The lack of transparency within Russell 1000 companies
By Dirk Olin and Mark Bateman
Frequenting the retail clothier Abercrombie & Fitch requires an act of faith. The shopper is greeted at the entrance by dark shutters and no windows. This signals an exclusive club, rather than a place to buy a polo shirt. But while the air of mystery might succeed in enticing a mall customer, that darkness on the edge of commerce is more disturbing in the realm of corporate governance. Abercrombie & Fitch has the dubious distinction of joining 29 other companies on CR Magazine’s “Black List” as examples of companies for whom zero points of relevant data can be found to compare its transparency to that of its colleagues on the Russell 1000 list of large-cap firms.
If the behavior of companies matters to the public, then access to information about their behavior matters too. It matters to investors when companies offer stock options to the CEO—which is why the Securities and Exchange Commission requires companies to disclose such packages and the CEO’s exercise of them.
But that’s table stakes. Public companies failing to provide that information are in violation of the law.
Take two other realms. Since it matters whether a company dumps toxic waste into a river, the public values disclosure of disposal policies. Investors and consumers likewise want to know how a company treats its workers, and it follows that they want companies to report on labor policies and workplace safety. The Environmental Protection Agency and the Occupational Safety and Health Administration require some disclosures that are housed in governmental databases, but nothing requires direct, company-level transparency to the public on these issues. (Often, the required reporting covers one facility or an event-specific issue, and the systems are not optimized to generate corporate-level summaries.)
We’ll leave to another time and place the discussion of whether or not disclosure should be governed by regulatory mandate. But even if only for the efficient functioning of our economy, substantially greater transparency offers value. Adam Smith’s metaphorical invisible hand relied on perfect information, by which he meant comprehensive information. That would be a step forward.
From IW Financial’s analysis for the 2010 CR “Best 100 Corporate Citizens List,” 612 companies out of the Russell 1000 had no discernable disclosure relevant to climate change performance. Some 600 companies had no discernable disclosure on broader environmental performance issues. And 161 companies did not even have basic disclosure about their employee benefit programs. Companies without any disclosure in these areas raise real questions of credibility.
From their lack of disclosure, we do not know if they are afraid of the data due to poor performance, if they are thumbing their corporate noses at us, or, worse, if they are not even aware that stakeholders care. It is a cliché that “what gets measured gets managed,” but it is also true that “what gets reported got measured.” So at a minimum, without transparency, we have no idea what any particular company thinks is important enough to measure.
Methods of evaluating corporate responsibility are subject to debate. Ideally, we would have perfect information and be able to compare companies on an apples-to-apples basis. The opacity of any specific company must of necessity remove that company from consideration. Here, America lags far behind its European colleagues. Out of the 1,360 companies that the Global Reporting Initiative (GRI) lists as issuing GRI-based reports in 2009, only 130 were U.S. companies.
Companies are not all the same and will not perform the same. Significant methodological hurdles hinder attempts to evaluate them against one another. And each methodology has to be weighed against its original purpose. For investors, it might influence a buy / sell pick. For consumers, it might affect brand choice. For employees, it might trigger a decision to stay or quit. In each case, the lack of disclosure by a company can put a thumb on the scales, creating the worst outcomes for that company: lost investors, consumers, or employees.
In the age of transparency, most businesses will realize that opacity operates against self-interest. A comparison of three-year returns on shareholder value between 2010 “100 Best” companies and “The Black List” reveals that the average for 28 of the 30 bottom for whom we have those numbers is -7.378 percent—compared with a +2.374 percent return for the 100 at the top and -5.4 percent for the entire Russell 1000.
If the “100 Best Corporate Citizens List” is a gold medal in stakeholder respect, the Black List is a scarlet letter in stakeholder disrespect. But it’s also just plain bad business.
Mark Bateman is Director of Research at IW Financial
Black List 2010 Methodology
By Jay Whitehead
We have a confession. What we have not told you is that every year after we publish the “100 Best Corporate Citizens List,” someone reminds us that we also have an obligation to publish the bottom of the list. Up until now, we’ve ignored that reminder. But we cannot ignore it any more. The “Black List” is the result of recurring demands to see which companies are the most opaque among the Russell 1000.
