The majority of Australian retail investors would accept lower financial returns if it meant companies they invested in always behaved ethically towards customers, employees, and community, according to a new report by KPMG.
The eye-opening finding comes from research into what motivates retail investors, entitled Shareholder Value: Shareholder Values. The report, launched today by KPMG’s research arm KPMG Acuity, is based around a nationwide survey of 1,510 Australian retail shareholders
“When we looked at the national conversation about trust, we felt a key voice was largely missing – that of retail shareholders,” said Amanda Hicks, Head of KPMG’s Customer, Brand & Marketing (CBMA) practice.
“What this new research makes clear for the first time is Australian retail investors are now keenly aware of the importance of reputation, transparency, ethical behaviour, values alignment, 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. 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,” she said.
Key findings include that:
- Transparency and honesty (51 percent rate this as a top five factor for investing, out of a possible 22 factors) is more sought after than any other factor aside from returns (60 percent).
- Lower financial returns would be accepted by most investors (57 percent) if a company always acted ethically towards customers, employees and the community. A higher number (72 percent) rated ‘reputation’ ahead of ‘recent dividends’ (69 percent) when deciding which companies to invest in.
- Executive pay is a major trigger for selling. While paying leadership and executives fairly does not drive shareholders to purchase shares (only 10 percent rank this in their top five), excessive leadership pay will drive them to sell (38 percent rank this in their top five).
- Philanthropic support for charities and causes is no substitute for integrated values. Retail investors are not especially impressed by one-off initiatives to ‘do the right thing’. Philanthropic efforts can and should continue, but they will deliver greater impact if tightly aligned with an organisation’s broader positive purpose.
- Age is relevant. Young investors are more likely to care about ‘trust’ factors (such as environment, ethics, values, good treatment of employees) in their investment decisions; while middle-aged investors are likely to care the least. For example, 66 percent of investors aged under 30 cited ‘ethical behaviour’ as an important factor, while just 49 percent of those aged 41-50 agreed – and, interestingly, 55 percent of over 60s agreed. Young investors are significantly more likely to consider environmental concerns than other age groups.
- Women are more likely to prioritise trust factors. On many (but not all) factors, women shareholders are more likely to care about ethical behavior (70 percent v 62 percent male), environmental sustainability (52 percent v 37 percent male), and whether companies in which they invest are paying their fair share of tax (70 percent v 59 percent male).
- Investors do read annual reports (89 percent)! And they’re not just looking at financial performance. Future strategy (95 percent), Board and Executive remuneration (89 percent) and CEO/Chair Messages (88 percent) are the next priority reading areas for retail investors.
KPMG Australia Chairman, Alison Kitchen commented: “Nearly every Australian business leader I talk to today understands that creating a culture that engenders trust is vital. But I think we fall short of recognising how deeply practical this problem is. Trust and culture are factors not just pertinent to our consciences, but to our hard-headed investment decisions.”
“Now we know that institutional investors do not have a monopoly on sophisticated judgment. The data shows that Australian retail investors are now keenly aware of the importance of reputation, transparency, ethical behavior, values alignment and social responsibility.”
“Our research indicates that boards and management have a green light from shareholders to pursue genuine efforts to become more transparent, more honest, more ethical, and more values-driven. This is an exciting finding and one that should drive a genuine advancement in the way we think about the phrase ‘delivering value for shareholders’,” she said.
Stephen Walmsley, Remuneration Consulting Partner for KPMG said: “Companies should take careful note of the finding that half of retail investors would sell in protest at excessive executive pay. Concerns about remuneration have become a real lightning rod among shareholders for broader governance and performance concerns, a dynamic unlikely to change in the foreseeable future. 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. CEOs are taking the reins at major Australian organisations on packages more modest than that of their predecessors. The increasing prominence of this practice is likely to become self-fulfilling as expectations shift. We are also seeing greater variability of incentive outcomes as Boards become more conscious of the links between performance, executive accountability and reward,” he added.
About this report
KPMG Acuity conducted a nationwide online survey of 1,510 Australian retail shareholders between March and April 2019, asking them about what is important to them when making investment decisions. Respondents were sourced from a commercial third party panel provider. All respondents had been personally trading or selecting investments within the last year. The key findings from the data were then summarised in this report – with relevant KPMG leaders additionally contributing short think pieces about the implications for their area of expertise.