Asset owners and managers are trapped in a system that measures success by relative return. Success means increasing “alpha” (your performance as compared to the market’s overall performance) or decreasing the fees charged to your beneficiaries.
But neither costs nor alpha matter to your beneficiaries nearly as much as “beta” (the return of the entire market). Improving beta requires that companies reject practices that will, in the long run, damage the systems that support our global economy, even if those actions could increase the relative return of the particular company. Investors can work with TSC to preserve critical social and environmental systems and improve overall market returns—and improve the world their beneficiaries will live in.
We all know the risk to global GDP if the earth’s temperature rises more than 1.5˚C and that loss will surely be more than can be made up by any active management strategy or lowered fees. By the same token, when companies fail to pay and train their workers, evade taxes and ignore human rights, they destabilize society, threaten infrastructure and risk the global order, all of which threaten the long term returns of universal owners.
But as an investment professional, you may feel constrained from engaging with companies on this type of issue without making a case that the engagement provides value to the company itself. You may feel limited either by your own understanding of your fiduciary duties or those of the companies in your portfolio.
Thus, even the most active shareholders on climate and social issues feel bound to argue that ESG performance is always a “win-win” for every company—that it helps its stakeholders and its bottom line. But it doesn’t take too much thought to realize that this could not be the case unless we had perfect laws and regulations that were perfectly enforced. And we know that isn’t the case: the fact is that markets reward profits—however they are made.
This leaves you and your beneficiaries in a bind. The most important, meaningful and straightforward engagements may seem out of scope. Meantime, the earth becomes hotter and increasingly unequal. The Shareholder Commons offers a way out of this conundrum.
We want to work with investors to help them act collectively to level the playing field so that all companies are competing to profit, but only from activities that do not create social and environmental costs borne by the rest of the market. These ideas are further explored in the Level Playing Field section, and in this blog piece and this article. Contact us if you are interested in participating in this movement through engagement with companies, drafting guardrails or other support.
Despite their critical role in our economy, capital markets are not structured to address pressing social and environmental threats. Instead, the laws and regulations that govern capital markets are written as if investors’ only concern with respect to any individual company were its financial returns. If markets continue to prioritize profit over systemic concerns, the power of private capital will continue to drive resource depletion, destabilizing inequality and climate risk.
TSC is proposing policy changes that could create capital markets that work to preserves critical social and environmental systems. The markets we have today are the result of policy choices made over the last 150 years. While these markets have been incredibly valuable in helping to build wealth in society, circumstances are very different now.
Today’s world is global, interdependent and approaching planetary boundaries; policymakers must change the rules so that markets reject behaviors that promote profit to the detriment of citizens, communities and society, even while continuing to play a critical pricing function through competition for profit.
The rules governing capital markets can be revised to reflect the importance to investors of a company’s impact on the market as a whole, and particularly how it affects diversified portfolios. These rules should enable investors to meaningfully engage with companies in order to ensure that their profits are not coming from the exploitation of common resources.
Most importantly, the Shareholder Commons believes that state and federal lawmakers must ensure that the fiduciary duties of both corporate directors and investment professionals allow them to take broader societal concerns into account when it is important to investors that they do so.
See this page for a list of policies we support. Contact us if you want to help advance change along these lines.
Many companies have deep commitments to stakeholders and responsible behavior, as demonstrated by the recent Statement on the Purpose of a Corporation from the American Business Roundtable. Nevertheless, companies are often caught in a bind similar to that which limits investment fiduciaries: they must always make the case that any decision they make will redound to the benefit of the company and its shares, at least over the long term, or else answer to a market focused solely on individual company returns. This focus on the business case makes authentic commitments to stakeholders difficult, if not impossible.
Indeed, very often there is such a business case. Corporations can frequently “do well by doing good.” But there remain many opportunities to do bad profitably, as well, and given the competitive nature of a market economy, corporations will feel continued pressure to engage in practices that internalize financial gain while externalizing systemic costs. TSC is developing collective action solutions that address this prisoner’s dilemma that companies may find themselves in.
The Shareholder Commons believes that responsible businesses will benefit if universal owners encourage a level playing field, where investors sanction limit that preclude companies from producing profits that do not reflect their true social and environmental costs. This level field can be created by shareholder action that encourages all businesses to operate within a small number of guardrails that protect critical social and environmental systems.
Please reach out to us if you would like to help design these guardrails.
The Shareholder Commons believes that the assumption that investors care only about individual company returns damages interests of universal owners, whose long-term returns depend upon all companies behaving responsibly towards society and the environment.
We hope to catalyze litigation that establishes the right of shareholders to insist on responsible business conduct. The Shareholder Commons will also serve as a voice for the universal owner in litigation regarding investor protections.
Plaintiffs can directly challenge the meaning of shareholder primacy and the nature of the sole beneficiary rule that governs many trustees.
We also believe that there is a need for the voice of universal owners to be heard in litigation over the nature of investor rights under protection regimes like the US federal securities laws
If you are interested in joining a panel of pro bono counsel for amicus briefing or bringing cases, or otherwise contributing to our work, please let us know.
Together, we're embarking on a fundamental transformation of our financial system...