Maximizing Shareholder Value Has Always Been About Good ESG Principles
By Brian Lund, CFA, Managing Director, Portfolio Manager, ClearBridge Investments
Business Roundtable, headed by 181 CEOs of top U.S. corporations, recently released a statement redefining the purpose of a corporation. The media trumpeted it as a major shift, with headlines like “Shareholder Value Is No Longer Everything, Top CEOs Say,” and, “Top U.S. CEOs Rethink the Meaning of Shareholder Value.”
But how can shareholder value not mean what it always has: that a corporation has a responsibility to maximize value for equity holders, just as it has a responsibility to repay debt to bondholders?
The text makes clear that this is a change in the description of the purpose of a corporation, rather than a change in the corporation’s mission. This makes more sense: they still believe in maximizing shareholder value – but are just saying it differently. The statement was “signed by 181 CEOs who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.”
It is meant to address misperceptions among the media, investors and even some company managements that enhancing shareholder value can mean damaging employees, the environment and the social good to maximize profits. This illustrates also why ClearBridge focuses on environmental, social, and governance (ESG) issues.
Value creation is not about short-term gains at someone else’s expense, but creating sustainable businesses that can survive economic ups and downs and earn excess returns over a long term.
ESG is often misperceived as a feel-good approach sensitive to the environment and disadvantaged workers. It is more. It is fundamental to long-term value creation that a company should not saddle itself with huge environmental liabilities. ESG is critical to assessing the potential long-term costs of producing products that may have negative societal effects, such as tobacco, weapons or gambling. It is vital that companies have solid governance, to ensure not only that the board and management put shareholder interests over their own, but that they also make good capital allocation and strategic decisions by seeking diversity in their ranks.
This is not to say that companies with ESG problems are not investable; rather, they are not doing all they can to maximize shareholder value, and thus are likely trade at cheap valuations.
ClearBridge seeks to engage companies to convince them their valuations can improve if they successfully address their ESG issues. Companies often are delighted to discuss these topics and work to improve their practices, making investment more appealing. Other companies are not receptive, and we must decide if the low valuation is low enough to qualify for investment.
It is great to see 181 top CEOs – such as JPMorgan’s Jamie Dimon – sign on to a statement showing they understand that pursuing ESG-friendly business practices is part and parcel of maximizing shareholder value. It is an enlightened view of achieving success for shareholders by making businesses more sustainable.
Now, if we could convince the CEOs that their excessive pay (Mr. Dimon earned $31 million in 2018) remains a drag on maximizing shareholder value, we could really celebrate.
Brian Lund is the Managing Director and a Portfolio Manager at ClearBridge Investments, a subsidiary of Legg Mason. Lund's opinions are not meant to be viewed as investment advice or a solicitation for investment.
Brian Lund, CFA
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