3 min read
Publicly traded companies typically reveal the amount of stock and stock options held by insiders such as CEOs and CFOs. Moreover, executive pay is oftentimes tied to the stock price. So, on top of their insider holdings, c-suite compensation can increase when the stock price does. This structure is intended to create a clear incentive for executives; make decisions that increase the stock price. That might mean increasing sales, lowering labor costs by firing employees or cutting pay, or increasing stock buybacks and/or cash dividends. There is a debate to be had about executive compensation. And conflicts of interest. However, I want to focus on how investors can affect company decisions through its stock price by rewarding certain humane behaviors.
If a stock's price is simply based on the company's future cash flows and total executive compensation is tied to the stock, then future cash flows will likely be their decision-making preoccupation. However, if a stock's price seems to respond to the company's socially responsible endeavors – driven by investors who are paying attention to those metrics – then the entire ballgame can change. If we can try to peg the stock price to a company's value to humanity, then executives would no longer have the incentive to focus solely on increasing future cash flows for investors. They could begin to focus on a company's impact on humanity in general. Consequently for example, choosing to pay employees more could increase the company's value to humanity, potentially leading to an increase in the stock price and likewise an increase executive compensation.
There is another benefit that can be had when driving change through stock prices -- clarity. Stocks can only be issued by publicly traded companies. Hence, they are required to disclose a lot about their business to the public due to regulations. This gives the public and investors an avenue to grade public companies' impact on humanity. Other avenues to drive change, such as private equity, are by definition private and not required to give such detailed disclosures. This makes it difficult, if not impossible, to judge whether a private equity fund (for example) is actually fulfilling its social responsibility commitments. In a June 2020 article in Institutional Investor titled "Private Equity Makes ESG Promises. But Their Impact Is Often Superficial," this question is explored, and doubt is raised as to how effective private equity is in generating real impact on society. Exchange traded companies, though, can be held accountable for their actions because some measure of transparency exists for investors to gauge the authenticity of their commitment and the effectiveness of their actions.
In the end, investors are the primary agents responsible for a stock's price. When they buy more, the price goes up. When they sell more, the price goes down. How investors value a stock determines which direction they send it. If investors invest in a way that is beneficial for humanity, they can influence those who are incentivized by stock prices and thus incentivize them to make company decisions that benefit humanity.
About the Author
Ernesto Garcia brings many years of research experience at top academic institutions to his Quantitative Equity Analyst role at Humankind. Ernesto previously studied the liquidity commonalities in ETFs to determine the level of diversity they provide investors and to estimate the liquidity commonalities they drive in their underlying equities. He is ABD in Economics from The Graduate Center at City University of New York.