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RepuTex has yet to rate

By Michael Coote

Friday 28th March 2003

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The new RepuTex rating system has attracted attention on both sides of the Tasman.

The brainchild of former Liberal leader John Hewson, now dean of the Macquarie Graduate School of Management, and former Standard & Poor's managing director Graeme Lee, it is based on stakeholder capitalism or "ethical" investing, which takes into account the views of interests external to companies and their shareholders.

It will help those who follow socially responsible investment (SRI).

Traditional rating agencies concern themselves with the ability of corporate issuers to repay debt. Fundamental analysis advances the cause of shareholder capitalism by assessing whether a listed company will make acceptable returns on capital for the risk involved.

Criteria for stakeholder capitalism may ask a wider range of questions about an investment than those of shareholder capitalism. It is a moot point whether these add more than a sense of moral comfort to investors.

Whether enhanced long-term value arises for investors from the application of vicarious stakeholder capitalism remains to be seen. SRI share funds have been hit by the bear market of 2000-03 as much as non-SRI funds.

Arguably, with corporate governance standards in the limelight post-Enron, SRI-type companies should become more popular with investors but it is far from clear whether people are rushing to open their pursestrings to firms that are big on compliance just because an ethical tag has been attached.

In any event, the regulatory thrust worldwide is to impose tougher universal rules. Ethical investment has reached $A14 billion in Australia and $US2 trillion in the US but these sums are organic chickenfeed in the wider market context.

RepuTex will publish its ethical ratings on the top 100 Australian firms annually in October. Ratings will range from a peak AAA right down to a bottom D.

Firms will be ranked on governance, environmental, social impact and workplace standards. These standards pretty much cover the "triple bottom line" (TBL) approach to SRI evaluations, which calculates a combination of financial, environmental and social considerations.

The point of difference of TBL from standard fundamental analysis may be hard to detect. Presumably top-100 companies comply with laws and regulations on matters financial, environmental and social anyway, with the penalty of prosecutions and civil lawsuits hanging over profits if they break the rules.

In other words, TBL criteria can look pretty much like business as usual for contemporary listed enterprises in developed countries. Fundamental analysis should pick TBL matters up in checking for contingencies that might affect returns.

To be justified as a distinctive investment analysis technique, TBL must uncover aspects of material significance that standard analysis does not. Reputex is going to call on the expertise of the likes of Greenpeace, the Australian Council of Trade Unions and the Australian Shareholders Association.

The ASA may have the skills to contribute meaningfully to picking good stocks, but how about politicised bodies such unions and greenie organisations?

RepuTex smells of politicisation. Dr Hewson told Nine MSN on March 16 he was against excessive regulation when asked if he thought the Australian government should give more power to the Australian Securities & Investments Commission to enforce corporate government standards.

A "name and shame" approach via RepuTex would be consistent with his point of view. Unions and greenies could find the same approach helpful to their own agendas behind a worthy cause smokescreen.

Will a top-100 Australian company get demerit points from the Australian Council of Trade Unions if locked in industrial action? Could a firm influence its rating by making donations to Greenpeace or likeminded lobby groups? Is management time well spent on placating self-appointed stakeholders?

RepuTex expects companies to co-operate with it but will rate firms that do not. Does a non-co-operative corporate, perhaps concerned with other matters of more relevance to shareholder returns, run the risk of a caning from RepuTex?

RepuTex could prove a means for vested interests to impose stakeholder pressures on listings to the detriment of shareholders. In the end, it is shareholders, who have risked their capital, who should call the shots on the rights and wrongs of the corporate management to whom they have entrusted their funds.

Management owes a duty to shareholders to comply with regulations as part of its normal function. So what do outside vested interests, not necessarily aligned with shareholders and with no capital of their own at risk, have to do with management matters? "All care, no responsibility" would seem to be the ethos.

RepuTex brownie points will make for keen interest to see whether the system is valid and adds true value for investors.

At least it will be subject to the kind of disciplines its espouses in advocating corporate governance quality. If RepuTex is not reputable, investors will give it a miss.

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