In publishing the “Black List,” we do not take our responsibility lightly. Companies on the “Black List” represent the least-transparent companies in the Russell 1000, which is a tough place to be in the era of corporate responsibility and its ever-intensifying drive for transparency. We expect the companies on the “Black List” will be unhappy with us. We offer them one piece of solace. All a “Black List” company has to do is make a few CR-related data points about itself publicly available. Report a couple data points to the Carbon Disclosure Project. Put your employee benefits policies online. Publish some human rights information. Get a formal climate change policy, and put it online. Some of the actions required are the public company hygiene equivalent of washing your hands after visiting the rest room. Yet all the “Black List” companies have made the decision to skip that basic step.
While being a “100 Best Corporate Citizens List” company is a major accomplishment requiring considerable commitment and cost, indulging in just enough transparency to get your company out of the cellar is not that hard, nor that expensive. And one thing’s for certain: it’s less embarrassing than being on the “Black List.”
The “Black List” methodology is exactly the same as what we use for the “100 Best Corporate Citizens List.” Our population of companies is still the Russell 1000. We used the same 349 data points in 7 categories. We used the same data provider, IW Financial. We contacted each of the companies by email to request that they provide any data they have to help us correct their files. We got no replies from the 30 companies that appear on the “Black List.”
Where the “Black List” differs from the “Best” list is in the paucity of data. Where “100 Best” companies disclose hundreds of data points in Environment, Climate Change, Human Rights, Employee Relations, Finance, Governance and Philanthropy, “Black List” companies have disclosed virtually zero. In fact, all 30 of this year’s “Black List” companies tie for dead last in every category—with the exception of three-year total return, which varied a bit as you see on the Black List above. And the irony is that “Black List” companies significantly under-performed both the S&P 500 and the “100 Best Corporate Citizens List” companies in three-year total return.
Like the “100 Best Corporate Citizens List,” the “Black List” is based 100 percent on publicly-available information from investment data provider IW Financial. The “Black List” is calculated based on the same methodology debated openly by the CRO Association. That methodology has become a proxy for the state of Corporate Responsibility standards. In the weighting of data categories, Environment and Climate Change between them represent 36 percent of the rating, with Employee Relations representing 19.5 percent, Human Rights 16 percent, Philanthropy 9 percent and Governance 7 percent. This reflects the increasing emphasis on managing the costs associated with environment and climate change, including the imminent pricing of carbon. It indicates the understanding that employee relations and human rights are more important than ever in today’s two-faced labor market, which features both workforce reductions and continued emphasis on talent-acquisition in-house and within the supply chain. It shows that “checkbook philanthropy” is a thing of the past, with contributions of in-kind product, service, and experience representing greater than 65 percent of today’s corporate contributions. And it indicates that the mechanics of good governance and compliance have become “table stakes” and are no longer a major differentiator among companies.
The Black List data, or lack thereof, was sought from 100 percent publicly-available data sources and computed by IW Financial, the Portland, Maine-based financial analysis firm serving the ESG (Environment, Social, Governance) investment community. Data in each category is of two types: true/false or numerical. “True” counts as a positive value, “False” counts as a negative value, and “no answer” counts as neutral. Numerical values are compared with all other companies’ numerical answers in order to generate a ranking.
Financial Methodology Note for 2010
In 2009, the “100 Best Corporate Citizens List” Methodology Committee of the CROA decided that in order to facilitate meaningful year-over-year comparisons, that it would be evolutionary rather than revolutionary in its methodology change management. To facilitate an orderly evolution, it set a target to evolve one category’s metrics each year. As a result, for 2010 the metric chosen for change was the Financial category. In 2009 the Financial metric was limited to one: three-year total return, based on the Morningstar definition. For 2010, however, the Committee was convinced that one metric would not fit all, since in 2002 companies such as Enron, Worldcom, and Tyco had scored well on this one metric just prior to collapse due to massive fraud. While a total of 10 different scandal-resistant metrics were proposed within the Financial category, the Committee settled on seven. Each data point is weighted equally.
The resulting Financial rank is based on a set of interlocking relationships that define a company that is financially healthy and is highly likely to be free of fraud or misrepresentation. For this inaugural “Black List,” we wanted to show the one data point that varied significantly from company to company, i.e., three-year total return.
In the “100 Best Corporate Citizens List,” we used a Yellow Card/Red Card approach to signify companies that qualified numerically but whose recent history included a disqualifying formal conviction (a Red Card) or who face a potential conviction in the future (Yellow Card). We have no need for such a structure with the “Black List.” Being on the “Black List” is penalty enough.