Professional Documents
Culture Documents
Investment: A Model
for Business and Society Rodger Spiller
ABSTRACT. Two key questions lie at the heart of In search of ethical business
the business challenge for business ethics: is it possible
for business and investors to do well while doing Ethical Business (EB) philosophy emphasises
good; and if so, how can this be achieved? This paper doing well while doing good and redefines the
adopts an international investment perspective to meaning of corporate responsibility: Only if
address these questions. It demonstrates that it is
business learns that to do well it has to do good
possible for business and investors to achieve a triple
bottom line of environmental, social and financial
can we hope to tackle the major social challenges
performance. facing developed societies today (Drucker, 1984,
A new integrated model of Ethical Business p. 55). Within EB, business is urged to take
including an Ethical Scorecard performance mea- responsibility for the whole. Harman (1990)
surement technology is presented based on interna- explains why this is necessary:
tional ethical investment criteria and case studies of
businesses rated highly by ethical investors. Ethical Business has become, in this last half-century, the
Performance Scores are presented for these businesses most powerful institution on the planet. The
and New Zealand business. Examples from New dominant institution in any society needs to take
Zealand are presented to illustrate the Ethical responsibility for the whole. This is a new role for
Scorecard and ethical business practice. The model business, not yet well understood and accepted.
and scoring system provide a basis for international (Harman, 1990, p. 12)
benchmarking of ethical business to assist investors,
managers and researchers. In 1991 Kanter developed this theme by posing
some challenging root questions about what
guides business decisions:
Is wealth production really the goal of business, as
some economists say, or is wealth a by-product,
an incentive en route to other ends? When a cor-
Rodger Spiller is Director of the New Zealand Centre for porate mission statement contains only one goal
Business Ethics, which works with the Auckland to create shareholder value has an essential ingre-
University of Technology, Auckland University, dient been lost? (Kanter, 1991, p. 10)
Manukau Institute of Technology and private sector
support to encourage business ethics research, education Her conclusion reflects the essence of EB:
and practice. Rodger is Managing Director of the personal
investment advisory and financial planning firm, Money Money should never be separated from mission. It
Matters (NZ) Ltd, a Certified Financial Planner and is an instrument, not an end. Detached from
Chartered Accountant. Rodgers PhD is in business values, it may indeed be the root of all evil. Linked
ethics and investment. He has researched ethical business effectively to social purpose, it can be the root of
practices in Australasia, the US and Europe. He is opportunity. (Kanter, 1991, p. 10)
Executive Director of New Zealand Businesses for Social
Responsibility and a Director of Transparency Similar questions and the concomitant search for
International (NZ). models of EB prompted the establishment in
1990 of The Business Enterprise Trust, whose . . . more work by the socially responsible invest-
US Trustees included the Board Chairs of busi- ment community on the important question of
nesses including Johnson and Johnson, IBM and how to define more explicitly what we all instinc-
Hewlett Packard, and such noted academics as tively recognise as a socially responsible company.
Peter Drucker and Robert Reich. The Trust This daunting task of putting all the pieces together
into a cohesive whole still lies ahead for those who
placed advertisements in the New York Times and
would reimagine and redefine the relationship
Wall Street Journal, asking readers to Tell us between corporations and society. (Lyndenberg,
about the business decision you most admire: 1996, p. 76)
Its one of the great untold stories in business the This paper tackles this daunting task by inte-
success of individuals and companies who know grating and expanding the management and EI
theres more to good business than next quarters
approaches. To date there have been minimal
bottom line:
connections between these two worlds, which is
Employees who arent afraid to show moral unfortunate because the EI perspective has the
courage and act on principle. potential to make a significant contribution in
Entrepreneurs willing to take risks for a assisting management theorists and practitioners.
socially visionary product or service. The model and examples presented here can
Managers who have pioneered enlightened
provide a framework for recognising, under-
business practices.
