Shareholder value in a populist world
We often talk about politics, markets and economics separately as if they exist in a vacuum from each other. In reality though they are of course inextricably linked, and we think analysing these connections is going to be especially important to our portfolios over the coming years.
I am particularly referring to some of the debates surrounding inequality, populism and one which I have begun to notice far more recently, the importance of prioritising shareholder value over the impact corporates have over other stakeholders. We have already seen the seeds of this social frustration sown globally in many ways, albeit so far the roots have been socially or politically driven. Movements such as Occupy Wallstreet (2011), the election of Donald Trump (2015) and, more recently, the UK’s decision to leave the European Union (2016) have all been forms of social frustration which have had an impact on the political and economic landscape and therefore financial markets.
When analysing this, I think it important to stress we do try not to have any political inclinations or to think what the best or worst outcome is but what the most likely outcomes are and where risks to the portfolio may be forming. It remains our fiduciary duty to invest our clients’ capital based on what the future holds, rather than what we theoretically/politically think it should be.
This is by no means the first time I have seen it mentioned but I think it is worth taking notice when Larry Fink (CEO of Blackrock, the world’s largest asset manager) choose to base his shareholder letter around this exact topic and encouraged corporates to re-think their purpose and the impact they have on stakeholders as a whole rather than shareholders exclusively.
It has largely been the prevailing mantra of the last few decades to place shareholder value above all else and the interests of other stakeholders (on aggregate) have come a distant second, third etc. This may seem entirely normal, after all the companies are owned by the shareholders and it makes sense that the company would act in their interests and their ultimate wish to make profits.
The problem is that these priorities have some wider implications for society, and it appears likely that this is a contributing factor to inequality, populism etc. If you consider that the stakeholder groups of customers and workers to these companies are also just people (that vote), this linkage becomes very clear.
The reason this is of such interest to us as investors is not because we wish to act based on strong opinions but more that, if the emphasis on growing shareholder value is changing, it could have wide-reaching implications for stock market returns and the types of companies you want to invest in.
At the moment, I think we are still in the early stages of these debates, but I believe they will grow and grow and the role of corporations in society is already a key feature of the US presidential election in 2020 which have spill over consequences to the rest of the world.
The implications for how we view the world are difficult to define but we think the biggest factor for investors is the need to be flexible. If the corporate sector faces headwinds rather than tailwinds for the coming decades, it is crucial to have the ability to invest in other areas that can add value. It reinforces our core belief that it is far more relevant for clients to have an inflation related benchmark rather than one comprised of equity market indices, such as the FTSE 100.
Philip Bagshaw, CFA
Senior Portfolio Specialist
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