By Rodger Spiller
Does the Nadia Lim/Simon Henry debacle raise issues of ethical or responsible investing or is it part of a business’s social licence to operate?
It is both. Furthermore, the public outrage should be interpreted by boards and fund managers as yet another example of the need to ensure companies focus on ethics and walking the talk.
Social Licence Under Threat
Maintaining a social licence to operate is an essential requirement for any company. Meeting this requires the company to have the support of stakeholders, including the public.
When a CEO makes comments widely regarded as sexist and racist, social licence and company value are threatened. As CEO of DGL Group, Henry's remarks appear to have done that. All investors may wish to see this addressed to avoid losing further value within their investment.
DGL clearly states the value of respecting diversity. The statement of Our Values on the company's website includes, "We respect the importance of ethical practice. DGL Group values the rich social and cultural diversity of our communities…".
The CEO making comments that are not adhering to this standard is a cause for alarm. It raises questions as to what extent this value of diversity is reflected in the company practices.
The board statement that Henry's comments were "completely inappropriate, unacceptable and offensive" acknowledges the issue, as did the message "his comments are contrary to the culture of respect, diversity and inclusion encouraged and expected at DGL Group".
There are degrees of ethical investment, all of which reflect and strengthen social licence to operate. At Money Matters we have developed three portfolio approaches - light, medium and strong. Our "ethical light" approach goes well beyond the frequently cited proxy for "ethical" of just an ESG (Environmental, Social and Governance) approach.
For ethical investors adopting our "ethical strong" portfolio approach, there is a focus on the United Nations Sustainable Development Goals (SDGs), including SDG5 Gender Equality –
"Achieve Gender equality and Empower All Women and Girls". The SDG report 2021 noted that women hold only 28.2% of managerial positions.
For example, our portfolio's "ethical strong" funds include fund managers with "no companies with no gender diversity at the board level" criteria. In another example, presented at an industry Meet the Managers roadshow this past week, an ethical bond fund manager presented a slide on "impact" with measures of key SDGs, including SDG 5 with the figure 100% for "female representation on board of fund holdings".
Responding to Henry’s comment, Nadia Lim suggested it could be time for some education: "First off, I would say, 'Go get some unconscious bias training'.” She wants Henry to "open his mind" and "see the potential" that comes in all shapes, sizes and cultural backgrounds.
This type of training would be in keeping with the recently launched Inner Development Goals (IDGs). The IDGs are a global initiative aiming to further action towards achieving the SDGs.
Whilst the SDGs provide a vision of what needs to happen, the IDG initiative maintains that progress towards achieving this vision has “so far been disappointing”. The IDGs provide a blueprint of the capabilities, qualities and skills we need to achieve the SDGs. They include an “inclusive mindset and intercultural competence” – willingness and competence to embrace diversity and include people and collectives with different views and backgrounds.
Ethical investment researchers often consider the practice of “developing human capital”. Money Matters is now encouraging these researchers to ask: to what extent this is being done with reference to the IDGs? I imagine investors researching DGL will ask this question.
The NZX recognises that the most fundamental aspect of good corporate governance is ethical behaviour. This is highlighted by the NZX in its commentary to Principle 1 which states: 'Ethical behaviour is at the heart of good corporate governance and underpins an issuer's reputation'.
In a joint submission to the NZX Corporate Governance review in January this year, I and others recommended that Principle 1 be included in the NZX review.
We also recommended changing Principle 1 to “ethical standards” from “code of ethics". We cited Jane Arnott's report Codes vs Commitment – An Assessment of the Codes of Ethics of the NZX50. (The Ethics Conversation, 2021) which identified that 70% of CEOs neither formally nor personally championed their own company's code for ethics.
Such a disconnect between an issuer's ethical underpinning and leadership represents a risk to all investors and stakeholders that warrants redress.
We also highlighted to the NZX the need for companies to provide and report on ethical leadership development training regarding the application of a company's code of ethics and wider ethical considerations and practices.
A case study: investing in women entrepreneurs
As the media storm was gathering last Thursday, I happened to be meeting with Matthew Clunies-Ross, chief investment officer of Artesian, a global investment manager.
Matthew said there was a key event for Artesian's A$100 million Female Founders Fund on Thursday night. The Artesian website describes how:
“Artesian recognises that talent is evenly distributed across male and female founders (as well as investors, employees and board members). However, there is material inequality between the opportunity available for male and female founders in the start-up ecosystem.”
This endemic gender inequality has resulted in asymmetrical capital distribution and a relative value pricing opportunity. The Female Leaders VC Fund addresses this market failure and targets strong returns by providing financial and strategic support to the unique perspectives, unexplored business opportunities and underinvested talent of female founders.
The fund offers investors a unique opportunity to gain broad exposure, and co-investment opportunities, to a range of female-led high-growth investment opportunities across the Asia Pacific region. The fund is targeting an annualised return of >20% (pre-tax) over 7-10 years.”
Artesian is a partner in Beyond the Billion – a global campaign launched to address the gender venture funding gap where female founders were receiving only 2.2% of venture capital. In 2018 its first billion campaign (The Billion Dollar Fund for Women) reached its goal in nine months.
Rodger Spiller is managing director of Money Matters
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