ICGN'15: On sustainable market reform—what needs to be done?

Day 3 of the ICGN annual conference opened with a lively panel discussion on the subject of sustainability reform. From the title of the session, I thought the conversation would explore ways and means of reforming the capital market in the fight against short-termismthe goal being longer-term corporate value and sustainable economic growth. However, the conversation was actually about the ESG (environmental, sustainability, governance) agenda.

The starting point for the conversation what that shareholders need to change their mindset, away from short-termism and quarterly results, towards the long term prospects of the company, for the good of the economy and the well-being of society. Regulation was identified as being important (and probably necessary) if the desired behaviour change was to occur. However, there was little appetite for a new regulatory regime to expedite change. Rather, the panel thought professionalism was a far better vehicle—on the basis that professionalism well implemented should reduce the need for prescriptive regulation.

Notwithstanding this, a reasonably significant shift in behaviour is likely to be required (amongst shareholders and the board) if companies are to respond positively to the sustainability expectations of customers, suppliers and the general public. Institutional investors probably need to step up and become part of the conversation, both to move their focus beyond the ninety day cycle and to pressure management into embracing sustainable business practices. 

The panel was asked how this move towards professionalism could be effected. One popular and readily implementable option was to use the AGM as a forum to raise questions. If institutional investors were to speak publicly (at the AGM) on matters of climate change, sustainable business practices and responsible business practice (for example), and do so in a firm but fair manner, then others (including the press and smaller investors) would notice. In so doing, astute directors and managers would respond by adjusting various priorities.

Much of the conversation was focussed on structural responses to identified problems. However, the ante was raised somewhat towards the end of the session, when an audience question shifted the conversation. Panel members were asked for their thoughts on how to drive desirable (sustainability) behaviours in the boardroom. After some um-ing and ah-ing, the following three items were proposed:

• Think in terms of the purpose of the business
• Demarginalise ESG: Make it prominent on the agenda
• Respect SME suppliers—they are not equipping to fund the working capital of larger companies!

This seemingly 'thin' response exposed another problem: that investors may not think about what goes on in the boardroom as much as some might think or hope. This probably needs to change.

Standing back a little, the session explored a different question from the one I expected to be tackled. However, the discussion was very helpful because it demonstrated that change is possible if the right sort of pressure and catalyst is brought to bear. The power of the AGM as a suitable forum to raise questions and exert pressure on the board and management of companies should not be underestimated for example.