Accountable may be an exception. Not many books on capitalism and corporate governance have the potential to spread like a meme. O’Leary and Valdamanis have a rare talent for using memorable terms like the Two-Buffett Paradox, Fiduciary Absolutism, and Milgram-Nixon Syndrome. Buy it on Amazon and I might get a few cents for the referral. I bought it as audible but then had to have it in print too. The book‘s central message is empowering. We need a capitalist reformation centered around three proposals:
- Recharter corporations around a deeper purpose
- Hold corporations accountable to that purpose
- Align their purpose with their prosperity
We will examine that prescription further. As noted in a previous post, one of my favorite lines from the book is the following:
capitalism is nothing more than the sum of our individual choices. Our economy is no more moved by an invisible hand than a Ouija Board is moved by invisible spirits. It’s just us. (229)
Whereas Lukomnik and Hawley traced and destroy much of our current economic paradigm by noting incongruities in applied theory, O’Leary and Valdmanis are more concerned with habituation, ideology, and institutionalization. They are more concerned with what passes for everyday knowledge than theory.
Accountable: The Trajectory of History
History is traced from indentured servants of the Virginia and Massachusetts Bay companies to Gen Z searching Keyvalues.com, Idealist.org, and 80,000 Hours for work aligned with their values. Economic output skyrocketed. The ideology that private vices add up to public virtue is now seen as transparently short-term as fishing with dynamite.
Andrew Carnegie’s Gospel of Wealth focused on the second of his two-step approach. “First, make as much money as humanly possible by any means possible. Second, give it all away for the betterment of mankind.” Bill Gates’ “giving pledge” is a modern version, which was joined by Warren Buffett. Howard W. Buffett, his grandson, takes a less dichotomous approach to business and to life, yielding the Two Buffett Paradox.
The two Buffetts offer conflicting visions of the corporation. Buffett the elder is skeptical of corporate social responsibility, taking the traditional view that corporations should focus on maximizing shareholder value. Buffett the younger believes corporations should focus on creating social value. …
This is the Two-Buffet Paradox: business leaders are simultaneously asked to lead according to the conflicting worldviews of both Buffetts. For many corporations, the rational response is hypocrisy… It’s easier to fake good works than good returns.
A fiduciary relationship exists where one party is duty-bound to act with utmost good faith for the benefit of the other party. A fiduciary relationship is a recognized legal relationship such as guardian and ward, trustee and beneficiary, principal and agent, or attorney and client. Here our authors do point to a specific theory advanced by Michael C. Jensen and William H. Meckling. Jenson argued the single-valued objective function should be for the corporation’s managers to maximize financial value for shareholders.
Here’s the result of fiduciary absolutism: corporations see no purpose higher than profit, no duty greater than maximizing shareholder value. We have an economy that maximizes the one thing we shouldn’t care about – short-term stock price – at the expense of everything we should. … Fiduciary absolutism doesn’t maximize profit; it maximizes the profit motive. And it doesn’t maximize shareholder value; it maximizes today’s share price.
Workers are reduced to value extracting machines. Fiduciary absolutism ignores people in their everyday lives as stakeholders.
Over 137 million Americans own stock, directly or through an investment fund. Yes, the wealthiest 1% own 38%; the top t0% own 80% but typical shareholders have a diversified set of stocks in a retirement account worth $65,000 that they won’t withdraw for decades. The authors argue huge funds like BlackRock, Vanguard, and State Street, the fiduciaries for those retirement accounts, should focus on typical shareholders. Their fiduciary duty is to the people, the beneficial owners, not to the shares themselves
Readers are probably familiar with the laboratory experiment that made Stanely Milgram famous. Subjects rationalized their bad behavior while administering what they thought were powerful shocks. Someone with greater authority and knowledge expected them to do it. Milgram remembered Hitler. They were just doing their jobs.
Nixon’s defense during the Watergate scandal was that he had plausible deniability. The Milgram-Nixon Syndrome applied to companies is that managers and workers are just doing their jobs to maximize profits. Shareholders can claim not to be responsible for the harm caused by their companies since they were not giving direct orders. No one is accountable.
