International Society for Philosophers

Philosophy for Business
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ISSN 2043-0736

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Philosophie & Wirtschaft


Daniel Silvermintz

Tom C. Veblen

Marco Senatore

Peter S Borkowski

Dena Hurst

Sean Jasso


Geoffrey Klempner

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P H I L O S O P H Y   F O R   B U S I N E S S           ISSN 2043-0736

Issue number 16
21st February 2005


I. 'Philosophical Investigations of IS Project Failures' by Nicolas Reimen

II. 'Mainstreaming Responsible Investment: Executive Summary' by Simon Zadek,
   Mira Merme and Richard Samans

III. Mainstreaming Responsible Investment: Press Release



In case anyone was under the illusion that the Philosophy for Business is
confined to social and ethical questions, Nicolas Reimen's revealing anatomy of
IS fiascos provides an excellent counter-example. Drawing on the later
philosophy of Ludwig Wittgenstein, Reimen offers a stringent critique of the
flawed methodology of current IS practice, and the unquestioning adherence of
many IS professionals to the project of rigidly formalising semantic meaning.

There is now a growing consensus that the growing threat to the global
environment, and to the quality of life generally would be greatly reduced by
more socially and ethically responsible investment. The problem, as the authors
of 'Mainstreaming Responsible Investment' (AccountAbility and the World Economic
Forum) explain in their 'Executive Summary', is that the structures which favour
short-term over long-term considerations are too deeply entrenched, creating an
inertia which resists all attempts to alter the status quo. Moreover,
initiating change faces the familiar problem of the 'Prisoners Dilemma'. No
company or institutional investor wants to be the first to launch a policy
which appears to put them at a disadvantage in relation to their competitors.
This compellingly argued report shows the way out of the dilemma, by providing
all the ammunition policy makers need to create better, more forward-looking
structures. But will they take up the challenge?

Geoffrey Klempner



1. Introduction: IS and meaning

"Computers are everywhere, computers are ubiquitous, computers are
pervasive...". How often do we hear such words these days. But it was not
always so. Until quite recently (the early 1990s, say), the transformation of
business by the computer was still mostly represented as a thing of the future;
forecasted with confidence or, sometimes, anticipated with worry. Now, it is a
thing of the present. Computers are there, everywhere, and hardly any more of
them could be crammed into most businesses. Therefore, the use of computers in
business is no longer only a matter of forecast. It is now possible to survey
results, compare them to forecasts, and reach conclusions.

To avoid any misunderstanding, before we move any further, let us make it clear
that this paper is focused solely on "Corporate Information Systems" (or IS, for
short). This term usually designates most of what comes to mind when one thinks
about how computers can be used in a firm: to compute payroll, process banking
transactions, airline tickets, orders, invoices, etc. But it does not include
the likes of rocket control computers, industrial robots or electronic car
ignition controllers. This distinction is important because the impact of these
two categories of systems on business practices is completely different. To
summarize, our focus here will be those computer applications which interact
solely with humans through screens, keyboards and printouts (or sometimes
voice-mail) to the exclusion of those which interact directly with a physical
process through sensors and actuators. 

One consequence of this definition is to highlight the link between the
philosophical question of meaning and IS practice. Computers and humans
interact by exchanging signs and only signs. So what goes on in such a context
depends primarily on how meaning is given to signs, or fails to be given, or is
lost, etc. Post "linguistic turn" 20th century philosophy also happens to focus
on these issues. Progress, in the analytic tradition, has often been understood
as the ability to propose a new, and better, account of how meaning attaches to
signs, or to objects. Similarly, in the discourse about IS practice, it has
always been taken for granted that success is linked with the ability to
capture the meaning of the signs being processed so as to reach the best
possible understanding of the rules governing their use. Both analytic
philosophy and IS practice share a sort of "semantic optimism": a belief that
semantic analysis of natural language is both possible and able, by itself, to
avoid vagueness and resolve ambiguity. IS professionals are great believers in
clarity and formalism. They hold logic in great esteem, as a way both to
accuracy and to justice.

2. IS Fiascos

In practice, however, IS Fiascos do happen. One of the most famous, the Denver
Airport baggage handling system failure, resulted in a delay of more than a
year in the airport opening and additional costs in excess of 300 million
dollars. This is by no means an isolated case.

Let us try to outline the dynamics of the typical IS fiasco. At the start of
all IS projects, there is a bid, or a managerial decision to award the project
to a given IS group. Then, the analysts of this group conduct interviews with
members of the future user organization and produce a specification document.
This document is ratified by the client through a more or less formal review
process. Then "implementation" work begins. The developers from the IS group
write programs and test them against the specification. Once these tests look
satisfactory to the IS group leader, he decides to roll out the finished
product to the client organization for acceptance tests.

