Follow the money: Who's really making the demands?

This article is the second part of a three-piece series. Here is part 1

The market isn't what you think it is

In my previous article, I explained that the "maximize shareholder value" doctrine didn't originate from Milton Friedman's 1970 essay, but rather from the corporate raiders of the 1980s, who employed leveraged buyouts to extract value from companies. I shared my painful personal experience of seeing a cash-rich company become unable to pay its bills overnight, and eventually cease to exist.

Today, I want to follow the money with you. I want to show you exactly who makes these demands, why they are made, and what that means for how you run your business, especially if you're trying to build something sustainable.

This matters especially for those building businesses in the sustainability and climate space, because the businesses we need, the ones that will help us transition to a thriving, regenerative economy, are exactly the kinds of businesses that require patient, long-term capital.

How private equity and venture capital actually work

Let me be clear up front: not all Private Equity (PE) and Venture Capital (VC) firms behave the same way. I've worked with some who are genuinely long-term partners keen on helping build great companies. However, structurally and systemically, I've seen reasons why this sector creates pressure for returns that can feel impossible.

Here's what I've observed:

When a private equity firm raises a fund, it is getting money from limited partners, such as pension funds, endowments, and wealthy individuals. These limited partners expect returns. Good returns. Often, they're looking for returns of 15 to 25 percent annually.

The PE firm has a limited time frame — typically about 10 years — to invest the money, grow the companies, and return the cash, along with profits, to those limited partners.

So right from the start, there's a clock ticking. And that clock creates pressure.

For venture capital, the situation is even more extreme. VCs are investing in startups and early-stage companies. Most of those investments will fail completely. Therefore, those who do succeed need to do so significantly to compensate for all the failures.

Research shows that VCs typically need returns within 8 to 12 years. And because they're making risky bets, they need their winners to return 10 times, 20 times, sometimes 100 times their investment.

Think about what that means if you're running a company backed by VC money. You can't just build a nice, profitable, sustainable business. You need to build something that can scale massively, quickly. Even if that's not what the business naturally wants to be.

What I've seen happen 60 times

I've led 60 acquisitions and 10 dispositions in my career. I've watched this play out over and over.

A PE firm buys a company. Immediately, the pressure starts: Cut costs. Improve margins. Sell off underperforming divisions. Hit specific EBITDA targets. Get ready for exit in 3-5 years.

Now, some of that can be good, right? Sometimes companies do have fat to trim. Sometimes they need more disciplined operations.

But here's what I've seen happen too often. The long-term investments get cut.

That new IT system you need? Deferred. That R&D project that might pay off in seven years? Canceled. That investment in employee training and development? Not this year. That sustainability initiative that would future-proof the business? Too expensive right now. Those cybersecurity investments to keep you hack-proof? Spend no more than the cheapest available options.

Why? Because all of those things cost money today and pay off tomorrow. And when you're on a 3-to-5-year clock with aggressive return targets, "tomorrow" is too late.

I've signed those orders. I've watched those decisions play out. And I've seen what happens five, ten years later, when the company needs those capabilities it never built.

The research backs up what I've lived

Scientists have studied what happens when companies have high institutional ownership, including that of mutual funds and hedge funds. They found something fascinating and troubling:

These short-term institutional investors, who constantly buy and sell, have a negative impact on corporate investment in research and development.

The researchers found that these investors, who are measured on quarterly performance, pressure management to boost near-term earnings. And one of the easiest ways to boost profits? Stop spending money on long-term R&D.

One researcher literally said: "Most short-term institutional shareholders are transient investors who care for the firm's near-term earnings and discourage managers from making long-term investments such as R&D that have a long-term payoff."

Now, here's where it gets interesting for those of you in the sustainability space:

Another study found that long-term institutional investors — those who hold stocks for years — actually have a positive influence on corporate social performance and environmental initiatives.

So it's not that all investors are bad for sustainability. It's that the wrong kind of investor pressure — short-term, transient, and quarterly-focused — undercuts exactly the kind of long-term thinking that sustainability requires.

Have you felt this tension in your own organization? The gap between what you know the business needs long-term and what the quarterly numbers seem to demand?

The loud minority versus the silent majority

In most public companies, particularly in the United States, institutional investors — such as pension funds, mutual funds, and index funds — own the majority of the stock. We're talking 60, 70, sometimes 80 percent ownership.

But they almost never take public positions. They don't make demands. They stay quiet.

So when an activist hedge fund with 2 percent of the shares shows up and says, "I want you to buy back stock," or "I want you to cut R&D spending," or "I want you to spin off this division," what happens?

Often, management just agrees. Sometimes, without even holding a shareholder vote.

Why? Because they're afraid. They don't want a proxy fight. They don't want negative attention. They don't want the stock price to drop while the fight plays out.

I've been in those rooms. I've felt that fear. It's real.

