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Saturday 20 April 2019

tortoise thinkin • editor’s notes

Responsible capitalism

Recent Tortoise ThinkIns have underlined the message that business is failing too many people in society

By James Harding

Over the past 10 days, Tortoise has hosted a number of ThinkIns around the subject of responsible capitalism. We were in Washington DC on the eve of the World Bank/IMF Spring meetings, then back in our newsroom in London. Here’s the readout:

“The system is producing self-reinforcing spirals up for the haves and down for the have-nots, which are leading to harmful excesses at the top and harmful deprivations at the bottom.”

Ray Dalio, CEO of Bridgewater Associates, April 2019


“Middle-class incomes have been stagnant for years. Income inequality has gotten worse. Forty percent of American workers earn less than $15 an hour, and about 5 per cent of full-time American workers earn the minimum wage or less, which is certainly not a living wage. In addition, 40 per cent of Americans don’t have $400 to deal with unexpected expenses, such as medical bills or car repairs. More than 28 million Americans don’t have medical insurance at all … No one can claim that the promise of equal opportunity is being offered to all Americans through our education systems, nor are those who have run afoul of our justice system getting the second chance that many of them deserve … Simply put, the social needs of far too many of our citizens are not being met.”

Jamie Dimon, CEO of JP Morgan Chase, Letter to Shareholders, April 2019


“Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them.”

Larry Fink’s annual letter to CEOs, January 2019

The critics of capitalism are, increasingly, to be found not just on the streets but in the corner offices. This month, Ray Dalio, the world’s most successful hedge fund manager, and Jamie Dimon, the chief executive of America’s biggest bank, have voiced their concerns that capitalism is failing too many people in society. Last year, Larry Fink, the boss of the largest fund manager in the world, declared that it was time to invest in companies not just delivering financial results but with a social purpose, too.

From Boeing’s responsibility for two air crashes to the Morandi bridge disaster in Genoa to the Vale dam collapse in Brazil, there is growing concern that shareholder reward is trumping the public interest – and with deadly consequences.

Capitalism’s apparent crisis of conscience has revived the debate about the purpose of a company and the role of the shareholder.

Milton Friedman’s often quoted definition of the purpose of business – “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays in the rules of the game, which is to say, engages in open and free competition, without deception or fraud” – is often misrepresented. Part of his argument was that we shouldn’t entrust public policy to plutocrats: business people are not elected nor answerable to the public.

“Customers are number one; employees are number two and shareholders are number three.”

Jack Ma, CEO of Alibaba

To be sure, some corporate leaders can change the culture of their companies and answer consumer demands for more responsible practices. There are businesses that are genuinely prioritising environmental impact or employee opportunity. More and more leaders in the business world are quoting John Kay: “Profit is no more the purpose of business than breathing is the purpose of life.” But, that said, there are companies who do little and talk a lot about it. And even effective corporate social responsibility and impact investing is good, but not sufficient.

“In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.”

Warren Buffett, CEO of Berkshire Hathaway

The ThinkIns have left four areas to consider:

  • Tax: the pendulum is swinging back on corporation tax, not least because cuts in corporation tax may mean greater corporate philanthropy, but the amount companies then give is a fraction of what they used to pay into public services through tax.
  • Responsibility: there are plenty of rules and regulations that are too loosely enforced; whether it is regulators, board members, employees or executives, the restoration of public trust in capitalism requires muscular enforcement of stakeholder interests by those around the table.
  • Ownership: the rise of activist shareholders has backfired on shareholders more generally. It has focused minds on the short-termism of financial investors and, at the same time, the passivity of index funds. In the City of London, there’s more and more vocal criticism coming from the likes of Barclays and Terry Smith of the activists’ formula of cost-cutting and constrained investment damaging the longer-term health of the business and the economy.
  • Regulation: businesses are not going to act in the public interest unless required to, which leaves the burden of responsibility for the system with regulators and legislators. The licence to operate is granted by the state and, from finance to tech, government can more closely set the terms.

Whoever the candidates are in the US in 2020, and as and when a general election is called, capitalism and its discontents will be at the heart of the contest.

Screw the shareholders (12:31)