This is the point where the first symptoms will appear when a project has taken
the fiasco route. They will take the form of reports, from Managers of the
future user departments, pointing out discrepancies between the new system's
behaviour and what they expected. Of course, there will be some reports of this
kind in any project. But when they are very numerous and tend to snowball as
corrective measures are attempted, one starts to speak of a fiasco in earnest.
This phase generally culminates in an angry meeting where blame attribution is
the primary issue. Though the details vary, the basic arguments are always the
same: the IS group leader claims that the requirements formulated by the users
were incorrect, or later changed, and the users representatives will claim that
the IS people failed to understand their requirements. Of course, agreement is
never reached at such meetings and the solution of the crisis will inevitably
hang on a decision by higher authorities: a top company executive or a court.
In any case, money will already have been spent and delays incurred, generally
destroying whatever economic rationale the project might initially have had.

The first reaction to such "horror stories" is usually to dismiss them as
normal business risks: fiascos happen in every industry. Quite true. But one
may note that their frequency in corporate IS is rather high. Above all, they
seem harder to explain than those taking place in other sectors. The Channel
tunnel (Eurotunnel) was a huge industrial and financial fiasco but it is quite
easy to understand its cause: the rocks met at a certain depth were not those
expected. Nature retains its ability to surprise us; empirical knowledge is
just that: empirical. But IS projects do not rely on empirical knowledge, or so
it is claimed. If semantic optimism and IS design methodologies were right, a
proper analysis of customer requirements, of the rules that give meaning to the
signs used, should rule out any surprises. So, how are we to explain that some
projects do fail? Incompetence? botched analyses? But then comes the
observation of the high frequency of IS fiascos. Almost every firm above a
certain size has known its IS catastrophe, though few naturally boast about it.
And these accidents do not only belong to the past. Anecdotal evidence, as
witnessed by most IS managers, including myself, suggest that their frequency
may even be growing. So should we assume that the incidence of incompetence or
negligence is higher among IS professionals than in most professions?

Another possible explanation is that some of the basic assumptions of today's
IS work practice are flawed. We have already drawn a parallel between some of
these assumptions and recurring themes in analytic philosophy. Let us pursue
this parallel further by drawing on one of the greatest philosophers of this
tradition: Ludwig Wittgenstein. Prima facie, IS fiascos are very shocking
events from an analytic point of view. Since the only things involved are
symbols and their usage rules, it seems that a suitable logical analysis should
rule out any surprises. I think that Wittgenstein's account of rule following
may help us understand why this assumption often turns out to be false.

3. Wittgenstein and IS practice

Wittgenstein's philosophy is generally divided into two sharply opposed
periods, 'earlier' and 'later'. The first revolves around a formal account of
meaning, in the continuity of Russell and Frege. In the second, this system is
rejected, along with the possibility of ever producing such an all-embracing
logical construct. The main text in which these latter views are presented, the
Philosophical Investigations, is considered as one of the most difficult ever
written. Reading it with IS practice in mind removes, in my view, some of the
difficulty: it is as if one was reading remarks on an IS fiasco.

The reliance on examples is one of the characteristic traits of the later
Wittgenstein. In one of these, we are asked to consider the case of a
(supposedly very young) pupil who is being taught how to write down sequences
of numbers of the form:"2, 4, 6, 8...", "3, 6, 9, 12...", "4, 8, 12, 16...",
and so on. Apparently satisfied with his progress, the teacher gives him a new
challenge: to continue the sequence with an interval of 2 but beyond 1000.
Instead of the correct answer, the pupil writes: "1000, 1004, 1008, 1012, ...".
Wittgenstein writes:

     "We say to him: 'Look what you've done!' - He doesn't
     understand. [...] 'Yes, isn't it right? I thought that was
     how I was meant to do it.'" (Philosophical Investigations,
     henceforth PI, para 185).

This is, of course, an extremely simplified example. But the last sentence, in
particular, seems right out of an IS project meeting. 

To avoid such pitfalls, the standard IS response is to make the specification
as formal as possible. In the same spirit, Wittgenstein considers the use of an
algebraic formula like "s(n) = m x n, where m = 2 or 3, etc." as a potential
solution; a way to irrevocably rule out any mistake of the sort the pupil made.
As a result, it indeed seems that,

     "the steps are really already taken, even before I take
     them in writing or orally or in thought. And it seems as
     if they were in some unique way predetermined, anticipated
      - as only the act of meaning can anticipate reality"
     (PI para 188).

But then our attention is drawn to the fact that the expression "m x n" could
be interpreted in an other way than the one we are used to: instead of "m times
n" it could be taken to mean "n to the power m" or "m plus n" or whatever. Of
course, to imagine so much in this case seems far fetched. But it is because we
are so familiar with the expression "m x n". In most IS situations, where
analysts are faced with "business domains" they know nothing about, imagining
several possible interpretations for a given formula is not far fetched at all. 

