Company warning signs

Moneyweb

When the bottom fell out of the Steinhoff share price last year, many investors and asset managers were asking themselves if they should have seen it coming. Could they have noticed that the risks had grown too large to justify an investment?

What some others noted is that there had been corporate governance questions for some time. But that doesn’t mean a company is inevitably heading for a disaster like the one that hit Steinhoff. But increasingly the way companies conduct themselves is becoming a fundamental investment concern.

Social licence to operate

Jessica Ground at Schroders calls this a company’s “social licence to operate”. These days, judging a company’s ability to generate profit must entail an understanding of who is affected in the generation of those profits, and how.

“The long-term success of any company is very dependent on it having successful relations with all its stakeholders.

“That means employees, suppliers, governments and regulators and the environment. And, broadly, what we see happening is that because of the drive towards transparency and the rise of social media, people are becoming much more aware of the state of those relationships.

“Companies that don’t have healthy relationships are being caught out and finding that their business models look unsustainable.”

The issues are often subtle

“In the UK, we’ve had a lot of focus on how companies treat employees. With the rise of the internet in places like distribution centres, we’ve been exposed to seeing companies that use contract workers and don’t pay them fairly or treat them well by subjecting them to intrusive searches. Parliament is now looking at it, and there’s an effect on their reputations.”

Risks that can’t be ignored

Another big concern is the impact company activities have on the environment.

This is particularly critical for businesses that use or extract natural resources. Water has become an issue in many places and companies that use too much have fallen foul of authorities. In some countries, companies like Coca-Cola have had their licences withdrawn due to their practices.

This is a risk investors can’t ignore. Hence asset managers are analysing these issues more thoroughly and engaging with companies to encourage more sustainable behaviour.

“I’m yet to find a perfect company with no risks,” Ground says. “Sometimes we think those risks might be fully discounted in the share price, but engagement is important to get a company to improve.”