What can asset managers do to help during a pandemic?
The answer is quite a lot. Our duty of care stems from managing $50tn worth of debt and equity in listed and private companies globally that, in turn, employ many millions of people directly and via suppliers. The ultimate owners are mums and dads, pensioners, public institutions and charities — the same people whose livelihoods are under pressure.
Hence asset managers have the clout and moral legitimacy to help mould decisions made in company boardrooms. How should this influence be used? A good place to start are the five requests drawn up by a coalition led by the Office of the New York City Comptroller, Domini Impact Investments and the Interfaith Center on Corporate Responsibility.
Companies must try their best to protect staff, offer sick leave and prioritise health and safety. Bosses need to be financially prudent and to keep paying suppliers. If redundancies are necessary, these should be done sensitively.
At a time of uncertainty and strain, these are the right things to do. But they make sense from an investment perspective too. Shareholder returns and corporate responsibility are not incompatible. Why this is so, however, is not always well understood.
Much of the confusion arises from our regarding companies as things. Rather they are a network of relationships. There are stakeholders with a claim on the assets and cash flows — owners, employees, customers and suppliers — as well as external ones such as communities and the environment.
When we rush to blame companies, therefore, or ask a favour of them in a crisis, we must think about which of these stakeholders we mean. Another problem is they are all interlinked. Unintended consequences abound. For example, suppliers routinely paid on time may lose the desire to innovate.
The interplay between owners, employees, customers and suppliers is also misunderstood. Textbooks often describe it as a zero-sum game. An Easter holiday sale that is good for customers must be funded by lower prices for suppliers, less pay for employees, or fewer profits for shareholders — or all three.
This model underpins the accusation that shareholders favour profits over employees. But this zero-sum view of a company is mostly inappropriate as it assumes no growth. Mostly, the corporate pie being divided up becomes bigger. This means shareholder returns can rise even as workers, customers, suppliers and other stakeholders gain.
Growth is also linked to productivity. Shareholders can benefit when companies distribute more of the pie to employees because doing so can lead to higher revenues. When Henry Ford doubled wages to $5 more than 100 years ago he was pleased to discover that production levels rose by at least a fifth.
What is more, happy workers are loyal, lowering staff turnover costs such as recruitment fees and training expenses. Physical and mental health improves, which reduces days lost. This explains why wages can rise at the same time as overall employee costs decline — a win-win-win-win for shareholders, staff, suppliers and customers.
As the global lockdown is eased, customers will come back to life and the companies that tried hardest to help their staff and supply chains should recover fastest. My hope is that bosses remember the lessons of the crisis and will continue to honour their social obligations. It shall be pleasing if asset managers have contributed to this change in behaviour.
Until the economic pie starts growing again, however, the zero-sum model remains relevant. This means trade-offs. For example, with suppliers still vulnerable at this crucial stage of the crisis — and given customers are already on their knees — shareholders must bear more of the load.
If this is a price worth paying, investors need to concentrate on longer-term performance. And what matters right now is absolute rather than relative returns. Wealth needs to be rebuilt. Asset managers and their clients should only worry about short-term rankings when as many companies as possible, and the societies in which they operate, are thriving once again.
Nicolas Moreau is chief executive of HSBC Global Asset Management
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