To parry this new threat, most IS professionals, unwilling as they are to shed
the comforting belief that meaning can be formally captured, will choose to
pile more definitions on an already fat spec. But this process never ends.
Specifications grow larger and larger and the dreaded ambiguity is still there,
though in a different place. Indeed, it seems that the opportunities for
misunderstandings multiply as the amount of fine print grows. In the end, only
desperation remains. As Wittgenstein famously put it: "This was our paradox: no
course of action could be determined by a rule, because every course of action
can be made out to accord with the rule. The answer was: if everything can be
made out to accord with the rule, then it can also be made out to conflict with
it. And so there would be neither accord nor conflict here." (PI para 201). For
the average IS professional, this sounds like the end of the world. And, as we
have seen, the end of the world happens quite often. The so-called "rule
following paradox" just quoted is a very apt description of precisely the sort
of argument one hears at those post-fiasco meetings when one tries to determine
who was to blame; i.e. whose behaviour it was that did not accord with the rules.

Fortunately, there is a way out:

     "It can be seen that there is a misunderstanding here from
     the mere fact that in the course of our argument we give
     one interpretation after another; as if each one contented
     us at least for a moment, until we thought of yet another
     standing behind it. What this shows is that there is a way
     of grasping a rule which is not an interpretation, but
     which is exhibited in what we call 'obeying the rule' and
     'going against it' in actual cases." (PI para 201)

In this last sentence, we hear the echo of another famous Wittgensteinian
motto: "don't think, but look!" (PI para 66). Many exasperated company
executives try just such an approach when an IS project dispute reaches their
desk for a final decision: "But, for heaven's sake, our company's practice is
such and such, why doesn't your system do the same? Our company's way of doing
things is right there under your noses. Why don't you just look!?" The "way of
grasping a rule which is not an interpretation" is this: practices "in actual
cases". As Wittgenstein points out, signs have a meaning only when embedded
within the practices of a given community: "a person goes by a sign-post only
in so far as there exists a regular use of sign-posts, a custom." (PI para 198)

But the way Wittgenstein suggests we take out of his own paradox also has
another purpose: to show a certain class of meaning theories to be based on an
illusion. In the discussion about the pupil Wittgenstein characterises this as
the belief that,

     "the way the formula is meant determines which steps are to
     be taken. [...] It is as if we could grab the whole use of
     the word in a flash" (PI para 191).

As if, once we had grasped the whole meaning of a rule, all its future
applications were fully determined and, hence, under our control. At this
point, Wittgenstein asks:

     "But have you a model for this? No. [...] You have no model
     of this superlative fact" (PI para 192).

As it happens, IS professionals now have plenty of models which support their
unwavering belief in just this sort of "superlative facts". Some are called
"data models" (notice the use of precisely the same word), others "meta data
repositories" or "business rules engines", "data flow diagrams",
"object-oriented methodologies" etc. Each new fad in IS consulting brings along
its own tools and expressions but the underlying theme is always the same:
Protect yourself! Use formal methods in order to capture meaning.

4. Conclusion

Wittgenstein wanted his philosophy to be "therapeutic" and "businesslike":

     "There is not a philosophical method, though there are
     indeed methods, like different therapies [...] The
     philosopher's treatment of a question is like the treatment
     of an illness" (PI para 133).

"My father was a businessman and I am a business man: I want my philosophy to
be businesslike, to get something done, to get something settled." (M.C. Drury
'L.W.: Personal Recollections,' p. 110). This sounds like a perfect definition
of what "philosophy of business" is about. Indeed, Wittgenstein would probably
have made a decent IS consultant. His advice is exactly what the IS profession
now needs. What is extraordinary about his philosophy is that he may have
conceived all of it before the building of any Information System was ever

Without subtracting anything from his merit, we may venture the following
history of ideas hypothesis: modern IS practice is the heir of the very
philosophical theories Wittgenstein was up against. Logical Positivism and
Russellian logical atomism formed the philosophical cultural background of most
of the founding fathers of computer science (e.g. Alan Turing or John Von
Neumann). Later on, the same philosophical influences were still quite
obviously at work on people like Noam Chomsky, whose formal grammars are of
widespread use in computing today, or E.F. Codd, the founder of modern database
theory. In short, the debate that opposed Wittgenstein to most of the analytic
philosophers of his time is now being re-enacted between IS theorists and the
hard realities of corporate life.

