For the past two and a half decades, we have witnessed how globalization, digitalization and the associated productivity gains have been increasingly accruing to the owners of capital rather than labor (see our DWS CIO Chart of the week, June 11, 2021: Tax and mend). If Friedman was alive, he would see no cause for concern given his assertion that a firm’s sole responsibility is to its shareholders.
But things have changed.
In a global survey released at the beginning of last year, 56% of people polled believed that capitalism, as it exists today, does more harm than good. And coronavirus has meant even greater scrutiny on the support mechanisms companies are providing to their employees, contractors and customers and how this drives company performance. Look no further than the 1,500 employees who tested positive for Covid-19 across Germany's meat-processing industry this time last year and the subsequent regulation to improve poor working conditions within the sector as a precautionary tale for companies who don’t look after their staff.
Global investors agree. In a survey of pension funds from around the world published last month, 59% cited Covid-19 as a key factor in their heightened interest in the social pillar (referring to the three pillars of ESG) because of its growing materiality and an even greater number, 66%, regarded employees as financially the most material component of the "S" pillar. But spare a thought for shareholders, who were ranked fourth in terms of their financial materiality. A clear sign that shareholder primacy is being rejected in favor of stakeholder-centric capitalism. This opinion may be put to the test once pension funds, or shareholders generally, are faced with the option of either supporting share buy backs or higher wages for lower income workers.
Despite research pointing to the materiality of human-capital policies to investment performance, information about such policies has not become a staple of corporate reporting. This leads one to ask: "Why do we not see more reporting of human-capital information in public annual reports?" Thankfully, the regulators are responding to the clamor for such information with the SEC mandating publicly listed U.S. companies to include human-capital resources disclosure and the EU working hard on its new social taxonomy, to be guided by human rights, and due for release this summer. The challenge remains while environmental taxonomies are based on science, social issues are more qualitative in nature and can be viewed very differently in one part of the world to another. Some more co-ordination will be necessary, but we are hoping for a steep learning curve – hopefully to the benefit of all stakeholders.