Wake Up Call for Corporate Leaders

Lex Suvanto is Global Managing Director, Financial Communications & Capital Markets and David Carey is Senior Content Advisor at Edelman This post is based on an Edelman memorandum by Mr. Suvanto, Mr. Carey, Laurie Hays, and Josh Hochberg. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

What it takes for public companies to pass muster with major investors is changing. Until recently, a laser-like focus on maximizing shareholder returns was singularly paramount. No longer.

A new set of guiding principles, initially set forth in an August statement from the Business Roundtable and reinforced in our survey findings, is gaining acceptance.

Today, stock performance and financial returns are increasingly joined by a new set of investment criteria for leading institutional investors. To measure up, most investors agree, companies must address the needs of a wide range of stakeholders and must implement effective environmental, social-impact and governance (ESG) practices.

These are among the main findings of the new Edelman Trust Barometer Special Report: Institutional Investors. The study, in its third year, surveyed more than 600 institutional investors in six countries managing over $9 trillion in assets.

The report sheds light on pivotal issues shaping major financial institutions’ investment choices, as well as what drives investor trust in companies.

Here are ten insights from this new study:

  1. Investors agree that a multi-stakeholder commitment is essential. 84 percent of investor respondents agree that maximizing shareholder returns can no longer be the primary goal of the corporation, and that business leaders must commit to balancing the needs of shareholders with those of employees, local communities, customers, partners and suppliers.
  2. Overemphasizing shareholder returns can lead to multi-stakeholder activism. 71 percent said that companies will make themselves responsible for employee or consumer activism if they overemphasize shareholder returns at the expense of other stakeholders. Three-quarters say that companies with employee activism are less attractive investments.
  3. Investors are investing more in ESG-excelling companies. 61 percent have increased their investment allocation to companies that excel when it comes to ESG factors, and more than half of investors believe that ESG practices positively impact trust.
  4. More than half of investment firms are hiring more staff for ESG. The growing primacy of non-financial priorities is having an impact on investment-industry hiring, with 56 percent of respondents saying their firms are adding staff to focus on ESG issues.
  5. Cybersecurity, employee health and eco-efficiency are top priorities for investors. 99 percent of respondents expect the Board of Directors (of the companies in which they invest) to oversee at least one ESG topic. Data privacy and cybersecurity, employee health and safety, and eco-efficiency of the company’s operations are the top priorities among other ESG topics in respondents’ plans to engage with the Board in the next 6 months.
  6. ESG has become a leading consideration in voting and engagement policies. 87 percent of respondents say their firms have changed their voting and/or engagement policies to be more attentive to ESG risks, and 86 percent would consider investing with a lower rate of return if it meant investing in a company that addresses sustainable or impact investing considerations.
  7. Investors associate ESG with financial performance. 58 percent of investors recognize a correlation between a company’s operating performance and level of ESG disclosure, and more than half believe ESG initiatives favorably impact a company’s growth and the ability to manage risk.
  8. C-suite compensation should be tied to ESG performance. 52 percent of investors say that linking executive compensation to progress in reaching ESG performance targets would improve their trust in a company.
  9. In the face of activism, Board engagement is as important as management engagement. 86 percent of investors must trust a company’s Board of Directors before making or recommending an investment. The chief ways firms are taking an activist approach are by actively seeking an audience with the Board of Directors and more frequently asking to meet with company’s management.
  10. Company and leadership social media content matters. 96 percent of investors use one or more social platforms on a weekly basis. When evaluating a current or prospective investment, 82 percent of investors consult the company’s social media channels and 79 percent of investors consult the social media channels of a company’s leaders.

Investors are increasingly drawing a straight line between corporate investments and societal value. ESG priorities are no longer optional. This should serve as a wake-up call for corporate leaders.

A new corporate Zeitgeist is emerging—one that promises to shape the economy and society for years to come.

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