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How to give shareholders a say in corporate social responsibility

  • If companies are going to pursue goals beyond profits, investors should be allowed to weigh in, argue these academics

The idea that companies need to pursue a purpose beyond profit has gained traction in recent years, growing stronger in 2020 with the pandemic and social-justice protests.

But 50 years after University of Chicago economist Milton Friedman argued in a seminal essay that the only responsibility of business is to make money for shareholders, corporate purpose remains a controversial topic. Indeed, many investors, academics and even executives say that trying to overhaul capitalism by requiring firms to be purpose-led could make things worse, not better, for those such efforts are intended to help.

Why is corporate purpose controversial?

One concern is that it reduces accountability. Shareholder value can be clearly measured, so it’s easy to assess whether a company is delivering it. But “purpose" is nebulous and means different things to different people. An energy company that closes coal-fired plants, causing mass layoffs, could be deemed purposeful as it’s serving the environment. But one that keeps such plants open to preserve employment might be viewed as purposeful through another lens.

If all sorts of actions can be consistent with purpose, there’s no way to hold a chief executive officer to account—anything goes. Evidence suggests that reducing accountability to investors reduces long-term value, with no corresponding benefit to other stakeholders, including employees, customers, suppliers and the community at large.

A second concern is that often a stated purpose is generic and doesn’t tell you what the enterprise stands for. A purpose to “build a sustainable company that creates value for our investors and stakeholders" is meaningless, as any company could have this purpose. Or a company issues an inspiring purpose statement, but never puts it into practice.

Many companies that signed the Business Roundtable’s 2019 Statement on the Purpose of a Corporation, which outlined a modern standard of corporate responsibility that includes investment in employees and communities, subsequently blocked shareholder resolutions demanding they explain how they would deliver on the pledge. Under cover of an ill-defined purpose, a CEO might pursue his or her pet social causes, rather than the ones most material to the company’s business. This matters: Research shows that only performance on material social issues ultimately benefits investors.

Giving investors a vote

So should we abandon the whole idea of purpose? Not necessarily. The trick is to find a way for companies to pursue purpose while remaining accountable to investors and ensuring that statements translate into action. Our proposal is to give investors a “say on purpose" vote, similar to the two-part “say on pay" votes that investors have in Europe.

Here is how it would work. A company issues a statement, as many already do, stating its purpose beyond profits. Importantly, it would clarify the principles that would apply to trade-offs the company might make between investors and stakeholders (say, it will sacrifice profits to reduce carbon emissions) or between different stakeholders (it will decarbonize even though doing so will lead to layoffs). Every three years, investors would have a “policy vote" on this statement, to convey whether they buy into it and the trade-offs it implies. An investor would vote against it if he or she disagrees with the priorities, or if it is so vague it gives little guidance on what the company stands for.

The statement is important, but what matters most is whether it is put into practice. Therefore, every year investors also would have an “implementation vote" on whether they are satisfied with how the company is delivering on the statement. Although both votes would be advisory, meaningful opposition would show leaders that they are off course, which could precipitate investor selling or a change in management.

Power of the approach

The power of the say-on-purpose approach is immense. First, the policy vote would give clear guidance to companies on how to make decisions that involve trade-offs, but with the legitimacy provided by investor support. In a recent paper, Oliver Hart of Harvard University and Luigi Zingales of the University of Chicago noted that investors might be willing to sacrifice some value for social objectives, and suggested that companies hold a shareholder vote on each major decision.

The problem is, companies often need to make decisions on a timely basis, such as whether to continue paying furloughed staff in a pandemic. What’s more, investors might not have capacity to vote meaningfully on multiple decisions a year. Say-on-purpose achieves the same objective but in a more practical way that retains decision rights within the board.

Second, the implementation vote will enrich the dialogue between investors and management. The power isn’t just the vote itself, but the process that investors must undergo to cast it. A common complaint is that investors focus excessively on short-term profit, but they will need to deeply scrutinize a company’s long-term value and stakeholder relationships to vote meaningfully. This feeds back into the first advantage: Knowing that investors will evaluate the company based on long-term performance, executives will have the confidence to make long-term decisions.

‘Managerial capitalism’

Many proposals to reform capitalism seek to weaken investor rights. They would harm both accountability and performance, with little evidence that stakeholders would benefit. Rather than moving from shareholder capitalism to stakeholder capitalism, those proposals would lead to “managerial capitalism" where CEOs pursue their own interests, shrinking the pie at the expense of all.

Say-on-purpose goes with the grain of investor oversight, but provides a way for legitimate factors beyond shareholder value to be taken into account. Importantly, it can be initiated by companies themselves, without the need for regulation. By proactively elevating the dialogue beyond short-term profit, companies will have the freedom to focus on long-term value—benefiting both shareholders and society.

This story has been published from a wire agency feed without modifications to the text.

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