shareholders – Escondido Framework

US Republicans who don’t understand shareholder capitalism

Freedom, but not to do business with ESG informed institutions

Ron DeSantis, governor of Florida and fancied candidate for the Republican presidential nomination in 2024 is proving to be an unexpected enemy of investors in US businesses and the “free market”. The FT reports that he announced legislative initiatives on 13^th February to ban banks and other financial groups from “discriminating against” energy companies, gun sellers and other businesses, and asset managers from considering ESG in investment decisions.

This appears to be only one of 49 legislative initiatives so far this year across the United States. To the extent that these are the result of the efforts of lobbyists working for pariah businesses, this is fair enough and – in terms of the Escondido Framework model of the firm – represents an understandable response by the managements of such businesses to the pressures they face as they attempt to shape the interface of their businesses with the suppliers of capital.

Whether it is a rational response or is likely to succeed (by reducing the cost of capital or relaxing the pressures faced by management from active investors) is uncertain. The FT reports further that the Indiana Bankers Association, representing 116 banks, is trying to frustrate legislators in the state who are trying introduce a measure to require the state to divest and cancel contracts with financial groups that consider “social, political or ideological” factors. The Chief Policy Officer of the IBA has said “A lot of my members have ESG statements [that] could prohibit an organisation being a custodian of the state’s finance as a result of this legislation.”

But the growth of ESG is a rational response of businesses to institutional investors’ concerns about the outlook for businesses who traditional activities and business models face a long term threat because of they harm that they are perceived to present to people and to the planet. Each mass shooting in the US contributes to a ratcheting up of the anti-gun lobby and, absent short term crises resulting in a profit windfall (and these invite a taxation response) the outlook for companies extracting and supplying fossil fuels is undermined by the need to move to net zero. And when it comes to good governance, the example of value destruction by an unshackled Elon Musk, reinforces the case for the “G” in ESG.

It is reasonable for climate-change-denying and gun-toting Republican elected officials to include financial institutions that do not subscribe to the “E” and “S” elements in the ESG principles among the organisations with whom they do business, providing that such organisations can demonstrate over the long term that they serve the fiduciary responsibilities of the offices to which they have been elected (it is hard to see how they can ignore the “G”). But it is conflicts with their duties and with the commitment claimed by most Republicans to market capitalism to cave in to the pressure from the pariah businesses and legislate against doing business with ESG informed investment decisions that offer better long term returns and less risk of fraud, provider capture or adverse outcomes from wacky decision making.

The paradox of the anti-woke investor

Fundsmith founder, Terry Smith – No Nonsense?

The Escondido Framework argues that all the market interfaces of the company (with customers for their goods or services – either B2B or B2C, labour, their own suppliers of goods and services, and providers of capital) are essentially similar.

Customers for goods and services make their decisions to purchases on the basis of a variety of characteristics of the offering: quality, product features, after-sales support, credit terms, price and more, and in relation to all of these, the competing alternatives. Employees consider not only the raw salary package, but the variety of employment terms, both hard and soft benefits, company culture and values, corporate reputation, risk, opportunities for career development, and that’s just the start of the list. Suppliers of goods and services also have complex decisions in terms of how they view their customers, whom to serve and how. It is not just a matter of price. For example: is this customer big enough to justify the effort to sell to them compared to the other potential customers out there; can we support the service levels and stock requirements to meet their demands; would our brand be damaged in the eyes of our premium customers if we sell to downmarket segments? And suppliers of funds to companies, whether equity, debt, or hybrid instruments, consider a wide range of trade-offs: risk (reflecting a wide variety of considerations: operational, financial structure, regulatory exposure), term, liquidity, income generation, value growth, portfolio diversification for starters.

So what should we make of the debate raging over ESG informed investment and rise of the vocal “anti-woke” investor?

The Escondido Framework is not a normative model, arguing over rights and wrongs of ESG investment. The model describes the world as it is, and highlights the shortcomings and incompleteness of other models of the organisation. Investors, alongside with consumers, suppliers and especially employees include ESG type considerations in the mix when deciding who to do business with and on what terms. Do I want to be complicit in the destruction of the planet, oppression of minorities, exploitation of disadvantaged populations – whether on a third world plantation or facing an early death through a predisposition to consume addictive toxins (alcohol, tobacco or opiates). ESG is a fact of life in all markets, the only question is the weight and precise form in which it plays into the consideration of all the parties (aka stakeholders) with whom companies interact.

