Investors are more keenly focused than ever on the long-term “social licence” which comes from being a good corporate citizen.
The misconduct dribbling out of the Hayne royal commission into banks, headlines about obscene corporate pay packets and a spotlight on the broader dangers to society of inequality have elevated some of the softer issues much higher in the minds of shareholders.
They are increasingly having to factor in the longevity of businesses and the consequences of poor corporate behaviour into decision-making about where to invest.
The 39 per cent plunge in the share price of AMP in the past three months has long-term holders of that blue-chip stock wincing, and wondering if the business model is permanently broken.
Stockbroking house Morgan Stanley has stepped back and taken a close look at the ASX200 stocks and which companies are in the box seat to thrive over the next few years as “good” companies doing good things for the wider world.
They are treating their employees well and have an equitable and sustainable business model delivering benefits for the broader economy, while still making strong profits that will deliver for shareholders.
Morgan Stanley says companies with an inclusive workplace with highly motivated employees tend to do better and that “inclusive growth” is now much more important for listed companies.
It uses the OECD’s definition of inclusive growth as “economic growth that is distributed fairly across society and creates opportunities for all”.
A company still needs strong management to be able to execute strategies well and to be able to generate shareholder value and be operating in sectors where the demographics are running the right way and demand for its goods and services are strong.
Morgan Stanley has picked out diagnostics group Sonic Healthcare, hearing implant business Cochlear Group and property and infrastructure company Lendlease Group as the three standouts among the ASX200 for being able to maximise the benefits as the world looks to more “inclusive growth”.
Analysts came to the view that Australia is in transition after more than 25 years of uninterrupted and robust growth, with overall sharemarket returns having been boosted by “super-cycles in commodities and household leverage, as well as tightening oligopolies”.
But those favourable trends have either peaked or are under threat from structural change. It also comes amid a “consumption crunch” in Australia where there is stagnation in real wages, rising energy costs, increasing wealth inequality and a relative deterioration in “job quality”, and big demographic shifts which means that healthcare is in huge demand.
Step forward Sonic Healthcare, Cochlear and Lendlease.
Morgan Stanley says Sonic is “well-positioned to benefit from ongoing demand for early medical intervention via diagnostics as the population ages, as early medical diagnosis can reduce patients’ long-term health care costs”.
Sonic also has a higher percentage of women employees and its average pay per employee is “high for the sector”, while its remuneration policies generally receive strong backing from shareholders.
Doing good for society
Cochlear is also high on the list of delivering on all fronts for broader economic growth, doing good for society, looking after its workforce and generating strong returns for shareholders. “There is a well-established link between age and hearing loss,” Morgan Stanley says.
As the population ages Morgan Stanley analysts believe there is upside to current estimates of 150,000 people transitioning from moderate hearing implants to those that address severe hearing loss. Cochlear also has a high level of employee retention.
The stockbroker says Lendlease Group has been increasing its breadth of product offering to include affordable housing, and housing that is built to rent, while the growth in the company’s retirement and communities business will be robust.
It says Lendlease’s average employee pay is high compared with the sector average, while there is solid backing from institutions on remuneration policies.
Morgan Stanley’s examination of ASX200 companies and their ability to harness inclusive growth also earmarked private hospital operator Ramsay Health Care and Primary Health Care as being highly ranked companies.
But the consumption crunch and shifting demographics along with generally lower diversity levels at the upper echelons of management and boards meant that the retail sector was at the bottom of the 12 sectors it scrutinised.