If it’s good enough for the Brownlee brothers it is good enough for me…………….
Company management often put keeping their shareholders happy above all else; largely due to the fact that they are at the very least strongly incentivised to do so (if not forced by law).
Depending on your point of view, Milton Freedman is often credited with or responsible for building this culture of putting shareholders first. His Shareholder theory from 1970 states it is the company’s social responsibility to maximise returns to shareholders. If you look back even further back in history, a court case involving Henry Ford was where this trend actually began. Ford lost the case in 1919 and was told he had to operate the Ford Motor Company in the best interests of shareholders.
Taking a step back; prior to this he was running the business in a more charitable manner. For the benefit of employees and customers; and this is what the minority shareholders were unhappy about. Was Mr Ford really in the wrong though? Was he wrong for trying to stop paying dividends to fund investments in new plants, or wrong for cutting prices to make cars more affordable? Worse still; has this not lead to a focus on the next 12 months; maybe even the next quarter, at the expense of the long term?
This case likely influenced short-term thinking at companies, more deeply than any technology advance has in the years between then and now (which we love to use as an excuse for short termism). But does business always need to be so cut throat…and can being a capitalist with a conscious actually lead to better return in the long run?
As far back as 1799 Robert Owen (an early industrialist) and partners bought the New Lanark Mill in my adopted home of bonnie Scotland. Early factories were harsh, with hazardous working conditions; shifts were as long as 13 hours a day for 6 days. Children as young as 5 worked in the factories. Often the machines were seen as more important than the people. Encouraged by results he had when managing a Cotton Mill in Manchester; he put principles ahead of profits as the main aim of the business. Instead of expecting children to work in his mill he paid for education, opening the first infant school in Great Britain. He installed 8 hour shifts and other improvements in workers’ rights. Despite anger and opposition from shareholders (who tried to sack him), other mill owners (who thought he made them look bad) and even his own staff (who did not trust him at first); the end result was strong profits driven by greater work force efficiency; likely because they were happy. Owen battled the social norms all of his life and would later go on to found the Co-Operative movement and dedicated his life to social change.
What can we learn from this today?
Should companies have more social responsibilities than putting Shareholders first? What about employees, customers and maybe even the planet? Thinking of shareholders may not always be in the best interests of the company (or shareholders for that matter). If we made Shareholders one of the considerations, but not the only one, we might drive a culture of longer-term thinking and one that focuses more on all stakeholders in a business and not just one.
Sadly if I look back over the last 20 years; there are many examples of companies trying to think more sustainably, but not being given a chance by shareholders. Whole foods sold out to Amazon for fear of being forced to tie up with a big supermarket chain. But what is becoming more frequent is companies failing because of innovation that is driven by ethics; this trend is almost certainly here to stay. Whether it’s Tesla*; whose one and only mission statement is “to accelerate the world’s transition to sustainable energy” or Hotel Chocolate*; who supply great tasting chocolate whilst treating people fairly and treading lightly on our planet, the financial world is slowly beginning to appreciate that shareholders are not the only stakeholder that matters.
*Several of the Kames Capital Funds invest in Hotel Chocolate and Tesla.
About the author
Neil Goddin is an investment manager, with responsibility for co-managing both long only and market neutral strategies within the Global Equities team. He also leads the team responsible for building and maintaining the Kames equity investment screen, which provides inputs into the investment process across our equity strategies. Neil joined us in 2012 from LV Asset Management where he was Head of Investment Risk. Prior to that, he worked for WestLB Mellon Asset Management and Deutsche Asset Management in various risk-management roles. He has 21 years’ industry experience*. *as at 30 November 2019