August 2019 may go down as a watershed moment in corporate America – with the long-held concept of
shareholder primacy abandoned in favour of broader stakeholder accountability
A watershed moment?
August 2019 may go down as a watershed moment in corporate
America. In a statement released by the Business Roundtable
– one of the world’s most powerful business lobby groups – the
long-held concept of shareholder primacy was abandoned in
favour of broader stakeholder accountability.
The declaration from the Roundtable, which consists of over 180
CEOs from leading US companies, marks a notionally significant
departure from the shareholder capitalism espoused by Milton
Freidman over fifty years ago. Specifically, that a company’s sole
social responsibility is to increase its profits.
Instead, the open-letter states that the purpose of business is
inherently much wider and that companies are accountable not
just to their shareholders, but to their employees, customers,
suppliers and communities at large.
Doing well by doing good
The statement follows an evolving logic of sustainable business
practice which has been building for some time now. Namely,
that a company can do well by doing good.
This alignment of profit and purpose in many ways makes
perfect sense. In today’s globalised, information-rich world,
the numbers of stakeholders in a business are vast and well
informed. As such, there is a far greater visibility, accountability
and immediacy of a company’s actions than at any point in
This means that real (or even perceived) infringements of
stakeholders’ interests can have significant consequences for
a company’s reputation and ability to do business. More and
more, companies therefore need to be aware of the implicit
‘social contract’ that they hold with all of their stakeholders.
Likewise, increasing evidence suggests that companies with
a keen focus on social responsibility are being rewarded with
greater brand loyalty and a stronger presence in the market
Sentiment and action
But statements and soundbites on sustainable business practice
are also becoming common place in corporate parlance, often
without tangible substance behind them. As investors, we need
to know that the messages a company sends on sustainability
are firmly matched by sentiment and action.
This is where a thorough integration of Environmental Social
and Governance (ESG) analysis, especially when viewed
through the lens of active ownership, can make all the
Understanding the governance of the companies we invest
in is the starting point for this analysis. It provides us with
the context for how a company creates value and helps us
identify the ‘non-financial’, or more accurately, the ‘not-yetfinancial’
factors that could impact its ability to generate
long-term sustainable returns.
Governance, governance, governance
Our particular emphasis on governance stems from the
belief that it is a fundamental determinant of long-term
performance. Problems here are, more often than not,
reflected in a company’s environmental and social track
record, making it a reliable proxy for wider sustainability.
What’s also crucially important is the method and degree
of importance that a company places on measures of
non-financial performance. That is, what metrics (if any
are used) to account for its business activities beyond the
balance sheet. Admittedly, this is an evolving discipline for
companies and, indeed, the wider investment community.
However, adoption of reporting recommendations such as
those put forward by the Task Force on Climate-related
Financial Disclosures (TCFD) are an encouraging sign of a
company’s transparency and commitment.
Finally, it is always incredibly informative to hear first-hand
from management teams about their company’s purpose. Do
they speak passionately on their corporate beliefs? Do these
reflect a wider sense of corporate and social responsibility?
And how much of this is conveyed throughout the whole
A new era
Whether August’s statement by the Business Roundtable means
we are about to enter a new era of corporate purpose has yet to
be seen. In the meantime, what is clear to us is that integrating
ESG analysis through active ownership provides the best way
of understanding how a company creates value for both its
shareholders and wider stakeholders.
This information is issued and approved by Martin Currie
Investment Management Limited (‘MCIM’). It does not
constitute investment advice.
Market and currency movements may cause the capital value
of shares, and the income from them, to fall as well as rise and
you may get back less than you invested.
The opinions contained in this document are those of the
named manager(s). They may not necessarily represent the
views of other Martin Currie managers, strategies or funds.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not
be assumed that any of the security transactions discussed here were or will prove to be profitable.