Shareholder value theory is under attack. In fact, about a decade ago in an interview with the Financial Times on the future of capitalism, Jack Welch, former CEO of General Electric, famously called shareholder value “the dumbest idea in the world.” The irony of course, is that Welch is also regarded as the father of the shareholder value maximisation movement in the 1980s.
The rejection of shareholder value, and more accurately of shareholder primacy, is therefore not new. Welch’s comments came at a time of a time of widespread distrust and outrage towards the capital markets and corporate elite following the 2008 global financial crisis. Fast forward ten years and the sentiment still resonates – society is reeling from the impacts of the crisis and business is still stumbling in the dark to find better ways to do business.
The recent statement by the Business Roundtable (BRT) can be seen in this light. Impatience from both the political left and right and heightened awareness of global problems such as climate change and inequality have forced the hand of business. The statement can be read as tacit acknowledgement of businesses contribution to global crises and an attempt to reposition the corporation as a benevolent force in society, ready to deliver value “for the benefit of all stakeholders”.
Any commitment to a stakeholder approach should be welcomed. In trying times, it is promising that the CEOs of the largest and most powerful companies in the world recognise that business as usual is not an option. However, a successful stakeholder approach is unlikely to succeed unless we achieve two things, both of which ShareAction has been campaigning on for well over a decade.
Firstly, stakeholder interests need to align. Business will find it incredibly difficult to deliver value for all its stakeholders if they each have competing interests. There is a risk that those with the loudest voice will be heard above others. In addition, business alone cannot determine the needs of diverse stakeholders such as workers and communities – each must be given a seat at the table. This means ensuring all stakeholders are able to speak up for their interests as well as having the means to hold business to account when it fails to deliver what has been promised, for instance through increased social dialogue and worker representation.
Under shareholder primacy and short-termism, shareholders and the C-suite have been handsomely rewarded at the expense of workers whose power and leverage have been diminished over successive decades. Many argue that the rising inequality and stagnant wages has its roots in the primacy of shareholder interests over others. An effective stakeholder approach requires all stakeholders – including shareholders – to share a common purpose. At ShareAction, we think shareholders, who after all act on behalf of other stakeholders, are uniquely positioned to speak up for them.
Indeed, many are already doing so by forming powerful coalitions and alliances with other stakeholders. In 2019 for instance, investors have worked with civil society and trade unions to file and vote in favour of a record number of shareholder resolutions on issues including working conditions and human rights.. The BRT’s statement can, in some ways, be seen as an attempt to diminish the voice of an increasingly active shareholder community – we shouldn’t forget it was this same lobby group that earlier this year, lobbied the Securities and Exchange Commission in the United States to make it more difficult for shareholders to file resolutions.
Secondly, ‘value’ must mean more than financial returns. To date, investors have been held back by a damaging interpretation of fiduciary duty based on short-term profit maximisation. However, the logic of short-termism is redundant at a time of climate crisis, mass species extinction, and rising inequality. Thankfully, many investors are rejecting this approach. What good are returns on an uninhabitable planet? Instead, the most effective way for shareholders to fulfil their duties as responsible stewards of capital is through long-term, active engagement. This approach naturally requires consideration of a wider set of stakeholders, but also of a broader set of issues beyond the financial realm which are also in the long-term interests of people putting money into the system.
Financial returns are not generated in a vacuum, they depend and impact on resilient and well-functioning social and environmental systems. In recent years, investors have begun to shift their attention to the social and environmental impacts of their investments. We have already seen investors filing ambitious proposals at companies in support of climate action, and demanding more transparency on workforce practices in the UK and supply chains, as part of the Workforce Disclosure Initiative. In this light, shareholder value – a powerful force for change – is being reimagined beyond financial performance.
The difficult job is maintaining the pressure on the investor community to continue to align with the interests of the people they serve, and to look beyond the bottom line as the only measure of corporate success. Inevitably there will be difficult trade-offs. This will involve shareholders, and indeed, CEOs, ceding ground to others. It will require the end of shareholder value theory underpinned by the principles of CEO and shareholder primacy. However, we should be careful about signalling the end of shareholder value particularly when we consider the potential of shareholders to drive positive societal change.
In the absence of strong political leadership on urgent issues like the climate crisis, the responsibility must naturally fall on those with the greatest leverage – shareholders. As Bill McKibben put it recently, “financial giants are the masters of our planet – imagine if they put that power to good use”. In these challenging times, shareholder value may turn out be one of the most powerful ideas in the world.