(c) Nicolas Reimen 2005




     The Global Corporate Citizenship Initiative of the World
     Economic Forum, in association with AccountAbility,
     organized a series of discussions during 2003-04, with
     corporate and investment community executives, as well as
     other experts:
     "To improve understanding of concrete impediments to and
     opportunities for broader integration of social and
     environmental aspects of corporate performance in
     mainstream investment policies and practices."
     The initiative's core aim has been to identify specific
     obstacles to wider incorporation of non-financial
     considerations in the valuation and investment strategies
     of major institutional investors. These discussions also
     sought to explore possible changes in policies and
     practices that could 'tip' systemic change in the
     investment community in this direction.

Responsible investing is most commonly understood to mean investing in a manner
that takes into account the impact of investments on wider society and the
natural environment, both today and in the future. The most visible
manifestation of this aspect of responsibility has been so-called `socially
responsible investment' (SRI). Initially confined to the negative screening of
investment funds managed on behalf of specific religious communities, or
targeted at a narrow range of specific issues such as apartheid South Africa,
the last decade has seen an extraordinary growth in the scale and breadth of
application of SRI. There is over US$ 2 trillion under professional management
in the United States linked to some kind of socially responsible investment
strategies, a fourfold growth over the last decade[a].

However, the logic of responsible investment - i.e., the deliberate
incorporation of material social and environmental considerations in investment
decision-making - has yet to be embraced by the wider investment community.
Responsible investing remains a boutique segment of the industry despite
widespread, if largely anecdotal, evidence that social and environmental
factors affect market valuations both positively and negatively.

Most obvious are instances with direct legal consequences. ABB, for example, is
one of many companies facing massive liabilities associated with asbestos. The
financial markets discounted Wal-Mart's normally buoyant share price on news of
the class action related alleged discriminatory labour practices. Market shifts
associated with changing societal concerns are ignored at a company's risk.
McDonald's, responding late but forcefully to obesity and broader health
concerns, was duly rewarded with a rise in profits and share price. Broader
political risk can be rooted in the dynamics of progressive social change.
Sasol's SEC 2003 filing highlights the slow pace of black economic empowerment
as a significant risk that may adversely affect the business, operating
results, cash flows and financial condition. Similarly, recent poor performance
in Europe of leading US retail brands has been attributed by some business
commentators to broader international disenchantment with the US. More
positively, shares in Brazil's top cosmetics group, Natura, offering mid-range
products grounded in strong social and environmental credentials, soared
upwards on their debut on the Brazilian stock market in June 2004.

Despite these and other examples, attention to non-financial factors within the
wider investment community remains largely reactive and episodic. What could
propel responsible investing from the boutique to the mainstream? Based on
three roundtable discussions involving mainstream investment fund managers,
analysts, trustees and advisors convened in 2003-04 by the World Economic
Forum's Global Corporate Citizenship Initiative and AccountAbility, the answer
is likely to be found in the major demographic changes sweeping most advanced
industrialized countries and transforming the nature of corporate share

The New Landscape of Corporate Share Ownership

Today, beneficial owners - those who will ultimately benefit from share
ownership of large corporations - are no longer the wealthy privileged few.
Particularly in Northern Europe, North America and Japan, but increasingly on a
global basis, the beneficial owners are now the huge majority of working people
who have their pensions and other life savings invested in shares of the
world's largest companies. The biggest two shareholding bodies in Britain, for
instance, are the British Telecom and the mineworkers pension schemes. In
Denmark it's the workers' pension fund, the civil service fund in Holland, the
public employees of California in the United States, and in Canada, the
teachers and civil servants of Ontario. Each of these funds holds a small share
of literally thousands of companies. Further, it isn't just that domestic funds
own the companies in their own nation. Increasingly, funds have an ever-larger
proportion of their equity invested internationally. Quite literally then,
these and other such funds constitute the majority ownership of our corporate
world. Each pensioner owns a tiny interest in vast numbers of companies. From
the telecoms of Panama to the chemical companies of Germany, from the
electronics companies of Silicon Valley to the oil wells of Nigeria, millions
of citizens are the beneficial owners.

Most individual participants in pension plans, mutual funds, and insurance
companies are investing to provide for their retirement or other long-term
financial needs. In this sense, the widespread benchmarking within the fund
management industry against short-term performance benchmarks that fail to take
account of social, ethical, and environmental aspects of corporate performance
is increasingly out of step with underlying client interests. Social and
environmental factors can be quite significant drivers of longer term financial
performance, particularly through their influence on the enabling environment
for business operations and investment. In the long run, the vitality of
markets is influenced greatly by prevailing legal, regulatory and macroeconomic
conditions, which ultimately reflect policy - i.e., political - choices made by
democratic societies. While a serious problem or major opportunity associated
with the environmental or social performance of a particular business model may
not manifest itself in the short term, it may well show up in financial results
and market valuation over time as consumers, regulators, voters or plaintiffs
lose confidence and respond accordingly.

