Bennett Freeman Addresses European Conference on the “Purpose of the Corporation” and Shareholder Value
Calvert SVP Bennett Freeman addresses how generating shareholder value and societal benefit are not mutually exclusive but complementary as more companies see long-term gains in addressing urgent sustainability challenges.
Please see the text of the speech below:
Thank you for inviting me to speak to you today on behalf of Calvert Investments. Please allow me to express my sincere gratitude to the hosts of this event: Frank Bold, Richard Howitt and the Cardiff Business School as well as organizers Chris Halburd and Filip Gregor. Let me add that Richard Howitt has been a persistent and influential leader on behalf of corporate responsibility for fifteen years now in the UK and across the EU, and its mainstreaming here and across the Atlantic and around the world owes him no small debt.
The time has indeed come to reassess–and in some ways redefine–“the purpose of the corporation” as this conference proposes. At Calvert we have embraced and advanced a broader view of that purpose–certainly including but not limited to shareholder value–for over three decades as we have evolved into the largest family of U.S. mutual funds spearheading what we called socially responsible investment and we now refer to as sustainable and responsible investment. Our success both in generating competitive returns for our investors and in influencing hundreds of companies to become more sustainable and responsible tells us that we do not have to choose between shareholder value and societal benefit–that we can and should combine the two approaches on a much broader scale that can achieve a much deeper impact.
While our investment philosophy at Calvert will always focus on maximizing returns for our shareholders, it will also remain instilled with the deeper purpose of identifying and further improving corporations that act as responsible citizens in promoting a more sustainable world. From the vantage point of over three decades delivering on that dual proposition, we observe two sets of trends that make us optimistic that the world is now moving in our direction:
First, we see a positive shift in the mindset of investors. While we once attracted investors who were mainly interested in aligning their personal values with their investments, we now attract investors who understand that this alignment can maximize their returns as well as contribute to a better world. These investors care about the size of their retirement portfolios and the kind of world that their children and grandchildren will inherit; they care about both, not just one or the other because they want to be financially comfortable–and socially responsible–at the same time. And we at Calvert believe–and our investors have come to recognize–that our ability to incorporate and increasingly integrate environmental, social and governance factors into our financial analysis of companies allows us to avoid certain companies and invest in others that present the best prospects for long–term success in a 21st century world in which those factors are increasingly salient and indeed in many instances material.
At the same time, we see more and more traditional mainstream institutional asset managers and pension funds acknowledging the importance of these ESG factors as vital sources of risk and opportunity that can and do affect long–term–and sometimes short–term – performance of companies. That wider–angle lens view of the world will increasingly drive investment in the 21st century and allow investment managers to look over horizons and see around corners that were not visible or discernible to most as recently as a decade ago.
Second, we see more companies across virtually all industries and geographies embrace at least the language if not always the substance of corporate responsibility and sustainability. More companies recognize that corporate responsibility is hardly limited to philanthropy– however useful and laudable–and that the most serious contribution they can make is to find points of alignment between shareholder value and societal benefit by connecting their corporate strategies to sustainability challenges that also present opportunities to deliver new products and services to new markets and customers.
These companies recognize the challenges, and seek to seize the opportunities associated with the steady march toward a more sustainable world: from addressing climate change and water scarcity to fighting disease and hunger; to ensuring digital access and freedom; to educating and empowering women and girls; to alleviating poverty and generating more equitable, sustainable growth. We at Calvert believe that the success of the corporations in which we invest will depend in part on their willingness and ability to see risk and especially opportunity in these terms, not only in the advanced economies but also in the emerging and frontier markets which are moving front and center into the global economy. At the same time, we believe in the primary role of governments–not just markets and companies–to address these challenges where they have the greatest legitimacy and capacity to do so–whether on their own or together with business, NGOs and civil society.
But still too few companies see the incentives to take such a longer–term, strategic view of their sources of competitive advantage and indeed their corporate purpose. Most major multinational corporations continue to prioritize the maximization of short–term value at the expense of investing in long–term sustainable outcomes. For example, in 2010, the Fortune 500 had $700 billion profits from $10.7 trillion in revenue, generating an overall 6.5% return on investment. These corporations returned very little of these earnings into long–term research and developmentand instead spent much of these earnings on short–term buybacks and dividend distribution–sometimes appropriately and necessarily but too often lacking a longer–term lens of shareholder value, let alone societal benefit.