So, this tiny minority gets to drive strategy, while the silent majority — who might actually support long-term thinking — never gets heard from.

There's an excellent quote from Larry Fink, the CEO of BlackRock, one of the world's largest asset managers. He warned companies that they may be harming long-term value creation by "capitulating to pressure from activist hedge funds to increase dividends and stock buybacks."

Even BlackRock, which manages trillions in assets, sees this as a problem.

The impossible trade-offs

Here's what this means for actually running a business. Trade-offs must be made. No company has unlimited resources. You cannot do everything.

The question is: What framework are you using to make those trade-offs?

Are you making decisions based on what will boost the stock price this quarter? What activist investors might demand? What do your PE backers need for their exit timeline?

Or are you making decisions based on what will build a sustainable business over 10, 20, 30 years? What do your customers actually need? What will position you for the climate-changed world we're moving into?

Let me give you some examples of the trade-offs I'm talking about:

IT Systems: You need to upgrade your IT infrastructure. It will cost $5 million and take two years to implement. During that time, it'll be disruptive. Profits will take a hit. But five years from now, you'll have better data, more efficient operations, and you'll be able to scale more easily.

Do you make that investment? Or do you keep limping along with your old systems because you're afraid of what the quarterly earnings call will look like?

New Product Development: You identify an opportunity to develop a new product line that targets an emerging market, potentially offering a sustainable alternative to your current offerings. It'll take three years and significant R&D investment. It might cannibalize some current sales. But it positions you for the future. It's where the market is going.

Do you do it? Or do you keep milking your current products because they're profitable now?

Circular Economy Transformation: Maybe you need to shift from a linear "take-make-dispose" model to a circular economy model. That requires building reverse logistics, rethinking your supply chain, and possibly even creating an entirely new division. It's expensive. It's complicated. It'll take years to pay off.

But it's also where regulation is heading, where customer demand is going, and what the planet needs.

Do you make that leap? Or do you wait, because the return on investment doesn't look good on a 3-year timeline?

These aren't hypothetical for me. I've faced every one of these decisions. Sometimes I made the long-term choice. Sometimes I didn't. I'm still learning which battles to fight and when. The truth is, most of us are learning to. Every. Single. Day.

Executive compensation distorts everything

When a CEO's compensation is 50 percent or more stock-based, they're not thinking like a long-term steward of the business. They're thinking like a trader.

What will move the stock price? What will impress analysts? What will the activist investors like?

I've sat in rooms where smart people made dumb decisions because they were worried about their stock options vesting, or their equity package being underwater, or the board getting nervous about the stock price.

These aren't bad people. They are people in a system that rewards short-term thinking and punishes long-term investment.

I've been that person. I've made decisions I knew were wrong for the company's future because the incentive structure demanded it. It's one of the things I'm not proud of.

Every sustainability investment falls into this trap

Here's the climate connection I keep coming back to: Every single sustainability initiative falls into this category of long-term investment with short-term costs.

Switching to renewable energy? Costs money upfront, saves money over time. Redesigning products for circularity? Investment today, competitive advantage tomorrow. Building climate resilience into your supply chain? Expensive now, essential later.

If you're making decisions based on quarterly pressures or PE exit timelines, these investments don't make sense.

If you're making decisions based on building a business that thrives for decades, they're obvious choices.

What framework is your organization using? And if it's the short-term one, what would it take to shift?

What we've created

Here's what I've come to see. "The market" is not a unified force demanding high returns. "The market" is:

• Private equity firms with 3-5 year exit timelines
• Venture capitalists with 8-12 year fund lifecycles
• Activist investors with 1-2 percent stakes making noise
• Executive compensation structures that prioritize stock price
• Quarterly earnings pressures that are largely self-imposed

Meanwhile, the majority of shareholders — those who own the majority of the stock — remain silent. They're in it for the long term. They're pension funds investing for retirees 20 years from now. They're index funds that hold stocks forever.

But they don't make demands. So we don't hear from them.

Instead, we hear from the loud minority. And we call it "market demands."

Once I saw this clearly, I could start to make different choices. What might shift for you if you stopped treating "market demands" as inevitable and started seeing them as coming from specific actors with specific — and sometimes misaligned — incentives?

What comes next

In my final article in this series, I want to explore how to actually resist these pressures. We'll look at different ownership structures, different funding models, and practical strategies for building businesses that can invest for the long term.

I'm going to share my one big regret from 20 years ago. Something I wish I'd done differently. And I'll share what's becoming possible now that wasn't possible then.

Because here's the thing: We can't get a do-over on the last 40 years. But we can absolutely do things better going forward.

And for those of you building businesses in the climate and sustainability space, understanding these dynamics isn't just interesting. It's essential. Because the businesses we need to build for a thriving planet are precisely the kinds of businesses that this system fights against.

But they're also the businesses worth fighting for.

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