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Beyond ESG: How Individuals Can Influence Corporations

Global X ETFs

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Research Analyst

Applying an ESG or values-based approach to one’s portfolio is just one method individuals can use to influence companies, along with purchasing decisions, employment, and advocacy.

Corporate influence in America undoubtedly grew over the past few decades, impacting society, government, the economy, and the environment along the way. While individuals may at times feel limited in their ability to influence mega-corporations and their practices, they have more tools and power to affect change than ever before. It is important that individuals understand the levers at their disposal, including their consumer choices, investment preferences, employment decisions, and influence within their networks. It is through the combination of these mechanisms that individuals can impact meaningful change on corporations that aligns with their personal values.

The Rise of Corporate America

us equity market cap-gdp ratio at all-time high

The fall of the Berlin Wall in 1991 was a victory for liberalism and capitalism. Communism’s failure fomented the birth of a global consumer culture and reaffirmed corporate America as pack leader. Today, corporate earnings are at record-highs, as is stock market capitalization as a percentage of GDP.1 Employment levels are also high and an elevated level of those employed work in the corporate sector. Between 2008 and 2018, roughly 10% of the total labor force moved from the public to the private sector, while the proportion of those self-employed fell by roughly 13.2 As such, corporations have grown tremendous influence over government, society, the economy and the environment.

us corporate profits to gdp

Individuals Have More Tools and A Bigger Platform

But in response the rise of corporate influence with consumer capitalism, “stakeholder capitalism” arose with individuals seeking to level the playing field. Stakeholder capitalism empowers individuals by considering the interests of all those impacted by a corporation’s actions, rather than just shareholders or the c-suite. Individuals are stakeholders in corporations, as shareholders, consumers, and employees, and are global citizens with vested interests in the economy, environment, and local communities. Through organizing collectively and leveraging various media platforms, people are successfully gaining the attention of executives and helping to shape corporate behavior.

Businesses are showing a willingness to be more inclusive of stakeholders, too. Last year, the U.S Business Roundtable (BRT) emphasized how important stakeholders are to enhancing corporate value over the long-term, stating that  “while each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.”3 The BRT’s emphasis on the expansion of stakeholder inclusion was echoed across the international business community. The World Economic Forum’s “Davos Manifesto 2020” dovetailed with the BRT’s message, emphasizing that “the purpose of a company is to engage all its stakeholders in shared and sustained value creation.”4

In this model, corporations actively engage with individuals, helping to maximize value for all stakeholders. And when companies don’t or won’t listen, customers, employees, and shareholders organize to direct their influence toward specific causes and demand corporate accountability.

  • Customers: Consumer boycott campaigns can be an effective tool for impacting change in companies. Consumers are the clients of retail-facing firms, and without their loyalty, a business can incur severe financial or reputational damage. In the short term, boycotts can force companies to pull products from shelves as these seek to pacify or appease a vocal audience, and in the long term, such actions may even reshape entire corporate policies.

Take Nike for example: throughout the 1990s, Nike faced a series of consumer boycotts related to Nike factories’ sweatshop conditions. After the companies moved much of its manufacturing overseas to take advantage of cheap labor and regional expansion opportunities, the company was accused of exploitative working conditions and employing child labor.

In 1998, the company’s CEO addressed the concerns and sought to repair Nike’s global image. In a speech, the CEO addressed underlying issues publicly and cited ways or “laws” that Nike factories throughout the world would adopt to improve its practices and image. This included removing toxic adhesives, raising the minimum working age, expanding education opportunities, and extending micro loan programs to its employees. In recent years Nike has been lauded by industry groups for steps it has taken to safeguard its supply chains and practices from promoting human rights violations.

A more recent example is with Sonos, the high-end wireless speaker company. After the company made it clear that it would discontinue software updates for older products in an effort dubbed ‘forced obsolescence’, customers took to social media to angrily criticize the policy. Twitter users expressed frustrations, using the hashtag “#SonosGate” and “#SonosBoycott,” and called for class action lawsuits to compensate customers. In a public apology letter to its customers, Sonos acknowledged that its policy reflected a lapse in judgment and that the company would reverse the policy to support product longevity and encourage consumer retention.