Investors and executives with a long-term standing, implementing and evaluating EB,
perspective and commitment to the com- thereby increasing the quality and quantity of EB.
monweal. Before presenting some findings from my search
for EB I firstly address the financial objection that
If you have encountered such acts of courage, prevents many business practitioners and investors
integrity or social vision in business we invite you
from seriously considering EB.
to nominate them for one of the 1990 Business
Enterprise Awards. . . . These stories become
models for all of us and for the next generation
of business leaders. They help shape the future of Ethical rewards and the triple bottom line
American business. (Hanson, 1990, p. 1)
Many investors believe that EB provides superior
This paper responds to the call from leading financial performance. Benefits that a company
business people and academics such as those might experience include: increasing productivity
involved with the Business Enterprise Trust for and loyalty of employees; improving customer
more research defining and illustrating EB. This sales and loyalty; growing supplier commitment;
is done through adopting an international invest- improving environmental quality; and reducing
ment perspective and linking this with manage- legislative demands with strengthening commu-
ment and business ethics. A particular focus is nity and government relations. Management
ethical investment (EI) in which investors are quality can increase and when combined
constantly judging the environmental, social, and with enhanced relationships with stakeholders,
financial performance of business and considering can improve financial performance for share-
this triple bottom line in their investment holders.
decision making. Indeed, EI researchers make an Despite these potential benefits critics argue
award similar to that of the Business Enterprise that EI and EB must involve a reduction in
Award whenever they assess a business as having financial return and/or an increase in risk. Many
satisfied their investment criteria. business practitioners and investors who believe
The EI community has identified a similar that environmental and social responsibility are
need to that articulated by the Business a distraction from the business of business,
Enterprise Trust. United States socially respon- which they see as being solely the task of making
sible investment (the US term for EI) researcher profits, share this view. The belief has led to a
Steven Lydenberg (1996) called for tendency for EI and EB to be dismissed. The EI
Ethical Business and Investment 151
experience provides valuable insights to address ronmental, social, and financial wealth creation.
this objection. The major financial objection to EI and EB has
The most comprehensive and ongoing guide therefore been resolved.
to the performance of EI in the US is the
Domini Social Index (DSI) created by leading EI
research organisation Kinder, Lydenberg, Domini The Four Ps of ethical business
and Co., Inc. (KLD). The DSI comprises 400
companies and is designed to represent the Having shown that business can do well while
market of stocks that most ethical investors buy doing good the next question is how can this be
from, thereby acting as a standard by which the achieved? My approach to this question was two-
performance of ethically screened portfolios can pronged: on the one hand to research com-
be measured. It can be compared with the S&P panies internationally rated most highly by EI
500, which represents the market of large capi- researchers, and, on the other, to review a wide
talisation stocks most investors buy from. The range of literature from texts on ethics through
performance of the DSI has demonstrated that to accountancy. My findings are summarised in
there is no cost to EI (KLD, 1996; Luck and what I refer to as the Four Ps of ethical
Pillote, 1993). This conclusion is consistent with business: purpose, principles, practices, and perfor-
those of Hamilton, Jo and Statman (1993) in the mance measurement. This model is illustrated in
US and Mallin, Saadouni and Briston (1995) in Figure 1 below.
the UK who found no significant difference The purpose of EB is to create environmental,
between the performance of ethical funds and social, and financial wealth, thereby making a
that of conventional funds. positive contribution to the environment and
Providing financial support for the view society in a financially responsible manner. The
that EB outperforms conventional business, principles that guide the EB include fairness,
Herremans, Akathaporn and McInnes (1993) caring, honesty, and courage. EB practices address
found that UK socially responsible companies stakeholder concerns such stakeholders include
have higher stock market returns, and the authors the community, the environment, employees,
suggested that ethical investing strategies are fun- customers, suppliers, and shareholders. EB per-
damentally sound since their selection criteria formance measurement involves accounting for
help to effectively lower investment risk. More environmental and social as well as financial
recently, Russo and Fouts (1997) found that envi- performance. This involves qualitative as well as
ronmental performance and economic perfor- quantitative measures and utilising both stake-
mance were positively correlated in the US, with holder perceptions and company data to deter-
environmentally conscious portfolios achieving mine performance in terms of the triple bottom
better returns compared both with the S&P 500 line.
index and those companies considered to be not
environmentally conscious. My own analysis of
the performance of the NZSE 40 (the index of Purpose
the 40 largest companies listed on the New
Zealand Stock Exchange) and an ethical portfolio The EB aim to create environmental and social
screened for the conventional sin stocks of as well as financial wealth occurs most explicitly
alcohol, gambling, and tobacco showed that there in those businesses that respond to the challenge
was no significant difference between the two made by Drucker (1984) for business to identify
portfolios for the five years to 31 March 1998. and respond to environmental and social needs
The international experience suggests that by transforming these problems into oppor-
there need not be a cost to investing ethically. tunities.
