Yahoo Finance Stewardship Investing: Why Should Companies Care?
It sounds like an episode of "Downton Abbey," but stewardship is a hot topic in investing. Stewardship, and its cousin, ESG (which focuses on environmental, social and governance) investing, are holding the attention of institutional investors as evidence mounts that doing the right thing pays off.
In fact, demand for parsing stewardship and ESG dynamics prompted Morningstar, the Chicago-based financial research firm, to introduce a new ESG score that money managers can use to see how well companies are doing on those fronts.
Mark Regier, vice president of stewardship investing for Everence and Praxis mutual funds in Goshen, Indiana, defines ESG as "making the world a better place" and stewardship as creating long-term value by making the most of tangible and human assets.
Stewardship is how well managers do at making the most of their companies' assets for long-term return, says Simon C.Y. Wong, a consultant and adjunct instructor at the Northwestern University School of Law in Chicago. It's "how well they behave as owners, including their focus on the long term," he says. Family-owned companies are a good point of comparison, he says, because owners often manage for the long term and are more willing to make the necessary investments to ensure a company's competitiveness over the long run than do managers who feel vulnerable to short-term shareholder and public pressure.
That's where the "Downton Abbey" analogy is apt: A good steward (Carson the butler comes to mind) treats the belongings and employees of the estate with the next generation in mind. Hence, no selling the family silver to pay for this year's Boxing Day feast. Egan-Jones Rating Co., for example, weights the components in its Corporate Stewardship Rating primarily by strategy and competitive position, followed by wealth creation, followed by systems and controls, including digital security.
Matthew Illian, a certified financial planner with Marotta Wealth Management in Charlottesville, Virginia, says the trend toward more accountability is exactly what his firm's individual clients want to hear.
Corporate boards that drive outsized CEO paychecks and brush off shareholder inquiries have made individual investors "feel impotent" and despairing of driving real change, Illian says. "We're all owners, but we're all such minority owners that it's impossible to be heard."
With new research from Morningstar and others that indicates companies with high grades for stewardship and ESG earn higher returns in the long run, fund managers now have evidence to do what individual investors want them to do: inject values into investment decisions, Illian says.
In the past, Regier says, some companies have put out glossy reports full of bragging points that weren't backed up in real life. Now, companies are being asked to commit to accountability and transparency. Analysts are asking companies not only about tomorrow's likely numbers, but how those numbers will be sustainably achieved. "Often, managers' marching orders are in conflict with lofty principles," Regier says. "That's where you see stewardship driving long-term performance -- are the managers part of the goals? Or are they driving for quarterly results, no matter what? What does it mean to integrate those values into the actual management process that creates the returns we're looking for?"
One example: the promise of nearly instantaneous delivery of goods with humane conditions for workers in distribution centers. "Are you willing to pay overtime to meet the promised delivery goals?" Regier asks, only partly rhetorically. His firm has asked Wal-Mart (WMT), he says, what would happen if a supplier offered a slightly higher price with assurance of sustainable processes.
Individual investors can take cues from institutional investors' influence. "What is their stance, and how do they vote, on executive pay and the makeup of the board, for example?" Wong asks. Other indicators: how often a portfolio manager turns over a company's stock and if a portfolio manager holds onto a company's stock for several years or even a decade. "It is a usually good sign for individual investors if there are top institutional shareholders who have had large, steady positions for a long time."
Another indicator is how a company goes about paying taxes. A sign of good stewardship is paying taxes without a fuss, while still managing tax obligations and cash flow for shareholder benefit. "Are they blindly going for the lowest number they can get? That's a warning sign," Wong says.
Employee policies, practices and culture are another indicator. "How they treat employees is part of the brand proposition," he says.
Endowments and pensions, such as CalPERS, the huge fund representing California educators, are stepping up their demands, cheered on, Illian says, by the support they detect from individual investors. Institutional investors have realized they can drive not just a few decisions here and there, but deep cultural change in key industries. "They're looking within industries for the stewardship cultures that promote long-term profitability," he says.
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