Wake Up Call for Corporate Leaders
Posted by Lex Suvanto and David Carey,
Edelman, on Monday, December 23, 2019
Lex Suvanto is Global Managing Director, Financial Communications
& Capital Markets and David Carey is Senior Content Advisor at
Edelman This post is based on an Edelman memorandum by Mr. Suvanto,
Mr. Carey, Laurie Hays, and Josh Hochberg. Related research from
the Program on Corporate Governance includes
The Agency Problems of Institutional Investors by Lucian
Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum
it takes for public companies to pass muster with major investors is changing.
Until recently, a laser-like focus on maximizing shareholder returns was
singularly paramount. No longer.
A new set of guiding
principles, initially set forth in an August statement from the Business
Roundtable and reinforced in our survey findings, is gaining acceptance.
performance and financial returns are increasingly joined by a new set of
investment criteria for leading institutional investors. To measure up, most
investors agree, companies must address the needs of a wide range of
stakeholders and must implement effective environmental, social-impact and
governance (ESG) practices.
These are among the
main findings of the new
Edelman Trust Barometer Special Report: Institutional Investors. The study,
in its third year, surveyed more than 600 institutional investors in six
countries managing over $9 trillion in assets.
The report sheds light
on pivotal issues shaping major financial institutions’ investment choices, as
well as what drives investor trust in companies.
Here are ten insights
from this new study:
Investors agree that a multi-stakeholder
commitment is essential. 84 percent of investor respondents agree
that maximizing shareholder returns can no longer be the primary goal of the
corporation, and that business leaders must commit to balancing the needs of
shareholders with those of employees, local communities, customers, partners
Overemphasizing shareholder returns can
lead to multi-stakeholder activism. 71 percent said that companies
will make themselves responsible for employee or consumer activism if they
overemphasize shareholder returns at the expense of other stakeholders.
Three-quarters say that companies with employee activism are less attractive
Investors are investing more in
ESG-excelling companies. 61 percent have increased their investment
allocation to companies that excel when it comes to ESG factors, and more than
half of investors believe that ESG practices positively impact trust.
More than half of investment firms are
hiring more staff for ESG. The growing primacy of non-financial
priorities is having an impact on investment-industry hiring, with 56 percent
of respondents saying their firms are adding staff to focus on ESG issues.
Cybersecurity, employee health and
eco-efficiency are top priorities for investors. 99 percent of
respondents expect the Board of Directors (of the companies in which they
invest) to oversee at least one ESG topic. Data privacy and cybersecurity,
employee health and safety, and eco-efficiency of the company’s operations are
the top priorities among other ESG topics in respondents’ plans to engage with
the Board in the next 6 months.
ESG has become a leading consideration in
voting and engagement policies. 87 percent of respondents say their
firms have changed their voting and/or engagement policies to be more
attentive to ESG risks, and 86 percent would consider investing with a lower
rate of return if it meant investing in a company that addresses sustainable
or impact investing considerations.
Investors associate ESG with financial
performance. 58 percent of investors recognize a correlation between
a company’s operating performance and level of ESG disclosure, and more than
half believe ESG initiatives favorably impact a company’s growth and the
ability to manage risk.
C-suite compensation should be tied to ESG
performance. 52 percent of investors say that linking executive
compensation to progress in reaching ESG performance targets would improve
their trust in a company.
In the face of activism, Board engagement
is as important as management engagement. 86 percent of investors
must trust a company’s Board of Directors before making or recommending an
investment. The chief ways firms are taking an activist approach are by
actively seeking an audience with the Board of Directors and more frequently
asking to meet with company’s management.
Company and leadership social media
content matters. 96 percent of investors use one or more social
platforms on a weekly basis. When evaluating a current or prospective
investment, 82 percent of investors consult the company’s social media
channels and 79 percent of investors consult the social media channels of a
increasingly drawing a straight line between corporate investments and societal
value. ESG priorities are no longer optional. This should serve as a wake-up
call for corporate leaders.
A new corporate
Zeitgeist is emerging—one that promises to shape the economy and society for
years to come.
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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