With gas prices climbing to levels not seen in decades, Frank Dixon (MBA ’87) told the Sustainable Development Society on April 6th that they ought to climb higher.
Dixon joined Bernie Sheahan (MBA ’96), Director of Advisory Services for the International Finance Corporation (IFC), for a spirited conversation about corporate accountability. Both speakers spiced up an otherwise serious conversation about risk mitigation and corporate financial performance with references to Baywatch star Pamela Anderson, washing machines, and the Queen Mother’s skivvies.
Dixon, a Managing Director of Innovest Strategic Value Advisors, is a firm believer that today’s corporations are getting off easy – he asserted that corporations are not being held accountable for their full impact on society. Failure to incorporate externalities into prices, for example, forces companies to send inaccurate price signals and to act irresponsibly.
To tackle this problem and create an effective “Enron screen,” Dixon has crafted a new index called Total Corporate Responsibility (TCR). This index includes metrics from government relations to human capital to industrial ecology and hence, measures the full social and environmental impact of companies’ products and business practices. Dixon believes companies that perform well on his TCR index are also the companies that succeed financially – and he has the numbers to prove it.
Results from Dixon’s extensive research – he oversees 35 analysts assessing the performance of over 2,000 firms – show positive correlations between social and financial performance. As Dixon explained, “superior sustainability performance serves as a proxy for management quality.” Perhaps this is why Socially Responsible Investing (SRI) has grown 40 percent faster than all other assets in the US since 1995. SRI assets under management currently stand at $2.2 trillion and Morningstar and Lipper give 75% of the largest SRI funds top scores.
Dixon believes that existing economic and political systems compel firms to be irresponsible, make unethical behavior more likely, and increase the risk of catastrophic investor losses. Government lobbying efforts, for example, cause governments to focus on short term solutions and create corporate welfare. According to Dixon, “washing machines are man-made entities meant to wash clothes. Corporations are man-made entities meant to make profit. Neither should influence the shaping of public policy.”
Dixon also believes that we must avoid modern day “world is flat” assumptions. According to the logic of the discount rate, which we hold dear here at HBS, the lives of our grandchildren are worthless. The discount rate, according to Dixon, “implies that future generations and the resources that support them are nearly valueless and don’t need to be considered when making economic decisions.”
Sheahan, who in addition to leading IFC’s company-wide sustainability initiative was IFC’s Chief Strategist and Director of Operational Strategy, provided a humorous anecdote of how careful consideration of social and environmental factors is a critical risk mitigation strategy.
Several years ago, one of Marks and Spencer’s most profitable projects was selling underwear to the Queen Mother. When sales halted, they sought an alternate revenue stream and designed a leather jacket sourced in India. However, concern about the treatment of the cows soon raised the ire of PETA (People for the Ethical Treatment of Animals) supported by Baywatch superstar Pamela Anderson. Sheahan explained that along an interdependent international supply chain, “what isn’t your fault can still hurt you.” The new leather jacket project was a disaster.
Sheahan told another poignant story of an accountability failure, this time
set in a mine in the Junin region of Ecuador. Concerned about community displacement, deforestation, and health risks introduced by the actions of the Mitsubishi mining subsidiary Bishimetals, several Junin community members hauled articles from the mine, inventoried the goods to show no intention to steal, and then burned the mine to the ground. To avoid these embarrassing and disastrous outcomes, Sheahan advocated the use of the Equator Principles, an international framework developed in 2002 with guidance from the IFC for banks to better assess, mitigate, and monitor the credit and reputation risks associated with financing development projects.
Dixon’s “best in class” ratings send clear, relevant and actionable signals to investors and firms. Since capital markets strongly influence corporate strategy, Dixon and Sheahan believe that indices such as TCR and frameworks such as the Equator Principles can be primary drivers of system change, sustainability, and effective capitalism. Both emphasize how careful consideration of social and environmental factors is not only a necessary risk mitigation strategy, but a critical element of successful corporate financial performance.