Shareholders, Stakeholders, and Reclaiming Economic Power

An interview with John Streur, President and CEO of Calvert Research and Management

We sat down with John Streur of Calvert to discuss the interplay of power and progress as it relates to sustainable investing, and the way that John sees forces strengthening in support of the common good. Over the past 50 years as a society, we have increasingly granted power to corporations, and corporations focusing exclusively on benefits to shareholders. John shares his thoughts about that forward momentum from a lens of historical trends, the current moment and the path ahead with regard to the impact companies’ actions have on the world – both on people, and on the environment.

Below we summarize our conversation with John.

“We are all stakeholders, in a very real sense, in the actions of so many companies from all over the world.”  – John Streur

NB: What is the backdrop behind the shift in corporate focus from shareholders to stakeholders?

JS: The shareholder, of course, is somebody or some institution who has an ownership position in the company through either direct ownership of shares of the company or through a mutual fund. What’s the difference between a shareholder and a stakeholder? A stakeholder is everybody who the company impacts; the employees, the customers, the communities, where the company does business, and, you know, in this era of climate change, it’s really everybody. Everybody in the world is impacted by the actions of companies all over the world.

A Shift Back to Stakeholders

John Streur’s sense of the breadth of impact of corporate behavior comes after a half-century of a more narrow fixation on the shareholder’s interest as more significant than the interests of other stakeholders.  The current shift to elevate other stakeholders’ interests is a hopeful one and reminds us of an earlier era when corporations had more explicitly recognized those interests. In 1943, Robert Wood Johnson laid out the credo for Johnson & Johnson, saying the company’s first responsibility was to those who used their services, and then their suppliers, their employees, their communities, and the environment. Their final responsibility was to their stockholders. In operating according to these principles, they expected all stakeholders to be well-served, and that the shareholder would make a fair return.

Last year a group of 181 publicly traded companies representing nearly 30% of the publicly traded equity market published a joint letter announcing that they were shifting their corporate purpose. Going forward, rather than primarily building value for shareholders, they will shift their efforts to include all stakeholders.

NB: Are you seeing more strategic, corporate clarity and purpose now in 2020 than, say, in 1943? How should we think about the concept of a “fair return” for different stakeholders?

JS: That’s a great question. In 1943, corporate purpose was in pretty good shape. And there was an accountability that existed, and a responsibility that was reflected in the statement that you read a few minutes ago. At some point in the 1950s and early 1960s, the system really swung around to thinking about financial returns and the concept that the business of business is [business. This idea of business with profits first, and shareholders first, was really created in the late 1960s.

People deserve to be treated respectfully. Human rights need to be observed. Equality has to be part of the consideration. Companies need to perform along according to societal expectations at a given point in time.

When we think about what is a fair return for the use of financial capital, we can also think about what is a fair return for the use of human capital? And what is a fair return for the use of natural capital? In a very real sense, corporations are organizations that exist to convert financial capital, human capital, and natural capital into profits, and into services, and into good.

So, what is a fair return for people? Well, equity is very important, and companies compete in the labor market for human capital and that market helps determine a base wage. What we think is very important is that companies treat people fairly. Gender equity is important, diversity and inclusion is important so, we think about fairness, we think about justice, both in terms of returns to human capital and also in terms of returns to environmental or natural capital.

NB: In a world that considers all stakeholders, what is our role as investors? Do ESG considerations support or threaten companies’ financial profitability?

JS: There are a whole set of decisions that we need to make, a whole set of actions we need to consider and undertake to fulfill our responsibilities as investors because as investors, we have voting power, we have the power to interact with companies.  And, really, we have a very real responsibility for guiding their actions. In thinking about the global commons, not just our financial returns in the short-term, but the overall health of the system.

It’s so obvious to all of us that a company has to do a great job for its employees, has to do a great job for its customers and the communities and environment, for the whole system to work long term and for the company to prosper long term. I think that is so clear and so obvious. It’s just that for a while, we focused just on financial returns and set those other issues, off to the side. Recently, it’s become inescapable that companies have all of these other impacts that are relevant to the whole world, and they’re also very relevant to corporate profitability.

One of the big things that it’s changed in the past 15 years is our information systems, so we can see what companies are doing all over the world. We can communicate that very quickly and we’re all aware of both positives and negatives that companies are creating around the planet, and that has an impact on how we perceive these companies who we do business with. Now, it’s worked its way back into have an impact that financial returns. So, it’s really come full circle over this period of time.

