A United Nations-sponsored international business initiative that promotes the adoption of environmental, social, and “good governance” objectives by corporate managements around the world, finds itself trying to respond to charges that it fails to observe “basic requirements for good corporate governance,” for its more than 1,200 members, many of them U.S. firms.
The accusation has special resonance at a time when the U.N. and its sprawling array of funds, agencies, and special programs have embarked on an aggressive strategy of partnership with corporations, non-government organizations and other private-sector actors to promote what are called “ESG issues” (short for environmental, social and corporate governance) in the service of sustainability and a radically reorganized global green economy.
The partnership strategy is expected to play a major role in what the U.N. calls its “Post-2015 Development Agenda,” a new era of global coordination to support “sustainable development.”
The initiative known as U.N. Principles for Responsible Investment (PRI), launched with much fanfare at the New York Stock Exchange in 2006, has become an important tool in that strategy, and now gets substantial financial backing from the European Commission.
Despite its U.N. affiliations, and the presence of two of the U.N.’s top officials on its powerful Advisory Council, PRI is now organized as a British non-profit corporation.
One of its main purposes is to convince institutional investors who handle trillions in funds to use nebulous “ESG issues” in valuing, rating and selecting corporate stocks, as well as pushing similar attitudes on corporate management through, among other things, “shareholder engagement and voting” (translation: boardroom pressure), according to PRI’s website.
PRI members are estimated by the U.N. Global Compact, another U.N. business partnership organization, to manage assets worth an estimated $34 trillion.
PRI is currently ramping up the pressure on its membership—and all the companies they control or influence—to toe the ESG line. As of March 31, 2014, each PRI member must provide the organization with formal reports on, among other things, “how you include ESG factors in your investment decision-making processes,” and how each firm encourages “ESG disclosure from the entities in which you invest.”
The complaint against PRI, launched by a group of Danish investment companies that quit the initiative in January, is that their say in many of these matters have been drastically curtailed after insiders “radically changed the organization’s constitution without the involvement or consent of its members at the time” as the dissidents put it. And, after three year of muffled discussion, PRI still hasn’t returned to its corporate members adequate say in choosing who runs the institution and how it is managed .
Among the important things that were lost, according to the organization’s current managers, were the overall membership’s right at an overall general meeting to approve the group’s “strategy and annual work plan, annual financial report, accounts and budget, and changes to membership fees, among other matters. ” The “other matters” include the right to hire and fire members of the board of directors that have responsibility for the organization.
In other words, pretty much everything that counts.
Persons familiar with the issues involved told Fox News that the broad membership of PRI was not consulted on the organizational changes, or their rationale.
Members of the Danish group of dissident , contacted by Fox News, have declined to speak about the board room battle beyond a brief press release they issued announcing their departure effective January 1.
For their part, top managers of the non-profit claim that their reorganization was simply the result of a decision to move to Britain and follow that country’s corporate law, and “a desire to improve the effectiveness of [PRI’s] operations.”
PRI’s “dual structure,” according to the organization’s managing director, Fiona Reynolds, “allows the United Nations to continue to participate in the governance of the PRI” even though U.N. officials cannot take on “external fiduciary duties and responsibilities” as directors under ordinary corporate law. (Reynolds did not say it, but the reason for that limit is because of the U.N. officials’ diplomatic immunity.)
A PRI spokesman did not answer questions from Fox News about who initially decided to make the organizational changes, whether the changes were ever voted on by the general membership, why London was chosen as the new venue for the organization, and whether alternate forms of organization were ever considered that would put the U.N. participants in a different role.
As things now stand, the key overseers among 13-member PRI’s controlling Advisory Council include Achim Steiner, the head of the United Nations Environmental Program and George Kell, executive director of the U.N. Global Compact, along with a small group of influential, mostly public-sector pension funds.
(In an interesting bit of reciprocity, the chairman of PRI also serves as a board member of the Global Compact.)
One member of that inner asset management group is CalPERS, the California Public Employees' Retirement System, the largest public pension investment fund in the U.S.
Another is the Dutch pension fund giant PGGM. In January PGGM announced that it would withdraw investments from five Israeli banks to protest Israeli policies on the West Bank, and cited a “dialogue” with the banks under the “Responsible Investment policy” as a stage in its divestment decision.
Those two funds along with seven other “asset manager” firms are the ones allowed to hire and fire members of PRI’s actual board of directors, known as the Association Board, which has financial and legal responsibility for the organization.
Nominees for the Association Board are first vetted by a six-member nominating committee that according to the PRI’s website does not include U.N. officials. Nonetheless, according to a U.N. Global Compact spokesperson, the Compact “participates”
The same Compact spokesperson told Fox News that PRI members were “informed” of the changes to the organization’s management structure, including plans for creation of the new Association Board beholden to the elite Advisory Council, at a general meeting in October 2010, and the new board was chosen by the Council insiders “in subsequent months.”
“Our understanding is that no strong opposition was voiced at the time,” the spokesman said, a statement that avoided the issue of whether the changes were approved by the overall membership, and the rise of concerns that may have come later.
UNPRI’s Reynolds was slightly more straightforward. “While the changes to PRI’s governance arrangements were made following legal advice and in good faith,” she told Fox News, “some signatories raised concerns about the process used to adopt the new legal and governance structure and elements of the new Constitution.”
But after the dissident Danes first threatened to walk out, PRI suddenly decided to become more transparent, and according to its website, began publishing additional information about its finances; the deliberations of its Advisory Council, board of directors and committees; and the operations of “regional and country networks, steering committees and working groups” the organization has established.
None of that prevented the Danish firms from announcing and staging their January 1 walkout.
As a result, in December, PRI decided that it had to jump in front of the process. It announced that “as it calls on investors globally to drive improvements in the governance of companies and markets, it must set an example and match the levels of accountability and transparency it expects of its signatories”—an acknowledgement, at least, that it was operating under a double standard.
Then it proposed to begin a “timely and necessary” review of the organization’s governance relationships, which it attributed to “the pace of change within the PRI and the widening scope of activities now being undertaken by the organization”—as well as “the recent decision by several Danish signatories to publicly delist due to governance concerns.”
The organization also declared that it is “committed to ensuring this review is carried out to the highest standards of independence, impartiality, transparency and accountability and that its findings and recommendations - along with any subsequent changes to PRI governance as a result of the review - are clear, practical, understood and supported by signatories via our decision-making processes.”
It did not, however, say it would do things fast.
Instead, PRI pulled together a draft scope of work for the review, which took until February. Then it put the scope of work out for membership review, and expected to have the feedback in-house by the end of this month.
Meantime, it put out a request for proposals from independent experts who would be interested in carrying out the review. According to PRI’s timetable, a reviewer will be selected by the end of March.
The review itself is expected to last from April to June, 2014, and the expert has been expressly told that it must include “the viewpoints of the Council representatives, Board directors, PRI executive team, and UN partners,” as well as the general membership.
Then the report will be chewed over in various phases from July through November, largely under the supervision of PRI’s current management and the PRI governance committee, which is made up of five members of the Advisory Council inner circle, and chaired by the representative of CalPERs.
PRI’s members will get a chance to read about any changes that comes as a result of the elaborate exercise, but there are few signs that they will actually get to vote on them.
According to the PRI website, the Advisory Council will be “ultimately responsible and accountable for ensuring that recommendations emanating from the review are effectively implemented, by the end of December 2014”—following “consultation” with the rest of the membership.
Meantime, PRI will continue its work of “fostering good governance, integrity and accountability; and addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation.”
George Russell is editor-at-large of Fox News and can be found on Twitter @GeorgeRussell