WHY CLIMATE ACTIVISTS SHOULD TALK MORE ABOUT OWNERSHIP AND FINANCE
When it comes to tackling climate change, we spend a lot of time talking about government regulation, incentives and impact investing. We should talk more about how companies are owned and financed.
A recent HBR article, “Impact Investing Won’t Save Capitalism,” argues that to tackle big problems such as climate change, impact investing as it is traditionally conceived isn’t enough. They share that while it is “sometimes possible” to marry competitive returns with environmental and social good, much of the transformative technology that is necessary to mitigate climate change is simply not profitable for individual investors and businesses, and therefore it won’t be readily adopted in the short term. They conclude that the solution is to focus on altering the rules of the marketplace through major regulatory and policy change, such as putting a price on carbon and subsides.
While we agree that policy change is a critically important lever for initiating systemic change, let’s face it, such systems-level change can take herculean effort and be slow going. What if we flipped the script on this problem, and focused on altering the rules of the game at the company-level?
Remember the old slogan “think global, act local”? What if we as entrepreneurs, board members and investors focused on what can be done locally, within our companies, to shift the goals and incentives to tackle climate change? Company-level change is vastly more doable by a distributed group of committed people.
A key-lever for shifting corporate behavior is looking at how companies are owned and the ways investors are rewarded.
This is where steward ownership comes in. Steward ownership makes changes to corporate DNA that address the deficiencies within conventional corporate structures that disincentivize directors from making better climate choices. Here are three ways we believe steward ownership can help:
1. Shifting Investment Horizons
Corporations beholden to the whims of the public markets or to private investors with control can push boards to focus on maximizing short term returns and meeting growth targets set within arbitrary time periods (like quarterly earnings, or average cycles of 5-7 years for private equity). This means they can be less forgiving when it comes to supporting potentially less profitable, time intensive, but necessary technological innovation such as those needed to combat climate change. Leading economist Mariana Mazzucato writes about this issue in her paper, “The Green Entrepreneurial State.” Steward-owned companies, on the other hand, are designed to be held for the long term and their investors understand the meaning of patient capital.
2. Retooling Board Accountability
Most modern legal forms of a corporation are built on the scaffolding of shareholder primacy: the view that corporations exist to serve the interests of shareholders first and foremost, and the interests of other stakeholders or other purposes are subordinate. Recent movements towards legalizing Benefit Corporations are aimed at shifting that dynamic, empowering boards to consider other stakeholders and social and environmental purposes beyond profit maximization. Still, in most cases, shareholders maintain control, with sole ability to direct the board, and they can change the commitments/priorities at will. Addressing big problems, like climate change, require boards to have clear and consistent mandates. Steward ownership locks in board accountability to a sustainable purpose at a level deeper by separating voting rights and economic rights and placing voting control in the hands of people who are directly responsible for shepherding the mission. Furthermore, steward-owned companies often include benefits to other stakeholders (such as workers, community, suppliers) as part of the purpose, and include them in governance.
3. Protecting Ownership Permanence
Most companies are established such that the ownership stake in the enterprise is bought and sold as a primary mechanism for investors to recoup a return. As ownership changes hands, who leadership is accountable to, and the company’s mission, strategy and operations, can radically shift. Often times, companies get absorbed into larger entities, without much of the original operations remaining. Many company-level efforts to curb climate change are a long-term play of risk mitigation and innovation and need to be maintained to reap benefits (think soil carbon sequestration). If companies are less committed to longevity, many of these efforts will not last. Steward ownership permanently locks in independence, by decoupling investment from ownership, and holding ownership in trust so that it is not for sale.
As a human race, we need to be pulling out all the stops to mitigate climate change. Rethinking ownership and investment can be an important part of the solution.
