10 | BUSINESS AND SOCIETY freshfields.com
Source: Marshall E Blume and Donald B Keim,
Institutional investors and stock market liquidity:
trends and relationships, Wharton School working paper;
Thomson Reuters; McKinsey analysis
The need for business to communicate short-term
financial performance - and therefore focus on shortterm
decision-making - is often used as a reason why
its relationship with society is so fragile. Surveys by
McKinsey show that in a given situation only half of
businesses would make decisions with the long term in
mind, yet a recent McKinsey study of US stocks reveals
that 75 per cent are owned by long-term investors.
It may therefore be easier to put societal contribution at
the heart of strategy than many business leaders think.
There was widespread public anger that individuals were
not held to account for the credit crisis and the scandals
that followed. Fast-forward a decade and regulations are
being tightened to make it more difficult for corporate
leaders to escape punishment if misconduct is found.
In the UK, the government will bring in reforms this
year that shift the dial as far as white-collar offences
are concerned. Borrowing from bribery and tax evasion
laws, the changes mean that instead of proving a senior
executive actively aided fraud or money laundering,
the authorities will simply have to show that they failed
to prevent it. This is part of a global trend - similar
reforms are in the pipeline in France and New Zealand
while new US attorney general Jeff Sessions is a strong
believer in the deterrent value of jail time for executives.
The accountability drive is extending to supply chains,
too. In the EU, companies now have to file sustainability
reports on their operations in each country in which
they employ more than 500 people. Like the UK's
Modern Slavery Act - which mandates that companies
publish statements online detailing what they have
done to investigate the potential use of forced labour
- the EU's sustainability reporting lacks punitive
provisions. But, says Marilyn Croser of corporate
responsibility lobbying group Core, the advantage
of these reforms is that they push potential concerns
'up to the boardroom, rather than the CSR department'.
Once again transparency is being used to drive
change, with society's relationship with business
the force on the lever.
Then there is executive pay. What President Trump,
himself a well-rewarded CEO, thinks about the
Securities and Exchange Commission's plan to force
companies to publish pay ratios remains to be seen. But
politicians across the world increasingly seek to remind
executives that they live in the same world as their staff.
Theresa May's recent focus on corporate governance
has zeroed in on similar comparisons, while Sigmar
Gabriel - him again - has proposed setting legal limits
on boardroom pay in Germany. In one of the most eyecatching
moves to date, the city of Portland will foist an
additional 10 per cent tax on businesses if their CEO's
salary exceeds that of the median worker more than
one hundredfold. Such interventionism responds to the
sense that boards are out of control, out of touch and
unaccountable to their shareholders and wider society.
75% of US stocks
are owned by longterm
But a better relationship
with society could also
chime with investors.
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