Owning capitalism

© Nathan Dumlao / Unsplash
13 April 2018

By Adrian Dellecker, Head of Programme, Luc Hoffmann Institute

Capitalism – love it or hate it – is under growing scrutiny. With rising social inequality and continued environmental degradation, many say it is simply not working, or only for a privileged minority.

One capitalist trend that is on the rise with significant implications – good and bad – for social and environmental sustainability is shareholder activism, where shareholders influence company decisions by exercising their rights as owners. It’s an issue of great interest to the Luc Hoffmann Institute.

Our early research, interviews and workshops point to a ‘broken link’ in capitalism, mainly between the owners of capital (the public, institutional investors and pension funds) and its managers (companies) with significant consequences for the sustainability agenda.

Considering that millions of us are, to a degree, owners and investors, whether through direct ownership, savings accounts, or pension schemes, this broken link is a cause of concern for everyone. If we all own bits of the world’s capital, how can we concentrate our decision-making power on how it is spent and ensure this power has the right impact?

One of the most striking findings of our research is that investors who buy only around 1% in a company can have a huge influence over its strategy just by exercising their shareholding right to vote. Imagine translating that into political terms: a party gathering a mere 1% of votes in an election having such disproportionate power – an alarming notion.

Yet such ‘small’ investments (today, 1% in Nestlé will set you back a cool CHF 2.3 billion) weigh significantly on corporate decision-making. This is largely because the other ownership is diffuse and very often, ‘passive’.

Passive shareholders are investors who do not actively use their owners’ rights. Arguably, they include institutional investors who outsource voting to proxy companies with little oversight. There are also a number of investment vehicles which merely track a ‘basket’ of shares, or indices, via exchange-traded funds, and who do not directly own these shares. This category is growing rapidly and includes Blackrock, which despite its call for greater supervision, has a business model founded on passive ownership and, by its own admission, cannot directly influence the corporations it owns through voting.

In other words, vast chunks of corporations are owned by people and institutions who do not exercise the basic rights that capital ownership affords: a say on how it is spent. Yet if capitalism is to be a force for good, if it is to make rational decisions about the allocation of capital, owners must be better informed and act on their judgement. This includes the wider public which owns shares including through pension schemes.

Addressing passive investing is important for investors who care about environmental and social sustainability. Activist investors tend to focus on economic and governance issues such as executive pay, dividends, or share buy-backs rather than a company’s environmental impact.

Companies themselves presumably have a strong incentive to value sustainability, to ensure their long-term health and ultimately, value – and many are trying to make their supply chains sustainable. Long-term investors are also likely to care about the sustainability of their investment. In this sense, perhaps pension funds are most ripe for shareholder activism for sustainability.

Together with SustainAbility we’ve started carrying out further research into the impact of ‘short-termist’ shareholder activism and identifying opportunities for longer term approaches that generate wider benefits. In all our research and discussions, the role of technology has featured prominently, for example, in adding greater ownership and trust to supply chains (through blockchain certification) or by connecting investors directly to proxy companies.

Technology can also be a potential disruptor. Imagine if companies, including start-ups, could raise capital through asset-backed ‘cryptoshares’. This would cut out expensive intermediaries and connect investors directly with the ownership rights these shares afford. Transferring ownership would not require formal stock exchanges – voting via smartphones would be a breeze.

With technology, as in other areas linked to shareholder activism, public policy is key. The regulatory frameworks that underpin the ownership of capital and the rights it provides are critical – but they vary from country to country, and are not fixed. They need to evolve to meet the challenges of 21st-century capitalism.

In May the Luc Hoffmann Institute will be gathering a broad range of leaders and newcomers on the issue of shareholder activism, including ‘initiates’ from the corporate and institutional investment world and representatives of government, academia, NGOs and the technology sector. The aim is to bring in the best thinking and practice, build new networks and take a holistic look at how, together, we can best harness shareholder activism for sustainability.

Please get in touch if you’d like to find out more. You can also learn more about the project here or read our new report:

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