Long-termism, Davos and the Blame Game

Catherine Jackson and Keith Johnson write: An unusually candid comment from Unilever CEO, Paul Polman, was highlighted by Financial Times columnist Michael Skapinker in a November 22, 2010 op-ed article.  “Unilever has been around for 100-plus years. We want to be around for several hundred more years. So if you buy into this long-term value-creation model, which is equitable, which is shared, which is sustainable, then come and invest with us. If you don’t buy into this, I respect you as a human being, but don’t put your money in our company,”  Polman said.  With Unilever no longer giving earnings guidance, he added, “We certainly don’t want to attract the investor base that wants higher and higher and quicker results against targets that we put out every 90 days.”[1]

These comments come in the context of a current UK Department for Business Innovation and Skills' public consultation on whether short-term focus of the capital markets is impairing long-term business success.[2] The consultation seeks comment on the same issues raised by Unilever and the Financial Times.

So, who are these long-term shareholders that Mr. Polman says he wants to attract?  Presumably they are patient investors - like pension funds, insurance companies and sovereign wealth funds.  They have long-term liabilities and interests in seeing companies generate wealth sustainably, without taking risks that can destroy value or undermine stability of the market “beta” on which most of their returns depend.

However, sometimes things are not so straightforward.  At an October 2010 investor conference in Amsterdam, a senior Unilever officer expressed irritation that financial analysts rarely ask about Unilever's ESG practices or mid/long-term prospects.  A member of the audience turned the question around and inquired about what Unilever’s pension fund was doing with respect to ESG issues at the companies in which it invests.  The executive could not provide a response.

We wonder, how is it that a company so focussed on sustainability could not even know whether its pension fund shares these concerns?  Why is it that corporate pension plans remain silent on all aspects of ESG?

Similar questions could also be asked of long-term shareholders who support responsible investing.  Why are their analysts not asking Unilever management about ESG risks and opportunities?  Are sustainability issues factored into investment decision-making in a meaningful way?

Unfortunately, too many shareholders still obsess about short-term objectives and quarterly earnings guidance.  They don’t ask whether a company has what it takes to be around for the long term.  This is particularly troubling at pensions (including corporate pensions) which have obligations that require sustainable capital growth 50 to 75 years into the future.

Accenture recently surveyed over 700 CEOs on behalf of the UN Global Compact.[3] They found that CEO’s have shown a marked change in attitudes toward sustainability, so much so that they now blame investors for undermining sustainability with their continued preoccupation on short-term results.

Thankfully, there might be good news in the making.  The World Economic Forum (“Davos”) has initiated several projects which relate to this gap.[1] One is “The Future of Long-Term Investing” and the other is “Mainstreaming Sustainable Investing.” Those attending Davos 2011 will be able to hear about how this company-investor dynamic can be changed.

The test will be whether long-term shareholders in the room are listening.  It would be a good start to the New Year if they were.  Integration of sustainability into investment practices is essential to “walking the talk.”  Companies will be unable to integrate sustainability into business strategies and reporting without investors joining them on that walk.

*Catherine Jackson is President of Selegna, Inc., and former Manager of Corporate Governance and Proxy Voting at Ontario Teachers' Pension Plan; Keith Johnson is Program Director of the University of Wisconsin Law School's International Corporate Governance Initiative and former Chief Legal Office at the State of Wisconsin Investment Board.


[1] This has been recommended by many thought leaders, including a highly regarded Harvard Business School duo:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=297156.

[2] See http://www.bis.gov.uk/assets/biscore/business-law/docs/l/10-1225-long-term-focus-corporate-britain.pdf.  Public comments are due January 14, 2011.

[3] http://www.businessweek.com/managing/content/jun2010/ca20100624_678038.htm.

[4.] http://www3.weforum.org/docs/WEF_IV_IndustryPartnershipOverview_2010.pdf; and http://www.weforum.org/pdf/mri_summary.pdf.