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21st century governance challenge

The End of Sovereignty: The Challenge to Investors

By September 12, 2018August 11th, 2022No Comments

This year, there have been many important developments in the discussion on the role of investors in corporate responsibility and leadership in a global society.

In the spring PGIM, the global investment management businesses of Prudential Financial, Inc. (PFI) and one of the top 10 largest global investment firms, issued a provocative paper titled The End of Sovereignty, on globalization, nationalism and the implications for institutional investors. The paper explores how the sovereignty of nation-states is now challenged by the forces of globalization and technology beyond their direct control. It notes that 70 of the top 100 global “economies” are multinationals, dominating most nation-states in economic terms and that “the current attempt we see by populist governments to wrest back control from these forces may well be one of the defining struggles of our times.”

To meet this challenge, PGIM asserts investors and investment managers must be prepared to be viewed as agents of change taking public stances on global challenges from climate change to gender equality. While until recently this would have seemed an unlikely path for most investors, we have seen a rapid change in the last few years as large institutional investors have expanded their stewardship frameworks to focus on the long-term sustainability of their investments in an “end of sovereignty world” and increasingly turbulent operating environment. BlackRock, Vanguard, and others are increasingly asking companies about their “social purpose,” as BlackRock CEO Larry Fink wrote earlier this year. Fink’s letter has received significant attention and debate. Central to meeting this challenge for companies is defining how far an individual company can or should go in making a “positive contribution to society.”

As Harvard professor George Serafeim wrote in Investors as Stewards of the Commons, “In the absence of a regulatory intervention that forces prices to reflect all externalities imposed by market participants, it is challenging for individual firms to take leadership positions on global challenges.” A possible solution, he suggests, are pre-competitive collaborations that level the playing field for all market participants and alleviate the competitive disadvantage. Key to driving these collaborations, he argues, would be a small set of large institutional investors with significant common ownership of companies within the same industry or supply chain and a long-term investment horizon. These investors, through active engagement with large firms around a systemic framework such as the Sustainable Development Goals, could create a comprehensive platform for collaborative action that would apply equally to all companies these investors are invested in and thereby ameliorate the first mover and “free rider” challenges that currently can impede progress. He points to several examples of this type of collaboration as around specific issues, e.g. Responsible Denim and GSA, a trade body representing mobile operators that has developed a framework to collaborate in maximizing their contribution towards the SDGs.

At the High Meadows Institute, through our Institutional Investor Industry Engagement Project we have brought together a group of the large institutional investors to explore the approach Serafeim suggests, and in future posts will update our readers on our progress.