There are conflicting accounts as to whether ESG focussed companies and investment funds deliver superior returns. Part of the problem is one of definition and the nature of the measures employed: movements in share price are a poor metric because any starting point in a share price measure has future performance expectations priced in. However, to the extent that robust taking ESG issues into considerations reflect long term strategic thinking and the combination of transparency to investors and quality in decision-making processes, it is hard to see why and how ESG would not offer great value creation over an “anti-woke” alternative.

The Financial Times has once again (Helen Thomas on 11 January, following an article by Harriet Agnew on 12 January last year) focussed on a spat between “anti-woke” investor Terry Smith of Fundsmith and the leadership of Unilever. Smith has mocked Unilever’s leadership in his annual letter to investors for highlighting its sustainability credentials and for “virtue-signalling ‘purpose’”. He takes issue with Unilever for “purposeful” brands. For example, he comments about soap that “when I last checked it was for washing” dismissing Unilever for talking about “inspiring women to rise above everyday sexist judgements and express their beauty and femininity”. But, as Thomas points out, “the huge success of Dove – one of Unilever’s biggest brands, held up as a marketing case study – suggests a bit of female empowerment and body positivity isn’t a stupid way to sell soap. Rather like efforts to make mayonnaise appealing to health-conscious millennials [Smith laid into Unilever’s account of the “purpose” of Hellman’s last year], Smith just isn’t the target market”.

He is on stronger ground in his criticism of Unilever, which has been subject to a raid by activist Norman Peltz who now has a seat on the board. He complains that Unilever has failed to engage with his fund which had been a long-term holder of Unilever stock and twelfth largest shareholder. Marketing to investors, involving both taking strategic marketing decisions about the proposition provided to the investor (ie the profile of the investment including characteristics such as those listed provide above) as well as communicating with the shareholders, is one of the core responsibilities of the chief executive.

Reading the Fundsmith shareholder letter, I take away the impression that Smith’s criticism of “virtue-signalling” reflects a politically informed discomfort with a company that responds to trends in society and to the new consensus about threats to the environment. However, his language elsewhere and his stated strategy to invest in good companies, hold onto shares for the long term, suggest that he doesn’t recognise that his fund should invest in companies that adopt the underling strategic approach of Unilever (even if not its failure to communicate adequately with large shareholders or its apparently inept approach to large transactions). Given the stated approach (effectively to emulate Warren Buffett), Smith ought to be able to leave his personal politics and any “anti-woke” tendencies outside in the carpark when he comes to work and to recognise the value of purpose and ESG when investing on behalf of his clients.

“It’s the investors’ fault, not ours”

Financial communications company Tulchan’s State of Stewardship report, capturing the views of 35 FTSE company chairs (26 from FTSE 100), makes depressing reading. “Many of the chairs interviewed for this report conveyed a sense of deep unease at what they feel is a lack of alignment between their objectives and those of their shareholders” writes Mark Burgess, a Tulchan Communications partner, in the foreword to the report. And whose fault is this? According to the commentary and the chair’s quotes scattered through the report, it appears to lie with the investors.

“The report suggests….that we should recognise that board are mostly constituted by good people trying to the do the right thing for the good of their stakeholders., and invites shareholders overseeing them to start by assuming positive intent, placing accountability for stewardship where it belongs;[1] in the boardroom and working together to improve conditions for growth”.

This is a bit like a sales and marketing director blaming customers for not buying their products or services. No, you need to design your offering to meet customers’ needs, and your advertising agency (Tulchan’s equivalent in the consumer marketplace) should shape your messages to so that they demonstrate how your offer will address those needs.

Shareholders don’t “oversee” boards. Boards are accountable to shareholders, and to other stakeholders too. Their companies have a duty to provide returns that are sufficiently attractive to shareholders in terms of the balance of capital growth, dividend income, risk, timing, and alignment with ethical and any other shareholder concerns. Folded into risk are concerns about consumer and supplier market movements, competition, government intervention, financial leverage, and investors’ portfolio composition[2]. Get that right, and investors will place a higher value on your shares. Get it wrong and investors will either sell or, if they believe other directors will provide returns (taking all the dimensions list above into account) that are more attractive to them, replace you. Boards need to think of their shareholders as customers and shape their offer to them as though they were customers.

