Centre Main

Advocacy Update

 

June 2008

 

Where Do You Stand?
This month we introduce a new feature of Advocacy Update. Each month we will ask a quick question or two, seeking your views on a monthly topical issue, hoping from your responses to better inform our work on the issues, concerns, and topics of most interest to you and your local financial markets. Check our web site and successive monthly newsletters where we will report back with your feedback and how we have incorporated it into advocacy and research.

 

Top Story:  Green or Greed: What Price for Ethics?
Next time you visit your local retailer, browse the "Ethics" aisle and see what’s on sale. Specials this week may include discounted “greenwash,” half-priced corporate labor scandals, and mark-downs on faux social responsibility. Far-fetched? Not entirely: as we were recently reminded by a Wall Street Journal article on consumers’ perceptions of company ethics, there is indeed a bottom-line consideration attached to ethical corporate behavior. Social and environmental consciousness has become both a major branding focus and an incentive to “sell ethics” at many companies. Certainly there’s no objection to companies being encouraged to behave ethically by such drivers, as long as they are not the only motivation.

 

After all, if good corporate behavior is premised only on profit, what happens when selling ethics no longer helps the bottom line?

 

As an organization dedicated to business integrity, the Centre promotes the concept that sound corporate ethics should be a central goal of the company, a responsibility to society and to the markets that the company strives for every day. High professional standards, social responsibility, and ethical behavior cannot and should not be treated as mere commodities; instead, corporate integrity should be expected of any company — whether or not the consumer rewards it.

 

Based on a study by a pair of marketing scholars at the University of Western Ontario’s Ivey Business School, the article we reference, “Does Being Ethical Pay?” reviewed what premium — or discount — consumers say they pay in relation to their beliefs about a company’s ethics. If the corporation is seen as genuinely committed to using environmentally sound production methods, protecting consumer safety, or engaged in fair labor practices, the consumers surveyed said they will pay a reasonable premium for the company’s product. If not, or if even worse the consumers consider the company guilty of degrading the environment, human rights, or safety, consumers will buy their goods only at a heavy discount. So the verdict is clear: It does “pay” for corporations to act ethically, and to make sure the buying public hears about it.

 

Obviously we recognize that “Does Being Ethical Pay?” by Remi Trudel and June Cotte merely represents academic research, and found the snapshot of consumer opinions it revealed interesting reading. Yet there is a serious undercurrent in the study’s results as they hint that we — consumers and companies alike — will base our need for ethics on the sales price attached. It will be a sad day indeed when companies and their boards base their corporate citizenship solely on how, or if, “being ethical” impacts the income statement.

We at CFA Institute — one of the original purveyors of ethics in financial markets — were interested to see the article, both as a discussion of corporate ethics in action, and because we have just released the result of our own, extensive research on a related subject. Just as consumers at the retail level are learning to shop “green,” investors in public companies are increasingly required to shop the financial markets and make investment decisions that are impacted by emerging environmental and social factors. Environmental, Social, and Governance Factors at Listed Companies: A Manual for Investors will aid investors in assessing the risks and opportunities associated with environmental and social issues, and provide investors with helpful resources to identify the issues and clarify the relatively sparse and inconsistent information provided in current corporate disclosures. Visit our web site to learn more about our work on environmental, social, and governance issues and the investment profession.

 

In Other News


Have Your Say
Send us your best advocacy ideas. The Centre's Advisory Council is set to meet in New York in July and we are interested in hearing from you on topics or project ideas you would like us consider with the Advisory Council. Please e-mail us with the top areas of interest in your market (and tell us what country you work in).

 

Pension Trustee Code Published
Our new Code of Conduct for Members of a Pension Scheme Governing Body is now available online. The Code is intended to guide members of a pension scheme governing board who do not have extensive experience in the investment industry or familiarity with the fundamental ethical concepts related to asset management. It includes 10 universally applicable ethical responsibilities and guidance on professional conduct to ensure that individual members of the board may follow best practices as they undertake their duties.

 

Have You Earned a Waiver?
The CFA Institute Centre has created a set of new web pages designed to help CFA charterholders and candidates learn about waivers available from regulatory licensing or qualification exams in a number of markets around the world. Certain regulatory bodies will grant to investment professionals who have passed various levels of the CFA exam a waiver from licensing or qualification requirements. Visit our new web pages for information about waivers available in your area.

 

Short-Termism Survey with NIRI Released
View the results of a recent member survey the Centre conducted in parallel with the National Investor Relations Institute (NIRI). Respondents provided insight on their practices and preferences regarding public company financial and non-financial guidance, expanding on research the Centre conducted in preparing Breaking the Short-Term Cycle and Apples to Apples: A Template for Reporting Quarterly Earnings with the Business Roundtable Institute for Corporate Ethics. The survey’s results focused on quarterly earnings guidance, poor communications and transparency, and current incentive structures as three forces driving short-term thinking in the markets.