NB: Can you share with us some specific examples of companies that have made progress in the transition toward a low carbon economy?

JS: We’ve got a lot of work to do, but good things are happening. Virtually every company that has a carbon footprint is now working to try to become more efficient and reduce it. Management knows now that this is also a financial issue. Companies in the utility sector are some of the largest emitters in the world and they emitted much more five to seven years ago when they were burning so much coal. So, investors, including Calvert, and I want to give credit to innumerable investors who joined the mission, have been working with utility companies to get them to transition away from coal, towards less carbon-intensive fuel.

Natural gas, wind, solar – tremendous progress has been made across the entire utility sector. We are very engaged with one utility in Hawaii – Hawaii, Electric to ensure that they’re making the kind of progress that they want to make in transitioning from a fossil fuel burning utility to renewables. Think about Hawaii. There is no oil drilling there. All of the oil that they had been using to produce electricity came into the Islands on barges and then was burned in their generating plants to create electricity for the islands. They want to become fossil-fuel-free over time. This is just one of many examples of utilities around the country that Calvert and other investors have worked with to help hasten the transition from coal to natural gas and ultimately to renewables.

Another great set of examples are companies in the technology sector. You may say, John, you know, does a technology company really have a carbon footprint? Two important concepts. One, well, data centers use a lot of electricity, and they need to cool their systems, so they do have a big footprint. But, secondly, these are very influential companies and when they demand renewable energy, when they start to create renewable energy, they have an impact on the overall system, including policymakers and the utilities. They begin to create an environment where other companies will have access to cleaner electricity as a result of their actions. The tech sector has really shown a lot of leadership in pushing for access to renewable energy. Companies like Google have been locating their data centers where they have access to renewable energy, hastening the change.

NB: Calvert has deep roots as a global thought leader on women’s inclusion and equity; can you tell us about The Calvert Women’s Principles?

JS: In 2004 Calvert helped architect The Calvert Women’s Principles at the United Nations. The Women’s Principles are a set of very strongly stated objectives and behaviors that companies or any organization should undertake to create the right environment for women to have equality at the workplace and in society broadly.

These were created for the purpose of handing to a company or handing to a government or any institution, a set of principles that they could work within their organization to create the right environment for women to do their best work, to have a safe and productive environment and excel, and to help to address real issues about equality between men and women in society and in organizations.

Female participation in the workforce has been steadily increasing since World War II, and today we owe at least 1.5% of our GDP growth over time to the participation of women in the labor force. Women’s employment is extremely important to the functioning of the overall economy. Still, we have issues with equal pay for equal work. We have issues of what I consider to be workplace safety across the board.  So, it’s essential that companies address these issues and create an excellent environment so they can compete for the best people regardless of gender.

NB: Tell us about your efforts to apply positive pressure for companies to diversify their boards.

JS: I just want to close out this comment with a little story about something we started in 2017 and 2018. We identified the companies amongst the one thousand largest companies in the US that were performing poorly in terms of board diversity. We have a lot of research on why it’s important to have diversity, as you might imagine, based on comments. We wrote to the CEO and board, and we included research, and we said, hey, you are performing amongst the worst in your industry, in establishing a diverse board or a diverse management team. Here’s the data, here is what you look like relative to your peer group, and here’s the research that shows why this is a bad idea, and here specifically, is what we want you to do to improve on this metric.

It was very impressive in terms of the response that we were able to get  About 80% of the companies that we interacted with that way began to take action.  With the 20% that didn’t, we were fairly aggressive in terms of filing shareholder resolutions. Every single one of those companies came to the table and said, what do we need to do to negotiate an outcome so you’ll draw this resolution before it goes to a vote.

NB: What about California’s law requiring companies to add women to their boards?

JS: We want to make companies better so, we invest in companies – we want to strengthen them. If we bought a house, we’d like to improve it. If we invest in a company we want to take every step possible, to make that the best that the company can be in terms of its impact, and in terms of financial returns.

I think that move in California makes a lot of sense from a system of change, a theory of change perspective. It’s great to have the government on our side. We don’t have every government at our side so, we welcome the actions of the California government. I think they could be a little bit more ambitious even in numbers. Our research indicates that we need a minimum of four women, or four people of color, within an organizational structure, to really get the benefit. If we just think about that, we believe, and our research tells us it’s important to reach a critical mass, to get the most out of the benefits of diversity. So, we support that what they’ve done and we think, getting up towards 50%, a minimum of four – that would be an even better goal set. That’s what we look for.

