In case you missed it, there was a rather provocative article in a recent issue of The Wall Street Journal entitled “How to Give Shareholders a Say in Corporate Social Responsibility” (subscription required). It was written by a professor and an executive fellow at London Business School and suggests that “if companies are going to pursue goals beyond profits, investors should be allowed to weigh in.” Specifically, it proposes “to give investors a ‘say on purpose’ vote, similar to the two-part ‘say on pay’ votes that investors have in Europe.” The article goes on:
“Here is how it would work. A company issues a statement… stating its purpose beyond profits…. [I]t would clarify the… trade-offs the company might make between investors and stakeholders (say, it will sacrifice profits to reduce carbon emissions) or between different stakeholders (it will decarbonize even though doing so will lead to layoffs). Every three years, investors would have a ‘policy vote’ on this statement, to convey whether they buy into it and the trade-offs it implies. An investor would vote against it if he or she disagrees with the priorities, or if it is so vague it gives little guidance on what the company stands for.”
Now I grant you that say on pay votes have generally benefited both companies and investors by encouraging and facilitating engagement between the two. I also grant you that among the topics investors and companies might discuss is how companies should address their “purpose.” But voting on it? I beg to differ.
First, there is an inconsistency in the authors’ logic. While stockholders get to vote on truly major matters, such as the sale of the company, they don’t get to vote on most matters affecting profitability, such as how capital should be allocated and what new products and markets to pursue. So why should they get a vote on matters involving social purpose?
Second, the article assumes that stockholder interests and corporate purpose amount to a zero-sum game, in which profits must suffer if purpose is pursued. I disagree to the point that I find the assumption offensive. There are many aspects to corporate purpose that I believe tend to enhance profitability — like taking the interests of your customers and workforce into consideration.
Third, irrespective of corporate purpose, stockholder vs. stakeholder capitalism, and so on, one of the fundamental underpinnings of the modern corporation – and, IMHO, one of the principal reasons for its success – is the notion of absentee ownership. That doesn’t mean that corporations are not accountable to their owners; quite the contrary. However, it does mean that owners are not expected to weigh in on everything the corporation does. And giving owners the ability to weigh in on everything the corporation does would, it seems to me, paralyze companies to the point that they would be unable to act even if they really needed to.
Last, I am not sure that owners want responsibility or accountability for telling the companies they own to do or not do such-and-such. I really admire most institutional investors and have learned a great deal from so many of them. However, I have had darker days when I’ve had an image of a management team running some sort of gauntlet with investors on the sidelines, throwing rocks (or worse) at them and rejoicing at the fact that they — the investors — aren’t charged with making the decisions that lead to rocks being thrown. Do we really want to give every investor one of those handheld gizmos where they can cast a vote on building a new plant? An acquisition? What color paper towels are in the restrooms at headquarters? And would they want to have that responsibility?
Personally, I am glad that corporations have become more purposeful and are adopting purpose-driven strategies rather than treating purpose as irrelevant or separate and distinct from strategy. I am sure that there will be some stumbles – possibly big ones – along the way, as companies learn how to implement their purpose-driven strategies. But I also believe that many if not most companies can and will learn from these stumbles and will get it right, or closer to right, in the fullness of time. Let’s not throw the baby out with the bathwater (or, to pick a less odious metaphor, let the perfect be the enemy of the good) by imposing a “say on purpose” vote.