Companies strive to maximize short-term profit while faking good works. Funds measure performance by that same single objective, although their clients may have other shared interests. Meanwhile, the typical shareholder has plausible deniability and blames the government for not adequately regulating or not picking up the pieces.
Accountable: Corporate Social Responsibility (CSR)
For decades, there has been a growing movement to reduce the harm created by irresponsible companies. The Sustainability Accounting Standards Board (SASB) and other bodies developed reporting frameworks to help us focus on the most material issues. In many cases, companies can actually improve their financial performance by addressing at least low-hanging fruit to improve energy efficiency. Eliminating systemic racism and sexism can increase profits. Public reputations are often critical to sales.
A large portion of the book is taken up with a discussion of various efforts, including divestment. “Divestment does not reduce the amount of profit an endowment makes from oil and gas companies; it just changes when the endowment will receive that profit. It’s as if protestors are demanding ‘Don’t profit from oil in the future – profit from oil today.'” (132)
Two-thirds of Americans do not believe the financial system is benefiting the economy. Yet, more Americans trust CEOs than the government. Impact investing, while more promising, represents “well under 1 percent of global equity value.” The authors conclude that “all investing should be impact investing. We should build a financial system that grows corporations for the long term in ways that have a positive impact on society and the environment. Impacts should share center stage with profits.
Recharter Corporations Around a Deeper Purpose
Historically, governments got something beneficial to society in return for limited liability, legal personhood, and freely transferable shares. Companies should serve a broader purpose than “to do what is lawful in the State of Delaware.” The social purpose should be the same or at least align closely to the business. All actions should be aligned around a common goal. If that purpose reflects a social purpose it will be more inspiring to all stakeholders than profit maximization.
Health care companies should heal us. Education companies should teach us. Food companies should nourish us. Finance companies should enrich us. News companies should inform us as an engaged citizenry.
Purpose facilitates the ability of managers to focus on creating long-term value and reducing long-term risks. Rechartering is a more direct way to harness capitalism than traditional socially responsible investing or corporate add-ons.
One company in our portfolio reincorporated as a public benefit company (PBC). Veeva’s public benefit purpose is to
help make the industries it serves more productive and create high-quality employment opportunities. This public benefit purpose aligns with Veeva’s focus on helping life sciences companies in their mission to improve and extend life.
Given that so many investors and corporate managers are under the sway of fiduciary absolutism, rebuilding even companies with a deeper purpose will be difficult. I see another difficulty. Adopting a deeper purpose, especially as a PBC, may actually make it more difficult to hold companies accountable without going to court, where precedent is sparse.
For example, I filed a shareholder proposal at Veeva to allow special meetings. They countered with a similar proposal but required that only shareholders that have continuously held shares for one year or more can call a special meeting. Although I am sympathetic to the idea of giving priority to long-term shareholders, imagine trying to gather and submit all the documentation the company may require for that unusual provision. Stock holdings in most portfolios vary considerably from quarter to quarter as funds rebalance or take other actions. This is a very unusual provision that companies have recently been adopting to make themselves look good on the surface. Unfortunately, many proxy voting policies do not dig into the weeds.
Hold Corporations Accountable to that Purpose
Companies must set targets against a key set of metrics that go beyond financial statements. Preferably, they do so in public, since those are more difficult to ignore. “Etsy issues an integrated report, so that all the information is shared with all of the investors.” It even issued an auditor-reviewed SASB report in its SEC 10-K.
Boards must take responsibility to ensure progress toward purpose is reported at least as consistently as short-term profit. Business models should align purpose and prosperity with all their stakeholders.
Align Their Purpose with Their Prosperity
Business models need to be rebuilt to serve a company’s purpose. One example is Kaiser Permanente. As an insurer and provider, customers are paying the company to keep them well. Preventative care keeps patients out of the emergency room. That is good for all Kaiser’s stakeholders.
Other examples are Vemo Education and Lamda schools. By taking a cut of student’s pay after graduation, they need degrees to be meaningful and for students to be able to find good jobs.
