Shareholders need to get more involved, for ethical, financial and simply practical reasons…
Unilever's plans to relocate its headquarters from the UK to the Netherlands have been met with fierce criticism from a number of shareholders in recent days.
Aviva Investors, which holds a 1.4% stake in the consumer goods giant, told the BBC there would be "no upside, only downside" should the move take place.
Whether or not you agree with the Aviva on the Unilever debate, it's a timely reminder that shareholders can speak up against the decisions a company makes.
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A duty to hold companies accountable
I believe shareholders can no longer turn a blind eye to the way that companies they are invested in behave.
Perhaps in the past there was some excuse; before the internet existed it would have been incredibly difficult for the average small-scale investor to research what the businesses they were invested in were doing.
What’s more, even if they had been unhappy with the company’s behaviour, it would have been difficult to the point of impossibility to track down other shareholders ahead of meetings, to express concerns and discuss ways they could vote to influence behaviour.
That’s all changed.
Shareholder activism is a growing flood of influence. It’s time shareholders – both institutional and individual – used that influence to demand ethical actions and transparency from the businesses they are invested in.
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It’s not normally about ethics though…
Yes, okay. To date, shareholder activism has not been about saving the whale or concerns about modern slavery.
It’s been about dividend payments and rewards for the board, not about the social and ethical impact of the business (to cite the recent Unilever case, it's fair to say most criticism has come from shareholders worried about the impact on them more than anyone else).
Perhaps a few universities worried about the ethics of their investments, mindful of the pressures of their politically passionate undergrads.
And maybe a few ‘green’ funds targeted their investments towards demonstrably ethical companies.
But rising shareholder activism places a responsibility on investors to demand greater ethics, greater corporate responsibility and greater transparency from their investments.
And the number of shareholders choosing to exercise that influence is on the increase. A report from Activist Insight found 758 companies worldwide faced shareholder activist campaigns in 2016, that compared to 520 campaigns in 2013.
Having found their voice, it’s time for them to also find their consciences.
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Of course, shareholders aren’t used to behaving like this, they might be owners but they are not normally involved.
A board is appointed and runs the business, making the decisions and ensuring a company can react in an agile and timely manner, consulting its shareholders usually only once a year.
That makes sense.
However, in a world where we’re all increasingly conscious of our environmental footprint and the wider impact of our shopping choices, it’s not acceptable to be blasé about the behaviour of an organisation that you are earning an income from. Not now that there are ways to influence that behaviour for the better.
Scandals bubble for longer and break more widely
In an increasingly connected world, encouraging ethical behaviour from businesses can be considered one way of protecting your investment.
Thanks to Twitter, Facebook and other social media platforms, it’s possible for a corporate scandal to be publicised internationally, especially if well-known celebrities and campaigners join in.
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Some merger agreements in the US are even having ‘Weinstein clauses’ written into the contracts to protect buyers against any future fall-out that results from sexual misconduct scandals.
That’s because they recognise that poor practice can result in a social media/newspaper storm that devalues the firm at a later date.
“Social due diligence is becoming more and more important and, particularly for founder-centric businesses, money is being put aside to address #MeToo issues,” Gregory Bedrosian, chief executive officer of boutique investment bank Drake Star Partners, told Bloomberg.
If concerns about #MeToo scandals are worrying corporations as they undertake mergers then concerns about ethical scandals ought to also carry some weight with investors.
Some activist fund managers are already recognising the value of ethical considerations and pushing the boards to improve their focus.
For example, Bloomberg also reports that CtW Investment Group has recently asked more than 30 big-name companies, including Tesla and Apple, for more information on their employment practices.
It wants assurance that workers are not being set up for lower pay, reduced mobility and the ability to escape workplace harassment – and asks directors to provide reports on this to shareholders.
Frankly, if a group that works with a coalition of union pension funds with more than $250 billion in assets is sending letters like that then small-scale investors should be similarly worried.
They may not have the clout of activist fund managers but they have potentially an even greater personal stake in the businesses in which they are invested.
What’s more, companies that recognise their shareholders care about ethics are surely more likely to interrogate their own decision-making more carefully.
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Good investments
For those investors who need a more transactional reason to care about the ethics of their investments, it’s worth remembering that is it simply good business sense to do so.
Scandal destroys business reputations, their sustainability and their value. A negative story can destroy the value of shares held in a business – and thanks to social media and increasingly international reporting, a negative story can spread around the globe within hours.
Last year, shareholders in the South African retailer Steinhoff saw $12bn of its value wiped off within a few days as it revealed “accounting irregularities”.
More recently (and famously) Facebook’s data collection scandal sent the company’s value plunging by roughly $134 billion, or 24%. Yes, it recovered after a relatively short period of time, but that must have felt pretty hairy for investors and some will have sold at that lower value.
Obviously far better to avoid such scandals to begin with. Investors have started flexing their muscles – for ethical and financial reasons it’s important they continue to do so.
What do you think? Should activist shareholders try to steer a company’s ethics or is it up to the board and shareholders can simply sell if they disagree? Have your say using the comments below.