Today we welcome the debate around how we define and measure shareholder value as paramount to the purpose of ensuring sustainable outcomes to uplift humanity. Professor Lynn Stout of Cornell University Law School recently wrote a book entitled The Shareholder Value Myth in which she describes succinctly the concerns of solely relying upon maximizing shareholder value. In her words, "Shareholder value thinking causes corporate managers to focus myopically on short–term earnings reports at the expense of long–term performance [which] causes companies to indulge in reckless, sociopathic, and socially irresponsible behaviors." While we do not think that such indulgence is always the case–and believe that there are a number of companies which nonetheless manage to operate within that dominant paradigm yet generate both longer–term shareholder value and societal benefit–they are too few and the incentives for them to take the longer view are insufficiently tangible.
That dominant paradigm is beginning to be challenged–even and most significantly from those who have been its greatest protagonists and practitioners. One such apparent convert is Jack Welch, the former CEO of GE, for whom I worked early in my career from the mid–Eighties to the early Nineties. Jack made GE into one of the most profitable companies in the world by increasing profits 600% with 100 consecutive quarters of increased earnings–and not only embodied but articulated the primacy of shareholder value beginning with a famous speech he gave shortly after becoming CEO in 1981. But more recently, without at all regretting that remarkable track record, he now emphasizes that a sole focus on short–term profits is a mistake that companies cannot afford to make, and that profits must be allied with efforts to increase the long–term value of a company to ensure sustainable success. In his characteristically pungent language, he recently told the FT that “On the face of it, shareholder value is the dumbest idea in the world Shareholder value is a result, not a strategy. Your main constituencies are your employees, your customers and your products.”
Jack’s successor Jeff Immelt has walked the walk towards a longer–term vision connecting GE’s success to a broader purpose without foreswearing shareholder value. In a speech in Detroit at the height of the recession in 2009, Immelt said “The primary job of business leaders is to build competitive companies that win over the long term in every corner of the world. To do that, business must shake off the short–term mindset that brought on so many problems.” Those words are consistent with GE’s actions, especially with Ecomagination, the company’s environmental and sustainability–focused R&D and business platform. Initially dismissed by some naysayers at its launch as little more than a brand marketing platform, GE’s products and services marketed under the Ecomagination banner have generated $100 billion in revenue in its first 8 years while making the company a global leader in renewable energy and helping the world in its urgent, even desperate, need to curb greenhouse gas emissions and curtail climate change.
Another corporate leader willing to break away from the still dominant paradigm is Paul Polman, the CEO of Unilever, with whom I will have the privilege to meet on behalf of Calvert later tomorrow here in Washington D.C. He recently wrote that “the short–termism of so much modern business–‘quarterly capitalism’–lies at the heart of many of today’s problems. I agree and have said so many times, occasionally to my cost. At Unilever, words have been backed with action. We have aligned management incentives for the long term and invested heavily in R&D to build our pipeline of innovations. In addition, we have moved away from quarterly profit reporting.” Under Paul Polman’s leadership, Unilever has also made a ten–year commitment towards “sustainable growth across its value chain” with the goals of improving nutrition and health, reducing environmental impacts and diminishing poverty in the parts of the world where it markets and sources its products.
Unilever and GE are leading by example but we need many more companies to step forward. We need many more to demonstrate that shareholder value–especially if recast along a longer–term horizon– can and must generate societal benefit as well as solid financial returns consistent with this broader corporate purpose in the 21st century.
At the same time, the growing number of investors who share this view must step up our shareholder advocacy and public policy engagement to raise industry standards of environmental and social performance and to expand disclosure and reporting requirements. We have the credibility to make the case–what we Americans call–‘skin in the game”– to point towards that more balanced, longer term view of shareholder value and corporate purpose alike. Let us combine forces, maintain this focus and then, after years of hard work and hard–fought victories, look back at this conference as a turning point when we crystallized the problem and galvanized action.
Thank you for the opportunity to address you and good luck in your deliberations today.