Trusteeship and Corporate Responsibility: does the share market react the way it should?

In the past few weeks I have written articles that relate to the effect of the BP oil spill in the Gulf of Mexico, and what it means for corporate social responsibility. I have made the argument that Corporate Social Responsibility (CSR) programs are failing society, and that the current financial system doesn’t allow or encourage large transnational corporations to behave in a greater ethical manner (see my article Corporate Social Responsibility: is it a myth? http://wp.me/pS6DN-2w).  When I presented this argument it was put to me by some that profit is not the only determinant of corporate policy, and that corporations with CSR programs are competing with each other to strive to achieve greater responsibility.  Do I agree?

I do agree in principle with this point, there are some corporations who strive to perform in an ethical manner, and if we look to the Indian transnational corporation The TATA group, we can see some great community and employee welfare programs that have been developed along the principle of Trusteeship. Trusteeship is an ethical principle advocated by Mahatma Gandhi in India, at the beginning of the 20th Century, which encourages businesses to act in a way that is good for the community, society and the national good.  However, I don’t believe there are enough examples of this attitude in the corporate world.

Most large corporations are principally concerned with profit making, and I don’t have an issue with this, if it is done with ethical principles employed in this pursuit of profit.   As I have mentioned previously financial markets appreciate and reward profit making behavior, and when the share price increases, so too does the value of the company. This is another principle driver in corporate decision making: creating shareholder value. Unethical behavior can affect the share price, particularly when it impacts upon profitability such as with BP with the loss in profit due to the oil leak in the Gulf of Mexico (see BP oil Leak: is this an indicator of disasters to come? http://wp.me/pS6DN-2c).  There are also ethical Shareholder groups that are investing in the market to encourage greater ethical corporate behavior, but at this stage I believe their impact on the share price is minimal.  However, corporations are still ultimately rewarded by the financial markets for profit making activities, regardless of the ethics of how the profit is achieved.

Two events in the past 24hours illustrate this point for me. Goldman Sachs overnight came to a settlement with the US Securities and Exchange Commission (SEC) over the sale and marketing of the toxic mortgage securities that were partly responsible for the collapse in the global financial system.  The agreement was for a payment of US$550 million and reform of business practices related to the sale and marketing of such securities.  Goldman Sachs was of course one of the banks to have ultimately benefitted from the collapse of competitor banks, sweeping in and buying up distressed assets at bargain basement prices.  It can hardly be suggested that they have behaved in an ethical manner, and especially not in a responsible manner. So what was the response of the financial markets to this news? The share price went up 4.43% in the hours leading up to the announcement, as rumors spread, and then jumped another 5% when the news was made official.

The second example was BP, who after 12 weeks of oil leaking into the Gulf of Mexico, and adversely affecting the livelihoods of millions of people who live on the gulf coast, were able to place a cap over the leaking oil well. This cap has stopped the leak for the moment, and there is ongoing monitoring of the seabed and well to ensure that no blow out will occur. Now this is good news at last for the people of the Gulf of Mexico.  Once again when news of this successful capping of the well reached financial markets it resulted in an increase of 8% in the share price.

Corporate decision making in much of the western world is driven by profit, profitability, and shareholder value. The share price movement in Goldman Sachs and BP illustrate this point as far as I am concerned.  I am sure that Mahatma Gandhi would be most concerned with the behaviors of corporations like these, as they certainly are not adhering to the principle of trusteeship.  If we want Corporations to behave in ethical and responsible ways, then we need to reconsider how we reward companies on the stock exchange.

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