Stephen Netherway considers the increasing demand for business to not only follow the rules but behave ethically too
There is no doubt that the focus on corporate ethics is on the rise, as illustrated recently by the publicised removal of Harry Stonecipher, the (former) chief executive of Boeing.
It may well be a moot point whether ethical issues, or issues pertaining to corporate standards, should extend into personal lives, but there is no doubting that corporate business is currently more aware of putting in place policies of corporate social responsibility or corporate responsibility (CR).
Key factors in stimulating this focus are the ever-increasing public and governmental scrutiny into corporate performance, including focus on social, ethical and environmental (SEE) impact, along with stakeholders demanding that businesses report publicly on their CR policies and performance.
By way of the latter example, the Company Law Review Steering Group recommended in its report on British company law in July 2001 that all companies of a significant size should be required as part of their annual report to publish an operating and financial review containing information on SEE policies. Furthermore, the Association of British Insurers has more recently demanded that companies should detail the management of their non-financial risks in annual reports. Additionally, the advent on 1 April of Operating and Financial Reviews (OFRs) heralded a potential broader audience for CSR. In the US, the impact of Sarbanes-Oxley and other legislation and associated litigation risks results in CR activities being increasingly audited as part of overall risk management processes.
So what exactly is CR? As a concept, it means different things to different people: to some, it begins and ends with a corporate impact on SEE/wider community issues; for others it means no more than embracing concepts of observing good business ethics. However, in reality, CR often embraces much more, perhaps in more subtle ways than may be first appreciated. One of the key drivers is the demand of key business stakeholders - the shareholders and investors - to have financial investments protected to the full and maximise financial return. Out of this often emerges pressures to better focus on risk management and often this can be seen to be manifested, at least in part, by the espousal of CR values that embrace risk management elements.
Once we are talking about risk then, of course, we are considering a basic component of the re/insurance industry - add the corollary of reward for assumption of risk and this essentially is the industry. It is now widely recognised that if businesses fail in good working practices they are more likely to be sued by third parties or prosecuted/shut down by government/regulatory agencies.
Once we understand that CR policies are, at least in part, often designed to interfere in this dynamic, with direct or indirect intent to manage and eliminate business risk, then what we are also considering is potential management of insurable risk. CR is therefore an area of potential interest for the re/insurance market.
Some might question whether this interest is somewhat fanciful - if CR principles espoused and adhered to by businesses are essentially restricted to non-financial issues, or hard to identify business risks, for example, such as those addressed by SEE policies, then just where is their relevance to insurable risk? However, even SEE policies can impact upon insurable risk, for example, where there may be focus within such a policy on the direct costs of a product recall. In reality, any drive by shareholders/investors for CR adherence is likely to generate an element of risk management as part of that business's CR policy.
Financial benefits can follow
At an insured/insurer level there is therefore a theoretical opportunity to obtain a financial benefit out of a CR focus. If insurers can target insureds who possess and follow CR policies that espouse better and relevant risk management then underwriting performance may improve; if they analyse the insured's published CR policies, they may get a better picture of the insured's risk profile. Equally those insureds have the potential to secure more favourable terms of cover. Indeed, if insureds can secure such benefits then brokers, too, have further opportunities to deliver if not exceed client expectations and demands.
Reinsurers should also receive a benefit of better risk profiling at an insured/direct insurer level. As a class they are more restricted in their ability to require or demand underlying risk assessment to focus on such matters. However, any concerted collective demand by reinsurers on insurers to use analysis of CR application will also be influential in making CR analysis the norm across the market.
For each market player there is a theoretical opportunity to increase bottom line financial performance. Whether this plays out in practice will depend on the attitudes of re/insurers and ultimately the actual relevance of CR to the market's assessment of risk. If the market does not, or chooses not to, recognise the importance of CR policy considerations as a risk assessment tool then that will be the end of the matter.
Instrumental in influencing opinion will be brokers who, if persuaded of the relevance of CR in terms of performance delivery and financial advantage, are likely to be vocal advocates of promoting CR. Indeed, it is the broker who is probably best placed to identify whether the market will recognise CR in relevant risk assessment process; brokers can measure such matters by reference to broking successes and feedback obtained.
The key to interesting brokers in the potential relevance of CR, and so determine if they become advocates of CR focus, will be if brokers themselves can be convinced that such a focus will bring them opportunities for competitive advantage in the ways illustrated above. Putting it another way, will they miss opportunities if they do not use the CR documents to present risks to the re/insurers?
Pressure for change
Potentially there may be a chicken and egg scenario at play here: in order to see evidence of actual competitive advantage, brokers may require convincing that re/insurers do accept the importance of CR focus in their risk analysis; yet just how are these re/insurers going to be convinced about such matters in the first place, other than by being convinced about the relevance of such matters by the very brokers they deal with?
However, pressure to change may also come from re/insurer stakeholder demands to effect such a change, to assist their protection of their investment and to maximise their return. Peer pressure and commercial leverage could theoretically be applied to require those who insure risks directly to give consideration to potential insureds' CR policies and insureds' adherence to the same.
Consistent with prevailing corporate trends and pressures identified at the beginning of this article, all major market members - whether brokers, insurers or reinsurers - are likely to come under increasing pressure, to have in place their own CR policies. This may be as a result of investor/shareholder pressures or as part of wider stakeholder pressure to recognise adherence to CR as demonstrating "good industry citizenship".
There is evidence that the market is already recognising that possessing (and publicising) CR policies is a matter of increasing importance. For example, in the life and pensions market, a number of large insurance companies now have regard to how equity funds should be invested, taking into account SEE considerations in the selection and retention of investments. Additionally, many members now have their own CR policies, eg Zurich UK, Aviva and Co-operative Insurance Services.
It may be the case that even if market members give no thought initially to the impact of CR on risk assessment, they may subsequently wish to investigate these possibilities as their own CR philosophies and policies are put in place and they begin to understand those opportunities. The reality also is that if re/insurers do then proceed to insist on CR policies existing in their supply chain, then brokers, too, will have to employ CR strategies and begin to consider their implications to their wider business.
However one plays the scenarios out, all market members are going to be required to give some consideration and focus to CR issues, at least to comply with pressures to have their own CR policies - the interesting issue is that CR has a much wider relevance in the re/insurance market.
- Stephen Netherway is a partner in the insurance and reinsurance group of CMS Cameron McKenna.
Gordon Brown, UK Chancellor of the Exchequer
"Today, corporate social responsibility goes far beyond the old philanthropy of the past - donating money to good causes at the end of the financial year - and is instead an all year round responsibility that companies accept for the environment around them, for the best working practices, for their engagement in their local communities and for their recognition that brand names depend not only on quality, price and uniqueness but on how, cumulatively, they interact with companies' workforce, community and environment. Now we need to move towards a challenging measure of corporate responsibility, where we judge results not just by the input but by its outcomes: the difference we make to the world in which we live, and the contribution we make to poverty reduction."