplicable to ordinary punters. Take the re-election of James Murdoch as a non-exec at BSkyB last year, overwhelmingly supported by most shareholders. I suspect this decision was based on factors such as him having already given up the chair, having useful operational knowledge of the business (though of course this makes him non-independent) and it, basically, noy being worth one more heave to get him off the board. Yet his re-election came after he was criticised by both the parliamentary committee investigating phone-hacking and the broadcasting regulator Ofcom and despite there being obvious questions about his version of events in terms of News International's knowledge of hacking.

I guess what is at the heart of what I don't like is that making business case arguments implies that the merits of whether or not an issue can or should be addressed can be established by running a few models. I think these things are inherently political, and always have been. In contrast, one of the things you often hear in the responsible investment/corporate governance microcosm is that we need to be wary of 'politicising' issues or being seen to 'campaign' on them. (I heard a few asset managers express concern about the NOTW/BSkyB stuff being 'politicised', as if there had never been any political element to News Corp's operations in the UK.) As a tactic, or a presentational concern, I see the point. But as a way of thinking about what we are doing I think it is deeply flawed and cedes far too much ground to existing ways of operating within the financial system.

I do wonder if using business case arguments isn't also a bit 1990s. Given what we have gone through in the past few years, a faith in market-based 'solutions' to questions about how firms are run (both in terms of objectives and governance) has taken a bit of a battering. Will Davies' excellent paper on neo-communitarianism looks at what may be happening to broadly neoliberal ideas at the level of public pubic policy. I think this process may also occur at the micro level of corporate governance reform, with proposals being argued in different ways. Lynn Stout and Cass Sunstein have both argued for certain corporate governance ideas in 'behavioural' terms, for example.

Thinking responsible investment, I would also flag up Rory Sullivan's great article from last year where he argues -   

The critical first step is for us to be much more explicit about the goals and outcomes we wish to see from responsible investment. If responsible investment is not about the delivery of social or environmental purposes (beyond investment returns), then I suggest we retire the term ‘responsible investment’, and return to talking about investment (or, at a stretch, ‘enhanced analysis’) and wait for a new generation to take on the challenge of ensuring that the capital markets make a meaningful contribution to the goals of sustainable development.

That sounds about right to me. Mainstream asset managers used to get criticised by SRI types for asserting that they already factored ESG issues into investment decision-making (even though you couldn't tell from the outside). Yet with all the emphasis on business case argumentation, materiality and integration, isn't the responsible investment in danger of ending up not far away from that, but just with better processes for getting there? If the outcomes aren't much different what has been achieved? Incidentally, notice the same trend is at work looking at the slightly broader question of 'ownership'. After years of stressing the universal owner type model, note the renewed interest in concentrated portfolios with a limited number of stocks. Kind of where the mainstream asset management industry used to be before the rise of indexing, no?

Having said all this, it's important to recognise that business case/financial materiality is probably the dominant approach in the RI world currently, and likely to remain so for some time. But it will be interesting if public policy discussions head off in a different direction, as Will suggests, yet much of the RI sector remains wedded to arguing largely in business case mode alone.

NB. I recognise that the RI community is diverse, and some still do take an explicity ethical appproach. But, IMO, this is a clear minority, and the 'movement' in general is closer to the view I set out.