 

Adding to the Fair Value Debate
Rebecca McEnally, CFA, senior policy analyst in the Financial Reporting Policy Group, represented the Centre at the Standard & Poor’s Fair Value forum in New York on 15 May, reinforcing our position as a strong proponent of the transparency and accuracy gained through fair value reporting in financial statements.

 

Update from APAC
The theme of the 2008 Asian Roundtable on Corporate Governance, held in Hong Kong in mid-May, was related-party transactions (RPT), and Lee Kha Loon, CFA, head of the Centre in the Asia-Pacific region (APAC) was invited to lead a roundtable discussion as the subject is already under research at the Centre. The APAC office is currently investigating topics such as: the investor’s perspective on existing RPT regulations; reporting of RPTs; reviewing cases of violations; and the adequacies of board approval, particularly in family and state controlled companies.

 

Started by the Organisation for Economic Co-operation and Development (OECD) after the Asian financial crisis in the late 1990s, the objective of the annual event is to discuss with policy makers ways to improve corporate governance in the Asia-Pacific region. Roundtable participants include representatives from countries such as South Korea, Malaysia, Singapore, Thailand, Hong Kong, the Philippines, China, India, Pakistan, Taiwan, and Indonesia.

 

The APAC office joined CFA Singapore in support of a proposal by the Monetary Authority of Singapore (MAS) to introduce fair dealing guidelines for the board and senior management of financial institutions in the city-state. In what is believed to be the first of its kind in Asia, the MAS proposal focuses on the sales conduct of financial institutions toward retail investors. The Centre and CFA Singapore commended the initiative, noting that just as the regional economy and personal wealth grows, so does the base of inexperienced individual investors, making retail-investor protection a greater imperative for regulators in Asia. The joint comment letter (PDF) highlights how the principles outlined in the CFA Institute Standards of Professional Conduct — particularly regarding duties to clients — will enhance the MAS proposal.

 

Update from EMEA
Charles Cronin, CFA, head of the Centre in Europe, the Middle East, and Africa (EMEA) attended the International Organization of Securities Commissions (IOSCO) Annual Conference to further the Centre’s engagement in the CRA debates. The lead topic at the conference was IOSCO’s release concerning a revised code of conduct for credit rating agencies (CRAs), a subject on which the Centre has been actively engaged (PDF). As a member of the IOSCO Self-regulatory Consultative Committee, we have been able to make significant contributions to their work on governance of self-regulatory organizations and linkage with membership and corporate contributions.

 

As an organization, we support self-regulatory solutions and we believe that CRAs should adopt a different nomenclature for the rating of “structured products.” In our response to CESR we both reiterated this position and offered a proposed structure: “A compulsory association by law.” This is CESR’s offer, and core to the ongoing debate. In our consultation response, we also sought greater disclosure of assumptions and methodologies and that has been endorsed by both CESR and IOSCO as well.

 

In further response to our suggestions: we called for a strengthening of the IOSCO code of conduct for CRAs and more rigorous compliance, and this is what IOSCO has delivered; the term “investment grade” has been recognized as confusing; and, stronger compliance and review procedures have been included. Overall, an overwhelming number of our ideas have been accepted. We cannot claim they were unique ideas, as reform is always built on consensus, but we were there and counted in the debate and are grateful that the work of the Centre has been recognized in such a meaningful way.

 

Cronin and Kurt Schacht, CFA, managing director of the Centre, met in early May with ranking officials at Her Majesty’s Treasury (HMT) in the UK to discuss current proposals concerning the credit crisis, to reiterate our support of fair value accounting, to outline recommendations for credit rating agency reform, to discuss proposals for investor education, and to review the UK super-equivalence clauses in the UK market abuse regime, which we support. As a result of these meetings HMT has expressed an interest in knowing more about our content both to use in its own investor education program, and to follow our work on the Market Abuse Directive. Cronin also went this month to Brussels — to meet with members of the European Parliament and Council to share our Asset Manager Code of Professional Conduct and our views on CRA reform — and to Paris — to chair a panel on social responsibility at the Institutional Investor Educational Foundation Global Shareholder Activism Conference.

 

GIPS Standards in the News
Currently, all of the GIPS subcommittees are seeking volunteers. Subcommittee lists and descriptions are available on the GIPS web site. Please send us an e-mail to volunteer for any of these important committees or to obtain more information.

 

Latest Comment Letters
Read the most recent comment letters from the CFA Institute Centre, including messages to:

 

Did You Know?
You may subscribe to receive audio feeds or text alerts as new publications from the CFA Institute Centre become available or as news stories covering advocacy issues are released. Visit the subscription index to learn more.

 

Your Feedback Welcome
The CFA Institute Centre provides this monthly update to committee members, volunteers, staff, and other friends and subscribers. If you prefer not to receive future newsletters from us, or if you have comments or suggestions regarding CFA Institute Centre activities, please e-mail us.

 

If you know of others who might be interested in receiving their own copy of this newsletter, please forward this message or direct them to our subscription page.