Sleeping with the enemy

There will be new players
Active shareholders will increasingly become the norm, asking searching questions. Any board which is behind its competitors in strategic risk management may well be vulnerable. Perhaps this has left some of you quaking in your boots, giving you sleepless nights. But what if a new and novel approach could actually reduce risk?

You will need new solutions
Your company will need to cater for the beliefs of many (ethical) investors and other stakeholders. Sleeping with the enemy is a controversial title. I prefer engagement. In the good old days, it used to happen before the sleeping. Those companies that don't do it may see their share price affected. A fund manager once confided to me: "We research, read weighty tomes from analysts, discuss a stock at length, visit the company, meet the board ... and then we take a bet." How much better life would be for fund managers if they could rest assured that the company had taken steps to protect its long term interests. A number of reports have documented how companies with proactive, environmenlally respectful and socially respectful policies have done better.

Tomorrow's company
The Tomorrow's Company report (Royal Society for the Encouragement of Arts, Manufactures and Commerce) highlighted how companies that emphasised their "licence to operate" produced better returns on the stock market. The licence to operate is granted by stakeholders: the local, regional and national community, customers, suppliers and employees as well as the shareholders. Tomorrow's company could be your company, Tomorrow could belong to you. The Shareholder Action Service introduced its bespoke Financially Advantageous Shareholder Action service (FASA) for institutions and pension funds. It is a win-win-win, triple whammy, lower-risk approach to ethical investments. It's not only good for the client, but good for the company as it attempts to improve its bottom line. It marries shareholder engagement to environmental concern with the attraction of potentially improved stock market returns.

Traditionally, most ethical investors have sold a stock if they object to the company. However, the FASA service gives them the opportunity to retain the share, the dividend, the warm glow of a rising share price and still exercise their views. They can have their cake and eat it. Did I write win-win-win? I meant win-win-win-win. For, more than that, this is ethical investment with zero risk from disinvestment or increased volatility. It's legal, it's open and it doesn't endanger returns. Under these circumstances, doing the opposite and disinvesting could mean small company bias, decreased sales, pension fund trustees open to the charge of ignoring an opportunity to increase returns ... and potential litigation - something that trustees dread as they are now personally liable.

Ethical investors could be your friends
Ethical investors are the most loyal of investors. In these days of volatility and sliding share prices in the "old economy", investors that stick with you through thick or thin could be worth their weight in gold. A Bath University report showed that when ethical investors incurred a two per cent shortfall per annum in their fund, over 90% retained their holding. With a two per cent ethical benefit, more than 95% retained their holding. In other words, they were easily pleased, as interested in the ethics as in the finance, and less likely to be one of the now ubiquitous fly-by-night investors in the new economy. Large companies suffer from the "finger in many pies" problem, meaning that they are likely to fall foul of one or more of the common ethical investors' objections. Small company bias is a problem, and fund managers of ethical investors would be delighted if main market companies were to give them the slightest excuse to hold on to stocks instead of disposing of them. Sales of your stock by disenchanted investors could be reduced by proactive engagement. With the rise in take-overs in recent years, a little-known problem is that a popular stock with ethical investors may be "force-sold" if it is taken over by or takes over an "objectionable" company. When a stock becomes non-ethical, it is sold. This effect could be reduced by proactive checking and prior disposals or, better, by amelioration of a company's position on the problem issue. Of course, this would apply mostly to noncore issues only. A tobacco company will always be anathema, but it may gain investors on the margin, by, for example, acting perceptibly in some way against sales to minors and thus occupying the high ground. Among your stakeholders are millions of people who supported Vietnam war marches in the 1960s, anti-apartheid demonstrations in the '70s, Live Aid events in the '80s, and Red Nose Day events in the '90s. Others give clothes to Oxfam or recycle their bottles, cans and newspapers. They are, arguably, more likely to be decision-makers and people of influence. Companies do, sometimes, respond admirably, even to the smallest of investors. One particular client of ours held just {.150 of shares in a company worth billions of pounds, one of Britain's largest. His shareholding accounted for approximately 0.000 006% of the company. We indicated his concerns to the company and were pleasantly surprised to be invited to a board-level meeting.

Public pressure
Public, pressure group, ethical investor and City-based pressure is frequently interwoven and overlapping. There is growing concern among the public about ethical issues. For example, four out of five people want to avoid animal testing for cosmetics (EIRIS 1998)

Campaign group economic pressure
Many campaign groups have shifted their activities from disengagement from poorly performing companies to constructive dialogue with companies that show a commitment to improve. Pressure groups' tactics can be disruptive of company operations and can have publicity repercussions far beyond the scope of the actions.

There is a plethora of pressure groups. Large and vulnerable companies that don't already engage with them will need to start doing so. You can''t just hope they will go away. If their concerns are legitimate, it may be better in the long term to meet them. Companies also need to know how pressure groups (including disaffected customers) use the internet to further their aims. This is an important part of managing risks to a company's reputation.

City pressure
Jupiter Tyndall, a leading ethical investment fund, in its statement of investment principles states: "We believe that companies' environmental efforts should be recognised - and one way that we can do this is by investing in them."

A US report found that oil spills and other environmental disasters cut oil companies' share prices by 1.5% and reduced their market value by an average of$390m. Losses on share value cost far more than the clean-up operations required.

"This suggests that the market is factoring in other potential and future effects and possibly showing the influence of ethical investors disinvesting," according to Peter Webster (Ethical Investor magazine, Nov 1997).

Investor pressure
Individuals are becoming more aware of the power they have and will be able to influence the way companies behave. For example, in the row over Shell's Brent Spar disposal, Shells image suffered and a European boycott loomed.

The rapid growth of ethical investment funds shows that conscience could be a factor in the market, especially if more people knew about these funds, according to Investment Adviser (October 1997). Since 1997, the amount of money invested in the ethical sector has tripled to over £2bn, but this will increase exponentially with changes to the rules affecting pension funds.

Institutions
Institutions control 80% of shares. An EIRIS survey found that over 50% of respondents did not know where their money was invested and it worried them. Individual shareholders are putting increasing pressure on them to reflect their views. In the USA, 10% of all funds under management are invested according to one ethical criterion or more.--
Leon Pein, director, Shareholder Action Service, was ethical investment adviser at the Ethical investment Research Service 1995-1998, and previously a business and environment consultant for corporate companies.

Guide to action groups
Pressure groups range from the widely acceptable, such as Consumers Association, publishers of Which?, to fanatical fringe activists, such as The Group With No Name that recently targeted investors in Huntingdon Life Sciences which runs Europe's largest animal testing laboratory. Perhaps one of the most chilling messages comes from Global Response's website (although Global Response itself merely encourages people to lobby the environmentally unfriendly) which quotes U. Utah Phillips: "The Earth is not dying - it is being killed. And the people who are killing it have names and addresses". Below are some groups and their aims: