Global Policy Forum

By Lee Drutman

In the more than three years since the Enron scandal broke, we've heard an awful lot about "corporate accountability." It has become one of those delightful symbolic catchphrases that almost everyone supports (after all, who doesn't want more "corporate accountability"?). And yet, in achieving such mainstream acceptance, it has lost its punch as a means to hold corporations truly accountable.

For most people, "corporate accountability" brings to mind the likes of Ken Lay and Jeffrey Skilling and Bernard Ebbers and their financial accounting fictions that cost all those poor pensioners their retirements. And so, in the almost three years since the Sarbanes-Oxley Act was enacted into law in response to Enron and WorldCom, an awful lot of attention has been paid to rooting out accounting fraud. Indeed, this was the thrust of the Sarbanes-Oxley Act—to make sure corporations report their financial numbers honestly and accurately. The message in respectable circles was that corporations should be run transparently and devoid of cronyism. It's hard to argue with that. More than half of all households now have money in the stock market. They deserve to not be cheated by the likes of Lay and Ebbers.

Yet, at the same time—by focusing only on financial accounting—we've lost sight of broader definition of corporate accountability that should also include the environment, human rights, and other public social goods. For example, although the media and federal prosecutors focused on Enron's house-of-cards numbers games, how many people fretted about Enron's bribery of foreign officials and its construction of massive natural gas pipelines through a pristine region of a South American rainforest? Nor did many pay attention to documented human rights abuses at the company's Dahbol, India, power plant. Same with WorldCom. While Bernard Ebbers and fellow executives were indicted for massive accounting fraud, few paid attention to customer abuses at the phone company, such as the switching of customers' telephone carriers without permission.

Or consider the AIG scandal currently dominating headlines. Like almost all corporate scandals that have sustained media coverage in recent years, this one focuses on fraudulent accounting. The allegations are that that AIG engaged in a number of complex transactions, some of which involved subsidiaries in Bermuda and Barbados, in order to boost its revenue by as much as $1.7 billion. The purported victims are not AIG's individual customers (were they overcharged as AIG's corporate clients were?), nor their employees (are they treated fairly and paid well?), nor the public at large. The purported victims are AIG's investors, who were allegedly deceived by the phony accounting.

While the media and political powers that be focus on improving accounting standards (the current Washington debate is over Sarbanes-Oxley's mind-numbing Section 404, which involves internal accounting controls), a growing number of activist shareholders are pushing a much broader definition of corporate accountability. At least 211 shareholder resolutions on social and environmental issues are on tap for the 2005 proxy season, a new record. Socially responsible investors will be asking companies to address such issues as nondiscrimination in employment, better disclosure of environmental liabilities and health risks, disclosure of political ties, stopping environmentally damaging projects, getting companies to leave countries with human rights abuses, and improving the wages, benefits and conditions of workers. In fact, with political channels increasingly closed off, more and more public interest groups are turning to shareholder resolutions as a way to effect social change. Yet, if recent trends are any indication, few, if any of these shareholder proposals will receive anything close to majority support among the shareholders of major corporations.

And here's the troubling part. The reason that these resolutions don't stand a shot is the same reason that corporate accountability has become defined narrowly in terms of financial accounting—most shareholders invest first and foremost to grow money for their retirement or to send their kids to college, not to reform corporate behavior. They watch their stocks go up and down, hoping to catch a break and retire well. This is why people generally get angry when AIG or Enron or WorldCom pulls off accounting fraud—because it puts their retirements at risk. And this is why it becomes easy to define corporate accountability as accountability to shareholders, because that's so many of us.

What about defining corporate accountability more broadly? Well, even the most expansive definition of socially responsible investing (the Social Investment Forum defines socially responsible investing as investing that uses one or more of the three core socially responsible investing strategies—screening, shareholder advocacy, and community investing) accounts for only 11 percent of all assets. More narrowly, the assets of socially responsible funds (a decent proxy for the percentage of investors who deeply care about the consequences of corporate behavior) still represent only about one percent of all assets in the stock market.

Most investors, it seems, want their stock market returns. (And why shouldn't they—after all, isn't that what investment is all about?) They'd rather not hear about whether their fortune is being built on the backs of exploited workers, overcharged customers or polluted waterways. After all, there are kids to put through college, retirements to save for.

Yet, as long as the majority of investors are able to ignore this cognitive dissonance, it will be tough to expand the political battles of corporate accountability beyond issues of corporate governance and audits and other reforms designed to make sure companies are run honestly and profitably. Tougher questions of social and environmental accountability will be left to a minority of intrepid investors and corporate campaigners operating in a political environment that offers them little to no support.

Of course, there are cases where activist shareholders can convince managers that socially responsible policies are actually good for the bottom line. (PETA, for example, was able to convince McDonald's to adopt more humane slaughtering at a cost of $1 million per slaughtering line by showing it would yield fewer worker injuries and more meat per chicken). But mostly, it's a tough sell. Though one can find plenty of cosmetic socially responsible corporate programs and even more "corporate citizenship" rhetoric at most of the major companies, management is rarely willing to sacrifice profits to push real change—nor should they be, under current corporate governance guidelines—and almost always recommends against social and environmental proposals. As a result, very few resolutions proposing anything more radical than mild corporate governance reforms win a majority of shareholder votes.

The solution is a difficult one. It involves recognizing that there are trade-offs to stock market investing. Retirement savings cannot keep going up and up forever without some real consequences for the environment, workers, and even long-term economic stability. The solution involves long-term thinking, the kind that neither investors trying desperately to save for their retirements nor mutual fund investors trying to beat the market for the year are not likely to take. The market is unlikely to regulate itself. Instead, politics must get involved. Incentives must be changed. We must publicly recognize that corporate accountability means more than just providing cleanly accounted-for profits for shareholders. It means holding corporations accountable for everything they do—not just their accounting, but also how they treat the environment, their workers, and whether they value human rights. Without paying attention for these things, the more we invest, the bleaker our future will look.

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