Edouard Dubois and Ali Saribas pens an article for Harvard Law School
Calls for a more responsible capitalism have gone louder in recent years. A major shift happened last August 2019 when the Business Roundtable (BRT) published a ‘Statement on the Purpose of a Corporation’. For the first time, the BRT, an organisation that represents the CEOs of America’s largest companies, embraced the concepts of corporate purpose and stakeholder capitalism. This was followed by the World Economic Forum’s Davos Manifesto which highlighted that a company serves not only its shareholders, but all its stakeholders. Meanwhile, investors are placing greater focus on how companies “create value” for the longer term and what their “purpose” is. They have been progressively integrating environmental, social and governance (ESG) factors in their investment decisions while they have experienced a rise of inflows in their sustainable investing products.
The shift in mindset and in capital allocation have undoubtedly put management teams in a challenging situation whereby they need to balance the market’s demands for financial returns while ensuring that their actions are not detrimental to the interests of other stakeholders. As the coronavirus pandemic is providing an acid test to the sustainability claims of companies and investors, this crisis and its aftermath may accelerate the adoption of a more stakeholder-oriented decision-making process at companies. In the words of the historian Yuval Noah Harari: “That is the nature of emergencies. They fast-forward historical processes. Decisions that in normal times could take years of deliberation are passed in a matter of hours.”
SquareWell has already witnessed evidence of this shift of behaviour from some investors who have pushed their portfolio companies during the crisis to prioritize their other stakeholders. For example, Legal & General Investment Management (“LGIM”), managing more than $1 trillion of assets, is reported to have sent a letter to portfolio companies that the suspension or reduction of payments to shareholders may be necessary to guarantee the long-term sustainability of the company. BMO Global Asset Management (with over $500 billion of assets) expects companies to reconsider their share buybacks programs given the effects of the crisis, while UK asset manager Schroders (with over $500 billion of assets) asked companies that they “prioritize their key stakeholders, in particular employees but also customers and suppliers”, as doing so will benefit both the economy and investors.
In this journey to a more responsible capitalism, companies that have defined their purpose will have a head start as they should be better at managing the tradeoffs between their different stakeholders. Some shareholders like BlackRock have been quite vocal in their support of the concept of corporate purpose but most have remained silent. Therefore, SquareWell Partners decided to go directly to the source and aggregated the views of investors collectively managing approximately $22.1 trillion in assets in order to understand how relevant the concept of purpose is seen on the investor side.
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