‘Tis the most wonderful time of the year for shareholders: Spring is here, and with it, proxy season is on. Shareholders from the Fortune 500 and other listed companies will have their say in the companies’ annual meetings. Will shareholders show that they care enough about systemic risks to force individual companies to adopt enlightened business practices?
To achieve this goal, I’ve historically favored stakeholder capitalism, the paradigm in which company leadership takes the needs and contributions of all its stakeholders, not just shareholders, into account when managing its business.
But I’ve become intrigued by the notion that the better tactic may be to embrace the very opposite paradigm: shareholder primacy.
Already, one stakeholder capitalism believer, BlackRock, has changed gears. As of this year, it will enable many retail shareholders to vote in proxy season. It makes this move towards shareholder democracy as it faces heat on all sides: Climate activists say BlackRock hasn’t been doing enough to drive sustainability, while Republican lawmakers took issue with it driving too much of an ESG agenda. To escape that catch-22, BlackRock is now giving the final word to the retail investors whose money it manages.
Another strong believer in shareholder democracy is the NGO Shareholder Commons. If it had its way, many more companies this year would see their shareholders adopt impact-oriented proposals on issues like paying a living wage. Founded by Delaware-based corporate lawyer Rick Alexander, the Shareholder Commons “addresses social and environmental issues from the perspective of shareholders who diversify their investments to optimize risk and return.”
Why? As SC’s chief strategy officer Sara Murphy explained it to me: “The biggest risk to a diversified portfolio is no longer idiosyncratic. It is systemic… Yet, many investors are stuck in idiosyncratic land, where they are focused on enterprise value, which is best maximized by externalizing risk. But diversified shareholders end up paying for it in other ways. We’re sticking in shareholder primacy land, and we’re saying [to investors], you’re getting that wrong. We advocate for system stewardship.”
It may sound a bit complex, but it really is straightforward: If you invest in the whole stock market, your return on investment doesn’t depend as much on the return of any single company, but that of the whole stock market. And since the stock market includes the lion’s share of companies in the economy, what’s good for society and the economy is good for your returns.
It’s an aha moment. Because if more shareholders see things that way, shareholder primacy is indeed a great vehicle to promote sustainability and social impact practices at companies.
The best example may be the SC initiative, this year, to have retailers like Walmart, Walgreens, and others adopt a living wage for all their employees. Yet many workers at retailers don’t make a decent living wage because higher salaries mean higher costs, and therefore lower profits for shareholders.
Yet SC notes that in the big picture, higher salaries would flow right back into the economy and other public companies, leading to a higher overall GDP growth, and a higher overall return on investment. That’s at least partially true: U.S. listed companies account for about a fifth of U.S. overall employment, and their market capitalization hovers between 150 and 200% of GDP. Clearly, therefore, a change in payroll at listed companies will affect overall spending in the economy.
“We’re not making a moral case, and we’re not making a political case,” Murphy said. From her point of view, in shareholder primacy “there is no moral duty, only to maximize portfolio value.” And since “morality is not a uniform standard, whereas portfolio value is,” it is more effective to use shareholder democracy than political democracy to obtain objectives like paying living wages.
Having written the book Stakeholder Capitalism with Klaus Schwab, I hear Murphy crucifying the Business Roundtable’s blunt interpretation of the paradigm as rather harsh. “Everyone will have to drop the fantasy of doing well by doing good,” she told me. “Stakeholder capitalism is not the reality.”
But she has a point. It may be better for those with an impact-oriented agenda to adopt the paradigm of shareholder primacy than to have politically motivated lobbying groups define the meaning of stakeholder capitalism. There’s a bit of a Machiavellian logic behind it, but that’s just it: The end justifies the means.
We’ll certainly keep an eye out for those Shareholder Commons proposals this proxy season.
More news below.
Peter Vanham
Executive Editor, Fortune
peter.vanham@fortune.com
This edition of Impact Report was edited by Holly Ojalvo.
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