FT Series The Company of the Future: Profit and Purpose Opinion The FT View Investors should look beyond the bottom line Asset managers have a key role in changing corporate perspectives THE EDITORIAL BOARD The editorial board YESTERDAY This newspaper has welcomed the shift among corporate leaders from a narrow focus on shareholder value to the pursuit of a broader purpose - for a hard-headed reason: when business takes a broad perspective, it can leave everyone more prosperous, including shareholders. Rejecting the dogma of shareholder primacy is not a question of bleeding hearts, it is a matter of enlightened self-interest. That holds for investors too. There are two reasons why both retail savers and the investment industry should embrace a corporate perspective that looks beyond the narrow bottom line to take into account companies' impact on climate and environment, workers and the communities they operate in. First, the crises now confronting the world, from the risk of catastrophic climate change to economic resentment fuelling populism and protectionism, are bound to reduce the economy's profit potential. While the blinkered perspective of shareholder primacy did not cause them, it encourages their political neglect and obstructs attempts at solutions. The potential costs are dawning on investors. Second, much investment is channelled through diversified portfolios intermediated by managed funds. That means end investors, saving for their first house or their old age, are in effect "universal investors" exposed to hundreds or thousands of individual companies' fortunes. Their returns depend on that of the private sector overall. When one company profits by "externalising" its costs, that may flatter its bottom line only by losing investors more money in other companies which pay the price. Investors, the investment industry, and corporate management all have reason to adopt a universal investor perspective. It is in their interest to internalise costs to the planet, the workforce and communities. Some large investors, such as Norway's sovereign wealth fund, do so explicitly. But as the FT has found, many companies and investment managers feel constrained from doing the same. Some executives complain that portfolio managers demand a laser-like focus on narrow financial results - demands that are built into the incentives or legal obligations fund managers face. Corporates, governments and investment professionals all have a role to play in a more enlightened approach. Corporate leaders and investment managers must make the most of the legal room for manoeuvre they have. Jurisdictions differ, with some explicitly permitting company management to take outside stakeholders' interests into account. Even elsewhere, this can be justified as being in the long-term interest of shareholders and investors for the reasons set out above. ----
More leaders in the corporate and investment world should articulate these arguments and embed the thinking in the incentive systems and targets of their fund managers. The fund industry in particular can do a lot to communicate why a broader investment policy that encourages investee companies to take social and environmental challenges seriously does not violate duties to act in investors' interest.