Accordingly, it can be concluded that it is The approach recommended by Drucker
possible for investors to do well while doing (1984) goes beyond the views that business
good, achieving a triple bottom line of envi- should do well in order to do good or that
152 Rodger Spiller
Figure 1.
business social responsibility can be achieved breathing. You must breathe to live: but you
through simply donating money. For him, social dont live to breathe. In other words, focusing
responsibility extends from the goods and services solely on profit maximisation fails to provide a
created through to the way in which these are sufficiently meaningful purpose for business and
produced, and beyond. A key challenge here is investors to commit to, and fails to recognise a
to recognise the relationship between the business wish to assist other people and the planet.
and the environmental and social problems that
the business could assist in addressing. Mitroff,
Mason and Pearson (1994) describe this as a spir- Principles
itual activity and encourage business to pursue
world service and spirituality. They maintain The principles that ethical investors want to see
that the essence of spirituality in organisations is reflected in the businesses in which they invest
can be deduced from an analysis of Aristotelian
to encourage and allow everyone involved with virtues. While there is room for debate about
an organisation to draw his or her own unique which virtues to select and what they should be
spiritual connections between the resources of called, the selection that follows provides a sketch
that organisation and an important social or envi- of what a plausible list might look like.
ronmental problem that those resources could
help alleviate. (Mitroff, Mason and Pearson, 1994, Honesty lies at the heart of the functioning
p. 81) of business, which is built on a free-enter-
prise model of individual choice and liberty.
EB practitioners and ethical investors argue that Informed choice and a properly functioning
profit is a means to an end rather than an end in market each require honesty. A lack of
itself. OToole (1985) noted that profits are like honesty impacts not just on the participants
Ethical Business and Investment 153
who have been deceived in a transaction but tion of purpose and principles. While it is rela-
also on the business system that relies on tively easy for a business to produce a statement
an ability to make mutually beneficial agree- of purpose and principles, it is far more chal-
ments (Solomon, 1992). lenging to implement it.
The virtue of fairness or justice implies To guide implementation, I have identified
that a company has a sense of value, ten key business practices for each of the six
being willing to exchange value for value in main stakeholder groups: community; environ-
a market that is inherently subjective ment; employees; customers; suppliers, and share-
(Solomon, 1992). It also involves a company holders. By necessity many of these practices
being concerned to have fairness charac- summarise various facets, for example Fulfilling
terise all of its relationships, including those work includes employee work/life balance.
with society and the environment. Justice These practices are drawn from applying the
was considered by both Aristotle and Plato EI perspective to an evaluation of EB case
to be the basic virtue. As fairness, it is the studies and business literature. As would be
essential element in keeping the members expected in an emerging field, the list of
of an organisation and everyone concerned 60 practices summarised below is neither exhaus-
with it (in other words all the stakeholders) tive, nor uncontroversial. However, it does
committed to and supportive of the provide a starting point, a menu from which
enterprise. Without this commitment and companies can choose, preferably in conjunction
support business cannot function effectively. with their stakeholders, the areas on which to
Caring is a fundamental attitude within the focus.
model EB. It involves a genuine concern
and attention to the well-being of others 1. Community
and the environment. Solomon (1992) 1.1. Generous financial donations
describes caring as the glue of organisa- 1.2. Innovative giving
tional life an attitude that provides 1.3. Support for education and job training
employees and all other stakeholders with a programmes
real sense of connection to, and support 1.4. Direct involvement in community projects
from, the business. This in turn provides a and affairs
strong bond with the business and a reason 1.5. Community volunteer programmes
for sticking with it and also caring about 1.6. Support for the local community
its well-being (Solomon, 1992, p. 226). 1.7. Campaigning for environmental and social
Courage was the first virtue listed by change
Aristotle. This meant courage in combat, 1.8. An employee-led approach to philanthropy
which can be equated to the courage 1.9. Efficient and effective community activity
displayed by EB practitioners who refuse to 1.10. Disclosure of environmental and social
accept that the only social responsibility of performance
investors and business is profit maximisation.