[1] Tulchan’s punctuation

[2] Witness the challenge faced by Baillie Gifford needing to unweight its investment in Tesla as the share price took off

Norwegians have the power to tackle executive abuse of power

Norway’s population and land area may be only 0.07% and 0.08% respectively of that of the world, but through their nation’s $1.2 trillion oil wealth fund they own the equivalent of 1.5% of every listed company. If any single organisation is able to help overcome the market failure represented by the capture of economic rent by the managers (and the connivance in this of toothless or complicit remuneration committees), it is the custodians of Norway’s accumulated oil receipts.

It is reassuring to discover that Nicolai Tangen, chief executive of the fund, is on the case. Not only has it just voted against the pay packet proposed for Intel’s executives, but it voted against the remuneration proposal at Apple in March, having voted done the same at IBM, General Electric, and Harley Davidson earlier this year.

In an interview published in this weekend’s Financial Times, Mr Tangen explains that it has remuneration proposals that are not justified by performance, are opaque or not long-term in its sights. “We are in an inflationary environment, where we are seeing many companies with pretty mediocre performance coming out with pretty big pay packages. We are seeing corporate greed reaching a level that we haven’t see before, and it’s becoming very costly for shareholders in terms of dilution.”

He continues by blaming shareholders for not voting their shares: “We feel to a certain extent that shareholders haven’t really done their job in this area. We are sensing a bit of a shift in sentiment among the large shareholders in the world towards more scrutiny and more requirement for alignment.” However, he argues that the fault lies primarily with the boards themselves, stating that the “main blame is clearly with the CEOs and boards.”

Blaming the CEOs may be a bit unfair, even if it suggests that they are being less than strategic and are failing to fulfil their fiduciary responsibilities given that this will probably damage the interests of the company in long term, certainly if the investment community ever gets its act together. But it does point to a failure of the board as a whole, and particularly non-executive directors.

The FT also quotes the fund’s chief governance and compliance officer who says that the fund is currently targeting US companies because this is where the problem is most egregious. This suggests that there is a particular problem in relation to governance in the US. Part of the problem may be that although the US model places, in theory, greater power in the hands of the non-executives who generally compose almost all the board other than the CEO than models elsewhere, there is a tendency towards appointing a high proportion of NEDs who are either current or former CEOs themselves. The problem is compounded further in the US in the ease, particularly in the tech sector at the IPO stage, with which corporations employ share structures that limit the voting power of external investors. In some respects, the US corporate governance is broken, but it most certainly is if other big investors fail to follow the lead of the very large investor from the very small country near the top of the world.

Echoes of the eighteenth century – the Spac bubble

Emblematical Print on the South Sea Scheme - William Hogarth — Emblematical Print on the South Sea Scheme – William Hogarth

At the height of the South Sea Bubble, an investment prospectus seeking to exploit the febrile market of 1720 is supposed to have described “A company for carrying on an undertaking of great advantage, but nobody to know what it is.”

This story is generally described as apocryphal. It would indeed be unbelievable but for the appetite last year for investors to pour money into Special Purpose Acquisition Companies, or Spacs, shell companies that raise money from investors through a listing on a promise of merging with an unidentified private company[1]. Apparently, nearly half of the $230 billion raised globally in new listings have gone to Spacs. In the words attributed to PT Barnum “there’s a sucker born every minute.”[2]

There is no reliable record of whether the “company for carrying on an undertaking of great advantage” ever existed, let alone what became of the funds committed by investors if there ever were any. But the fortunes of the Spacs and their investors is better documented, and an analysis has been published by the FT today. 425 of these “blank cheque companies” have listed since the beginning of 2020. The shares in two thirds are trading at below the $10 listing price, implying that they are worth less than the cash that was invested. Only 41 of these companies have completed transactions, and on average their shares are 39% below their peak valuation, despite a rally in the US stock market overall. Only 3 are within 5% of their peak, 18 are more than 50% below their peak, and 8 are below the $10 valuation when they first raised cash.

Perhaps “purpose” and a credible plan is worth something after all? It is moot whether a speculative investment not underpinned by a credible plan and purpose is better than a pig in a poke but, if so, it is not by very much.

An FT reader (pen name: Warthog Under The Bridge) who has commented on today’s FT report observes: “As a rough guide, the only way to make money with SPACs is to be a SPAC manager. Buyer beware, the guys running the shows are doing very well at your expense.” There may some SPAC managers making out like bandits, and there may be some advisers and professional firms raking in fees. But there may be some whose own money is at risk or whose advisers were taking fees on a risk basis. But Warthog Under The Bridge is probably right to claim that there is no other way to make money from a SPAC. Nonetheless, those who have spent the past year on these ventures would have created more value for themselves and society doing something else!

