What Is “Stakeholder Capitalism”?
In its monthly Investment Insights publication, Merrill Lynch noted that while nationalism has been a strong trend throughout the past few years, globalism in the prior 30 years did much to reduce poverty worldwide. As trade agreements shifted many U.S. jobs and operations overseas, the average income of the lower 50% of global earners nearly double between 1980 and 2016. However, this came at a price, including the mass exodus of U.S. jobs and stagnant wages at the low-income scale.(1) And yet, U.S. investors benefitted from higher corporate profit margins and subsequent higher stock prices.
In 2020, the COVID pandemic created yet another wealth imbalance. The combined net worth of American billionaires increased by 36% between mid-March and December, while nearly 50% of lower-income adults struggled to pay their bills during the same timeframe.(2)
Even the Federal Reserve contributed to this divide, albeit inadvertently. By pushing interest rates down and injecting more cash into the loan market, investor confidence received a boost and many transitioned their portfolio allocations to higher-risk, higher-performing investments, which in turn increased stock prices.(3)
Many factors contribute to stock market performance that are not necessarily tied to stronger company fundamentals. Perhaps in response to these recent market influences, there is an emerging trend in stock market investing. It’s not just about how well a stock performs, but how the company achieved that performance. Many wealth managers are seeing an economic shift toward “stakeholder capitalism,” basically a tighter focus on corporate enhancements that potentially benefit all stakeholders, including employees, customers, and local communities, as well as shareholders.(4)
This approach represents a shift away from how company stocks have been evaluated in the past two decades, which often placed more emphasis on quarterly profits and less on five- to 10-year plans. Focusing on long-term results can help weather brief periods of volatility and disruption. Feel free to contact one of our advisors to discuss.
Last September, the World Economic Forum’s International Business Council released standardized Stakeholder Capitalism Metrics (SCM). This is a measure of how companies treat their workers, their communities, and the environment. The goal is to monitor these metrics with the idea of directing more capital to companies that deliver both positive returns and high satisfaction among all stakeholders.
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1 Merrill Lynch. September 2020. “Investment Insights.” https://mlaem.fs.ml.com/content/dam/ML/Articles/pdf/ML_The_Great_Shift_3235536_v10.pdf. Accessed Dec. 11, 2020.
2 Juliana Kaplan. Business Insider. Dec. 12, 2020. “American billionaires’ net worths have grown to $4 trillion during the coronavirus pandemic.” https://www.businessinsider.com/billionaires-net-worths-have-grown-to-4-trillion-during-pandemic-2020-12. Accessed Dec. 12, 2020.
3 Sean Ross. Investopedia. Nov. 24, 2020. “How Quantitative Easing (QE) Affects the Stock Market.” https://www.investopedia.com/ask/answers/021015/how-does-quantitative-easing-us-affect-stock-market.asp. Accessed Dec. 11, 2020.
4 Doug Sundheim and Kate Starr. Harvard Business Review. Jan. 22, 2020. “Making Stakeholder Capitalism a Reality.” https://hbr.org/2020/01/making-stakeholder-capitalism-a-reality. Accessed Dec. 31, 2020.