Christie Stephenson is executive director of the Peter P. Dhillon Centre for Business Ethics at the UBC Sauder School of Business.
As baby boomers age, society is approaching the largest transfer of wealth that North America has ever seen – but the shift isn't only financial. The women and millennials who will take over trillions of dollars are redefining how investment decisions are made – and the world's largest corporate leaders are taking note.
Because they tend to live longer than their husbands and hold increasingly prominent positions in the workplace, baby-boomer women are responsible for a fast-growing share of their families' fortunes. According to a report by the BMO Wealth Institute, women in the United States control more than half of the country's personal wealth – US$14-trillion – and by 2020, that number is expected to rise to a staggering US$22-trillion.
In Canada, women's share of private wealth is expected to more than double from $1.2-trillion to more than $2.7-trillion by 2024.
Over the next few decades, those unprecedented sums will in turn shift to boomers' millennial kids, now the largest demographic in the North American work force.
But along with that tidal-wave-sized transfer, there's another major shift on the horizon: an overhaul of how investors evaluate investment risks and opportunities. Traditionally, the measures have been almost entirely financial; if a company showed solid financial growth, beat earnings expectations and provided reliable returns, that was enough. But that's no longer the case.
In one study that involved women with household incomes of more than US$75,000, nearly all of the respondents said that "helping others" and "environmental responsibility" were important, and roughly 60 per cent made purchase decisions based on the company's corporate behaviour.
According to the Responsible Investment Association, millennial investors are 65 per cent more likely than their boomer parents to look at environmental and social concerns, as well as who is running the companies, when making investment decisions.
But, with their historic fixation on shareholders and short-term financial performance, investors have been the major holdout to real change. This has now reached a tipping point, and what was considered a niche approach has hit the mainstream. Market participants ranging from pension funds to the CFA Institute now consider companies' environmental, social and governance (ESG) strategies when calculating risk, and household names including Bloomberg and Goldman Sachs have moved in, sensing opportunity. The number of signatories to the United Nations-backed Principles of Responsible Investing, among them asset managers and service providers, has skyrocketed.
European companies are now publishing annual statements that show the measures they've taken to prevent slave labour and human trafficking from entering their supply chains and, as of 2017, public companies of a certain size with operations in the United Kingdom must report on a series of ESG indicators.
Last March, State Street Global Advisors, one of the world's largest money managers, installed a statue of a defiant girl in front of the Wall Street bull; it also vowed to pressure companies it holds to improve their boards' gender diversity. "Research shows that companies with greater levels of gender diversity have had stronger financial performance as well as fewer governance-related issues such as bribery, corruption, shareholder battles and fraud," it wrote in a statement.
Meanwhile, Canadian companies have begun reporting their efforts to bring more women into boardrooms and senior management and consultation with Indigenous communities is increasingly acknowledged as both a government and a corporate responsibility. Others have signed onto specific commitments involving the United Nations Social Development Goals, which aim to tackle some of the world's most pressing issues, including poverty, hunger and gender inequality.
"Society is demanding that companies, both public and private, serve a social purpose," wrote Larry Fink, CEO of BlackRock, the world's largest asset manager, in a groundbreaking letter to CEOs earlier this year. "To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.
"Without a sense of purpose, no company, either public or private, can achieve its full potential," he continued. "It will ultimately lose the licence to operate from key stakeholders."
Given this seismic shift, what do businesses need to consider? Corporate leaders and boards must take these social concerns seriously, whether it's climate change action or the #metoo movement. They have to realize that "no company is an island" and understand who their stakeholders are in the broadest terms. We've entered an era where social purpose and responsibility are both risks and opportunities.
Companies have always needed an "elevator pitch" – a quick way to capture their business model and express the essence of how they create value for investors. Now they might want to start sharpening their "social purpose pitch" to express how they create value of a different kind for stakeholders, and for the greater society.
Some corporations resist change, fearing it's impossible, or that it invites risk; others, knowing that passive investors don't vote with their feet, could be complacent. But, as Mr. Fink realizes, the smart ones won't.