Investment is first and foremost about meeting the needs of the owners of
capital. If the real owners of most of the capital in today's markets are
mainly the intended beneficiaries of the pension funds, mutual funds and
insurance companies, then the responsibility of these investors will
increasingly be to meet the intrinsic interests of pension plan participants
and insurance policyholders in not only competitive near-term returns, but also
the long-term vitality of their countries' economies, societies and
environments. This will require the deliberate incorporation of material social
and environmental aspects of corporate performance in investment analysis and
decision making, grounded in:

     1) full appreciation of the rights and long-term interests
     of the ultimate beneficiaries of funds that typically have
     very long-term liabilities; and
     2) broad understanding of the factors, such as social and
     environmental considerations, that could influence returns
     over the long term.

In this important sense, it is the transformation of share ownership by rapidly
aging populations in most industrialized countries that is fundamentally
altering our conception of responsible investment and potentially driving it
into the mainstream financial community, in ways that the founders of the
original SRI funds might not have imagined possible.

The Systemic Nature of the Challenge

That the investment value chain (e.g., pension/mutual funds, advisors, asset
management firms, analysts, etc.) as a whole does not factor in social and
environmental issues is not most usefully understood in terms of the personal
values of its participants. It arises because of today's blend of available
information, participant competencies and, most of all, institutionalized
incentives that drive behaviour. These factors combine in creating the
perception that significant competitive disadvantage will befall any one player
that strays from customary practice. That is, the development of responsible
investment is impeded by a classic "prisoner's dilemma" in which it is in no
one's interest to take the first step alone in making changes, notwithstanding
that all players could benefit.

Fund managers point to the role of their clients in driving their focus on
short-term performance. As one fund manager argued, "As long as client [e.g.,
pension fund trustees] mandates require us to deliver performance benchmarked
against short-term market tracker indexes, we will of course remain short-term
in our outlook." Analysts, similarly, argued that they could rarely advance
social and environmental performance issues so long as their clients, fund
managers, were only concerned with drivers of short-term performance and market
valuations. One analyst summarized his experience thus, "Strategic research on
future social and environmental risks and opportunities got me my five minutes
of fame. But there were no buyers for the work, and this is what counts at the
end of the day. Given the choice again, if I want to stay in business, I would
not do such research."

Such behaviour in financial markets has a tangible impact on the real economy.
One extensive study found that, "Because of the severe market reaction to
missing an earnings target, firms are willing to sacrifice economic value in
order to meet a short run earnings target... The preference for smooth earnings
is so strong that 78% of the surveyed executives would give up economic value in
exchange for smooth earnings... We find that 55% of managers would avoid
initiating a very positive [Net Present Value] project if it meant falling
short of the current quarter's consensus earnings."

Specific Impediments

Following are some of the most salient impediments to broader consideration of
non-financial factors by the mainstream investment community, identified by the
project's three roundtable discussions and further developed in chapters of this
report, contributed by three distinguished participants (Mehdi Mahmud, Executive
Vice-President of Jennison Associates; Francis Condon, Head of European Steel
Research, ABN AMRO Equities[b]; and Stephen Davis, President of Davis Global

Asset management
Fund managers must act in demonstrable compliance with the performance
objective of optimizing clients' financial returns, which is typically defined
in their contracts relative to certain benchmark indices, at specific levels of
risk, and/or with respect to pre-defined peer groups. The need for demonstrable
compliance creates a burden of proof on the part of the fund manager, which at
best heightens managers' sensitivity towards risk-taking and at worst
encourages inertia around "tried and true" approaches that are easily
defensible. This high level of regulatory awareness and scrutiny, combined with
the widespread use of benchmark indices and clients' gradually shrinking time
horizons for performance evaluation, is a powerful driver of conservatism among
fund managers with respect to innovation. Today, these indices are ubiquitous,
so much so that what began as a means of more rigorously measuring fund
managers' performance has gradually become a constraint on fund managers'
discretion. While there are exceptions, the empirical evidence is that the
average manager's propensity to assume risk relative to their respective
benchmarks (a statistical measure called tracking error) has declined over
time, leading to greater clustering of fund managers' returns. As the time
horizon for evaluating performance has gradually shortened, investment
management companies have evolved their business models accordingly. The time
horizon for business planning has shrunk, with many companies aggressively
managing their line-up of products to meet evolving demands in the marketplace.
As business planning and compensation practices go hand in hand, it is not
surprising the compensation practices in the industry have evolved towards
shorter-term performance. If left unchecked, this is likely to further
encourage clustering of fund managers' performance around narrowly defined
benchmarks and discourage adoption of broader, longer-term perspectives in fund
managers' investment decisions.

