Shareholder Activism: Driving sustainability into profitability

Shareholder Activism: Driving sustainability into profitability. Jessica Pham, Warwick Business School winner of the 2021 CoBS student CSR article competition, looks into the what, why and how of the potential win-win relationship between business, profit, consumers and sustainability.

Jessica Pham, Warwick Business School winner of the 2021 CoBS student CSR article competition, looks into the what, why and how of the potential win-win relationship between business, profit, consumers and sustainability. 

The green consumers, the impulse shoppers, the bargain hunters, the customers in search of the best quality…

As customers, we often have multiple criteria when looking to buy a product. We want good products at a good price. Functional, convenient, reliable, efficient. And the list goes on.

More recently, with the growth in consumer activism, we are demanding products to be more sustainable – taking into account environmental and social considerations (Brochado et al., 2017). If this wasn’t already difficult enough for companies to navigate, sometimes as well as being customers, we’re the investors. It may be customers investing because they’re just enthusiastic followers of a company, or simply (and most often times) people invest for the prime reason of expectations of high returns.

So it’s safe to say we have a lot of demands from companies. From the customer perspective, we want good, sustainable products; from the investor perspective, we want profitable investments. This balance between embedding both sustainability and profitability in organisations has previously been thought of as unachievable, the so-called profit-planet trade off (Bansal et al., 2016). However, sustainability and profitability can co-exist. Starting from us, the citizens. We drive the businesses, so businesses have to listen to us, right?

The Disconnect: Sustainability v shareholder returns

Corporate sustainability has become an expectation in companies over the last 20 years (Bonini and Swartz, 2014). Statements of social purposes, reporting progress against environmental, social and governance (ESG) metrics, and joining collaborative efforts, such as the Sustainable Development Goals (SDGs), are to name a few of how organisations are responding to the urgency of tackling environmental and social issues. And it all sounds great – companies are seemingly doing a lot to act responsibly. But when it comes to addressing sustainability and societal challenges, it’s often seen as separate from core business operations (Young and Reeves, 2020).

The global trend over the last decade has been focused on the money: optimisation of processes, greater efficiency, reaching financial targets (Young and Reeves, 2020). All with the aim of maximising shareholder returns in the short term, but this works against maximising a long term sustainable economic advantage (Ayres, 2017). In a sampling of leading public companies’ annual and sustainability reports by the Boston Consulting Group, only 3 out of the 15 companies explained how their goals in sustainability could positively impact the financial performance of their business.

So the current connection (or lack thereof) between sustainability and investor returns in many businesses is clear. The pressure of short term earnings performance clashes with sustainability initiatives (Bonini and Swartz, 2014). This puts us, the citizens, in a difficult situation. Deciding between investing in “good” companies producing sustainably or the non-sustainable and unethical companies that we don’t want to support but are motivated to invest in because they show prospects of short term profitable returns. But what if we don’t have to compromise? Sustainability can be used as an economic driver of value creation (Evans et al., 2017).

Re-imagining business

Shareholder Activism: Driving sustainability into profitability. Jessica Pham, Warwick Business School winner of the 2021 CoBS student CSR article competition, looks into the what, why and how of the potential win-win relationship between business, profit, consumers and sustainability.

To optimise for both sustainability and business value, organisations need to stop taking a fragmented, reactive approach (Bonini and Görner, 2011). It’s not just about complying with regulations or “reusing and recycling”. Instead, companies need to reimagine and rethink business models for sustainability (Gurnani, 2020).

Creating environmental and societal value, in turn, creates business value in three key areas: returns on capital, growth, and risk management (Bonini and Görner, 2011). Cost efficiencies, leading to improved returns on capital, can be found from more sustainable operations. Like for Bayer, the German pharmaceutical and nutrition/life sciences company, the development of a resource-efficiency check that uses by-products and reduces wastewater, was estimated to save more than $10 million a year (Bonini and Swartz, 2014). There are also advantages of extending sustainability efforts to customers; the process of building unique business models and new innovations that are difficult for competitors to copy can strengthen growth. Take the example of the energy industry: new products like commercialising investments in smart grids can generate more opportunities to create value and reach new customers and markets (Bonini and Görner, 2011). These are just two examples and two benefits out of the many that businesses can seek to gain from adopting greater ESG practices.

