Understanding Corporate Sustainability – Long-Term Growth & Resilience

The sustainability of companies refers to their ability to endure, grow, and remain relevant over the long term despite challenges such as market changes, technological disruptions, and economic fluctuations. Sustainable companies are those that adapt to shifting consumer demands, maintain financial and operational resilience, and embrace environmental and social responsibilities. This includes integrating sustainable practices into their core operations, which not only supports long-term profitability but also aligns with evolving societal expectations and regulatory standards. Ultimately, corporate sustainability reflects a company’s capacity to thrive while contributing positively to society and the environment.

Table of Content

1. Introduction
2. Life Expectancy of Companies
3. Survival of Sensex Companies
4. Sustainability of Companies
5. Conclusion

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1. Introduction

Value investors and even many casual investors espouse long-term investing. The question they rarely address is, How long is long-term? Is it 5 years or 10 years or even longer? Warren Buffett famously said, ‘Our favourite holding period is forever’,¹ adding, another time, that he buys ‘on the assumption that they could close the market the next day and not reopen it for five years’.² These are solid approaches to long-term investment.

However, we now live in a world where the only constant is change, and where change management is said to be the biggest challenge for managers. In such volatile times, the sustainability of many-perhaps all-companies is in question. As a result, long-term investors should begin thinking more about companies’ life expectancies.

2. Life Expectancy of Companies

We call companies like IBM blue chips. Early market investors bought blue chips, forgot about them for a decade (or three), then used the profits to provide for future generations. In India, some investors still swear by Dhirubhai Ambani and Azim Premji, insisting they would never sell their shares of these companies. Many have created enormous wealth by following this time-tested practice.

The new reality, though, is that the life expectancy of companies is shrinking. The planet is stressed, its resources increasingly scarce. Technological disruptions are undermining even long-established industries. All of this has drastically changed how companies survive and grow.

Steven Denning, a leadership guru who studies companies’ survival, says that the life expectancy of Fortune 500 companies has plummeted from around 75 years in the 1950s to less than 15 years now.

The Fortune 500 companies—the largest firms in the world—traditionally had the financial and technological muscle to knock aside competitors in difficult times. But their longevity is no longer a given. The fate of smaller companies could be even worse, unless they are nimble enough and smart enough to adapt to the changing conditions.

3. Survival of Sensex Companies

The Sensitive Index of Bombay Stock Exchange, popularly known as Sensex, was first introduced to investors with the base year as 1979. The Sensex listings consist of the 30 largest, most popular, and most liquid shares quoted at BSE. The Index Committee continuously monitors the performance of these shares while scanning the market for new companies that satisfy its tough inclusion criteria. The number of companies in Sensex has always been limited to 30.

The 30 companies included in the first list of Sensex in 1979, with the weightage of the shares in the Index, in alphabetical order, are given below:

The highest weightage was for textiles with 23.7%, followed by materials at 13.8%, consumer goods at 13.2%, automobiles at 12%, and all other categories at 27.3%. In terms of number, the automobile sector had five companies, followed by materials at four and industrials, electrical, textiles, metals and consumer goods with three each.

Earlier, the full value of the company was used to calculate the Index (number of shares issued*market price of share). Since 2003, the Sensex is calculated based on a free float capitalisation method. Free float refers to shares available for trading in the regular course. This excludes shares held by promoters, insiders, and governments. Market experts consider free float method superior to the earlier method of calculation of index as this includes only shares actively available for trading in the market. This reflects market trends in a more broad-based manner as it excludes promoters’ holdings, which are concentrated in the hands of a few persons and are not available for trading in the ordinary course of business.

The Sensex as of 1^st June, 2024 has the following 30 shares, with weights:

Source: Aditya Birla Capital

Today the maximum weightage is for banking and finance, followed by software/technology, FMCG, and automobiles. In terms of number, banking and finance dominates with eight companies, followed by software/technology with five companies, and FMCG and automobiles with three each.

4. Sustainability of Companies

A Business Standard analysis based on data compiled from Capitaline indicates that there was practically no change in the list of companies included in the Sensex in the first 10 years since 1986, when the Sensex was first developed. In the next 10 years after that, there were 25 changes in the scrips included in the Sensex. Changes (replacements) were more frequent since the liberalisation of the economy initiated during the nineties and this trend continued even in the pandemic times of 2020-23.

The size and type of companies finding a place in the Sensex has changed substantially over time. In 1991, the largest company in the Index was 100 times the size of the smallest company in the Sensex; whereas in 2024, the ratio is down to only 14 times. Furthermore, while manufacturing accounted for 96% of the Index in 1991, it accounts for only 42% in 2024. The opposite is true in services which dominates the Sensex with almost 60% share in 2024, compared to a measly 4% share in 1991.³

The topic of the chapter is sustainability of companies and the above comparison is highly relevant.

1. Only seven companies appear in both lists:
   Hindustan Unilever (then HLL), ITC, L&T, M&M, RIL, Tata Steel and Tata Motors (then Telco).
2. There were no banks/finance companies in the first list, but the new list is dominated by them:
   Axis Bank, Bajaj Finance, HDFC Bank, ICICI Bank, IndusInd Bank, Kotak Bank, State Bank of India, and Bajaj Finserv.
3. Other dominating sectors in the latest list are:

• • Software/Telecom: Bharti Airtel, Infosys, TCS, HCL Tech, Tech Mahindra, and Wipro
  • Automobiles: Maruti, M&M, and Tata Motors.
  • FMCG: Hindustan Unilever, ITC, and Nestle.

4. Many of the dominant sectors of today (banking and finance, software and telecom) did not find a place in the original Sensex. The textiles sector dominated the original list but does not appear at all in the new one.
5. It is indeed hard to believe that companies like Satyam Computers, Jet Airways, Oriental Bank of Commerce, Reliance Capital, Unitech, MTNL, and JP Associates, some of which have disappeared or become irrelevant, were once part of the hallowed index.

5. Conclusion

The above discussion clearly shows that the sustainability of companies, even seeming blue chips, has limits. This trend is likely to persist in the years to come, as technology changes life in unprecedented ways. So when we talk about very long-term investment—the buy-it-and-forget-it strategy—we also have to reckon with the changing landscape. Our universities, banks, automobiles, and family structures may change unimaginably in the years to come. Long-term investors should understand this, reconcile themselves to the changing realities, and adapt quickly to stay ahead.

1. From Warren Buffett’s 1988 Letter to Shareholders, available at: https://www.berkshirehathaway.com/letters/1988.html
2. Buffett, Mary, and David Clark, The Tao of Warren Buffett: Warren Buffett’s Words of Wisdom Explained (London: Pocket Books, 2008), 141.
3. Buffett, Mary, and David Clark, The Tao of Warren Buffett: Warren Buffett’s Words of Wisdom Explained (London: Pocket Books, 2008), 141.