In brief:
- In our view, society has started to shift away from the shareholder primacy model.
- The COVID-19 pandemic is likely to accelerate this shift, requiring investors to understand the value companies have been creating for and extracting from all stakeholders.
- We believe this shift suggests that margins could be lower versus expectations in coming years.
Despite its length, the recently ended eleven-year business cycle created meager economic growth relative to the generous returns that financial markets provided to investors. Central bankers expected low interest rates to spur corporate animal spirits, growth in capital expenditures and inflation aimed for the benefit of all. Instead, rather than creating wage growth and other broad societal benefits, the ballooning of central bank balance sheets unintentionally financed asset price inflation as dividends and share repurchases boomed.
This failing occurred alongside a peak in investor short-termism. Against a backdrop of below-average revenue growth early in the cycle to midcycle, corporations recognized the market's thirst for capital return amid slight regard for long-term value. Corporates gave the market what it wanted.
During the last business cycle, companies in the S&P 500 Index returned more than $9 trillion to shareholders, a sizable chunk of the index's $23 trillion market capitalization, mainly by leveraging their balance sheets. This helped push equity valuations higher in a way that was grossly inconsistent with the pace of US or global economic growth. The shareholder primacy model — the idea that corporations exist primarily to serve the interests of shareholders — was on full display.
