The shareholder now ranks last

There is a clear change in the ranking of company stakeholders. To deal with the healthcare crisis, which is becoming an economic crisis, companies around the world have endured subtle, and not so subtle, pressures to re-arrange who they look after first among their stakeholders.

In normal times, and in more capitalist cultures, it is the shareholder that usually ranks as the most important stakeholder for listed companies. This has clearly been the case in economies such as the US, UK and Australia. A round of redundancies for companies listed in these markets has often been cheered by shareholders with a rally in the stock price. Big distributions are paid to keep shareholders happy and often these distributions come at the expense of labour-market-supporting capex.

The result of a shareholder-focused equity market is clear. Profitability is higher, resources are used more efficiently and returns to the shareholder are greater. Plenty of wealth is created.

Coronavirus has changed priorities

However, the global pandemic has led companies to re-assess who they ‘look after first’ when conducting their business. While the shareholder has previously ranked first, we think they now rank last. Our guess of the current order of stakeholders in most developed countries, including Australia, is in Figure 1.

Figure 1: Stakeholder ranking for Aussie listed companies

Our thoughts here are supported by recent changes in how companies conduct their business. For example, succumbing to pressure from the Bank of England, UK-based banks announced a cancellation of their 2019 dividends (which still haven’t been paid) and agreed not to carry out share buybacks. The UK regulator welcomed the change.

In the US, companies receiving emergency loans from the Federal Reserve’s US$4.5 trillion facility will face temporary limits on what they can pay executives. They will also need to keep their workforces stable and face restrictions on shareholder distributions like buybacks and dividends. There have also been other efforts to help during the pandemic which makes it clear shareholders are currently not the most important.

European alcohol companies, like Diageo, often on the wrong side of the ESG stock screens, are now creating hand sanitiser to be donated. Fashion companies like Prada and Zara have shifted their focus to making surgical masks, also to be donated. Novartis has promised to donate enough doses of its malaria drug to treat several million people if trials show it is effective in fighting COVID-19.

Encapsulating all of this change, the CEO of Bank of America, the chairman of DSM (a Dutch chemical company) and chairman of Siemens and Maersk have written an open letter endorsing the change in stakeholder principles where the shareholder seems to rank last.

Corporate actions in Australia

In Australia, the banks are providing loan repayment holidays at significant immediate cost to their own shareholders. They have also been asked to bear some of the pain in New Zealand. Prime Minister Scott Morrison has asked landlords, including REITs (listed property trusts), to ‘work out the issues’ with their struggling tenants, at a likely cost of considerable dividend cuts.

The Australian Energy Regulator has asked for a whole-of-industry-response to households and businesses enduring challenges. Meanwhile, Transurban said it will shorten the amount of time it uses to pay bills and proceed with current projects to employ people. However, the company seems to be putting its suppliers and creditors ahead of the broader community. While Transurban will help those customers who reach out to them, they stopped short of providing a blanket reduction in their tolls. We are not sure how many of their customers have the time to ask them for help paying tolls, or how many were listening to the analyst call, but it did seem like the ‘lowest cost option’. We wonder if they’ll change their mind given the government hands out contracts to them. Plus their largest shareholders, the industry super funds, have members who are renowned to be some of the most socially conscious investors in Australia.

Change in the face of a pandemic 

We think the current message to corporate Australia is clear: ‘Do Your Bit’. You need to help out and shareholders will endure pain in the short term. In our view, Australia Inc should adopt a whole-hearted approach here, not only for the livelihood of the broader community but also to generate goodwill with their other stakeholders, to allow for their business to return to normal when the economy does.

However, we need to also consider the rules to investing could be changing for some time to come. While less shareholder-focused companies are appropriate for now, over the longer term this could mean less efficient use of resources, wasteful investment and less wealth for everyone.

We hope the current era where shareholders rank last is temporary.

Hasan Tevfik is an Investment Strategist at MST Marquee. This article does not constitute a representation that an investment strategy or recommendation is suitable or appropriate for an investor’s individual circumstances. It may not be construed as personal advice or a recommendation.