Shareholder Value, Corporate Governance, and Faith Driven Investing
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This article was originally presented at The Christian Economic Forum 2019.
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The Christian Economic Forum hosts a world-class Global Event each year to connect the top industry leaders and experts from around the world with other individuals who are compelled to act upon the principles of God’s economy. The following paper was presented at CEF 2019.
The Redemptive Potential of Closely Held Businesses
I first visited Nairobi almost 20 years ago, and it was there I first recognized the potential of businesses to drive Kingdom transformation. I was back and forth several times, working to establish a partnership with churches led by a group of remarkable Kenyan leaders who were creative, courageous, and whose redemptive influence across the entire city of Nairobi was extraordinary. Poverty in Nairobi looks different than it does in the US, and in that setting I saw clearly how businesses run by godly men and women were creating much needed jobs, especially for those who lacked widely marketable skills. Those businesses were also equipping employees with both work skills and life skills that enabled them to become more of who they were created to be. And they were generating income that funded church planting, creating products (from furniture to syndicated television shows) that promoted human flourishing, and articulating how their love for their employees flows out of their commitment to following Jesus. What I witnessed was, in my own mind, a sort of “firstfruits” of what could be if businesses run by believers in both the developed and developing world had a vision for redemptive impact through their businesses.
At the time, I was convinced that privately held businesses had significant potential for Kingdom transformation because in those entities power is typically concentrated in the hands of a relatively small number of individuals. The values and character of those individuals largely determine the values and ethos of the corporation. Such businesses, when run by passionate followers of Jesus, have potential for redemptive influence on the world—by creating jobs, cultivating a workplace environment that supports the spiritual, emotional and physical health of employees and their families, producing products and services that promote human flourishing, and generating wealth that is concentrated in the hands of Christ-followers who can steward it for Kingdom ends.
Structural Barriers to Redemptive Impact in Publicly Traded Businesses
I was also skeptical, at that time, of the potential for publicly traded companies to accomplish similarly redemptive work. “C corps” are designed to align the interests of various stakeholders around a singular objective—maximizing shareholder value. Corporate officers are accountable to the board of directors and the board is elected by shareholders. In publicly traded entities shareholders are typically so disconnected from the corporation that they have little interest in anything other than the financial results of the company’s operations and the impact of those results on dividends and share price. In fact, often a shareholder’s position in an underlying corporation is held and controlled by a fund manager whose incentives are designed to promote two things: gathering more assets to manage, and increasing the value of those assets by selecting securities that have the most potential for profit based on the financial performance of the company and any number of extrinsic factors that can cause short term swings in value. In this arrangement, any activity, value, or decision that is not focused increasing shareholder value is, at best, a distraction. It is misaligned with the priorities of the ultimate decision makers—largely fund managers—and therefore is likely to undermine an executive’s support with the board and institutional shareholders.
There is a certain genius to this structure. It takes a large and diverse group of individuals, with all their competing values and diverse circumstances, and orients them around a singular objective that they all agree is desirable. The very clear alignment of incentives around a single goal encourages disciplined decision making, corporate focus, and a specific outcome (enhanced shareholder value) that all parties regard as positive. Because money is form of power that is storable and fungible, it confers power on the owners that they can then utilize in ways that align with their diverse values. And there is some Kingdom fruit that typically results from this structure. Companies must be profitable in order to be sustainable and provide stable employment, which in turn gives employees the ability to contribute to products and services that (hopefully) promote human flourishing, to support themselves and their families, and to contribute to missions, churches, and compassion for the poor. Moreover, shareholders who are Christ followers can use the power conferred on them through the wealth created to support various Kingdom endeavors.
But there are also problems that result when we treat maximizing shareholder value as the ultimate goal. From a biblical perspective, the chief end of man is not to maximize shareholder value. Rather it is, in the words of the Westminster Catechism, to glorify God and enjoy Him forever. Or, stated in biblical/theological terms, we have been created to bear the image of the King.[1] Our identity implies a mission—namely to represent His character and purposes in the world by making them our own. As such, all our other objectives, including maximizing shareholder value, are subsumed under the larger mission of working toward redemption of all things under His authority for His glory. The dignity and ethical value of all our endeavors and affections depends on the degree to which they support our ultimate objective and our primary love. When shareholder value is treated as an end in itself, it is pulled out of its proper context and becomes an idol.
