“Companies that don’t change can be great investments”
From our first post in this series, we identified that research shows 80% of Americans see Global Warming as a threat, yet only 30% feel personal responsibility for our environment.
As we asked in that post “Why are most of us concerned about environmental issues and climate change yet do not feel personally responsible?”
Could it be that we hope for corporate investments to be the driver of change from our fossil fuel status quo to a clean energy future?
The shortest answer to that as a possibility is a simple look backwards. In 1970, renewable energy's share of the total US energy consumption was a tidy 6%. After hitting a high of 8.9% in 1983, it was down to 6.18% by the year 2000. Luckily since then it has nudged back upwards, hitting 8.29% in 2010. Clearly, however, as a society, we have our work cut out for us if we are to meet our increasing energy demands. Even British Petrolium projects the need to triple the amount of renewable energy over the next 20 years. If BP is advocating renewable energy, it might be time to pay attention.
A slightly longer answer, though, requires a little reflection on the nature of how decisions are driven in our corporate economy. In the corporate world, it's all about the bottom line. With bottom line thinking, an organization does not invest in something for the future. Say, for example, installing a photovoltaic array on their corporate office building in order to take it ‘off the grid’. Certainly switching any organization to renewable energy is a long-term profit booster, but the initial investment is a pretty significant profit drain. Our economy’s bottom-line thinking requires careful consideration to how financial decisions will impact corporate balance sheets, stock values, and shareholder values next quarter – if not next week. For any publicly traded company, the CEO’s performance is largely graded on how well she has navigated corporate decisions in order to maximize stock performance.
So that photovoltaic array better be cost competitive to the fossil fuel we are already sucking down, or else it will not see the investment.
Our court system codifies the expectation of increased shareholder value. According to Stephen Bainbridge there has been strong legal precedent for viewing corporate officer fiscal responsbility through the lens of creating shareholder wealth. From the 1916 Dodge Brothers vs Ford case:
Precedent legal case 1916 : Dodge Bros vs Ford A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes
And as he points out, decades later, this precedent law is still seen as the standard for viewing officer duty: “In most jurisdictions, courts will exhort directors to use their best efforts to maximize shareholder wealth.”
We readily complain about corporate profit-driven discisions and bottom line thinking. What we don’t spend enough time reflecting on, however, is the roll many of us play in that corporate decision making system. Consider:
- According to the US Department of Labor, of the 155 million working age people in the US 88 million have 401(K) plan with an average value of $89,000.
- According to Investment Company Institute, 40% of all households have at least one IRA account.
- In all, 54% of Americans have stock investments according to Gallup.
With such widespread inclusion in stock market involvement, each of us who own stocks, a 401(k), IRA, indexed fund or a mutual market account is directly involved in the mechanism which entrenches the focus on short-term value descision making. That system moves assets liquidly from stocks that are beginning to slow in growth to companies showing stronger value performance. Granted, your personal share of that system may be smaller than others, but you are a part of it. Any sense of security you may feel when you see an increase in your quarterly 401(k) statement is testament to the benefit you are receiving from that system.
And even though your 401(k) may be smaller than you like – the aggregate of our modest investments adds up to $8 trillion of market incentive (more than all of the cash that is in the US currency system) that is being swung around encouraging CEO’s to consider next month’s return. The entire system, in turn, is one which discourages investments in the future in lieu of near-term returns.
So, we can find personal responsibility in our purchase and investment choices. Is there anywhere else to look? We’ll explore one more in the next post.
Please let us know what you think is behind us having a low sense of responsibility on issues we seem to care strongly about!