The same probably applied in 1720. But as there is no record of that the “company for carrying on an undertaking of great advantage” ever existed, we also don’t know whether its promoters, their lawyers, or even the printers of the prospectus made money either.

[1] FT 2^nd May 2021

[2] Also apocryphal, but none the worse for that!

Lessons from Emmanuel Faber’s departure from Danone

On 26^th June 2020 99% of the shareholders in Danone voted for it to become an enterprise à mission, or purpose driven company, required not only to generate profit for its shareholders, but do so in a way that it says will benefit its customers’ health and the planet.

Less than nine months later, Emmanuel Faber, Danone’s chief executive and the architect of the new strategy, was ejected by the board in the face of pressure from activist investors. The FT leader writer observed on 18^th March that “a backlash against purpose-driven capitalism was overdue” and that the debacle was “a reminder that distractions from the core goal of making a profit can be dangerous” before concluding that it did “not …. signal that leaders should rein in their ambition to go further and reassert the role of companies in society” and that to “revert now to simplistic and damaging pursuit of crude share-price maximisation would be a mistake.”

The ejection of Faber was not an illustration of the primacy of Friedmanite shareholder value, but an example of a chief executive failure to manage the investor market interface. We don’t know precisely what the activist investors were thinking, but they were clearly dissatisfied with the returns they were expecting and believed that their investment returns would be increased with a different chief executive.

Under Faber’s successor, the activist investors hope that the value of their investment (in terms of capital growth and dividend returns) will increase as a result of improved internal operational performance and a changed strategy towards the customers at its other market interfaces – including suppliers, employees, consumers, owners of real estate and local communities, regulators, and government (recalling the appetite of the French government to view large domestic consumer businesses as strategic national assets when threatened by acquisition by overseas multinationals). The choices of the different types of customer will include some consideration of ESG: consumers with an eye to environmental consideration (packaging, use of sustainable resources; employees preferring to work for companies whose conduct they can take pride in; investors wanting to see good governance. The rhetoric employed by the activist investment customers may reflect discontent with financial returns, but implicitly they are concerned with how the Danone’s mission is translated into strategy and the possibility that Faber’s rhetoric around purpose conceals a lack of grip on operational performance.

The Danone debacle generated further commentary on whether this apparent backlash represented a retreat from “purposeful capitalism”. John Plender wrote a powerful article for the FT on 4^th April reflecting both on the Danone story and on the lessons from the Covid about the impact on stakeholders (particularly suppliers) who were unable to diversify their risk (unlike investors) when a business hit rocks as the pandemic closed down parts of the economy. He shared the view, which we addressed during the debate in 2017 on corporate governance reform in the UK, that appointing employee directors (or by implication directors representing any other specific stakeholder group) does not address the governance gaps. He went on to argue for changes to the incentive models for senior managers to address short-termism and that profit or share value metrics determining them should be supplemented by ESG related metrics. In short, “stakeholder capitalism must find ways to hold management to account” and that “the prevailing commitment to short-termist shareholder value has undermined corporate resilience.”

Hakan Jankensgard, Associate Professor of Corporate Finance at Lund University responded to Plender in a letter published by the FT on 7^th April with an assertion that the firms should adopt the Hippocratic oath since this “would ensure that firms act as good corporate citizens”, with focus on long term profitability and “not become do-gooders picking sides in social debates”. It is probably a reflection of the challenge of drafting a letter of appropriate length for publication, but some steps in his logic seems to missing. However, other parts of his letter are compelling, echo arguments within the Escondido Framework view on how firms work and pitfalls in contemporary corporate governance, and are worth producing in full:

“As far as everyone is concerned, shareholders are the root cause of all the troubles afflicting our societies.

“Well, think again. The real problem today is managerial capitalism – that managers run firms primarily to increase their own wealth and prestige. A few decades back, managers were busy building wasteful empires, and the shareholder model arrived as a particular remedy for this gross inefficiency.

“Another innovation that arrive about the same time prove more fateful. It was the idea that managers, if given the right financial incentives, would rediscover their entrepreneurial spirt. It caught on, to say the least. What it really did, however, was to shift managers’ focus from building empires to extracting wealth through compensation packages.

