Investing | Article

Change Won’t Happen Until We Invest Into It

by Sophia | 27 Oct 2020 | 5 mins read

Investors! What do we want? Profit! When do we want it? Now!

As investors, it feels natural for us to view shares solely as dividend delivery vehicles. But hey, we tend to forget that a shareholder has various other rights and entitlements too, these rights include voting for a company’s future — and attending something called an annual general meeting (AGM).

At AGMs, shareholders (or retail investors, like us!) are given the opportunity to meet with company leadership, who usually present financial performance reports and talk about strategy.

Think of it as a town hall where shareholders are able to ask questions and pretty much grill the leadership on the company’s performance and plans, or even pressuring the board to pay out a dividend. In essence, it’s where the management of the company is accountable to you, the shareholder.

It’s a simple, transactional relationship, however, in recent years this relationship has been cast in a bad light.

The Company-Shareholder Relationship — and Its Flaws

Economist Milton Friedman came up with something called the shareholder theory, which says that firms only have to prioritise shareholders since they form the “economic engine” that enables businesses to grow and expand. All companies have to do, essentially, is to bring home the big bucks and make huge returns.

Shareholder theory has become so entrenched that CEOs are now commonly paid with shares; if the company’s share value falls, they effectively get a pay cut.

The Friedman doctrine goes on to say that social responsibility is within the realm of the individual, not a company. Simply put: leave do-gooding out of business.

This is why the trend is now for companies to be guided by the goal of maximising profits, year after year. In the process, they minimise other concerns — environmental matters and social issues — and only fixate on shoring up share prices.

A notable case where a company prioritised productivity above all else was the Foxconn City suicides, where over twenty employees in Shenzhen attempted suicide due to the reasons of low pay and unfavourable work conditions (see: no vacation days, not being able to talk or eat during shifts). By 2018, Foxconn was reporting revenue of over US$175 billion. But that impressive revenue amount came at a great cost: the lives of its mistreated employees.

At this point, the cynic within you might be resigned to the face that profits come at a destructive cost. Simply put, socially-responsible profits seem oxymoronic.

Shareholder Activism, or How You Can Make a Change

Back to the aforementioned AGM. There’s strength in numbers: According to the Singapore Companies Act (CA), shareholders that make up 10% of the companies shares can band together to call for a general meeting to table an ordinary resolution.

If the vote passes 50%, the resolution is passed. So what can they vote on? Well, they can effectively choose to remove directors — directors who appoint CEOs, and CEOs who steer the company’s overall direction.

In essence, shareholders can exert pressure to ensure their voices are heard — something called shareholder activism.

But this is easier said than done, though. For example, SingTel has a market cap of S$36 billion. To effectively band together 10% of shareholders would be to have S$3.6 billion dollars’ worth of shareholders to table a resolution. That’s a lot of like-minded shareholders to scrounge together!

However, shareholder activism has seen movement of late in Singapore; more than a hundred retail investors of water treatment firm Hyflux organised a public demonstration over a bad deal they were getting as Hyflux was going under. Eventually, Hyflux cancelled its restructuring agreement with the investor consortium.

But while cases of activism have been on the rise, shareholders have still only been collectively compelled to act in drastic scenarios where companies were on the brink of a major restructuring at the detriment of all shareholders.

So what’s the solitary activist shareholder to do if they can’t rally change from within?

Invest Into Already Sustainable Companies

If lobbying for change isn’t your thing, there’s always the option of investing into companies that are already sustainable. This means digging into company reports and manifestos to really figure out what they’re about.

With $89 trillion in assets under management worldwide, asset managers have the power to lead the change towards sustainable investing. These asset managers include firms like Allianz Global Investors that dedicate themselves to ethical and sustainable investing and backing that effort with a dedicated ESG (which stands for Environmental, Social, and Governance) research team.

AllianzGI uses their influence to improve companies’ practices by actively engaging them to help them improve their ESG performance. AllianzGI also provides the option of proxy voting (read: they vote for you) to persuade investee companies remain responsible, especially where social and corporate governance are concerned.

In summary, companies like AllianzGI essentially do the legwork for shareholders like us to ensure that an investment is truly sustainable, ethical, and responsible.

But is Hope Profitable?

That’s all well and good. But at the end of the day, before we put our money where our mouths are, an important question to ask is this: is a sustainable investment even profitable?

The good news is that many investment firms believe that ESG investing is not a passing fad. AllianzGI states that interest and awareness about sustainable investing has grown so much that it “has translated into USD 30.7 trillion of sustainable investing assets globally in 2018, a rise of 35% in over two years” (Allianz Sustainability Report, 2019).

There’s real power behind our dollar now more than ever. In choosing the right companies, we can now make a positive change as young investors — and still secure our own financial future!