Responding to the issues of a wider group of stakeholders can help investors restore confidence in their actions, and the actions of the companies they invest in, a new report has found.
The report, What does stakeholder capitalism mean for investors?, by The Investor Forum and London Business School’s Centre for Corporate Governance (CCG), sets out a framework for investors to follow and calls on them to create approach that prioritise stakeholder issues and mandates that align interests and make it clear when and how investors will act on those issues.
“Investors are privileged to have the opportunity to exert significant influence over corporate priorities. At a time of huge economic and social change, it is essential that this influence is used wisely and with legitimacy, in accordance with client mandates and fiduciary duty, to support the creation of sustainable value and to rebuild confidence across the breadth of society” said Andy Griffiths, executive director of The Investor Forum.
The framework set involves a ‘triple test’ to decide which issues to prioritise. Investors should consider:
• the impact should be ‘material’ in its widest sense, which could extend well beyond financial materiality;
• there should be a reasonable prospect that investor action can be effective; and
• the investor should be well placed to act relative to other parties.
The report warns any assessment in this area should be evidence-based and backed up. “Everybody wants their issue to be promoted. But one person’s essential priority is another person’s fundamental error” said Tom Gosling, executive fellow of the CCG.
Stakeholder capitalism, in its many forms, is gaining ground due to the reported failings of shareholder capitalism, the report said. Earlier this month BlackRock CEO Larry Fink espoused the virtues of stakeholder capitalism in his letter to CEOs, and announced the creation of a centre for stakeholder capitalism.
Next steps
The report concluded with suggestions for what investors can do next:
- Review existing work and initiatives on model mandates to provide practical insights to align the investment chain.
- Work with investors to develop implementation guides for the sustainable approach to shareholder value outlined in Section 2.1 and Framework 1.
- Evaluate how the proposed principles for legitimate action on stakeholder issues outlined in Section 2.2 and Framework 2 could be embedded in the investment process.
- Consider how the sustainable shareholder value model and stakeholder issue prioritisation principles might be effectively integrated into the Stewardship Code.
- Review reasonable expectations of boards in relation to both the standards, and evidencing, of stakeholder impact assessment.
- Consider how the model extends beyond equity and across asset classes.
