What corporate governance can learn from the GameStop mania

“Never let a good crisis go to waste”. Like many tone-deaf phrases used during the pandemic, this one has reached ‘cliche’ status, peaking on Google Trends just as the outbreak took hold outside of China. 

Nonetheless, it does reflect how many people are in search of silver linings and new beginnings in anticipation of the world’s recovery. 

It’s an attitude which can be clearly observed in the stock markets, with younger generations representing the fastest growth segment among equity investors. Following the GameStop saga, we’re all aware of what many of these determined young investors are capable of. 

Harnessing that collective momentum for sustainability

They’re capable of much more than this though, because their values will increasingly shape the kind of pressure shareholders will be placing on public companies. 

Chief among these pressure-points will be sustainability. 

Goldman Sachs notes that in the energy sector alone, climate-related shareholder votes have doubled since 2011, and it was recently announced that BP has effectively thrown aside its oil exploration team as it positions itself for a greener future. 

Of course, not everyone – especially fledgling younger investors – can buy enough shares to qualify to vote at a company’s annual meeting, but they can choose where to invest their money. 

These choices will be a driving force in the growth of environmental, social and corporate governance (ESG) investment standards which are piling pressure on every industry.

Make no mistake, this kind of investment activism is already happening.

The recent short squeeze stocks like GameStop were powerful examples of how younger groups have the means to overcome their generational wealth disparity to project power through collective action.

These showed how, with the right communication and organization, retail investor communities with a cause can seriously rattle the hedge funds for the first time in history. 

Admittedly, these price swings were propelled by the institutional investors being forced to buy back their shorted stocks to avoid further losses, which drove the prices up to their heights.

Also, not every investor in these short squeeze stocks bought in for the cause, especially around the price peaks. But there is a precedent which has been set here. 

Conflicting views on climate change responsibility

Our data shows that sustainability is a core value for younger age groups who are now entering the stock market. Their approach to sustainability, however, is at odds with their older counterparts. 

The differences in these approaches say a lot about where these generations place the responsibility for climate change prevention. 

This, in turn, reveals how younger age groups will be pushing the sustainability agenda forward, and companies are directly in their crosshairs.

Broadly speaking, older generations have a much more hands-on approach to tackling climate change. They’re more likely than younger groups to be taking practical steps in their daily activities to reduce their own carbon footprint, such as recycling, using less energy, and using fewer single-use plastics. 

Younger consumers make a lot of noise about climate change, and their feelings on the subject are much more volatile. This is especially the case in Western countries like Europe and North America. 

It’s summed up in how they view the future of the environment: they’re much more likely than Gen X and boomers to either say the environment will get better or get worse in the future; a reflection of how these strong feelings are articulated between optimists and pessimists.

Older groups, on the other hand, are a lot more likely to believe there’ll be no change in the state of the environment in the future. That says a lot.

Although younger age groups do participate in practical actions like recycling, they’re relatively more inclined to believe individual action is futile without companies taking more responsibility.

Gen Z and millennials are up to twice as likely as older generations to believe their individual impact doesn’t make a difference when recycling and adopting reusable packaging.  

70% of them say brands should be doing more to address environmental issues. 

The most desired brand actions tend to focus on packaging, disposal, and affordability of eco-friendly products. But younger consumers stand out for putting a heavier emphasis on brands working with other stakeholders in society to drive more collective action. This could be actions like partnering with environmental groups or donating to them. 

This is a clear reminder that companies aligning themselves with expectations of sustainability need to think broader than their own operations. 

Whether it’s a customer or an investor, the future of these companies rests on demonstrating to them they’re pursuing a collective response, alongside tending to their own climate-related affairs. This stakeholder-driven perspective will be an important competitive differentiator.

The Tesla effect: sustainable innovation is sexy

We fully expect these consumer-centric expectations of brands to translate into investor-centric ones. 

This will open up a new front in sustainability to drive corporate action, and companies need to put their product innovation and strategies under the microscope to keep pace between these customer stakeholders and investor shareholders. 