Investment analysis
The broad philosophy of responsible investment has made little headway among
most mainstream equity analysts. This reluctance to move the research time
horizon beyond the foreseeable and the quantifiable represents a concern that
such analysis falls short of being "commercial". Three major impediments are:
(1) the current data set of performance indicators does not yet add up to a
consistent whole (i.e., company data on social and environmental performance is
patchy, often unaudited and lacking in historical benchmarks); (2) there is
limited ability among the current population of investment analysts, and new
analysts are receiving too little training in the use of nonfinancial criteria
in financial valuation; and (3) the way that sell-side equity analysts are paid
represents a significant disincentive to challenging this situation. On the
buy-side, research analysts who have spent years honing their analytical skills
and industry knowledge - and are therefore at peak levels of preparedness to
perform truly differentiating investment research on companies' long-term
business models - are typically removed from specialist roles and placed into
more generalist fund management positions where there is less scope to apply
such skills and knowledge.

Pension funds
The greatest impediment to the ability of pension plans to reflect the
inherently long-term investment horizon of their participants is perhaps the
one most deeply embedded in their own architecture. Most funds fail to meet the
bedrock governance standards they increasingly demand of companies. This can
most clearly be seen in the principal ways in which accountability and
transparency fall short. For example, savers can only rarely discover how their
funds are managed. They normally have no voice in how the funds operate or who
makes key fund decisions. Corporate funds and employee stock plans in many
jurisdictions are entirely or largely controlled by company management. Boards
of trustees of pension schemes generally do not operate as professional
oversight bodies. Recent probes in the US, UK and the Netherlands have exposed
many of the flaws. Most trustees are not getting trained, spend too little time
on the job, communicate too little with scheme members and ignore shareowner
activism and socially responsible investment, according to a Consensus Research
report for the UK Department of Work and Pensions[c]. They are typically not
paid or given authority comparable to directors at public companies, and few
spend efforts assessing their own performance or communicating with
beneficiaries. In other cases, particularly those of civil service funds,
trustee boards may be swayed excessively by political factors. Moreover,
intermediaries such as investment advisors, gatekeepers, consultants and fund
managers that link trustees to the investment process typically dominate
trustee decision making. Finally, too many funds rigidly split the functions of
ownership and portfolio trading. The responsibilities to vote shares and monitor
social, ethical and environmental (SEE) and governance may often fall into a
compliance or legal division, while professionals doing the buying and selling
of shares are rarely encouraged to gain knowledge and experience in the ways in
which SEE and governance affect risk and performance of particular companies.

Opportunities for Progress

Responsible investment requires an orientation towards strategies that optimize
long-term returns, both because this delivers better financial returns over the
time profile that interests intended beneficiaries, and because over these
periods social and environmental issues become more material and so can be
better considered. Realigning fund management towards the longer-term
performance of their investees requires a host of measures, embracing changes
in incentives, competencies and available information. Following is a summary
of recommendations emanating from the roundtable discussions and chapters
contributed by expert participants:

     Modify Incentives
     * Establish an international set of good governance
     principles for pension funds - a voluntary Fund Governance
     Code - that ensures accountability (disclosure of votes,
     policies, and management relationships) and professionalism
     (training, representation) on the part of boards of
     trustees. The aim of these principles would be to ensure
     the representation of long term beneficiary interests in
     intent, capability and practice.
     * Modify pension fiduciary rules which discourage or
     prohibit explicit trustee consideration of social and
     environmental aspects of corporate performance.
     * Increase the average duration of asset manager mandates
     to lend momentum to current experimentation with fund
     manager compensation arrangements linked to superior
     long-term performance.
     * Increase disclosure of fund manager compensation
     structures to encourage better linkage between pay and
     long-term performance.
     * Develop new business models for research on non-financial
     issues by analysts and incorporate this into the current
     regulatory review of the sell-side analyst function in
     diversified investment houses.
     * Require analysis of material non-financial factors to be
     included in pension fund mandates to asset managers.
     * Re-evaluate the relationship and relative organizational
     standing of buy-side analysts and portfolio managers in
     order to cultivate a more attractive long-term career path
     for analysts, allowing for the accumulation of necessary
     * Develop new performance assessment models that enable
     trustees to support long-term investment strategies while
     complying with fiduciary obligations.
     Build Competencies
     * Pay, train, and empower pension fund trustees more like
     corporate directors in order to increase the capacity of
     boards of trustees to exercise independent judgement in the
     long-term interests of beneficiaries.
     * Create a specific professional competency for
     non-financial analysis either through increased training of
     existing investment analysts or the establishment of a new
     category of specialists.
     * Increase the emphasis on non-financial aspects of
     corporate performance in graduate business schools and
     mid-career analyst educational programmes.
     Improve Information
     * Improve the consistency of the content, collection and
     assurance of material non-financial information.
     * Refine the concept of materiality and the basis for
     measuring and communicating its application to the links
     between financial performance and social and environmental
     * Expand the dialogue between analysts and corporate
     investor relations officers on the need for greater
     consistency in the content, collection and assurance of
     non-financial information.
Extending the Dialogue

It became apparent through the course of the project that considerable value
could be realized by deepening the dialogue among companies, pension trustees,
advisors, fund managers, analysts, policymakers and independent experts on many
of the impediments and opportunities for progress cited above. Many promising
areas for continued discussion and research are posed by the following

- What might an international set of voluntary principles for good governance
of pension funds contain?

