Has compliance really reached a turning point?

A May 17 letter from a group of major shareholders says compliance has reached “a watershed moment”. And when profit-driven assert management businesses like Aviva and Scottish Widows start agreeing with the Pope about ethics, something fundamental is certainly changing in our industry.

The Rana Plaza catastrophe has attracted comment from all sorts of people – and when the Pope accuses buyers from Bangladesh of using slave labour, it’s easy for cynics to wonder just how many white cassocks he’d have to buy to keep 4 million Bangladeshis in full-time employment.

And when a group of pension funds called for buyers to sign the AFBSB and support garment-industry unions on May 16 it was just as easy to point out that they were mostly public-sector or labour union funds. And even that, although they represented $1.35 trillion in funds under investment, scarcely any of them had ever been known to use their shareholdings to force ethical change on the businesses they partly own.

But no cynic could dismiss a letter the following day, coordinated by America’s Interfaith Center on Corporate Responsibility (ICCR). Though most of its signatories were religious groups, “sustainable” shareholder funds or public-sector asset managers, it was also signed by almost brutally mainstream pension funds such as Scottish Widows, Aviva, Threadneedle Investments, Canada’s NEI and Australia’s Solaris Investment.

All these groups have managers on remuneration plans driven by return on assets. And the letter says  they  “will engage the relevant companies we hold, asking for meaningful and transparent implementation of safeguards to prevent future Rana Plazas from recurring” anywhere in the world. Those safeguards include:

-                    Joining the AFBSB

-                    Committing to strengthening local trade unions and to ensuring a living wage for all workers.

-                    Public disclosure of all suppliers, their health and safety programmes and their performance against safety goals and any corrective action.

-                    Ensuring appropriate grievance mechanisms and effective remedies for affected workers and families

Collectively, the ICCR signatories hold $1.2 trillion in shareholder funds – and the tough-guy mainstream group among them regularly reviews substantial shareholdings in major apparel buyers. The ICCR group’s stance appears diametrically opposed to the stance taken by America’s National Retail Federation a few days earlier – only the ICCR signatories have a power with retail managers that easily outweighs the attitude of trade association bureaucrats.

The $2.5 trillion of funds that now might well not invest in companies with bad safety records in overseas garment factories represents what might be the biggest single change in the dynamics of our industry since garments first started being made in foreign countries.

Most hard evidence is that consumers do not allow ethical issues to influence the garments they buy very much – and that recent disasters have not deterred commercial buyers from sourcing in Bangladesh.

But constant pressure from real institutional shareholders is a whole nuther thing. These shareholders are pressurising for things most buyers claim is against shareholder interest. Indeed, they’re even pressurising for one thing – AFBSB signatures – we’ve argued some shareholder might even sue over.

Some might argue that Aviva, Scottish Widows et al represent the real views of shareholders, and that US retailers’ claim they’re against the AFBSB is really just the view of managers more interested in an easy life than in maximising shareholder value.

That might be unfair. But when bonus-motivated asset manages start calling for policies that looked extremist a few years ago, something fundamental has changed.

And we’re entitled to ask whether buyers resisting those changes are acting in shareholders’ interests, or their own.