KPMG Australia has today released a report on what motivates retail shareholders in the context of declining trust in corporate businesses: Shareholder value: Shareholder values.
The report notes that while the desire for better transparency and higher standards of honesty is well-established when it comes to customers, regulators and institutional investors, this new research confirms the desire is acute among retails investors as well.
Ethics over returns
1,510 active shareholders were surveyed between March and April 2019. According to the report, the majority of Australian retail investors would accept lower financial returns if it meant companies they invested in always behaved ethically towards customers, employees, and community.
An even higher number of those surveyed rated reputation ahead of recent dividends when deciding which company to invest in.
As reported in my blog article: Companies behaving badly – Product safety, in a speech last year, Chair of the Australian Competition and Consumer Commission, Rod Sims, said that companies often pursue maximum shareholder returns at the expense of their customers. Mr Sims said this approach too often results in behaviour that sees the customers of companies lose out, and that the incentives to behave this way currently often outweigh the incentive to put the customer first.
KPMG’s findings now give rise to a questioning of that approach. Regular shareholders reward companies that do the right thing by customers.
Consumer product safety
Ethical corporate behaviour in the consumer sector includes supplying only safe products.
Mr Sims cited numerous product safety cases undertaken by the ACCC and its state counterparts in which unsafe products had been sold and/or not effectively recalled. These include Daiso, Thermomix, Samsung and Woolworths. He pointed out that “the list includes well known and respected major Australian companies who have admitted, or been found, to have breached our consumer [product safety] laws. These same companies regularly proclaim they put their customers first”.
Unsafe products can injure and kill people – users and bystanders, young and old. It is companies – manufacturers, importers, retailers – that have the power to maximise the safety of their products. A well-designed product will address injury risk by taking into account the potential uses of the product and eliminating or minimising the hazards.
An ethical company will also have in place responsive customer feedback mechanisms and a proactive product recall system.
Generational shift and gender balance
The KPMG report found that young investors (under 30 years of age) are more likely to care about ‘trust’ factors (such as environment, ethics, values, good treatment of employees) in their investment decisions.
The report also found that female investors place a higher premium on ethical behaviour, noting that women are more often engaged in the community. As women do 70-80% of all consumer purchasing, this may also have a bearing..
It appears the writing is on the wall for all companies. What some might have tried to get away with in the past will increasingly be punished by shareholders and the broader community.
Enforcement of product safety regulations is still necessary. As Mr Sims said, bad behaviour by a company can undermine its brand reputation. “Poor behaviour must be visible to the consumer. Generally speaking, consumers are oblivious to misconduct unless they are directly affected by it. Further, misleading behaviour [and often unsafe products] by their nature are hard for consumers to detect. The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against such behaviours.”
Enforcement is often the best way to expose poor product safety practice.
In February this year the Australian Stock Exchange released a new edition of its Corporate Governance Principles and Recommendations. One of the key principles is for companies to instil a culture of acting lawfully, ethically and responsibly. It notes that both investors and the broader community expect this of companies.
The findings of the KPMG shareholder values report adds yet another voice that should compel corporate boards and management to act ethically. The report bears out the idea that most shareholders do not seek profit over ethics, and that behaving responsibly to the community can have a positive impact on the bottom line.