In the above examples, everyone wins. However, companies will face many hard choices where one stakeholder group wins while another loses. Reflecting on his fight with shareholders when Amazon offered to buy Whole Foods, founder John Mackey reportedly said: “Boy oh boy, did I wish we were a B Corp.”
Accountable: Citizen Capitalism
O’Leary and Valdamanis see repurposing capitalism as the $23 trillion solution. That is what the Fortune 500 is collectively worth and it far outweighs the $428 billion Americans give to charity each year. “Repurposing our corporations unleashes the power of the private sector to attack our biggest social and environmental challenges.
“We cannot outsource the moral responsibility of our technologies to third parties,” employees wrote to the CEO of Alphabet. Employee protests have occurred at many large companies, including, Microsoft, Amazon, and Palantir.
Remember, that typical investor has $65,000 in equities. The most important economic transaction most Americans make is where and how they work. Is it really the mission-oriented work they search for on Keyvalues.com, Idealist.org, and 80,000 Hours? “Workers with the luxury to chose their job can use their voice to push their values,” write the authors: “nearly three-quarters of US employees believe they can make a difference by speaking out against controversial issues at work, and nearly half of millennials claim they already have. In well-functioning organizations, these sorts of discussions can rise up to the top and are often addressed.”
I am on this side of the book, rooting for the authors but I feel a little less sanguine. Where is the worker’s actual voice? The three proposals do little to alter legal rights. Investors tell surveys they will vote. When they try to do so, they find it is not as easy as they thought. See Proxy Season 2021 Investor Sentiment Study: Action Needed.
People want to invest ‘responsibly.’ Less than half of baby boomers say ESG factors are important but 65% of GenX and 87% of Millennials say they care. $12 trillion is already invested in the US in funds that aim to produce ESG benefits.
Curious about the funds you invest in? Check out their MSCI rating. Find funds that invest your values at As You Sow. Invest with JUST Capital, which picks the top half of the Russell 1000 based on ESG performance and industry weight.
The authors remind readers to also consider how their banks and insurance companies invest, as well as organizations they contribute to, such as university endowments.
Engagement and proxy voting can be more effective than screening stocks but the authors fail to emphasize that point in this section. Yes, It is important to invest in funds aligned with your values. However, they should also vote your values. If you work with a financial advisor, you may want them to check out As You Vote. If you vote your own shares, research how some funds have voted or use the same tool to find funds that vote your values.
One new fund for citizen savers is Engine No. 1’s Transform 500 ETF (ticker: VOTE). The Managing Director is none other than Michael O’Leary. There is not much up on their website with regard to voting. That seems odd with a ticker symbol VOTE. However, Mr. O’Leary assures me they will be more favorably disposed to vote for ESG shareholder proposals than the Big 3 have historically done.
Climate change and other systemic issues like sexism and racism cannot be fully addressed as consumers. We need the help of the government. Sign up with Leadership Now to support bipartisan efforts to end gerrymandering and institute ranked-choice voting.
Research finds that we often vote in our country’s long-term interest, instead of our own pocketbook.
Fiduciary absolutism is an adversarial mindset. It’s about shareholders against stakeholders, government against corporations, private vice against public virtue. It divides us against ourselves as a country, as corporations, as institutions, and as individuals.
Citizen capitalism is a cooperative mindset. It’s about working together on the common project of our economy for the common good of our society. It’s about corporations that serve a deeper purpose and, ultimately, about citizens who live their values.
Accountable: Restoring Trust With Accountability
In a concluding section, the authors discuss the erosion of trust. The B Team is a coalition of business leaders aimed at restoring trust. They believe the “purpose of business is to drive inclusive social, environmental and economic benefit.” “Leadership that only values shareholders or financial performance must be replaced by principled leadership that holds itself to a higher standard and to all stakeholders.”
Revising charters to commit corporations to a deeper purpose and holding them accountable to that purpose is key for the authors. They give, as an example, how King John of England signed the Magna Carta to unify his kingdom. “Sometimes our shackles set us free.” Maybe, but the same day King John pledged to uphold Magna Carta, June 20, 1215, he also asked Pope Innocent III to annul it. King John was not shackling his own power for some higher good. The barons were forcing his hand.
