Superstar firms: Big and bad, or big and beautiful?

Sounds familiar? It’s the plot of many a dystopian future film or book, from Brave New World to Avatar and countless others. So far, so sci-fi. But is this just fantasy or is there an element of prescience of the growing power of the superstar companies?

Of course, people are naturally suspicious of highly successful businesses. How could they possibly have achieved such dominance without indulging in some unethical practices? And is their sheer size and power making them impervious to scrutiny and regulation?

For investors looking for stocks that balance performance with responsibility, superstar companies present a dilemma. Few companies, especially large ones, are entirely virtuous. An assessment has to be made on whether their contributions to the economy and society in general outweigh occasionally questionable governance and business practices.

So first: the case for the defence. There’s little doubt that superstar companies have democratised markets and given consumers more choice, more capabilities and lower prices. Think how Amazon has spawned thousands of small start-up businesses that depend on its platform to trade. Think how Apple empowers people to be creative through technology and how Google and the Internet have liberated the marketplace and thereby lowered prices. All are making positive contributions to our lives.

These companies are also massive employers. Entire communities and millions of people depend on them for their livelihoods and they contribute enormously to public funds. According to Apple, it is currently the world’s largest tax payer, paying over USD 35 billion in the last three years in corporate taxes alone.

Now for the charge sheet. Some superstars have been accused of using their dominant position in the market to keep wages low and force down the prices they pay suppliers. Others have used their political influence to avoid or dilute regulation. In spite of heavily promoting their green credentials, their records on the environment are often patchy at best. And more and more, governments are questioning some of their more ‘creative’ accounting practices. Indeed, some European countries are instituting a ‘tech tax’ on the US tech giants to counter this, a move that is threatening a trade war with Washington.

So, what can the ‘responsible’ investor do to ensure that the superstar companies they are investing in truly have a heart. At BNP Paribas Asset Management, sustainability is one of the pillars of our investment philosophy, so we scrutinize companies more than many:

• We use our influence as a major investor (and thus as stewards) to direct companies towards a sustainable future, talking to them, working together and monitoring their corporate governance.
• We establish a relationship with companies, have dialogue with them to encourage sustainability and ethical practices at every level of their business.
• As members of the Global Network Initiative we monitor the tech giants on civil rights, privacy, access to data and freedom of individual expression.

The debate will rage on and there are strong opinions on both sides. Is the primary role of a company to keep its shareholders happy or should it have a wider focus on being a positive influence on society as a whole? The answer, of course, is not black and white. Few superstar companies have an unblemished record and few are as villainous as they are often painted. It’s up to us, as responsible investors, to keep questioning them and making sure sustainability and responsibility stay at the top of their agendas.

For more insights on superstar firms and the implications for investors, visit Superstar Economy.