“This newspaper has welcomed the shift among corporate leaders from a narrow focus on shareholder value to the pursuit of a broader purpose — for a hard-headed reason: when business takes a broad perspective, it can leave everyone more prosperous, including shareholders. Rejecting the dogma of shareholder primacy is not a question of bleeding hearts, it is a matter of enlightened self-interest.” So says the FT editorial board in a powerful opinion piece today, before going on to argue that investors should follow suit.
The FT argues that there are two reasons for the investors to look beyond the bottom line and consider the impact of business decisions on climate and the environment and on workers and the communities they operate in. The first is that by ignoring the impending crises facing us, a corporate focus on shareholders alone contributes to the political neglect of the problems and can stand in the way of solutions. The second relates to the way that many investments are held by shareholders, through diversified portfolios intermediated by managed funds. The result of this is the ultimate investors (people like me with investment through pension funds, insurance policies and ISAs[1]) are in effect “universal investors” exposed to hundreds or thousands of individual companies, fortunes. As the FT team observe: “Their returns depend on that of the private sector overall. When one company profits by “externalising” its costs, that may flatter its bottom line only by losing investors more money in other companies which pay the price.”
Consequently, investors and company leaders both have an interest in internalising the externalities rather than ignoring them. But the FT finds that both company and investment managers feels constrained in doing so, and it argues that government should look at ways of changing the legal frameworks that shape behaviour by corporate leaders and fund managers.
My own belief is that there is evidence that some corporate leaders and some fund managers (notably Baillie Gifford who I got to know well over a period of nine years as the finance committee chair of an asset rich charity) do take the wider perspective and longer term into account and, in the UK at least, what is at issue is not so much the legal framework but the career paths, knowledge bases, incentive mechanisms, cultural biases and social norms in the City and in our board rooms.
[1] Individual Saving Accounts – the UK tax sheltered scheme for smaller retail investors