For decades, investors have recognized the importance of good corporate governance as a contributor to a company’s long-term prospects. Recent years have seen a growing consensus that good environmental stewardship can enhance returns, as well. (Dumping industrial waste into the river might boost margins for a few quarters, but it’s not a great long-term approach.
In 2020, it is the “S” in ESG—the social component—that takes center stage. That stage was set last year by the Business Roundtable statement that “the purpose of a corporation” is to serve a larger set of stakeholders beyond shareholders. Then came the Covid-19 pandemic, the killing of George Floyd, and the global protests that followed. It was impossible to ignore the reality that stakeholders weren’t being served.
Instead of the usual anodyne platitudes crafted to avoid controversy, the corporate response was powerful and pointed. There was genuine outrage, perhaps combined with a calculation that the nation’s mood had changed. Rather than worrying about offending anyone, companies clearly determined that the greater risk was that they might come off as too timid.
This special report looks at the response through an investor’s lens. Beyond their statements, what are companies doing to actually address problems faced by people of color and their employees, and how will that affect their share prices? Cynics will say it’s just marketing. Perhaps. But if this is what customers want, the firms that deliver will outperform. “It drives me a little bit crazy when people say ESG factors are nonfinancial considerations,” says Justina Lai, chief impact officer at Wetherby Asset Management. “If you’re a consumer business you need to understand what matters to your consumers.”
Nike shares are up 22% since the company launched its ad campaign with Colin Kaepernick, versus a 5% rise for the broader market. And it isn’t just customers—companies need to consider worker concerns. Lai points out that employees at Amazon.com walked out over Covid-19 conditions, while Microsoft employees protested the company’s work for Immigration and Customs Enforcement, or ICE. Few issues unite business leaders with human-rights activists as tightly as immigration; the entire tech community lashed out at the Trump administration for suspending the H-1B visa program, which business leaders say is necessary to recruit mission-critical workers.
At a difficult time in our history, here’s an optimistic thought: A virtuous circle may be starting to spin, in which companies treat employees and customers better, and as a result they outperform, and investors reward those behaviors, forcing laggards to catch up.
And then the world becomes a slightly better place.
Email: editors@barrons.com
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Corporate Behavior Might Actually Change. Here’s Why. - Barron's
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