Over the past few years, we have seen considerable changes in behaviour from a large portion of the providers of capital. An increase in responsible investing coupled with more forceful stewardship practices has resulted in companies and boards adapting to a reimagined idea of business purpose that looks further than economic returns for shareholders, but on a societal commitment to a range of additional stakeholders.
In fact, in 2019, the Business Roundtable, which is made up of CEOs from approximately 200 major US companies, issued a statement redefining the purpose of a corporation. It moved away from the notion of a company’s purpose being that of simply maximising profits for shareholders, to delivering value to all stakeholders.
ESG controversies have an investment impact
Many companies have been called out over the last few years over lack of diversity and representation, pay inequality between genders, poor oversight of supply chains, and environmental mismanagement, among other issues.
Last summer, for example, fast-fashion retailer Boohoo was publicly condemned by its investors for the conditions its garment factory employees were working under in Leicester, and the fact that they were being paid less than half the country’s minimum wage.
Holding the company accountable, one of Boohoo’s largest shareholders, Aberdeen Standard Investments, sold 27 million shares worth almost £80m, representing two-thirds of its holding in the company. Before the Leicester working conditions were publicly revealed, Boohoo was a popular holding for investors with an environmental, social and governance (ESG) focus, showcasing the need for a lot more scrutiny on the side of investors.
Described as one of the top corporate scandals in recent history, the 2015 Volkswagen (VW) emissions scandal revealed VW had been installing defective devices to cheat emissions tests. The scandal led to its share price to plunge as much as 23%, wiping out over $17bn in market value. The sheer scale of misconduct led to the CEO’s swift resignation and VW has since worked hard to boost its sustainability efforts and linked a portion of executive pay to ESG targets.
Investors want to know your purpose
Companies with a societal purpose will seek to incorporate values such as human rights, diversity and inclusion, resource efficiency and environmental stewardship into their business model, making them key factors in their decision-making processes. Such a move by companies will not only have a positive impact on stakeholders, but it can also prove beneficial to sustainable economic growth by creating value, enhancing a company’s reputation, and building competitive advantage.
Demands from institutional investors to channel capital towards better businesses has led asset managers to strengthen their engagements to uncover companies’ purpose and culture. In fact, according to SquareWell’s survey of asset managers managing approximately $22trn in assets, slightly more than three-quarters of investors participating in the survey expect companies to establish a corporate purpose. Some asset managers even include their expectations on corporate purpose in their engagement/ESG policies.
Northern Trust Asset Management (NTAM), for example, expects companies to “articulate a corporate purpose that envisages long-term sustained benefits to their customers, acknowledging the needs of other key stakeholders”. Additionally, NTAM will engage with companies on their corporate purpose to ensure appropriate capital allocation where it will deliver maximum sustainable risk-adjusted return.
Similarly, Schroders also expects companies to produce adequate long-term shareholders returns while having “due regard for other stakeholders including lenders, employees, communities, customers, suppliers, regulators, and the environment in order to have viable business models that create value over the long-term”.
Purpose and stakeholders
It is critical for investors to distinguish between companies using ESG slogans or gimmicks as marketing and those that have a social purpose integrated throughout their business. Greenwashing has become common; thus, stakeholders must have a critical eye and delve deeper into the practices of investee companies with their internal operations, supply chains, communities served and the environment.
With the current crisis laying bare the strengths or weaknesses of each company, businesses will need to walk the talk, guiding positive action within their organisations and the wider community. To achieve credibility and authenticity in their actions, the composition of boards needs to accurately reflect the societies they serve. It is the boards that ultimately help craft the purpose of companies and oversee its implementation.
Purpose statements are, however, often lacklustre and do little to effectively challenge companies—purpose must go beyond just a mission statement or a marketing tagline. In SquareWell’s investor survey, 86% of participating investors stated they expect companies to deliver on their purpose and 75% of investors expect clear KPIs to be communicated and managed.
Each company is different, and it is important that its priorities and potential impact are evaluated correctly and that a tailored purpose is devised to fit the company and all its stakeholders, including its shareholders. One fine example, taking to heart purpose and progress from its forward-thinking and avant-gardist welfare origins, is Solvay, the advanced materials and speciality company which built its corporate purpose from the founder Ernest Solvay’s idea that “from science will derive the progress of mankind”.
Solvay’s purpose is defined as reinventing progress and acknowledging the duality of the world. Recognising that “new” and “better” is not always “better for all”, the company has instead decided to link people, ideas and the chemical elements that form its products to shape the company’s corporate purpose and manifesto, or as Solvay puts it, “what we do is who we are”.
Performing with a purpose
Investors’ expectations from companies to meet stakeholder needs while delivering long-term returns is a difficult equation to balance. In 2020, 99% percent of Danone’s shareholders voted for the company to pioneer the French “Entreprise à Mission” model, becoming a business that is purpose-driven rather than one motivated solely by profit. While many welcomed Danone’s shift, some of its investors viewed such move to be potentially coming at the expense of their own interest.
To navigate such criticism by investors with potentially a shorter holding period, companies with a purpose need to demonstrate that such focus does not come at the expense of performance but that it helps drive it in the short, medium and long term. 2020 highlighted how purposeful companies, with stronger ESG credentials, outperformed their peers. According to BlackRock, 81% of a globally representative selection of sustainable indexes outperformed their parent benchmarks in 2020.
Isabella Champion-Sinclair and Paris Mudan are responsible investment analysts at shareholder advisory firm SquareWell.