NB: You testified last year to Congress on ESG investing, and the importance of measurement and reporting in making forward progress.

JS: You can manage what you measure, if you will. We know companies are required to disclose information about gender pay, they are required to disclose their metrics, their environmental impact, their environmental risk, disclose metrics around how they treat their employees, how they impact communities.  Once companies start to look at that information we know they’ll manage it. I know that from my experience working with companies all over the world.

We’ve always been a big advocate of metrics in key performance information from companies. Once you get companies within a peer group or within an industry focused on something, they begin to compete. We can actually look at companies and industries that are competing now to reduce carbon. It’s taking the positive aspects of competition and turning it on these issues of sustainability, and quality.

I am always here to provide testimony to a Senate on issues associated with required disclosures in regulatory statements. The point that we wanted to make clear to the committee – and the committee wasn’t necessarily initially friendly towards these ideas – was that this matters to financial performance. The issue that we really wanted to read into the record, and which they might not have expected, was that we want companies to do this in a way that bolsters financial performance.  Our expectation is that management is supposed to be good enough to get their environmental footprint under control and to do a great job for every employee and move profitability forward.

It can be done. We have lots of examples of companies that are doing it. An unexpected one is Tesla and its sustainability report. It was fascinating to us at Calvert that the company that was trying to be a huge agent of change moving the auto industry towards electric vehicles didn’t have a sustainability report. On one hand it was surprising. On the other hand, when you really know the organization it wasn’t that surprising. Many investors asked Tesla to address a variety of issues including workers’ safety, workplace safety, human capital management, as well as total environmental footprint, and produce a sustainability report. So, in 2018 Tesla produced its first sustainability report.

Another instance is Amazon. Until 4 or 5 years ago, they didn’t have a big sustainability program. That’s another company that Calvert engaged with: we filed shareholder resolutions there two years in a row in an effort to get more focus on sustainability. That’s a great example because Amazon employs over 700,000 people and is changing everything about retailing in this country. It’s having an enormous impact on our society. They didn’t have a big sustainability department, and they weren’t putting out a sustainability report, and they really weren’t moving on critical issues, like greenhouse gas emissions and renewable energy, like you would want such an important company to be doing. Now, Amazon, really made tremendous strides in this area, although they still have more work to do. There’s no way you can run a company that large, that complex, and not have issues to address. It’s just really important for us to all keep pressing them.

Transparency is key, so everybody can see what’s going on. Investors can begin to use that information to measure companies, companies can compete with each other on those metrics, and management can be forced into a situation where they’re going to manage it because they’ve got to measure it and they’ve got to report on it.  It’s part of an effort to improve the system, to drive change. That matters for people, particularly those most in need, and that matters for the planet – and it also helps us deliver really competitive financial returns for our clients.

NB: You’ve discussed your sense of privilege in pursuing positive change. What excites you about what you see on the horizon for our shared future?

JS: Well, I’ve got to put that in the context of what we’re going through today with the pandemic. We’re all living through a situation, a crisis, that is all ultimately going to drive a lot of change. I’m very respectful of the huge human impact and the stress and the disruption this is creating for everyone – and I’m also excited that we’re going to come out of this with positive change.

Part of what we’re doing as investors is understanding which companies are best able to deal with this kind of change. And what we do, as investors at Calvert, is think about change. As an investor, knowing what’s happening today or what happened yesterday isn’t very helpful. What matters is trying to understand which companies are best at dealing with what’s going to happen tomorrow or next year. What’s exciting to me is the positive change. So for me, as an individual and for Calvert, as an employer, being able to participate in positive change and be part of that and to be able to work with companies to help them do a better and better job at dealing with change and driving positive change and solving some of these problems.

As an investor, I’ve been able to see so many companies doing things that have created much more well-being for billions of people; lifting people out of poverty and creating a better world for them. That’s exciting to me and seeing it happen, not just in the tech sector, but seeing it happen in the industrial sector, in the companies that we used to look at and say, “I’d never invest in that company.” It’s exciting to see those companies change.

Positive change has touched every industry, really. Still, some of these industries have some enormous challenges, and we don’t own everything. There’s certainly companies and industries that we think are severely challenged and problematic. The most exciting part of what we do at Calvert is helping to drive positive change in creating good outcomes for our clients. It’s a tremendous privilege for me to be able to do that.