Recognizing that enhancing shareholder value is an objective whose value is contingent on its connection to our ultimate aim is useful in two ways. First, it gives us a lens that is useful when examining the motives of our own hearts. And second, it helps us evaluate potential decisions when the goals of maximizing shareholder value and glorifying God and redeeming all things under His authority are not aligned. It is relatively easy to think of many scenarios where the pressure to maximize shareholder value appears to inhibit the redemptive potential of publicly traded companies and undermines our ultimate objective as Christ followers. Executives struggle to combat workaholism in themselves and in their companies. Corporate resources are available to promote employee’s physical health and productivity, but seldom to foster relational and spiritual health. Companies have little incentive to serve the vulnerable by hiring and investing disproportionate training dollars in people who are capable but need extra training to develop marketable skills. And the ability of employees at all levels to justify decisions by reference to our ultimate objective is limited, at best. In short, the ownership structure of publicly traded companies, and the incentives it is designed to create, is positive when it is made subservient to broader Kingdom goals. But without its proper context, it tends to promote a range of outcomes that are at least partially at odds with our calling as believers.
Implications for Faith Driven Investing
What does all this mean for Christ-following investors? As stated above, I believe there is great potential for businesses that are owned and controlled by believers to have a redemptive impact on their employees, customers, and communities. Such owners and their teams are positioned to recognize, evaluate, and execute on opportunities for redemptive impact, and it is their prerogative to do so even when it appears that the profitability of the company might not be enhanced by those decisions. In other words, they have an opportunity to place profit and corporate success in their proper context, as good outcomes whose moral worth is derived from the degree to which they support the ultimate objectives that we have as Christ followers. And investors with capital should seize opportunities to promote the formation and success of such businesses.
But what about publicly traded companies? Christ-followers control extraordinary amounts of capital globally. Is there a way to harness that power to influence publicly traded companies in redemptive ways? Are there ways we could encourage the redemptive decisions of Christ-following executives, or promote God-honoring values in other companies that lead to human flourishing? I believe there are, but it will require more than eliminating companies from our portfolios that have products, services, or practices that are at odds with God’s commands. Let me offer a few ideas as prompts for further dialogue.
First, recognize that we live in a fallen world and that the redemptive impact of all these companies lies on a spectrum. Some have more redemptive impact than others, and none are perfect. That is true, even of privately held companies led by Christ followers. Every company will be a mixed bag, and investors will need to exercise prayerful discernment when making decisions about which companies to support, or which companies and issues we should seek to influence with our investment dollars.
Second, recognize that the corporate governance mechanisms in publicly traded companies are designed to minimize the ability of investors, board members, and executives to direct company resources toward any objective other than maximizing shareholder value. Therefore, in order to have meaningful influence on other values and goals, Christ-following shareholders will need to hold a significant piece of an individual company’s capital structure and will need to be intentional about impacting corporate decisions. Selecting or de-selecting certain corporations for investment based in biblical values, and then existing as passive participants in the capital structure, may keep our own consciences clear. But it is unlikely to do much to influence corporate decisions or priorities.
Third, if we seek to have influence, we need to become students of corporate governance structures and related institutions that have emerged over the last 10+ years. There has been a tectonic shift in the way executives, boards, and shareholders relate to one another. Shareholders exercise much more influence than was once the case, and there are specific mechanisms of influence that have proven particularly impactful. Proxy advisory companies, activist funds, institutional investors with disproportionate influence in shareholder votes, and widely followed blogs detailing trends and calling for change in corporate governance are all mechanisms that have the potential to focus and enhance the influence of like-minded, Christ-following investors. And there are interesting developments in all of them that hold interesting possibilities for redemptive influence. We need to understand the major trends, institutions, and sources of power that impact corporate governance, and seek to leverage those insights for redemptive ends.
And last, we must be focused. Christ-following investors need to get clear about what specific outcomes they hope to achieve, and to ensure that their work with individual companies is focused around those outcomes. Thousands of Christ-following investors, or even a handful of different Christ-following fund managers, advocating independently for varied changes are unlikely to be successful. But coordinated focus on a small number of changes has some potential for success.
Christ-followers control extraordinary amounts of capital, and if leveraged appropriately they could have redemptive influence on publicly traded companies. But the work required to achieve that sort of influence is significant. The move from investing that helps us maintain a clear conscience, to investing that impacts the companies we own, will force us to become activist shareholders. We should recognize that, choose to do it intentionally, and pursue it with excellence and innocence. Anything less than that is not worthy of our calling, and is unlikely to bear significant fruit.
[1] In the Ancient Near East, kings did not have social media or even mass media, and therefore had to develop mechanisms to remind people living in far corners of the kingdom who was in charge. They often used statues of themselves to remind subjects of their existence and authority. That practice informs our understanding of what it means to be made “in the image of God” (Genesis 1:26–27). We have been created to live and act in ways that testify to the existence and authority of the true King.