Are companies serving stakeholders or just paying lip service? It’s a good question for charity trustees to be asking when thinking about their investment portfolios.
Since 1997, a group of leading US executives known as the Business Roundtable has stated in its Principles of Corporate Governance that “corporations exist principally to serve their shareholders”. They grabbed headlines in August with a rejection of this narrow focus of the past and a new commitment to serving all of their stakeholders.
This transformation in the thinking of CEOs at some of the world’s biggest companies shows how much demand has grown for a more responsible capitalism. One that recognises long-term profits are dependent on a thriving ecosystem of customers, suppliers, employees, communities and the environment — as well as shareholders.
Our recent report Responsible capitalism: Benefiting society and investment returns chimes with the Roundtable’s assertion that for companies to prosper in the long run, they need to work to “ensure more inclusive prosperity” and “challenge [themselves] to do more”. We also fully agree with its “commitment to a free market economy”. We don’t think the two are mutually exclusive.
By some measures, it would seem that the Business Roundtable CEOs are largely walking the walk, as well as talking the talk. They seem to be doing well according to JUST Capital, a non-profit organisation set up by hedge fund billionaire Paul Tudor Jones to evaluate how well companies are serving their stakeholders. JUST Capital ranks 68 of the 181 companies who signed up to the Business Roundtable statement in the top fifth of the companies in the Russell 1000 index, which it tracks. But charity trustees, or any investor, wanting concrete evidence face a big problem — the scoring systems available are inconsistent and poorly correlated.
The phantom shareholder
And whatever the Business Roundtable might say about serving all stakeholders, officials at America’s main financial regulator, the Securities and Exchange Commission (SEC), aren’t lending a hand. When it comes to specific actions on environmental, social and governance (ESG) issues, the SEC recently imposed tighter regulations on proxy advisers, which could limit the ability of shareholders to exercise their stewardship responsibilities (an aspect of our investment process that Rathbones has been building over the past decade).
Ostensibly, the SEC was protecting company boards, and the shareholders they serve, from undue political influence. But any SEC claim to be acting in the interest of the public rather than the corporations they’re tasked with regulating, was quickly undermined. As it turned out, the SEC may have been unwittingly influenced in its decision by a PR campaign using fake letters from ‘ordinary shareholders’. The ghost-written letters, funded by a free-market advocacy group called The 60 Plus Association, expressed concerns about third parties “promoting their own agenda” in decisions affecting their investments.
Delegating your engagement
In fairness to the SEC, mass reporting on ESG factors and delegating proxy voting to governance advisers can be problematic. It’s better to have active engagement and a deeper understanding of the companies you invest in than to solely rely on external scoring systems. One problem is that governance advisers now want all companies to produce reports on all policies relating to issues like gender equality, modern slavery, climate change and so on, irrespective of the business type or the management’s track record in these areas. Some management teams are saying no as they feel that these are costly and the outcomes reported can be misleading or irrelevant.
All of these issues are important of course. We want to invest in companies that take them seriously and avoid those that do not. It absolutely makes sense for companies to see customers as key stakeholders, ranking alongside their shareholders.
Public opinion is shifting towards a more sustainable approach. But as we noted in Responsible capitalism, the big issues facing our society won’t be solved by government policy alone. Capitalism is essential, and we believe investing in firms with a solid purpose can deliver benefits to society as well as maximising returns to shareholders. This is a massive opportunity for companies that can find sustainable solutions to our environmental conundrums, address inequality and offer sustainable products to customers that vote with their wallets.
Andrew Pitt is head of charities at Rathbone Investment Management, which has a dedicated hub about responsible capitalism.
This content has been supplied by a commercial partner. Rathbone Investment Management is the overall partner for the Charity Awards.