“As manager took n their new role, they found willing accomplices in a cabal of short-term oriented investors looking for a quick return. This unfortunate marriage is the problem at the heart of today’s economy as it creates short-termism that adds to long-term risk.”

Rio Tinto’s dynamiting of the Juukan Gorge: Jean-Sebastien Jacques’s solution-space implodes

Juukan Gorge caves after Rio Tinto dynamiting

What better illustration could there be of the Escondido Framework approach to understanding ESG investing described in last week’s blog than the defenestration of Rio Tinto’s chief executive, Jean-Sebastien Jacques, by the company’s shareholders?[1]

In relation to the distinction made in last week’s article between the impact of regulation on the solution space available to executive teams, one of the interesting aspects of the dynamiting of Juukan Gorge and the two rock shelters is that the company had previously negotiated native title agreements with the Puutu Kunti Kurrama and Pinikura people, giving it rights to mine the area and had also secured regulatory approval. In Escondido Framework terms, as illustrated in last week’s blog post, the company thought that it was operating within the solution space defined by the market transaction with the owners of the land and that the regulatory market interface had not reduced the solution space available to the company.

However, the executives had failed to appreciate the sensitivities of the company’s investors to such an egregious violation of the heritage of not only the indigenous population but humankind as a whole.

Perhaps the board and executive team at Rio Tinto paid too much attention to the likelihood that investors in mining stocks are already a self-selected group that is less sensitive to ESG considerations than the investment market overall.

It matters little whether the response of the investors whose pressure on the board finally persuaded chairman Simon Thompson (who previously had insisted that Rio Tinto would not fire Mr Jacques) was a reflection of the potential for the scandal to increase future regulatory pressure on the industry, or a concern for the response of the upstream investors in their funds, or the consciences of fund management executives themselves being pricked by comparisons between the dynamiting of the caves with the actions of the Taliban blowing up the Bamyam Buddhas in 2001.

Either way, the shape of the investment market interface was sufficiently different to that perceived by Mr Jacques and his colleagues for them to have placed themselves, not temporarily but at a personal level permanently, outside the solution space available to them.

[1] For anyone who missed the story, Rio Tinto blew up two 46,000-year-old Aboriginal rock shelters in Western Australia, offending not only the Australia aboriginal community for whom the sites were sacred but also a wider public sensitive to an ancient archeological heritage. Initially the board decided to withhold bonuses for the executives involved, but has now decided that Mr Jacques should go (albeit not until early next year and without any further financial penalties)

How can technological change serve society through purposeful business?

This third session of the on-line British Academy Future of the Corporation – Purpose Summit was anchored in an interview with Satya Nadella, CEO of Microsoft and, as became clear, a living embodiment of the importance of purpose to business.

He conveyed a strong commitment to the resilience and survival of the corporation, and the place of purpose within this. Early on, he stated “A company should not outlive its social purpose. Its social contract should be sustained.” His final remark, in response to a question about what he wanted to achieve at Microsoft, was that measure of the contribution of leaders to their companies was that they left them with the institutional strength to outlive them. These two observations together add up to a compelling view of the role of the leader to ensure that the company’s purpose, in terms of what it provides to society at large, creates value for society. By implication, strategy is about adapting to ensure that the company’s purpose continues to achieve this.

Nadella, in common with Alan Pole of Unilever in an earlier, reflected on the importance of a company’s purpose in relation to meeting he challenges of the climate crisis and inequality. He spoke of the need for economic growth, but that it needs to serve everyone, to be anchored in popular trust, and to be sustainable – “you can’t have growth and break the planet.”

Nadella spoke repeatedly about the need to earn and maintain the license to operate, a particular concern for the very largest technology companies. They need to be more sophisticated in avoid the harm that is a consequence of their scale – not least to keep regulators and would be regulators off their backs. He spoke of the need for companies like Microsoft look upstream of themselves and see what they can do to ensure that through an embedded culture and value system of their own they do what they can to shape their external environment so that “we can be customers of good stuff”.

He was asked whether the pressures of quarterly reporting imposed short term pressures on Microsoft and compromised its corporate purpose and own long term strategy. He acknowledged that quarterly reporting was a constraint but only insofar as it forced the company to explain what it did and why. He explained that he had no difficulty, for example, justifying to his shareholders why Microsoft invested in local housing projects in Washington since the company need to support its wider workforce, not just highly paid software engineers but also people in blue collar service roles keeping the local economy operating.

