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Why wilful blindness explains a lot

Big corporations are often unwilling to acknowledge the problems staring them in the face, to the cost of employees, consumers and eventually profit.

Last week’s explosion at a fertilizer plant in the town of West, Texas, killing fourteen, is typical of the accidents that can bedevil the corporate sector.

Way too much ammonium nitrate was stored on site. Health and safety rules were breached. Inspections were infrequent. Houses and a school were too close to the plant.

Plant owner Donald Adair has conceded: “This tragedy will hurt deeply for generations to come.”

Fault has yet to be allocated. But the sorry affair looks like another case of wilful blindness among executives who fail to understand the consequences of their inaction.

 A book called Wilful Blindness by Margaret Heffernan explains how individuals who commit wrongdoing hide the truth of their misdoings from themselves, as well as others, to secure peace of mind.

Examples of wilful blindness over the centuries would include the German people turning a blind eye to the brutality of Nazi rule, tolerance of the 18th century slave trade and abuse within the Catholic Church.

In the business world, directors turn a blind eye to poor practice because they do not want to risk missing their profit and bonus targets.

This was why US banks did not worry about the poor quality of sub-prime debt they were injecting into their structured products and balance sheets. Credit rating agencies gave the products a good rating because they were paid by the banks to do so. Investors bought the things because their yield looked so good. It took years for money market investors to realise that they endangered the banking sector.

Until recently, BP prioritised its search for profits when drilling for oil. In the process, it overlooked its own safety record, and paid a heavy price when an oilrig in the Gulf of Mexico blew up.

Apple overlooked deplorable working conditions at its Foxconn computer supplier until 2010, when a string of revelations forced both companies to tighten up.

Institutional investors are starting to realise we can’t go on this way.  They are backing policies that ask companies and their suppliers to follow sustainable environmental, social and governance standards.

If asset managers want business from the institutions, they have no choice but to incorporate ESG into their investment strategies.

Managers such as Legal & General are suggesting that corporate executives who fail to meet the ESG test should suffer a bonus claw back.

This has happened to several banks that need to atone for their sins. Brazilian cosmetics company Natura has even tied manager bonuses to environmental and social goals, as well as financial targets.

The European Commission is proposing ways to force companies to come clean on their sustainable – or otherwise – stance during their annual audit. The Sustainability Accounting Standards Board of the US, a not-for-profit group, has developed techniques to help companies identify where their reputations are most at risk. Even the private equity business is trying to impress investors with newly minted ESG credentials.

These typically involve the use of checklists – increasingly seen as the best way to get things organised.

The SASB suggests, for example, that companies should build up “social capital” by improving their communications, community development, facilities, customer satisfaction, health and safety, disclosure, ethical marketing, access to services, customer privacy and attention to new markets.

Other checklists cover broad issues relating to their environmental standards, management of human capital, business model and leadership qualities.  

You may think this is political correctness gone mad, but it is the way we are heading.

Funnily enough, the ESG approach isn’t too different to the techniques used by family businesses to preserve their wealth and reputations over the generations.

And if it had prevented wilful blindness at that fertilizer plant in Texas there would be 14 more people living in the USA today.

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