The challenge is in how globally dispersed these groups tend to be for many public companies. So staying as close as possible to the attitudes and behaviors of these audiences, using globally consistent research for visibility across regions is key to success.

To see these consumer-centric expectations in action in the stock market, just look at Tesla. It took 18 years for the electric vehicle company to report a full-year profit. But that didn’t stop swathes of investors rallying to the stock and biting their tongues when, year-after-year, Elon Musk reinvested potential profits to fuel the company’s growth and innovation. 

That doesn’t make Tesla unique – growth stocks typically pump their earnings back into the business to sustain that growth. What does make Tesla unique in this respect is how many cars it produces compared to other auto manufacturers, and yet how much higher the market values Tesla compared to these competitors. 

In 2020, Toyota alone produced more than 7 million vehicles, whereas Tesla produced just over 500,000. Yet as of February 11th 2021, Tesla’s market capitalization stands at over $800 billion, over 3x that of Toyota’s $248 billion. In fact, Tesla is currently worth more than the 9 largest automakers combined.

The point here is:

Investors have been buying into Tesla’s vision, its mission, and the impact its technology might have on the world. 

Many might view this situation as irrational and detached from Tesla’s actual balance sheet. But it nevertheless gives us a strong impression of where investor money is increasingly going, how people are making these investment decisions, and the value people place on companies with a compelling vision for a brighter future. 

It’s no coincidence that the rise of stocks like Tesla happened as more Gen Zs and millennials enter the stock market; a movement which was only accelerated by the pandemic, and probably fueled by misused stimulus checks. 

With the market crash in March, this gave these fledgling investors an entry point into the market with hopes that the price crashes were just short term discounts. Many others joined the fray as tech companies benefited from the pandemic, sparking an unexpected sustained rise in the S&P 500. 

Our data shows that after steady rises since 2017, 2020 saw the number of Gen Zs in Europe and North America owning stocks increase by around +50%. For millennials, that growth sits at +28% for both regions, so clearly the GameStop affair shouldn’t be exclusively attributed to millennials. 

Other regions where share ownership was less prevalent also saw modest growth. Although some countries stood out, like South Korea, Australia, and New Zealand, where a high proportion of existing share ownership among younger groups grew considerably. 

Shareholders versus stakeholders

These shifts in our data will greatly impact how companies are directed and controlled. 

Different countries have different systems of corporate governance. In North America, the UK and Australia, the shareholder perspective holds that the corporation’s main duty is to maximize shareholder value. 

In places like Europe and Asia, the stakeholder perspective expects governance systems to balance the interests of a firm’s stakeholders, which include shareholders alongside any other groups in society impacted by a company’s operations. In terms of sustainability, this means everyone.

In the past, the shareholder perspective has prioritized profit over environmental responsibility, creating little incentive for companies to invest in costly sustainable practices, which may have put them at a competitive disadvantage. 

When one company reduces emissions, often lowering production output, another company will just step in to fill the void.

Now, with a new wave of sustainably-minded shareholders, investing in environmentally-friendly innovation will increasingly become both a positive competitive differentiator and a way of providing shareholders with value. 

The recent short squeeze stocks were the culmination of purpose-driven and crowd-sourced investment choices with little-to-no attention to financial fundamentals. These wouldn’t have been possible without a new type of investor willing to relinquish personal due-diligence to online communities with the aim to shape the world around them. 

This riskier and less accountable style of decision-making is completely at odds with traditional investor principles.

It would be a mistake to view recent events as bizarre phenomenons or one-trick ponies. These crowd-sourced short squeezes were built on online communities and the passion of people determined to make their mark on their surroundings through collective action. Sustainability could well benefit from them. 

We’re unlikely to witness quite the same volatility seen for GameStop with ESG companies, but looking ahead, the story and meaning of a stock will have greater weight alongside a company’s financial health. These stories can capture the attention and imagination of communities who are willing to take a risk.

Look out for our upcoming blog which takes a deep dive into this new wave of investors.