  • Employees: Employees are the lifeblood of organizations and therefore can play a major role in shaping a firm’s policies. In 2019, employees of tech giants, Google and Amazon, staged a series of walk-outs to protest the companies’ tolerance of sexual harassment and negative environmental impacts generated by certain business activities. This followed coordinated protests in 2018 at various Google campuses across the globe, where employees demanded an end to workplace sexual misconduct and gender pay inequality. These recent protests utilized traditional labor organizing tactics in a novel way to amplify employees’ reach and influence, harnessing the power of messaging to coordinate walk-outs. As a result of the protests, Google said it would change how it handles sexual harassment claims, that it would provide more transparency around its investigations and the handling of cases and require more sexual harassment training.
  • Suppliers and communities: Community organizing is an powerful check on corporate power. Communities are comprised of multiple overlapping groups of stakeholders and their confluence can apply substantial pressure. In 2014, the Los Angeles Clippers lost significant corporate sponsorships just one day after owner Donald Sterling made racist remarks on a leaked phone call. Facing pressure from multiple communities, companies like State Farm, Mercedes and Corona withdrew their sponsorship agreements, valued in the many millions. The team’s owner was banned for life by the NBA and eventually agreed to sell the team. Community organizing is especially powerful when they focus on supply chains and sponsorships, because of the strong impact that disassociations can have on a business’s reputation.
  • Shareholders: Individual investors and asset managers increasingly exercise their shareholder rights, engaging with corporations through proxy voting and dialogue to mitigate potentially negative non-financial impacts. Often these engagements are pressure campaigns designed to raise corporate awareness of social and environmental impact or to demonstrate how a lack of proper corporate governance can magnify these effects. In 2018, for example, Jana Partners, an activist hedge fund, partnered with pension fund CalSTRS, to pressure Apple – a company both funds were invested in – to consider the negative implications iPhone usage might have on children and suggested that they add greater parental controls. The joint tactic seemed to work; soon after the appeal, Apple announced that it would add parental controls, including screen time controls, to help parents protect their children.

Such collaboration between values-based investors can positively impact corporate behavior. As data providers and asset managers hone their focus on sustainable investing, increased attention can help identify poor corporate practices and pool investor dollars and votes to either fight back against bad actors or reward good corporate actors.

Such values-based investment approaches are gaining traction. Dollars invested in an ESG-oriented manner increased by 34% from 2016 to 2018, reaching $30.7T and representing a little under a third of the total global market capitalization.5, 6

Studies are showing that stakeholder capitalism could even contribute to superior stock returns, as companies that seek to maximize stakeholder outcomes may enjoy more sustainable profits. In a recent study of S&P 500 constituents based on their ESG rankings, companies in the top quintile outperformed those in the bottom quintile by at least 3% in each of the past five years.7 Further observations show that ESG integration could reduce exposure to regulatory or reputational risk within a portfolio.8

top esg ranked companies recorded better performance than the average S&P 500

Past performance is not indicative of future results.9

Conclusion: A Combined Approach Should Maximize Impact

Whether consciously or not, we make values-based decisions in our every-day lives, through the products we choose to buy, the employers we work for and colleagues we hire, how we invest our money, and how we socialize these decisions in our communities. Whatever one’s values may be, aligning them across these various tools of influence should maximize their impact and become a meaningful voice in shaping corporate policies.

Related ETFs

KRMAThe Global X Conscious Companies ETF is designed to provide investors an opportunity to invest in well-managed companies that achieve financial performance in a sustainable and responsible manner and exhibit positive Environmental, Social and Corporate Governance (ESG) characteristics.

FOOTNOTES

1. CNBC, “The stock market has never been this big relative to the economy, signaling it could be overvalued,” Jan 14, 2020.

2. U.S. Bureau of Labor Statistics (BLS), Employment by major industry sector, as of Feb 11, 2020.

3. U.S. Business Roundtable, “Statement on the Purpose of the Corporation,” Aug 19, 2019.

4. World Economic Forum, “The Davos Manifesto,” Dec 1, 2019.

5. Global Sustainable Investment Alliance, “2018 Global sustainable Investment Review,” 2018.

6. CNBC, “Global stock markets gained $17 trillion in value in 2019,” February 6, 2020.

7. Bank of America, “Why ESG matters – now more than ever,” Jan 17, 2020.

8. Ibid.

9. According to Bank of America (ibid):

“Top ESG-ranked companies recorded better performance than the average S&P 500 company. Source: MSCI ESG Research LLC, Sustainalytics, Refinitiv, FactSet.

To the right of the text, a line graph depicts the relative performance of companies top-ranked for ESG factors by three analytics firms versus the average S&P 500 company between January 2014 and the end of 2019. Over that time period, the companies top-ranked by MSCI showed relative performance 8 percent higher than the average S&P 500 company; the companies top-ranked by Refinitiv showed relative performance 10 percent higher than the average S&P 500 company; and the companies top-ranked by Systainalytics showed relative performance 15 percent higher than the average S&P 500 company.]”

Originally Posted on February 21, 2020 – Beyond ESG: How Individuals Can Influence Corporations

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