Accountable envisions repurposing corporations, holding them accountable, and measuring progress. That is a bold vision, but can that be done at a significant portion of our largest companies without transferring power? Will business leaders just learn from the B Team? Will they shackle themselves to higher measurable principles that will benefit all the company’s stakeholders?
As a sociologist of knowledge, I have long contemplated questions of objectivity and legitimacy. Karl Mannheim, the field’s seminal scholar, traced the connection between interests, ideas espoused, and what is ‘known.’ Mannheim theorized people with different perspectives may be unable to agree on absolute ‘truth’ but could strive for a new level of objectivity he called ‘relationism,’ a realm of knowledge constantly striving to enlarge itself. Who would be in charge of developing this new level of objectivity? The ‘unattached intelligentsia.’ People like professor Mannheim, of course.
Similarly, Thomas S. Kuhn, a scientist turned historian, places his faith in the scientific community. “What better criterion that the decision of the scientific group could there be?” I found the same theories of the priesthood in other fields of knowledge as well.
We all inhabit something of a bubble, based on reified conceptions of reality. For example, O’Leary and Valmanis discuss the fact that four out of five Americans live from paycheck to paycheck. Okay, I ‘knew’ that to be a ‘fact.’ That population spends $50 million a year on overdraft fees, payday loans, and interest in pawnshops. While the specific amount was new to me, it was not surprising. For that population, “one in eight Netflix transactions leads to an overdraft fee. That means for every $100 Netflix makes off this population, banks make $35 in overdraft fees.” Yikes, that blows my mind. I live in a bubble.
Accountable: My Two Cents
I embrace the three recommendations. Last year and early this year, I filed 9 proposals asking companies whose CEOs had signed the Business Roundtable Statement on the Purpose of a Corporation to reincorporate as PBCs. That would have required them to adopt a deeper purpose and would have legally bound them to live up to their public commitment to all their stakeholders.
However, the BRT’s statement was a PR stunt. It coincided with pressure on the SEC to strip shareholders and proxy advisors of substantial powers. All three actions gave CEOs more flexibility in running their companies. Corporate boards were not informed of the change in corporate priorities because there was no change in actual strategy.
My proposals requesting conversion to a PBC were not embraced by investors. Maybe a better first step is just to adopt a deeper purpose. The second step and third steps are more problematic. Business models should align purpose and prosperity with all their stakeholders.
How can we accomplish that when stakeholders, with the exception of shareholders, have no legal power?
In my ideal world, corporations would all be PBCs. Even that would not be enough because it moves issue resolution to the courts. Voting is a more efficient method of dispute resolution. Ideally, each stakeholder would have representation on the board. That actually may be practical, or nearly so, at locally owned and operated companies like newspapers and food cooperatives. However, there are limits as to how involved. I am more likely to want to be involved in deciding what products my grocer carries than how my paperclips are made.
Every company has workers. Giving them more say has been shown to increase productivity. It should be a win/win situation. Others argue similarly. For example, in his comprehensive Rethinking Securities Law, Marc I. Steinberg, a preeminent authority, advises the following:
A minimum of one board position should be allocated for employee representation. This measure would effectuate greater board diversity, bring different perspectives to the board, and likely improve employee morale. Indeed, many of the OECD countries mandate worker representation on corporate boards of publicly-held companies. This approach recognizes the significant contributions that an employee representative can make to enhance board deliberations and decisions. Further, as one source has posited, ‘there is a conviction that in a democratic society, people in power should be accountable to those over whom power is exercised [encompassing] every social institution, including the corporation.’ (p 149)
This year I filed 8 shareholder proposals aimed at putting workers into the initial pool of board candidates using a Rooney type rule. They fared better than proposals seeking conversion to a PBC. However, they were often even not endorsed by public pension funds, which are heavily influenced by unionized employees. My next strategy to win a voice for employees may be to lift the typical group limit of 20 for proxy access. Employees should be able to combine their shares with those of other investors to run candidates agreeable to both employees and investors. They cannot do that now with the 20 member limit to achieve 3% held for 3 years. We need to figure out a way for workers to have a voice. That voice should come through votes, not by going to court to enforce corporate purpose.