- Which jurisdictions would benefit by a change in fiduciary guidelines to
provide greater scope for consideration by trustees of social, ethical, and
environmental considerations, and how should such changes be structured for
maximum benefit and minimum effect on existing legal structures?

- What new business models for non-financial research by the buy- or sell-side
are possible, perhaps driven by changes in the mandates provided by pension
funds to asset managers?

- How could compensation arrangements for portfolio managers be modified to
encourage increased focus on long-term performance, and what conditions would
be need to be present for such practices to become more commonplace within the

- How might a professional competency in non-financial issues be developed more
fully within the investment analyst community?

- How could the content, assurance, and collection of corporate non-financial
information be improved so that it would be of greater utility to investment
analysts? What new performance assessment models and strategic management tools
(integrating social and environmental factors) show particular promise?

- What does the responsible investment debate imply for investment in debt and
derivative instruments?

Integrating social and environmental considerations into the investment
decision process is slowly moving from an incidental activity to one that is
integral to the fundamental changes sweeping the investment world. It is
increasingly central to an appreciation of the interests of the tens of
millions of individual participants in pension funds, mutual funds and life
insurance policies who now comprise the bulk of share ownership and, by
extension, the future role of financial markets in supporting global economic
growth and social progress. The World Economic Forum's Global Corporate
Citizenship Initiative and AccountAbility look forward to the opportunity to
continuing this vitally important discussion.


a. Nelson (2003), Nelson’s Directory of Investment Managers, 13th Ed, USA

b. Mr Condon has recently moved to join the Sustainable Business Advisory team
of ABN AMRO’s Group Risk Management.


(c) World Economic Forum 2005

[Mainstreaming Responsible Investment was launched on 13th January 2005 by
AccountAbility and the World Economic Formum. 'Executive Summary' is reproduced
with permission. For more information, go to or
contact Matt Jowett at]



New report shows institutional investors fail pension policy holders by not
addressing social and environmental issues in investment decisions

London, 13 January 2005. Mainstreaming Responsible Investment A new report
released by AccountAbility and the World Economic Forum offers the most
comprehensive and incisive insight to date into the failure of the financial
community to meet the needs of the real owners of capital through its
unwillingness and inability to consider material social and environmental
factors in investment decisions.

The report paints a picture of rising pressure for change in the financial
community driven largely by the changing composition of corporate share
ownership due to population aging and the related growth in private retirement

As Simon Zadek, Chief Executive of AccountAbility, observes, "The real owners
of capital in today's markets are you and me, the intended beneficiaries of the
pension funds, mutual funds and insurance companies. The responsibility of
institutional investors must be to meet our intrinsic interests. These go far
beyond short-term financial returns, both because financial returns are
effected over the long term by the investments' social and environmental
impacts, and because we depend on the long-term vitality and health of our
economies, communities and the natural environment. Our interests must be that
trustees and fund managers acting on our behalf take account of material social
and environmental aspects of corporate performance".

The report entitled Mainstreaming Responsible Investment is the outcome of a
series of three expert Roundtables during 2003 and 2004. The Report's findings
have emerged from two years of in-depth discussions with practitioners. Its
findings and recommendations draw directly from the perspectives of pension
fund trustees and executives, portfolio managers of mainstream asset management
firms as well as of buy-side and sell-side analysts.

Al Gore, Chairman of Generation Investment Management, commented,
"incorporating social and environmental factors into investment decisions may
seem exotic to some fund managers and pension fund trustees today, although
certainly not to us at Generation. But there is no doubt it will be core to
tomorrow's successful investment strategies and practices. The
AccountAbility/WEF report goes a long way in identifying the impediments to
this process and how best to overcome them".

The report's proposals are aimed at both the investment community and
governments. Patricia Hewitt, the UK Government's Secretary of State for Trade
and Industry, writes in the report's Preface, "I very much welcome the work
which AccountAbility and the World Economic Forum have done to bring together
these different players... I believe that the answers lie not in rethinking
business and investment from scratch, but in the kind of improvements in
knowledge and practice which are discussed in this report".

