I see some voices are claiming that the sustainability focus we now see in investing and in the society at large is the start of the fall of capitalism and shareholder value maximisation.
This is based on the thought that shareholder value maximisation has historically emptied one natural resource after the other on earth or been dependent on exploiting humans in one way or the other. And thereof it would be impossible to maximise share holder value when stopping this kind of practice.
I think this is a faulty conclusion.
I would rather say that the sustainability focus is strengthening the shareholder value maximisation theory.
In the longer run, there are industry life cycles and then I’m thinking of the ones that see birth of an industry and the end of it, not economic cycles. The first is starting off by a business opportunity and the latter by the end of the business opportunity due to better technology, end of resources or as we now see for some industries the global collaborative wish to end it due to inhuman practices or too large green house gas (GHG) emissions, etc.
Sustainability focus is now very much about the latter and this is rather “new” for business in a historical perspective.
So, how can sustainability strengthen the shareholder value maximization?
Well, when companies are taking all stakeholders interests’ into account, they lengthen the expected length of their life cycle. Both the industry life cycle (if the industry changes) and also their own company’s life cycle (relative to competitors). They likely also increase creativity, sales, productivity, etc. And the reputation will benefit from it and that is good for business. I could make a long list here, but I’m sure you get the point.
Some sustainable actions that will lead to shareholder value maximisation
If you have a sustainable resource strategy, you are likely not running into an industry life cycle with an abrupt end due to resource unavailability. You’re also reducing the risk for a potential Inevitable Political Response, that can be of any magnitude and come at any cost, very unpredictable. It may cost you in the short run, but you would likely get more back in the long run.
If you treat your employees as individuals and if they can have a personal joy in working for the company it does not take much to see how this can be beneficial. You’ll likely end up with a high degree of fidelity and also proudness of being part of the company. Creativity and “doing the best for the firm” are nice effects in the resulting culture. This can be a powerful “on the side” sales effort for the company. It may cost you in the short run, but you would likely get more back in the long run.
If you treat your suppliers well and also help them become sustainable, you’ll definitely see them more as a partner, as will they. Partnerships can bring long lasting value enhancing development. It may cost you in the short run, but you would likely get more back in the long run.
If you treat local communities well, they will see the benefits of your for instance manufacturing through jobs, without damaging your reputation for polluting their drinking water. This is also a way to ensure you can keep the “license to operate” that may be controlled by local communities. It may cost you in the short run, but you would likely get more back in the long run.
These are some examples. I jumped the client relationship here as it is quite obvious in all financial value maximisation theory, but also here it can be optimised by considering the long term effects also and not only the short and mid term effects.
The sustainable business model
As investors, we would like the business models of the companies we invest in to be sustainable, that they thrive in the long run. If companies only focus on the short or mid term seen from a shareholder as we did before, it does no longer make a good match for us. We wish companies we invest in to take all relevant stakeholders topics into account to convince us they maximise shareholder value in the long run.
Conclusion – Sustainable Shareholder Value Maximisation
The maximal shareholder value creation can only be obtained with a sustainable business model that takes all stakeholders into account.
In addition to the above, taking all stakeholders into account, is also reducing the risk of the business model and hence the risk of an investor’s investment.
So, the theory of shareholder value maximisation has been improved with sustainability that brings a longer perspective and is stronger than ever.
This is the Sustainable Shareholder Value Maximisation
What do you think?
*SRI – Sustainable and Responsible Investing