Tuesday, April 20, 2021

Investors are starting to demand better from the businesses they own

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In 1970 Milton Friedman wrote an op-ed that would embolden investors and infuriate activists for decades. His title: “The social responsibility of companies is to increase their profits.” Despite insistence of many that his doctrine is dead, Friedman’s acolytes still have at least one powerful ally: the US Department of Labor.

In one new rule to take effect in January, the ministry will require public pension plans to choose investments “based solely on financial considerations”, specifying that assets “can never be enlisted in the pursuit of other social or environmental goals at the expense of Of these financial considerations. It is a drop of cold water on the responsible investment movement, which has quadrupled its assets during the last decade.

The new rule is an example of how adversarial capitalism can be. Businesses maximize profits for shareholders – workers, communities and the environment be damned. Not surprising only half of Americans under 40 have a favorable view of capitalism – and only a third of all Americans believe that our financial system benefits society.

As an impact investor who helped launch Bain Capital’s social impact fund, I take a different point of view. Many impact investors believe shareholders are best served when companies focus on creating long-term value for customers, workers, communities and the environment.

To understand why, we must ask ourselves a fundamental question: who exactly are these shareholders?

There are 137 million shareholders in the United States, or 137 million Americans who own shares directly, through pension funds or investment funds like those managed by Black rock or loyalty.

Share ownership, like all wealth in the United States, is unevenly distributed: richest 10% hold four fifths of stock market wealth. But what if we focus not on the richest shareholders but rather on the typical shareholder? When the Department of Labor sets policy – like a new workplace safety rule – it seeks to benefit the typical worker rather than the wealthier. Treating shareholder interests as separate from broader social and environmental considerations misses a critical point.

Of all the Americans who own stocks, the typical shareholder is 51 years old and has a retirement account worth $ 65,000. They are often invested in broadly diversified index funds. A target retirement fund Vanguard, for example, owns shares in more than 11,000 stocks and 15,000 bonds in all sectors and regions of the world.

They also work for a living. Shareholders rely on our economy’s ability to provide good, well-paying jobs. They are customers of the businesses they own. They live in the environment that businesses can pollute, and they are citizens of democracy that some businesses seek to influence.

Of all the roles they occupy, the shareholder is a relatively minor role.

So, most shareholders benefit when companies make long-term investments in worker training, sustainable operations and fair business practices. They benefit even if these practices reduce short-term profits, because they hold a representative share of the world economy for decades. They are shareholders, yes. But these are long-term shareholders who care more about creating lasting value than meeting quarterly earnings expectations.

It is therefore strange that our economy reflects their interests so badly. More than half of Americans believe that companies should take action on climate change. But over the past two years, investors voted to pass only four of the 42 shareholder proposals related to the environment.

Two-thirds of Americans believe that companies wield too much political influence, but shareholders only adopted 8% of proposals that would address lobbying.

Almost three quarters of workers say CEOs earn too much. Each year, shareholders have the right to vote on the compensation of the CEO. And each year, more than 97% of executive compensation are approved with an average of 90% support.

In today’s financial markets, there is little responsibility for anything other than short-term profits.

Many investors are starting to demand more. According to a recent Morgan stanley survey, 95% of millennials and 85% of all investors are now interested in sustainable investment strategies. Almost nine in ten believe that “it is possible to balance financial gains with a focus on social and environmental impact.”

To meet this growing demand, many asset managers have started offering responsible investment funds. These funds are often referred to as “ESG funds” because they focus on the environmental, social and governance characteristics of companies. They amassed billions of dollars in assets in recent years as investors seek to realign their portfolios with their values.

Impact investing, where investors buy private companies with the specific aim of making them more socially and environmentally responsible, grew up to over $ 715 billion today.

But retirement accounts and investment funds aren’t the only dollars invested on behalf of most Americans. Insurance companies invest our premiums, banks invest our deposits and endowments – in universities, foundations, etc. – invest our donations. Institutions with more than $ 14 trillion in assets have committed divestment from oil and gas in a movement often led by students.

Even the labor department is not immune. After proposing the new ESG rule this summer, he received nearly 9,000 comments, of which 96% opposed the rule change. This helps to explain why the final rule returned language that initially focused even more on environmental and social concerns.

The pressure is increasing on businesses to better reflect the values ​​of their owners. No one thinks twice about the small business sponsoring the local Little League team or making sacrifices to keep people on the payroll during a crisis. But as businesses grow and go public – and ownership grows, dispersed, intermediated, and anonymous – we lose sight of this truth. It is up to shareholders to recognize that their interests are poorly served and to demand better.

Michael O’Leary is co-author of Responsible: the rise of citizen capitalism. He was part of the founding team of Bain Capital’s impact investment fund. The opinions expressed here are his.

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