Chair of the House of Commons Science and Technology Select Committee and former minister, Greg Clark, had to follow this tour de force. He reflected on the how the Covid-19 pandemic had accelerated some technology trends such as video-conferencing but also commented on the degree to which the recent experience surrounding the popular responses to apps to tracking infected patients had highlighted the importance of face to face contact in service activities.

The third contributor to this session was Ngaire Woods, Dean of the Blatavnik School of Government at Oxford who focussed on the role of government in regulation and the limitation of self regulatory codes in prevent a “race to the bottom”. It was apparent that her underlying thesis is that, notwithstanding the sense of purpose adopted by some business leaders, regulatory intervention is necessary – citing as her example the need for Robert Peel to secure the legislation to ensure widespread adoption of the standards in factories that Robert Own had pioneered. She also highlighted the need for appropriate regulation, in that the cheap solution is not always the best (using the example of the alternative approaches to preventing oil spills: the inexpensive solution of a fining system was ineffective whereas the policeable and expensive solution of requiring tankers to have a double skin has been highly effective). In answer to questions later, she also argued that governments should be prepared to use their power as lenders of last resort in the pandemic to secure responsible and purposeful behaviour by business – an answer that unwittingly brought us full circle back the issue addressed by Nadella of the license to operate.

Role of stakeholders in purposeful business

The second session in the British Academy Future of the Corporation – Purpose Summit took place earlier this afternoon, with a focus on the role of stakeholders in purposeful business. The proposition in the Escondido Framework that what most people call stakeholders should be thought of as customers of the firm is at odds with conventional stakeholder theory, but for the purpose of this review I will talk about stakeholders as conventionally understood.

Some of the richest material in the session came from Victoria Hurth from the Judge Institute, although perhaps I reach this conclusion because the language she employs comes closest to that used in the Escondido Framework model of the firm. She framed her introduction to the session by talking about the relationship of corporate purpose to stakeholders being one in which the role of the market is to mediate the pressures from stakeholders. She also talked about tapping the wisdom of shareholders to give meaning to the purpose of the company, which may be another way of looking at the Escondido Framework view that the organisation exists to resolve the symbiotic needs of the stakeholders. She wrapped her introduction with an argument about need for diversity on boards to help with a paradigm shift away from a shareholder value driven model of the firm to one driven by purpose in the service of stakeholders – but without demonstrating the logic behind her argument. There may well be plenty of meat underlying her assertion, but today she did not have the time to make this part of her case.

Frances O’Grady, from the TUC, made the case for hearing the voice of the workforce on the boardroom, referring back to Theresa May’s proposals for changes to corporate governance and the subsequent review that I contributed to and commented on in 2016 and 2017. She explained that she is agnostic about whether worker representation should be in the context of a unitary board or a two tier board following the model in some northern European countries. She also argued for a change to directors’ duties, by implication beyond those set out in Section 172 of the Companies Act requiring them to take account of all stakeholders, to require more focus on the long term.

Dan Labbard, CEO of the Crown Estate (an organisation whose roots go back to 1066 and William the Conqueror) addressed the question of whether a focus on purpose creates additional risk to the corporation. He argued that a focus on purpose equips the corporation to recognise and then organise to address risk, in contrast to a primary focus on profit. He build on this argument by encouraging organisations to proactively go out to their stakeholders with a purpose led strategy, rather than merely responding to stakeholders, and to look at risk through a stakeholder perspective.

Jim Snabe chairs two of Europe’s biggest corporations, Siemens and Maersk. He framed his concerns around the impact on companies of globalisation, technological change and the climate crisis. He argued for leadership anchored in corporate purpose, which describes as explaining why your organisation exists. Leading two companies with two tier boards, he is an enthusiast for this model, explain that the “management board drives the bus” while the supervisory board “sets the GPS”. He sees four roles for the supervisory board: ensuring the strategy is correct by asking the right questions; ensuring that the strategy is aligned with the United Nations strategic development goals; promoting the next generation of leadership; and defining success in terms of addressing the needs of all stakeholders.

Colin Mayer opened the responses to questions by observing that it is difficult, notwithstanding the variety of means that can be considered (different board structures, consultative bodies, citizen juries), to capture the views of stakeholders. (for the Escondido Framework perspective, visit the section of this site addressing governance and some of the relevant earlier posts).

Investors should look below the bottom line – says the FT

“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