It’s not all about the money
Yes, profits are good. But also consider the impact of ethical practices before investing in a business.
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]week.co.za
*The writer owns shares in Famous Brands.