The following call to action is based on the article “Whose Portfolio Is It, Anyway?” published here in the Stetson Law Review. A fuller discussion of integrated governance principles is included in the recently-published book, Benefit Corporation Law and Governance: Pursuing Profit with Purpose, available here.
CAPITAL RULES THE ECONOMY
Worldwide equity markets are valued at $70 trillion, and venture capital and other private equity at $10 trillion. The owners of these securities control the private economy, which allocates most of our investment capital: in the U.S., business and consumer spending accounts for 80% of GDP, while government spending accounts for just 20%.
Right now, this private economy operates through a governance system focused on financial returns to shareholders. Regulating the impact of business on people and the planet is left to others. But institutional shareholders control the equity markets and have the power to reorient business and make it accountable to shareholders for environmental and social impacts, as well as financial return.
With such power comes responsibility.
ESG INTEGRATION IS NOT ENOUGH
There has certainly been movement among investors to focus more on environmental, social and governance issues. These are good developments, but they are generally restricted solely to strategies that increase an individual company’s long-term return. While developing techniques to identify opportunities to “do well by doing good” is a welcome development, it is not enough. There are many opportunities for businesses to do even better by doing not-so-good, and thus plenty of opportunities for asset owners and managers to “beat the market” by investing in and encouraging such behavior.
Focus on individual share price and relative portfolio performance inexorably leads to systemic risk and disruption. Asset owners (and their human beneficiaries) are relying on those systems and must discourage that activity, even when doing so conflicts with the pursuit of shareholder value at an individual company. Otherwise, the systems in which their investments are embedded will fail.
CALL TO ACTION
Institutions should adopt new principles focused on integrated governance, in order to measure and manage systemic impact, and not just company returns. A proposed set of principles follows.
INVESTMENT PRINCIPLES FOR INTEGRATED GOVERNANCE
Preamble
Our paramount duty is to act in the best long-term interests of our investors. Our beneficiaries are invested across markets through our portfolios, through other investments, and through assets owned by other institutions that represent their interests, including defined benefit plans, insurers, endowments, and foundations.
Governance is a critical factor in determining whether firms create long-term durable value that contributes to rising markets that benefit all investors. Models that emphasize only share value encourage firms to impose external costs on society and the environment. This emphasis creates systemic risks and long-term adverse effects on the securities markets, and threatens the value of all long investment portfolios, including our own. In contrast, purposeful corporate governance models can create corporations that are accountable to shareholders for external impacts, and transparent with respect to such impacts. Purpose, accountability and transparency can be encouraged through corporate charters that create benefit corporations or similar entities (“integrated governance”). The missions of such firms are aligned with the society within which they are embedded, and will lead to better long-term performance for all investors, including our own.
Therefore, where consistent with our fiduciary responsibilities, we commit to the following:
Principle 1
We will incorporate integrated governance principles into our policies and practices, and support the creation of long term, durable value by companies within our portfolio, including those within funds in which we invest as limited partners or otherwise.
Principle 2
We will work together with corporate managers to implement integrated governance, including by voting our shares in favor of charter amendments to create benefit corporations or similar entities.
Principle 3
Where otherwise consistent with our investment policies, we will invest in entities with integrated governance, including benefit corporations.
Principle 4
We will work together with other asset managers and owners to create an investment environment that discourages private enterprise from creating financial returns through practices that impose adverse external costs on the markets, society and the environment.
Principle 5
We will promote the adoption and implementation of these principles throughout the investment industry.