The report identifies key impediments to broader consideration of social and
environmental factors by the mainstream investment community, and explores
changes in policies and practices that could 'tip' systemic change in the
investment community in this direction. "We found that the issue is decidedly
not the personal values of these market participants but rather the framework
of industry customs, structure, and regulation in which they operate. It is the
combination of available information, participant competencies and, most of all,
institutionalized incentives that drive behavior" said Richard Samans, Managing
Director of the World Economic Forum's Global Institute for Partnership and

Mainstreaming Responsible Investment includes a series of recommendations for
reform of industry practices and public policy. These draw upon chapters
contributed by three distinguished expert practitioners from different segments
of the investment value chain: Mehdi Mahmud, Executive Vice-President of
Jennison Associates (asset management); Francis Condon, until recently Head of
European Steel Research, ABN AMRO Equities (investment analysis); and Stephen
Davis, President of Davis Global Advisers (pension fund trustee adviser),
respectively. The report outlines an agenda of reforms to realign incentives
within the institutional investment community and strengthen its ability to
produce and understand non-financial information that may be relevant to
financial performance. Among the recommendations are:
     * Create an international set of good governance principles
     for pension funds akin to a corporate governance code
     * Increase the duration of asset manager mandates
     * Increase the disclosure of asset manager compensation
     * Develop new business models for research on non-financial
     issues by analysts
     * Re-evaluate the relationship and relative organizational
     standing of portfolio managers and buy-side analysts
     * Pay, train, and empower pension fund trustees more like
     corporate directors
     * Create a specific professional competency for
     non-financial analysis
     * Increase the emphasis on non-financial aspects of
     corporate performance in graduate business schools
     * Widen the dialogue between analysts and corporate
     investor relations officers on non-financial information 
Notes To Editors

AccountAbility's mission is to promote accountability solutions that further
sustainable development, developing appropriate standards based on leadership
practice and engaging in public policy processes and reform. Based in London,
AccountAbility is an international membership organisation with a
multi-stakeholder governance system ( For
further information on AccountAbility and the report Mainstreaming Responsible
Investment, please contact Matt Jowett, Management Services Co-ordinator at

The World Economic Forum is the foremost global community of business,
political, intellectual and other leaders of society committed to improving the
state of the world. Incorporated as a foundation, and based in Geneva,
Switzerland, the World Economic Forum is impartial and not-for-profit; it is
tied to no political, partisan or national interests. The Forum has NGO
consultative status with the Economic and Social Council of the United Nations.
( For further information on the Global Corporate
Citizenship Initiative and the report Mainstreaming Responsible Investment,
please contact Stefanie Held, Senior Project Manager GCCI, at or Valerie Weinzierl, Project Manager GCCI, at

Authors of Report

Simon Zadek is Chief Executive of AccountAbility, a Senior Fellow at Harvard
University, and has worked with numerous major corporations in the strategic
development of their approaches to corporate responsibility. Simon has authored
many books, reports and articles on corporate responsibility, including "The
Civil Corporation" and "Tomorrow's History". (

Mira Merme is Senior Associate at AccountAbility with many years experience in
development finance and until recently ran a group of publicly listed
companies. Mira has authored various reports and articles on corporate
responsibility, including her co-authorship of an AccountAbility report,
"Redefining Materiality". (

Richard Samans is Managing Director of the World Economic Forum's Global
Institute for Partnership and Governance.

Three specialist chapters have been written on financial analysts, pension
funds and fund management, respectively by Francis Condon, Stephen Davis and
Mehdi Mahmud.

Francis Condon, until recently the Head of European Steel Research, ABN AMRO
Equities. Francis has 16 years of experience as an equity analyst following six
years with Prudential Assurance Corporation and ten years on the sell-side with
ABN AMRO. In August 2004, Francis moved over to ABN AMRO's sustainable
development team in Amsterdam (

Stephen Davis, PhD, is president of Davis Global Advisors (DGA), the leading
consultancy specializing in international corporate governance and publisher of
the weekly "Global Proxy Watch" bulletin. His forthcoming book, The Civil
Economy - co-authored with Jon Lukomnik and David Pitt-Watson - forecasts
market architecture. He is a co-founder and former governor of the
International Corporate Governance Network and founding partner of
GovernanceMetrics International and g3, a corporate governance advisory firm
working with the World Bank Group. (

Mehdi Mahmud is Executive Vice-President at Jennison Associates, a US
investment firm. He is responsible for the investment oversight of the firm's
"Value, Blend, and Small-Cap" equity capabilities. Mehdi is also responsible
for setting the strategic direction of the firm. Previously, Mehdi was a
portfolio manager at J.P. Morgan Investment Management, and served as deputy to
the Global Chief Investment Officer at Credit Suisse Asset Management.