How stakeholder capitalism can be more than a PR stunt

Leadership in the financial services industry starts with listening to all stakeholders.

Joe Biden will soon be sworn in as the 46th President of the United States. The much-discussed “blue wave” neglected to materialize, so a dramatic legislative agenda is unlikely to emerge with a divided or slim majority Senate. Still, there are any number of sectors awaiting significant shifts — regardless of who has Senate control. Chief among them is the financial services industry.

As one of few sectors of the economy to do well during the COVID-19 pandemic, these financial services companies will be under even greater scrutiny than they usually are. From investments management, investment banking and analysis to consumer fintech, nothing touches as many aspects of life as the financial services industry.

A primary issue is whether the entire industry will truly shift towards a transformational approach or remain focused on the short-term bottom line focused shareholder capitalism.

About fourteen months ago, the Business Roundtable Table took what had been accepted as divine law and flipped it nearly 180 degrees, declaring that the “purpose of a corporation is to promote an economy that serves all Americans.” The shift from a focus solely on quarterly earnings to the benefit of various communities was a lot for any industry to wrestle with. The results are undoubtedly mixed and rather than consistent, clear policy and management changes, many companies are taking advantage of the new found focus on soaring public relations wins, rather than actually impacting lives.

President-Elect Biden’s acceptance speech at the Democratic National Convention focused on “delivering on the promise of America.” In his view, that means community investments in infrastructure, investing in the American worker, job creation, slowing climate change, and reducing economic and racial inequality. All of which is consistent with the Business Roundtable’s groundbreaking statement. Though the progressive Democratic platform is unlikely to see a vote in the Senate, corporations should expect to be viewed by a Biden administration as a partner in “delivering on the promise of America.” With Biden’s long record of public service and connection to the financial sector (see: Delaware, U.S. Senate), financial institutions can expect to be front and center.

Even though it was recently rejected, the rule proposed by the U.S. Department of Labor would require corporate pension funds to invest only in financial returns and not E.S.G. goals. While the sector is also unlikely to see legislative changes, like Senator Elizabeth Warren’s Accountable Capitalism Act, it remains incumbent on individual companies, boards of directors and C-Suite management to focus on more than the bottom line for shareholders. This is where the investment banking and investment management parts of the financial services industry come in. Investors rely on research reports (and algorithmic trading) to decide in which companies to invest. All the analysts focus almost exclusively on the bottom line. For stakeholder capitalism to take root, that needs to change.

Some efforts are already underway, like the hedge fund billionaire Paul Tudor Jones’ Just Capital, but all corporations — banks in particular — have to make a choice. Is stakeholder capitalism a PR stunt or does it shift the fundamental bottom lines they focus on? Does a bank double down on E.S.G. programs that work, like Bank of America recently did with its $2 billion Equality Progress Sustainability Bond or will they just pour money into programs that are either misdirected, mismanaged or poorly tracked? Doubling down could be good for business. There is research that shows E.S.G. funds outperformed the S&P 500 during the COVID-19 pandemic. In August, famed M&A attorney Martin Lipton went so far as to say that “stakeholder governance will be a better driver of long-term value creation and broad-based prosperity than the shareholder primacy model.”.

For a financial institution to successfully partner with communities, they need insight. The only way to get that is to go out and listen to their customers and communities. Now, more than ever it is necessary for every part of the industry from hedge funds to regional banks to understand the needs of stakeholders from stakeholders themselves. It’s time to truly partner with the community.

Divided government may simply place more onus on businesses to respond to the societal pressures of 2020. Wealth disparity, environmental justice, and racial equality are just a few of the issues that are unlikely to see Federal action. A lack of governmental regulation or legislation is no excuse for companies to not face those concerns directly. Corporations — particularly those in the financial industry — face a choice: use gridlock as an excuse for business as usual or to lead. Leadership starts with listening to all stakeholders.