Any serious business, lucky enough to be facing the rage of expansion, would be fighting to attract investors. Even if it is less than a million from a minor Venture Capitalist, a couple dozen millions from a Private Equity fund or new stock investors once they went public, every company tries to perform optimally in special issues that investors look at. So, what do shareholders and potential investors look for in a ‘successful’ company? Does this have something to do with the crisis cycle described in the previous post?
Venture Capitalists that fund startups are really concerned on the base structure of the business and its sustainability over time because they generally have monetizing horizons of 5 years or so. But this is not always the case for all investors. If I had a million dollars (which I don’t, but still) and I am going to invest it in the stocks, I just want the better return. So there are all these weird ratios: price to book, price to sales, price to cash flow, etc. which are not really representative of the base structure of the company. Of course, I would do some research on the company, but will I care about the carbon emissions, the long-term strategy, the corporate responsibility? Probably not as much as the dividends accrued by shareholders during the last year.
To make this clear, let’s take the situation to an extreme. Imagine I run a business and what I do is take a huge bank loan and give it to my shareholders as dividends. Of course this would be stupid, but I guess the valuation of my company’s shares will increase when the actual value of my business is the same (or decreased due to the new debt) and this action is clearly the antonym of sustainability.
What I am trying to say is that we have to make sustainability more attractive to investors, which are the main fuel for business growth. In this way, sustainable businesses will dominate the markets making the economy more sustainable. The eternal question will then be, can sustainability be attractive for short-term investors?
Venture Capitalists that fund startups are really concerned on the base structure of the business and its sustainability over time because they generally have monetizing horizons of 5 years or so. But this is not always the case for all investors. If I had a million dollars (which I don’t, but still) and I am going to invest it in the stocks, I just want the better return. So there are all these weird ratios: price to book, price to sales, price to cash flow, etc. which are not really representative of the base structure of the company. Of course, I would do some research on the company, but will I care about the carbon emissions, the long-term strategy, the corporate responsibility? Probably not as much as the dividends accrued by shareholders during the last year.
To make this clear, let’s take the situation to an extreme. Imagine I run a business and what I do is take a huge bank loan and give it to my shareholders as dividends. Of course this would be stupid, but I guess the valuation of my company’s shares will increase when the actual value of my business is the same (or decreased due to the new debt) and this action is clearly the antonym of sustainability.
What I am trying to say is that we have to make sustainability more attractive to investors, which are the main fuel for business growth. In this way, sustainable businesses will dominate the markets making the economy more sustainable. The eternal question will then be, can sustainability be attractive for short-term investors?
Thats a hard one. Maybe we can forbid short term investors. Once you have your share, you must keep it for at least, lets say, two months. Although this would be changing the rules too much!
ReplyDeleteI think beyond the investors there is a key word: trust. No trust no investment.
ReplyDeleteIn my opinion, Sustainability is related with long term efficient investments.
As you mention, I believe investors will always look for the highest dividens but awareness on sustainability issues is growing and will probably have much more impact in the near future.
ReplyDeleteWorld-class companies are aware of the growing interest of shareholders on The Sustainability Indexes(created by Dow Jones about 10 years ago), and are working hard to achieve a sustainable business.