Purposeful Checks And Balances



When was the last time your financial advisor asked you about your tolerance for climate or social challenges when it came to your financial investments? And if he or she were to ask you what would you say? In the world of investing, you are asked detailed questions about your risk tolerance, how long you would like to hold your investments and what expected returns you would like. But what about your risk/return profile on issues of climate refugees, employee retrenchments, loss of biodiversity or modern slavery?


As I discussed in a recent, ARCUS – Capital Allocators Going 3D, a new line named Purpose is needed to measure the expected impact from your investment. But how does Purpose filter down into your investments and who provides the checks and balances to ensure the Purpose of a company is accomplished?


In this month’s ARCUS, our Partnership and Stewardship Officer, Davina Ho discusses the active agency required to ensure that Purpose and all stakeholders are looked after.


I’d also like to take this opportunity to wish you a safe and relaxing holiday season and best wishes for 2021.


Thank you for your support and be safe,


Munib Madni,

Founding Panvestor



Last year 181 company CEO’s signed the Business Roundtable’s Statement: On The Purpose of A Corporation, where they agreed “to lead their companies for the benefit of all stakeholders.” A paper by Lucian Bebchuk and Roberto Tallarita at Harvard Law School looked into who the ultimate decision-makers that approved the signing of the Business Roundtable’s Statement; what they found was that in the 48 responses they received from companies, 47 of the decision-makers were the CEOs themselves and only one CEO sought Board approval. The argument being that in order to create real change within a company such as a drastic move towards stakeholders versus shareholders the Board of Directors would need to be involved for real change to take effect. So how can companies institutionalise stakeholders into their business without it looking like a PR stunt. And how do you balance the delicate task of short-term profitability and longer-term stakeholders? Below I’ve shared a few examples on how companies are now looking at Purpose and stakeholders more formally through: 1. Boards 2. Executive Compensation 3. & Incorporating Purpose Legally

1. Boards and AGMs

As shareholders we have a fiduciary duty to vote at AGMs and also to share, educate and guide executive teams through conversations. Boards are ultimately accountable to shareholders and increasingly to stakeholders to provide oversight to the executive management team. This year the COVID pandemic brought up many questions on a company’s Purpose and where its priorities lie with regards to capital and non-financial capital such as employees, suppliers and the environment. This left many Boards, management teams and shareholders scrambling for the right answers to some tough questions. In a study released this month by PWC and The Conference Board, only 30% of executive management teams say their Board is able to respond well in a crisis and only 18% think that they should challenge management on environmental issues. This is a huge disconnect from what shareholders are pushing for which is for more board oversight with regards to non-financial capital and managing risks. Just last week, one of the largest consumer companies in the world announced that it will allow shareholders to vote on its climate transition plans at its AGM on the 5th May 2021. This will include a detailed plan explaining to shareholders where they have a high-degree of certainty of meeting their targets as well as areas of uncertainty. Annual progress will be released every year from 2022 and shareholders will vote on the plans every 3 years. The function of the Board is evolving, now more than ever shareholders have a fiduciary duty to ensure that all four forms of capital are included into the Board’s oversight. In this coming season of AGMs companies will be scrutinized closely by shareholders with questions such as: Should buybacks be approved while a company re-trenches its employees? And how will the Board ensure that a company meets its environmental targets or social agendas? 2. Executive Compensation and KPIs The next leg down from the Board is motivating executive management to ensure decisions align with the company’s Purpose to all stakeholders which is usually done in the form of KPIs and executive compensation. When executive compensation is too focused on share price returns, CEOs and CFOs can resort to short-term share price shenanigans rather than focusing on the long-term returns of the company for all stakeholders. We’ve found many of our Purpose-drive companies have come up with their own internal indices and targets to measure and incorporate non-financial capital into executive compensation which is then sent for shareholder approval. Schneider Electric, for example, have set long-term incentive schemes related to non-financial capital for the both the Chairman and CEO’s compensation. 20% of their long-term compensation is tied to targets on the Schneider Sustainability Impact (SSI) dashboard which measures the company’s progress on 21 indicators such as labelling sites zero waste to landfill, employees have fully deployed their family leave policy and volunteering days. Schneider Electric recently reached a score of 8.63 on a 10-point scale on their 2020 goals and set more ambitious targets for 2025.



It’s these types of compensation plans that signal to shareholders like ourselves that a company is nurturing its assets rather than treating them as an expense and that management is truly aligned with all stakeholders.


Together the Board and shareholders need to ask questions on:


What non-financial capital performance indicators should be included into executive compensation?

And whether executive pay is fair to all stakeholders?



3. Incorporating Purpose Legally


Purpose is a subjective term and can be met with cynicism with companies having a purpose so broad that it fails to deliver any impact. We define a purpose-driven company as one that endeavours to make a positive change to their ecosystem, thus benefiting all stakeholders, including shareholders. Companies that have strategies to explicitly develop all forms of capital - financial, human, environmental and social in line with their Purpose are better positioned to deliver sustainable growth and returns over the long-term.

At an AGM in 2020, a French listed-company became the first of its kind to adopt the ‘Entreprise à Mission’ model created by French law in 2019 which embeds a purpose into its articles of association. Putting this to a shareholder vote gives management the confidence now to ensure progress on its environmental and social goals as well as deliver a profit. Incorporating Purpose legally requires more than the company, the Board and shareholders, it also requires legislatures and regulators too: So should the equivalent of Benefit corporations in the US be legislated globally where a for-profit company has the right to pursue positive impact on society, workers and the environment as well as profits?

Conclusion

As we approach AGM season into 2021, I expect to see the stewardship of capital evolve with a growing focus on the Board’s experience and diversity, on sensible executive compensation and KPIs, an increase of environmental resolutions and some difficult capital management decisions. We at Panarchy Partners very much take a collaborative and iterative approach to our stewardship and engagement with companies with our own Purpose being:

‘Together with capital owners and users we aim for a better future for the world.’

With that said I look forward to sharing more in 2021!

Happy Panvesting, Davina Ho, Partnership and Stewardship Panvestor