Corporate citizenship in a civil economy
Many companies around the world have discovered they can benefit financially from integrating environmental, social and governance (ESG) targets into their daily operations and strategy. At the same time, institutional investors are more aware of their roles as responsible shareholders after the devastation left behind by the credit crisis. Some of them have taken up the challenge to create a civil economy, in which they act as engaged shareowners for all the world citizens who have money in a pension or mutual fund or life insurance.
In ‘The New Capitalists’, Davis, Lukomnik and Pitt-Watson (2006) show that, in 1970, just a small group of wealthy individuals controlled corporations in the United States. And they really controlled them, as the financial institutions representing small investors owned only 19 percent of stock. Thirty years later, according to the American Conference Board, institutional investors owned 61.4 percent in the thousand largest public companies in the United States. In 2009, that percentage was 73.
That same picture applies to continental Europe. In 1995, institutional investors owned 22 percent of the listed companies in the Netherlands. That percentage increased to 84 in 2009. The majority of the stocks of Dutch listed companies are owned by non-Dutch investors; while, on the other hand, Dutch institutional investors have a global diversified portfolio. Given that half of the pension funds’ capital is invested in shares of listed companies and that saving for a pension is mandatory for all Dutch employees, we can say without a doubt that the average Dutch person is an international shareholder, or as Davis (2006) calls this kind of share ownership: ‘a citizen investor’.
Eumedion was set up in 2006 to increase the cooperation between institutional investors with holdings in Dutch listed companies to improve the corporate governance performance of listed companies. In practice, that means encouragement of joint consultations between institutional investors with listed companies and their representative organisations. But, our purpose is also to safeguard and improve the interests of those investors in relation to corporate governance by influencing legislation and regulations. We do that through consultation with the Dutch government, institutions of the European Union, and other relevant authorities and organisations.
Institutional investors invest directly or indirectly at the expense and risk of their ultimate beneficiaries, i.e. the persons entitled to a pension, the employees who pay pension contributions, the policy-holders, the members in investment funds, etc. These investors must deal prudently therefore with the financial resources entrusted to them and must render accountability for their dealings. In principle, this means that Institutional investors have a long-term investment philosophy. But such a philosophy is not synonymous with keeping shares in certain companies for the long-term. An institutional investor can come into conflict with its responsibility for its clients, for example, if it continues to hold shares in a certain company while the market value of the company in question is much higher than the value of the company according to the investor, or when the company’s strategy is no longer consistent with the institutional investor’s investment strategy.
The credit crisis has shown that the human factor plays an important part in investment decisions, even though we have tried to make investing a value free process through the efficient market theory, mathematical models and the goal of maximising the rate of return in the long run. Some say that the people in the financial world lost their way through animal spirits, some lay the blame with perverse stimuli as bonuses, and others think the credit crisis was just the result of laziness, incompetence and lack of common sense. My personal opinion is that we forgot the real economy. We cannot make money with money, there has to be a real underlying value. The value of money is trust. And trust can only grow if we have a fair and responsible society, wherein money is a tool to create a better world for current and future generations. Because of the credit crisis in the West, a growing group of people have lost and are still losing their trust in the financial institutions. It is important to regain that trust, as a low trust society is more expensive than a high trust one.
The role money can play in regaining trust in the financial sector is by putting it to work for a better and fairer society without losing the ability to get a decent rate of return. What is decent is that every investor can decide for him- or herself. By taking into account the effects on the natural and social environment and other externalities, maximising or optimising the rate of return will lead to a more decent outcome.
Investors and economists are always worried about the moral dimensions of such an approach. But nothing in this world is value free. If we build a model, we always have to start with assumptions. If we decide that maximising profit is the best thing to do, then that goal has to become our norm. In the last three years, we have painfully felt the consequences of going for the highest return. But somehow we do not learn from those painful experiences, as Kenneth Rogoff and Carmen Reinhart have shown. (2008, 2009)
The tendency is to blame the bankers and the big investors for the credit crisis, but governments, supervisors and citizens are as much to blame. They also were blinded by Mammon, the idea that more money would mean a better society and more happiness. Greed has never been good because on the other side of greed, there is always another person with less. The next step in overcoming the credit crisis is to create a responsible financial sector and that can only happen if consumers (beneficiaries of pension funds, buyers of financial products like life insurance, mortgages, etc.), bankers, investors and companies take their different responsibilities and are accountable.
Marleen Janssen Groesbeek
This blog is an excerpt from a larger article that was presented in April 2011 at the conference on New Economic Thinking at Bretton Woods, United States