It’s not all about the money

Yes, prof­its are good. But also con­sider the im­pact of eth­i­cal prac­tices be­fore in­vest­ing in a busi­ness.

Finweek English Edition - - Marketplace Invest Diy -

as in­vestors we’re cap­i­tal­ists, no doubt about that. But cap­i­tal­ism is more than just the pur­suit of prof­its at any cost. Aside from is­sues of so­cial jus­tice and hu­man­ity, un­bri­dled cap­i­tal­ism is dan­ger­ous and would ul­ti­mately lead to cap­i­tal­ism eat­ing it­self at its own ex­pense. We’ve seen this be­fore – most re­cently with Stein­hoff and the al­le­ga­tions that now go back decades. It paints a clear pic­ture of pur­su­ing prof­its at any cost.

So, cap­i­tal­ism needs to be mod­er­ated – and this task starts with share­hold­ers. That’s us – in­di­vid­u­als or cor­po­rates who own the shares in a busi­ness. We can as­sume that the busi­ness that we are in­vested in largely ex­ists to gen­er­ate prof­its that will ul­ti­mately flow to us. As share­hold­ers, we want the di­rec­tors of the busi­ness to fo­cus on those prof­its, so we can also make a profit.

But it is a lot more com­pli­cated, be­cause ev­ery busi­ness also has stake­hold­ers it needs to con­sider. These stake­hold­ers nat­u­rally in­clude the cus­tomers of the busi­ness, but also staff, com­mu­ni­ties in which the busi­ness op­er­ates, sup­pli­ers and pretty much any­body who comes into con­tact with the busi­ness.

And no busi­ness can ig­nore stake­hold­ers be­cause, if you do, the busi­ness will ul­ti­mately suf­fer, and so will the share­hold­ers.

The needs and wants of stake­hold­ers and share­hold­ers are of­ten at odds. For ex­am­ple, the cus­tomers of a re­tail out­let want prices to be as cheap as pos­si­ble and the staff want their salaries to be as high as pos­si­ble. Both would lead to lower prof­its for the busi­ness, but the fine line of what is fair is not that sim­ple. Lower prices could lead to more cus­tomers (in­deed this is the model of low-LSM super­mar­kets) and hence im­prove prof­its.

Pay­ing staff well would lead to hap­pier and more ef­fi­cient staff and, again, this could re­sult in bet­ter prof­its due to in­creases in pro­duc­tiv­ity, less sick days taken by the staff etc.

A dif­fer­ent, but very im­por­tant, ex­am­ple is Lon­min which had com­mit­ted to build­ing hous­ing units for its staff in 2006 al­ready but failed to do so, re­port­edly only build­ing three show units.

Dur­ing the Marikana Com­mis­sion that looked into the events sur­round­ing the Marikana mas­sacre in 2012, the chair­man of the com­mis­sion, Ian Far­lam, is re­ported to have men­tioned the fact that Lon­min had money to pay div­i­dends to share­hold­ers, but it did not hold to its com­mit­ment to pro­vide de­cent ac­com­mo­da­tion for work­ers. The Marikana mas­sacre, as well as the even­tual five-month plat­inum strike, have crip­pled the com­pany.

So, stake­hold­ers are im­por­tant and need to weigh against the de­sire for prof­its, be­cause with­out one, the other will even­tu­ally fal­ter. The prob­lem is how, as share­hold­ers, are we re­ally able to get in­sight into how a com­pany treats stake­hold­ers?

The an­nual re­port is a good first step. These re­ports go into a lot more de­tail about what the com­pany is do­ing, es­pe­cially with re­gards to the softer-skill stake­holder en­gage­ment. But, as in­vestors, we need to be putting in more work here. We need to de­cide who the stake­hold­ers are, and then we can check in on how the com­pany is manag­ing those re­la­tion­ships. One easy place to see this is in the min­ing in­dus­try and how the com­pa­nies man­age an­nual wage ne­go­ti­a­tions. Re­peated messy ne­go­ti­a­tions that re­sult in reg­u­lar strikes show a break­down of re­la­tion­ships, whereas multi-year agree­ments show two sides work­ing well to­gether.

An­other is sup­ply chain – wit­ness Fa­mous Brands*, now look­ing into us­ing cage-free eggs. But we also need to check up on them to en­sure that it is ac­tu­ally hap­pen­ing. And, im­por­tantly, we can’t only worry about eggs.

We can also use other sources. Brand sur­veys help us un­der­stand how the con­sumer feels about a com­pany while there are also “best place to work” sur­veys and union re­ports.

In­vest­ing is about prof­its, but it can’t only be about the prof­its – or even­tu­ally there will be no prof­its. ■ ed­i­to­[email protected]­

*The writer owns shares in Fa­mous Brands.

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