Describing courage as the essence of great- 2. Environment
ness, OToole (1985) maintains that this 2.1. Environmental policies, organisation and
virtue not only serves business and society management
but is also critical for the survival of 2.2. Materials policy of reduction, reuse and
capitalism. recycling
2.3. Monitoring, minimising and taking
responsibility for releases to the environ-
Practices ment
2.4. Waste management
It is at the level of business practices that the true 2.5. Energy conservation
test of EB occurs as practices reflect the applica- 2.6. Effective emergency response
154 Rodger Spiller
and strategy into performance objectives and accounting technology and the utilisation of this
measures, along with targets and initiatives in as a management tool. The greater the involve-
terms of what Kaplan and Norton describe as ment of the company, the greater the potential
four balanced perspectives: financial, customers, for it to obtain the benefits offered from mea-
internal business processes, and learning and suring performance in terms of the triple bottom
growth. line. The Ethical Scorecard offers a diagnostic
The Ethical Scorecard extends the Balanced tool and strategy for integrating various man-
Scorecard focus on satisfying shareholders and agement technologies aimed at improving the
customers to take account of the other primary companys performance from quality manage-
stakeholders in terms of employees, suppliers, ment through to employee satisfaction tools.
community, and the environment. While the The Ethical Scorecard includes assessments of
Balanced Scorecard focuses on how the company the significance of company performance relative
appears to its shareholders and customers, the to other companies. This benchmarking concept
Ethical Scorecard incorporates the perceptions of was applied by Kirk Hanson of the Stanford
all stakeholders. Business School in his Social Evaluation of
The companys purpose and vision is central The Body Shop. Introducing the report, he
to and the starting point for The Ethical noted that:
Scorecard. Purpose is considered in terms of
creating wealth through achieving a triple bottom The company requested an examination of its
line of environmental, social and financial per- social performance on those dimensions addressed
formance. in its Mission Statement and Trading Charter, but
Ethical principles are highlighted within The authorised me to include any other dimensions
which I felt were critical to an assessment of its
Ethical Scorecard. These principles can be
social impact and the fulfilment of its mission.
derived from a companys Code of Ethics and . . . I sought to evaluate The Body Shop against
where this does not exist can be created, prefer- comparable companies, against the companys own
ably through a process of dialogue with stake- values and goals, against the practices of the most
holders. Ethical principles provide an important outstanding companies (best practice), and
navigational tool to guide action. against the companys claims regarding its social
The primary focus of The Ethical Scorecard is performance. (Hanson, 1995, pp. 1, 3)
the companys practices. These can be categorised
in terms of the six main stakeholder groups and The terminology used in the Ethical Scorecard
considered in terms of the inventory of 60 best is similar to that applied by Boston based invest-
practices that I created based on international ment research firm Kinder, Lydenberg and
case studies and investment analysis and which Domini in its rating of strengths and concerns.
are presented above. I have assigned numeric ratings to assess each of
The Ethical Scorecard can be prepared at the sixty practices to obtain an overall quantita-
varying levels of depth. It can simply be tive Ethical Performance Score (EPS) that sum-
an account of publicly available information marises the Ethical Scorecard. A major strength
regarding quantitative measures, from the level of is recorded as 2, a strength as 1, no strengths or
donations disclosed in the companys accounts concerns, or equal strengths and concerns, or no
to its financial results, and qualitative assessments information as 0, a concern as 1 and a major
such as stakeholder perceptions of company per- concern as 2. The perfect EPS is 120 where
formance included in media reports. Additional each of the sixty practices is a major strength.
research with stakeholders can strengthen this Conversely the worst EPS is 120 where each
data. of the sixty practices is a major concern. A
Company involvement is preferable. This can neutral score is 0.
range from the provision of information to The model practices represent the ideal
external researchers, through to a complete company from an EI perspective and what the
embracing of the Ethical Scorecard and ethical EB case study companies, particularly The Body
156 Rodger Spiller
Shop and Ben & Jerrys state that they aspire to Ultimately, the Ethical Scorecard has the
achieve. These companies are not perfect nor do ability not only to assist investors but also to
they claim to be. Perfection is not a realistic provide a major contribution to company man-
expectation. What ethical investors do expect is agement wishing to improve business environ-
a positive score and continuous improvement. In mental, social, and financial performance. It
some cases information about these practices was provides a valuable tool for operationalising ethics
not available from the reports provided by the EB and value-based leadership.
