Sovereign power in a company is held by those whose legitimacy cannot be questioned without causing the whole system to fall apart. In a capitalist economy, this power is held by the shareholders. However, the reality is that when it comes to matters involving transformation, the interests of the sovereign power do not always align with the two other powers.
“The first hurdle comes from a disjointment between the shareholders, the CEO and their Executive Committee, and the company leaders.” – Cécile Beliot
When interests diverge, time is a key factor. Baptiste Eisele, a member of Pour un réveil écologique, believes the problem lies with the “financialization” of a company, which pushes management towards pursuing short-term profits, and away from considering the consequences this might have for future generations. “When shareholders prioritize short-term profit, it prevents transformation. Transformation, and the changes and investments it involves, should push us to think about performance over the long term instead”. This is exactly why Time for the Planet, a partnership limited by shares which currently has 53,621 shareholders, chooses not to pay any dividends. The rules are clear: the quest for sustainability cannot be compromised for short-term financial profit.
But how can this time-related paradox between economic performance and requirements for transformation be resolved when a company has a more traditional shareholding model in place?
Contrary to what is commonly thought, the financialization of a company is more the result of disengagement than it is of a strong shareholder base. A shareholder base that hardly exercises its power, is disinterested in the life of the company and its future, and views the company simply as a source of dividends that they can disengage from at will, will not make the same choices as one that is actively involved in the life of the company, and is concerned about its long-term viability and the sustainability of its decisions.
When faced with disengaged investors, executives find themselves caught between a need for payouts produced by short-term dividends to avoid shareholder volatility, and the demands of sustainable management in the face of a climate emergency. Unable to find a solution, companies become immobilized and end up lacking a properly invested shareholder base, which becomes a major obstacle on the road to bringing about necessary transformation.
Let’s look at some key ways we can re-engage them.
As short-term profitability is highly volatile, we must remind shareholders that sustainability and performance do in fact coincide, and that the latter is dependent on the former. Findings show that between 1995-2003, companies with better eco-efficiency (1) scores were already generating higher profitability. Socially responsible investment wasn’t ruled out because of a suspected “financial surcharge” that was thought to put it in a disadvantaged position. Fast forward a few years, and this remains true. Scientific literature has since largely demonstrated that investment in CSR drives innovation, which in turns acts as a source of value creation and transformation for the company. A study carried out in 2016 (2) reported an average economic performance gap of approximately 13% between companies that implemented CSR practices and those that did not.
It’s vital that communications to shareholders combine information related to the company’s financial performance with information related to CSR, in order to appease any concerns they may have. We must demonstrate their interconnection and show that the company’s CSR practices are central to value creation. By demonstrating the interdependence of these economic and environmental components, shareholders will be able to better arbitrate when it comes to making strategic choices in the future. According to Bris Rocher, “We must try to merge extra-financial accounting and financial accounting into one.”
In addition to keeping shareholders informed, companies can consider educating them on sustainability issues by opening up their internal training courses and learning pathways that are usually intended for employees.
From internal engagement initiatives to raise awareness, tools to pinpoint carbon emissions in the company’s value chain, and forward-thinking masterclasses and thematic training sessions, there are a number of ways employers are equipping their teams with the ability to make informed decisions. And these may also be useful for a generation of shareholders who are increasingly seeking a better understanding of the changes happening in the world, and younger shareholders who consider financial investment as an important way to address matters of sustainability.
An extensive, tailor-made program created by a company according to its own specific concerns will be the best way to ensure that shareholders are making well-informed decisions during genetal meetings.
Informing and training shareholders about the intersection of business model sustainability and financial performance is still not enough. We must ensure they actively participate in making strategic decisions, using their newly acquired knowledge.
“Shareholders can become passive if we don’t ensure they are fully on board,” explains Adrien Couret, CEO of Aéma Groupe. “They must have the courage to speak up when they disagree.”
Pierre-Yves Gomez notes that leaders must play a key role in bringing corporate democracy to life and encouraging shareholder engagement – one that consists of embodying and driving a culture of democracy. Founders, executives and other legitimate influential actors carry the responsibility of bringing the company’s agora to life. An annual study carried out by The French Association of Financial Management (AFG) demonstrated that dialogue with shareholders is developing, and reported that there are additional meetings being held to discuss specific issues outside of general meetings. These developments work to ensure that time is spent discussing subjects that are of prime importance for the company’s future.
The global pandemic has also given rise to new rites and rituals when it comes to corporate democracy. After digital voting was implemented in general meetings, the AFG recorded a sharp increase (+11% in France versus +17% in Europe) in the participation of management companies in general meetings. Bringing in conversational tools to ensure interaction with shareholders has also helped to spark discussions, even from a distance.
Lastly, securing shareholder commitment over the long term is critical to ensure the company’s financial health remains stable and allow management to focus on leading transformations. By building loyalty to the company, we can improve investor volatility.
One way this can be encouraged is through the very conditions of shareholder engagement. We can think of this as financially rewarding shareholder loyalty and sustainable, long-term investment, CEO of Camif Emery Jacquillat, explains. “Imagine that those who vote have a right proportional to the length of time they have spent with an investment in the share capital. It would favor those who have shown long-term commitment.”
But the key to shareholder loyalty certainly lies in more affinity-driven elements too, like the alignment between cultural and economic values, as is often observed in family companies. As a result, companies can emulate this by creating “communities of commitment” in which investors feel a sense of belonging and commitment to the organization’s purpose — extending beyond financials alone. This approach could attract a new generation of investors who see financial support as a means of activism. Affectio societatis in action.
(1) The economic value relative to the environmental harm it causes.
(2) Carried out by France Stratégie, the General Commission for Strategy and Foresight, as part of the Prime Minister’s office and in collaboration with the University of Paris-Ouest Nanterre and the École Polytechnique.