The majority of Australian retail investors would accept lower returns if it meant the companies they invested in acted ethically, according to a new report, while almost half have indicated they would be driven to sell their holdings in a company if its executive remuneration was excessive.
The research, conducted by KPMG’s research arm, involved a survey of 1,510 Australian retail shareholders.
The study found 57 per cent of investors would accept lower returns if companies behaved ethically toward customers, employees and the community.
A higher number (72 per cent) of investors rated reputation ahead of recent dividends, which was chosen by 69 per cent, when deciding which company to invest in.
Although returns were the most likely to be ranked as a top five factor for investing, which 60 per cent choosing it, transparency and honesty were the next highest out of a possible 22 factors, picked by 51 per cent.
Amanda Hicks, head of KPMG’s Customer, Brand & Marketing (CBMA) practice said the research clarified for the first time that Aussie retail investors are aware of the importance of factors such as reputation and social responsibility.
“This is a hugely significant finding, because it reinforces just how complex the idea of ‘shareholder value’ is in the modern era,” Ms Hicks said.
“Australian investors are not looking for directors and management with a laser focus on short-term returns. They expect more of corporate leadership and will shift their investment elsewhere if they don’t get it.”
Investors expect more of corporate bosses
Executive pay was reported to be a major trigger for selling.
While paying leadership and executives fairly was not found to be a driver for shareholders to purchase shares, with only 10 per cent ranking it in their top five factors, excessive leadership remuneration will drive many to sell, with 38 per cent ranking it in their top five.
Philanthropic support for charities and causes was also noted to be no substitute for integrated values – with investors not particularly impressed by one-off initiatives, the report found.
Notably, 89 per cent of retail investors reported reading annual reports, with 95 per cent looking at future strategy, 89 per cent reading up on board and executive remuneration and 88 per cent picking chief executive and chair messages as key priority reading areas.
Stephen Walmsley, remuneration consulting partner for KPMG said companies should take careful note of the finding that almost half of investors would sell in protest of excessive executive pay.
“Concerns about remuneration have become a real lighting rod among shareholders for broader governance and performance concerns, a dynamic unlikely to change in the foreseeable future,” Mr Walmsley said.
“Retail investors, along with powerful institutional investors such as industry superannuation funds, have put executive remuneration squarely in the crosshairs.
“But the welcome news is that after some difficult years of expectation adjustment, we are now seeing a cultural shift and a pleasing correction.”
Australian CEOs are increasingly taking packages more modest than their predecessors, with there being a greater variability of incentive outcomes as boards become conscious of links between performance, accountability and reward, he added.
KPMG Australia chair Alison Kitchen said nearly every Australian business leader she has spoken to understands creating a culture that engenders trust is important but they fall short in understanding how practical it is.
“Trust and culture are factors not just pertinent to our consciences, but to our hard-headed investment decisions,” Ms Kitchen said.
“Now we know that institutional investors do not have a monopoly on sophisticated judgement. The data shows that Australian retail investors are now keenly aware of the importance of reputation, transparency, ethical behaviour, values alignment and social responsibility.”
Adam Twemlow, KPMG enterprise partner added brokers and wealth advisers don’t want to put their money into an entity they think will struggle to earn trust.
“Partly it’s pragmatic and hard-headed. Investors are wary of risk and a poor culture around ESG creates plenty of it,” Mr Twemlow said.
“If you’re an importer of goods, for example, and you are making no obvious effort to ensure your supply chain is free of slave labour, there’s a solid chance you will get embroiled in legal strife or reputational assault.
“But partly investor behaviour is being driven by a values dynamic. Investors are people with beliefs and morals. While they are eager for returns, they would prefer those dollars to have been earned through improving the world.”
Younger, female investors care the most
Young investors were more likely to care about “trust” factors such as the environment, ethics, values, good treatment of employees in their investment decisions, whereas middle-aged Australians were found to care the least.
Around 66 per cent of investors aged under 30 cited ethical behaviour as an important factor while 49 per cent of those aged 41 to 50 agreed and 55 per cent of those over 60s agreed.
Young investors are significantly more likely to consider environmental concerns than other age groups, the report concluded.
Women were also more likely to prioritise trust factors – female shareholders were more likely to care about ethical behaviour, at 70 per cent compared to 62 per cent male, 52 per cent of females cared about environmental sustainability compared to 37 per cent male and 70 per cent of women prioritised whether companies are paying their fair share of tax, compared to 59 per cent of men.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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