Friday, 23 January 2009

The shareholder value argument

There isn’t as much business support for carbon reduction as you might think. Of course, plenty of larger companies talk a good game: a recognised CSR policy is useful for attracting Generation Y employees, if nothing else. But the Director magazine postbag provides a useful barometer of business frustration: we receive scores of letters for every cleantech entrepreneur we feature — most accusing us of environmental bias. “Greenwash”, scream the cynics. Climate change is a smokescreen for tax rises.

I was more than a little surprised to hear Sir Rocco Forte lapse into a greenwash rant during an interview at the tail end of last year. On reflection, I found his indifference to the commonly held, PC view of things, slightly refreshing: it’s not often that you catch the established business elite so happy to go against the grain. But on the whole it felt like a naive, poorly-researched position for such an accomplished businessman.

At least Sir Rocco avoided the “shareholder value” argument. The thinking goes like this: a director’s legal duty to maximise shareholder value is in direct conflict with an expensive CSR strategy. Any attempt to go green costs money (the costs of administration often outweigh any energy savings) automatically reducing shareholder value. How does a company geared towards maximising profits for its investors suddenly gain a conscience without losing sight of its legal obligation?

Theo Vermaelen, professor of finance at INSEAD, answers this conundrum easily enough:

“Shareholder value is calculated by taking revenues and then subtracting labour costs, executive compensation, interest and taxes. This residual cash flow incorporates the interests of all stakeholders, not simply the shareholder.”

Vermaelen also says that any company attempting to raise equity without announcing a later intention to implement social policies is “unethical”. Implicit in this is the assumption that the only thing investors care about is a financial return. Maybe they do. Vermaelen also clarifies that “maximising shareholder value is not the same thing as maximising short-term profits”. But his support of image over action feels disturbingly corporate:

“Obviously if CSR policies are simply PR or marketing exercises then obviously they are not inconsistent with value maximisation or unethical. But it is up to the company to prove that this marketing strategy works.”

Or how about we forget the gloss? How about we make a change for the sake of change? Last month I met Gavin Starks, founder of AMEE, a carbon calculation company. His goal, with apologies to those of you who get headaches about this sort of thing, is to measure the carbon footprint of the earth (as in, everything: every person, company, activity — the lot). His response to the problem of CSR conflicting with shareholder value is simple:

“I think you have to look at what value means and what time frame. Are we looking to provide the greatest return in the next 12 months, or the next 10 or 20 years? Forum for the Future mapped out various scenarios for the future of humanity. Most of those scenarios were war based, [as a result of] future scarcity. That becomes part of shareholder value.”

I’ll post a link to the AMEE story as soon as we publish it.

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