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    Economist-24 August-2019

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    Economist-24 August-2019

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    Economist-24 August-2019

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    Who should run Italy now? China bullies Cathay Pacific How recessions begin I XCOS ICO DELI cic wovesendnocearpaca ‘AUGUST 2¢TH-20TH 2019 What are companies for? Big business, shareholders and society SVONATIVA 62199 HN trem sceres! El a I’m froma company, and I’m here to help ‘The idea that companies with a sense of purpose could tackle social injustice, climate change and inequality is sweeping through parts of the business world ‘TA RECENT dinner in London, a chief executive promised that his airline ‘would soon offer electric fights, A credit provider enthused about increasing finan- ‘ial inclusion in the developing world; a luxury-car executive promised to replace the leather in her vehicles’ opulent interi- ors with pineapple matting and mush- room-based faux leather. They seemed to think such things made the companies they run sound more attractive. They prob ably elt that they were doing good, Businesspeople, being people, like to {eel they are doing good, Until the financial crisis, though, for a generation or so most had been happy to think that they did good simply by doing well. They subscribed to the view that treating their shareholders’ need for profit as paramount represented ‘their highest purpose. Economists, busi- ress gurus and blue-chip czos like those ‘who make up America’s Business Round- table confirmed them in their view. In a free marker, pursuing shareholder value ‘would inandofitseifdeliverthe best goods and services to the public, optimise em- ployment and create the most wealth— ‘wealth which could then be put toall sorts fof good uses. Iris a view of the world at the same time bracing in its simple rigour and comforting inthe lack of social burdens it places on corporate backs. Itisalso one which has faced increasing pressure over the past decade. Environ- mental, social and governance (es) crite- tla have come to play a role in more and more decisions about how to allocate fi- nancial investment, The assets managed ‘under such criteria in Europe, America, Canada, Japan, Australia and New Zealand rose from §22.911n in 2016 to $30.7tmatthe start of 2038, according to the Global Sus- tainable Investment alliance. According to Colin Mayer at the University of Oxford, whose recent book “Prosperity” isanattack onthe conceptof shareholder primacy, #86 has shot yet further up investors’ agendas since, Some of the world’s biggest asset ‘managers, such as BlackRock, an indexa tion giant, are strongly in favour of this The turn in events. The firm's boss, Larry Fink, hhas repeatedly backed the notion that cor- porations should pursue a purpose as well as, or beyond, simple profits, ‘The discontent does not end with inves- tors. Bright young workers ofthe sort busi- nesses most desire expect to work in a place that reflects their values much more than their parents’ generation di. And the publicat large sees a world with daunting problems—most notably climate change and economic inequality—that govern- ments arent solving. It also sees compa- ries which it holds partially responsible for these dite strats using thelr ever great- cer profits (see chart 1on next page) to fun- nel cash to stockholders, rather than in- vesting them in ways that make everyone's life beter. The lollygaggers should be pull- ingtheir weight I they won't do so willingly, perhaps they should be forced. Senator Elizabeth ‘Warren, one of the leading contenders for the Democtatic presidential nomination, says thatbeing big company isa privilege, notaright. She wants big American compa niles to apply for charters that would oblige them to look after stakeholders, especially local ones. Those who let the side down ‘would have theircharters revoked. Ms War- ren talks of herselfas a defender of capital- ‘sm; many see her plans as bordering on the socialist, But that may not matter ‘Amongyoung Americans, socialism sever less of boo word (seechatt on next page). »» ‘The Economist August 2jth 2019, > Inthe face of this rising tide, the Busi- ness Roundtable has either seen the light or caved in, depending on whom you ask. On August toth the great and good of ceo- land announced a change of heart about ‘what public companies are for. They now believe that firms should indeed serve stakeholders as wellas shareholders. They should offer good value to customers; sup- port their workers with training: be inclu- sivein matters ofgenderand race; deal fait- ly and ethically with all their suppliers support the communities in which they work and protecttheenvironment. ‘There was an immediate backlash, The Council of institutional Investors, 2 non- profit group of asset managers, swiftly de- ‘ounced it, others ralled against itas“ap- easement’ of politicians like Ms Warren, and a decisive step towards the death of capitalism. This might seem extreme: at firstglance, the roundtable's ecommenda- tions borderon theanodyne.Butifthepur- pose ofthe company slips its shareholder- ‘valuemoorings,who knows whereit might endup? Whose companys itanyway? ‘The most quoted assertion of the primacy of shareholder value comes from Milton Friedman, an economist. In 1962 he wrote that “there is one and only one social re- sponsibility of business-to use its re sources and engage in activities designed to increase its profits so long.as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud: ‘Ata time when governments expected companies to be patriotic and communi ties sawsomeofthemas vital resources his forthrightness shocked many. But though subsequently traduced as extreme, Fried+ ‘man’s position had fair amountofgivein it, He called on companies not just to stay ‘within the aw butto honour society's more ‘general ethical standards, oo; he did not equate shareholder interests with short= term profitability, Butthat wasnothow felt, heway that a They've got the money United stats gotl post txcorporte profits ‘As2501 GOP a0 70 ws aw we — Not such a dirty word United States, respondents" who havea veryor somewhat poste impression ot. rage Socialism Gapitalism onuan anane a 32 00 0 sot 6 6 ee ‘business schools and managementconsul- tants in America, Britain and continental ‘Burope proselytised for shareholder value in the 1980s and 1990s offered little by way. ‘of nuance, The biggest corporate-gover- nance concern was the agency problem how toalign managers with theinterests of the value-seeking shareholders. “Any chief ‘executive who went against [that] ortho- doxy was regarded as soft and told to get back on the pitch” recalls Rick Haythorn- thwaite, thechairman of Mastercard Such hereties can now hold their heads ‘up again, This is not simply because of the political climate or the public mood. Some economists argue that Friedman's position belongs to a simpler time. Oliver Hart of Harvard University and Luigi Zingales of the University of chicago see his argument as principally motivated by a form of the ‘agency problem; he didn't like managers being charitable with shareholders’ mon- ey, even ifitwas ostensiblyin the firm's in- terests, The shareholders could, afterall, lavish their profits on such good causes themselves, ‘True, pethaps, back then, say Mr Hart and Mr Zingales. Now, they argue, the ex- ternalities that businesses impose on soct- ety are sometimes impossible for share- hholders to mitigate as individuals, particulary ifthe politicaland egal system is a barrier to change. Individual share- holders cannot do much inlaw to prohibit ‘Weapons in Ametica, forexample. But they canexercise theirrightsas owners to influ- fence the firms that sell guns, Thus compa- nies can have purposes-but owners must provide them, not managers. Others argue that the idea of share- holder value, while still central, needs some modifications, Raghuram Rajan, an economistat the University of Chicago and former head of India's central bank, advo: cates taking note of the non-financial in- vestments workers and suppliersmakeina ‘company witha new measure of “firm val- ue" which explicitly takes note of a speci- fied set of such stakeholdings, Some companies have taken on board the idea that their increased power puts new demands on. them. Satya Nadella, Briefing Corporate purpose 17 chief executive of microsoft, says that a sense of purpose—together with a mission that is “aligned with what the world needs'—~isa powerful way forhis company toeampublictrust. And because trust mat- tefs, this puts purposeat the core of Micro- softs business model, “As technology be- ‘comes so pervasive in ourlives and society, we as platform companies have more re- sponsibility, whether is ethies around ar- tifcial intelligence, cyber-security or pri ‘acy,’ hesays, "Thereisa moral obligation. Firms in other industries are having similar thoughts. In each business, says Mr Haythomnthwaite of MasterCard, a wave of

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