Shareholders as allies in the sustainable transition
What can, should and want the company of the future to be for its shareholders, and conversely: what can the company expect from its shareholders in terms of long-term sustainability? For a series of articles on the 'company of the future,' an initiative by Management Scope and A&O Shearman, we recently held discussions with entrepreneurs and experts. The reason for exploring this is that the (figurative) identity of the shareholder is shifting from being only a provider of capital to being a (financial) stakeholder, and often further to that of a (financial) stakeholder who wants to have an influence on the company's strategy. Many executive directors are of the opinion that this creates tension. ‘As an executive director, it can be risky to be critical of your shareholders’, says Kees Aarts of Protix, an insect farm that produces sustainable proteins.
According to him, this results in measures for a transition often being delayed. His point is that capital providers should not interfere in the running of the company. ‘Unfortunately, these roles often get intertwined, leading to problems. This is not incomprehensible. Investors often make promises to their own constituencies, which more often than not conflict with the entrepreneur's long-term vision.'
‘Transitions indeed occur more 'despite' rather than 'because of' the business climate and powerful financiers’, Jeroen van Glabbeek, CEO of the publicly listed tech company CM.com, agrees. Ton Goedmakers of the family-owned business Vebego also observes that, for publicly listed companies, the focus on profit maximization remains the only constant factor. 'Even though it may not be exactly sustainable.'
Investing in both fossil fuels and green energy
Yet profit maximization and corporate social responsibility do not, by definition, always need to be opposing interests. According to Rients Abma of the umbrella organization for institutional investors Eumedion, many institutional investors - whose interests Eumedion represents - believe in growth stocks because of the long-term potential of new business models. He adds a caveat: it does require executive directors to be able to show that their sustainable business model can deliver results in the short and medium term, even if those returns are temporarily lower.
Moreover, investing in fossil fuels can complement green energy investments, for example, with investors reinvesting their profits from oil and gas stocks into green companies. Institutional investors can tailor their approach to individual investments. Outside of the stock market, they can increase their influence on how companies operate (focusing on returns, sustainability, or both) by having a representative on the Supervisory Board. This is common at publicly listed companies where a party holds a significant stake.
Everything considered, the view that sustainable transition occurs despite rather than because of shareholders may after all no longer be accurate. Investors may differ, roughly speaking, only in their underlying motivation. At one end of the spectrum are those who believe that investment in sustainability is a necessary evil, as otherwise companies will lose their right to exist, and on the other, those who invest in sustainability from conviction.
Companies are not without power
One might expect regulations such as the CSRD and CSDDD help companies to strengthen their position on their sustainable strategies with shareholders. Yet many entrepreneurs we spoke to see these regulations not as a guiding framework but rather as confirming the course they have already chosen - although that might change in the slightly longer term. Once the reports are published, they expect, it will reveal where companies really stand and who the laggards are. At that point, the regulations will likely begin to serve as a standard, and low sustainability ambitions will increasingly become a business risk, and therefore a risk for shareholders. Moreover, companies with sustainability ambitions are not powerless against potentially obstructive investors. A B-Corp certification can legally enshrine the company's social mission. Additionally, steward-ownership can separate financial ownership from voting rights, as Fastned - which is building and operating a fast-charging network along Europe's main road network - for example, has applied.
Market-government pendulum
Where between roughly 1980 and 2010 the government increasingly outsourced tasks to the market, since the financial crisis the pendulum has swung in the opposite direction, with more focus on the government to take responsibility in driving the transition. For (foreign) investors wanting to support sustainable strategies, a consistent and transparent long-term government policy is crucial. A focus on short-term political gains rarely aligns with the long-term policies that (foreign) investors seek. From our discussions, there is little confidence that politicians are weighing this sufficiently in their considerations. The halting of the National Growth Fund and the changes to the Dutch nitrogen policy were mentioned as examples.
Capital Market
In all our discussions, it became clear that access to capital is crucial for achieving and accelerating the sustainable transition. Currently, the European capital market cannot compete with the American one, says Rients Abma of Eumedion, because it is too fragmented. The Dutch capital market not only competes with the United States but also with the French, German, and Spanish markets. Europe needs to grow towards a much broader and deeper capital market, Abma asserts. ‘This can only be achieved through stock market consolidation and regulatory harmonization.’
Additionally, the investment culture needs to change, argues Protix founder Kees Aarts. For instance, investing in startups could be fiscally incentivized, creating a cycle where successful entrepreneurs support new startups. This happens much more frequently in the United States than in the Netherlands. Moreover, a shift in mindset is necessary. In the Netherlands, it is much less common than in the U.S. for a successful and wealthy entrepreneur to invest in his or her community. We should return to the less individualistic social climate of pre-1980, when churches, unions, schools, and companies fostered a sense of community. More community spirit and the ability to hold each other accountable within that community strengthen the willingness to collectively address societal issues. Employees could play a key role in this. If they gain more influence over the management of their own companies, says Kees Aarts, that connection between business and community might hopefully stimulate long-term thinking: ‘Even if it is not a family business.’
A Force for good
In this series on doing business in the future, we explore what companies must, can, and aspire to do now to continue ‘doing good’ five to ten years from now. When it comes to the role of shareholders, many are indeed willing to use their influence for good and that, conversely, companies are not powerless in the face of slackening shareholders. With a more competitive capital market and consistent government policy, shareholders can be an important ally in the sustainable transition.