Investors need to be aware of the indirect social implications of unethical corporate governance practices.
Social equity is being compromised by poor corporate governance performance and disclosure, according to a report by NGO World Benchmarking Alliance (WBA).
Its analysis of 1,000 of the world’s largest companies highlighted that only 1% are performing acceptably against 18 core social indicators. Whilst this small minority scored above 15 out of 20, over half scored between zero and five.
Some of the social indicators included corporate governance issues, such as lobbying, tax and data privacy.
By not acting ethically across these practices, companies are having a negative impact on wider society, said Dan Neale, Social Transformation Lead for the WBA. Companies that lack transparency in these areas of governance should be challenged by investors through escalation of engagement, he said.
“It’s critical that ethical fundamentals are in place so companies are best able to contribute to a just and equitable society that leaves no one behind,” Neale told ESG Investor.
Corporate scores across the ‘Act Ethically’ section – lobbying, bribery/corruption, taxes and data privacy – averaged 29%, with the majority of companies failing to publicly disclose sufficient information.
For their practices to be considered ethical, companies should demonstrate that they are committed to respecting privacy rights, taking a socially responsible approach to corporate taxation, working to eliminate bribery and corruption, and lobbying responsibly and transparently, the report said.
“In addition to undermining their own reputation, companies not meeting these expectations may harm the achievement of the UN’s Sustainable Development Goals (SDGs) and the universal realisation of human rights,” it added
The report found that the majority of companies displayed very little transparency of their tax practices.
Seventy-five percent of companies failed to publish their tax strategies and only 9% disclosed the amount of tax paid in each jurisdiction where the company has residence. Just 4% of companies met all of WBA’s ethical indicators on tax to a satisfactory standard, the report said.
“Investors need to be asking whether investee companies have a public global tax approach and strategy in place. Is it overseen by a governance body or executive? Who is accountable for ensuring the company remains compliant with its tax approach? At a minimum, companies should be transparent about all of these things,” said Neale.
Current tax practice risks compromising the ability of governments to address social inequality and invest in essential services, including healthcare and education, said Neale.
Increased transparency is therefore vital so that to tax evasion and avoidance practices can be more easily identified and held accountable, he added.
Ensuring responsible tax practices is increasingly on the investor agenda and also a focus for policymakers. Last year, 140 countries agreeing to the Organisation for Economic Co-operation and Development’s (OECD) plans for a two-pillar global tax reform.
The first pillar will ensure a fairer distribution of profits and taxing rights to ensure developing countries are paid what they are owed, while the second is intended to introduce a global minimum tax rate of 15% by 2023, which will generate an estimated US$150 billion for governments around the world every year.
Catching controversial lobbying
At a minimum, companies pledging to promote sustainable practices should demonstrate they are not lobbying against progressive action towards the Paris Agreement or the SDGs, said Neale. Without transparency, however, it is more challenging for investors to identify whether companies are attempting to undermine sustainability-focused legislation.
Only 20% of companies have published their high-level approach to lobbying. Further, just 8% disclosed how much they spend on lobbying and influencing legislation, according to the WBA report.
Companies are expected to have a socially responsible approach to direct and indirect lobbying and political engagement which is overseen by a governance body and supported by “appropriate controls and transparency”, the report noted. Lobbying efforts should not “undermine either the 2030 agenda or international human rights framework”, WBA said.
While anti-climate lobbying – both in person and online – has been subject to increasing investor scrutiny, engaging with companies on their social-related lobbying should be just as important, said Neale.
The US state of California tried to introduce a law that would require companies to classify gig workers as employees, meaning they have more rights, such as access to minimum wage. However, companies including Uber and Lyft fought back with a counter-proposal, Proposition 22. It was approved by voters in 2020, but was eventually ruled unconstitutional.
The right to privacy online
The majority of companies are not publicly committing to protecting personal and employee/consumer data, or publishing a global approach to managing data privacy, said the WBA report.
“Obviously, tech firms are more impacted,” Neale said. “But all companies should be thinking about how they protect data and don’t exploit it, even in regions where they aren’t bound by regulations like the UK’s General Data Protection Regulation (GDPR).”
Fifty-two percent of assessed companies have made a public commitment to protecting personal data at the global level, but only 20% disclosed a global privacy statement concerning collecting, sharing and accessing customer and employee data. Overall, 17% of companies fulfilled both of these expectations, the report said.
Companies demonstrating a “genuine commitment to human rights” will adopt global best practices across their entire organisation, rather than “simply arbitraging the differences between their markets of operation”, WBA added.
Neale said investors should increase their efforts to hold companies accountable.
“There’s a shift in mindset needed here. Normalising taking action against companies that are not being transparent – by asking for this information to make publicly available or by subjecting corporates to a vote – is key.”