Many bodies of research also cite this direct correlation between sustainable practices, share prices and business performance. For instance, recent research by Harvard Business School economists, Serafeim and colleagues, found that companies who adopted ESG policies in the early 1990s, termed as ‘High Sustainability companies’, outperformed their carefully matched control groups over the following 18 years. The Bank of America Corporation (2018) findings also support this correlation. Their evidence showed firms with a better ESG record than their peers produced higher three-year returns, were more likely to become high-quality stocks, were less likely to have large price declines, or go bankrupt.

This suggests sustainable initiatives are not key to only creating net positives to stakeholders on environmental and societal dimensions, but they also play a role in increasing returns to shareholders. As Young and Reeves (2020) put it: “Without collective value creation there can be no sustainable value extraction”. Therefore, investors don’t have to compromise and choose between companies embedding sustainable practices or choosing to make profitable investments – implementing ESG can have a direct positive impact on business results. What investors do have to ensure, is that companies are adopting sustainable practices in the first place in order to even begin reaping the returns from a strong ESG proposition (Henisz et al., 2019).

We, citizens, hold the power

Shareholder Activism: Driving sustainability into profitability. Jessica Pham, Warwick Business School winner of the 2021 CoBS student CSR article competition, looks into the what, why and how of the potential win-win relationship between business, profit, consumers and sustainability.

A barrier lies within many corporate managers that believe pursuing a sustainability agenda runs counter to the wishes of their shareholders. In a recent survey by The Bank of America, U.S. executives underestimated the percentage of their company’s shares held by firms employing sustainable investing strategies by 20% (average estimate of 5%; the actual percentage is around 25%) (Eccles and Klimenko, 2019).

Contrary to managers’ beliefs, evidence already shows there is a growing appetite among investors to engage with companies on ESG matters (Gordan, 2020). Rising shareholder and consumer activism is also a significant trend predicted to shape the societal context in the next decade of business (Young and Reeves, 2020). Therefore, if this is the supposed “new reality”, what actions can investors take to shape a sustainable, profitable world?

Investors can use their powers to address climate, energy and sustainability issues that affect long term performance. Gordan (2020) explains that in the US, more confrontational techniques are often used with activists seeking board representation or even instituting proceedings against the company. In Europe, activists adopt a milder strategy with two main focuses: establishing a dialogue with the board behind the scenes and applying public pressure. European activists use tactics such as social media campaigns, instructing proxy advisors to encourage shareholders to vote in line with the activist’s campaign and utilising their shareholder rights. Finally, in the UK, companies receiving significant annual general meeting (AGM) dissent, appear on the Investment Association’s public register and the UK Corporate Governance Code requires companies to publicly address these shareholders’ concerns within six months.

Therefore, shifting the power dynamics to shareholders, influencers, and activists injects a new risk into a company’s ecosystem and companies have no choice but to respond. Or at the very least, take investor concerns to the negotiating table in order to mitigate this risk. So investors are able, and should, use their rights and power to get companies to make beneficial changes. In this way, sustainability versus profits will no longer have to be nor a debate or a compromise.

Taking action

Society has changed, and the context for business has changed alongside it. Models of business for solely maximising shareholder value are fading out (Denning, 2019). Companies now need to co-optimize business with social value in order to deliver competitive total shareholder returns in the medium and long terms (Young and Reeves, 2020). With this change, businesses are likely to see a new breed of activism bringing new challenges. But what’s clear is that the best way forward for companies is to be proactive, pre-empt and work together in fulfilling the ever-louder calls from investors for more disclosure and higher-quality, reliable ESG data and reporting. Business is no longer a case of managing short-term risks. Instead, it’s about leading a better company for better shareholder returns, a better society and a better planet.

For a full list of references used in this article, please refer to page 21 of Global Voice magazine #18.

Shareholder Activism: Driving sustainability into profitability. Jessica Pham, Warwick Business School winner of the 2021 CoBS student CSR article competition, looks into the what, why and how of the potential win-win relationship between business, profit, consumers and sustainability.
Jessica Pham

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The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.  

In 2020, member schools now number 7, all “Triple Crown” accredited AACSB, EQUIS and AMBA and leaders in their respective countries.

The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.  

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