companies. This highlights a shortfall between
the EI reporting requirements and existing EB
reporting. The Ethical Scorecard addresses this Ethical business in New Zealand
shortcoming by integrating the EI perspective
with EB. This section presents the EPS for the NZSE 40
EPS ratings for each of the international case index of the largest 40 companies on the New
study companies are presented in Table I. These Zealand sharemarket and provides examples of
ratings are not presented as a definitive statement one practice from each stakeholder grouping
of the ethical performance of the companies, but from the Ethical Scorecard of the NZSE 40. This
simply report the findings based on the practices analysis is based on an extensive search of a range
information on which this research is based. of information sources including companies,
The EPS results reflect the pioneering work media and special interest groups. The focus was
of The Body Shop and Ben & Jerrys. The the 1996 reporting year supplemented by infor-
similarity in their scores may be partly attributed mation from the recent history prior to 1996 of
to their sharing ideas and insights regarding the NZSE 40 companies.
NPB initiatives. The EPS results for Blackmores The EPS for the NZSE 40 was 5. In per-
and Lend Lease indicate a solid basis for the centage terms this equates to 52%. While there
positive regard in which ethical investors hold is substantial room for improvement the NZSE
these companies. 40 EPS and Ethical Scorecard, examples from
The Ethical Scorecard can be used as a tool which are presented below, reflects a wide
for identifying companies whose practices are range of positive practices. The highest ranked
exemplary. This process is reflected in business company was Fisher & Paykel which at an EPS
ethics awards, which have an important role to of 32 or 63% was clearly in first position. This
play in creating improved business practice, by performance is similar to the international case
recognising leading companies whose practices study companies. The examples below illustrate
provide examples for others to learn from. It is some of the Fisher & Paykel practices along with
being used in the New Zealand Business Ethics other best practices from the NZSE 40.
Awards, which are being modelled on The
Business Enterprise Trust.
TABLE I
Ethical performance scores
union (Metro, 1996, p. 79). The Warehouse take part. Based around the three Rs of
induction programme consists of six environmental policy reduce, reuse and
modules that are completed in 10 hours recycle Clean Retail includes such prac-
over three months. Each Warehouse store tices as reducing waste, energy and water
has an in-store trainer responsible for use. Retailers are encouraged to use less
on-the-job coaching and operational packaging, recycle all waste, carry out envi-
training. An area trainer responsible for ronmental audits, set achievable goals, and
in-house training supervises this position. monitor procedures on a regular basis (New
The training programme includes units Zealand Hardware, 1997). St Lukes has
on customer service, loss prevention, also demonstrated social responsibility by
security, health and safety, a two-stage man- adopting a policy phasing out smoking in
agement development component and area public areas in its seven shopping centres
management development (The Merchant, (The New Zealand Herald, 8 April 1994).
December 1995).
The Merchant: 1995, Education and Training: Keys to New Zealand Refining: 1996, Annual Report
Professionalism (December). (Whangarei).
Metro: 1996, Is This Man a Saint? (December). OToole, J.: 1985, Vanguard Management (Doubleday,
Milburn New Zealand: 1996, Annual Report New York).
(Christchurch). Ports of Auckland: 1996, Annual Report (Auckland).
Mitroff, I. I., R. O. Mason and C. M. Pearson: Russo, M. V. and P. A. Fouts: 1997, A Resource-
1994, Frame Break: The Radical Redesign of based Perspective on Corporate Environmental
American Business ( Jossey-Bass Publishers, San Performance and Profitability, Academy of
Francisco). Management Journal 40(3), 534559.
New Zealand Business: 1992, How to Measure Your Solomon, R. C.: 1992, Ethics and Excellence (Oxford
Teams Performance (July). University Press, Oxford).
New Zealand Hardware: 1997, West City New St Lukes Group: 1996, Annual Report (Auckland).
Zealands First Eco Shopping Centre ( July). The Sunday Star: 1993, Rhetoric and Reality (15
The New Zealand Herald: 1994, Shopping Centres to August).
Ban Smoking (8 April).
The New Zealand Herald: 1994, Milburn Idea Used
for Oil (15 September). New Zealand Centre for Business Ethics,
The New Zealand Herald: 1995, Interest-free Home P.O. Box 250,
Plan (22 June). Auckland 1,
The New Zealand Manufacturer: 1996, Insulate your New Zealand
Pallet (3 March). E-mail: rodger@moneymatters.co.nz