Morality and Reality

Two recent articles about pollution and global warming triggered a thought which had been a latent reflection arising from reading Cicero’s writing on duties (De Officis) where he seems to be descriptive about morality and ethics rather than prescriptive, though it is clear he advises choosing some behaviors and values over others.

Nevertheless, one of his notable assertions is that the honestum and the utile in reality are interdependent. What is virtuous and authentically good when shown in public leads to prudent and efficacious consequences and what is of real utility in life tends to have an affinity with virtue and goodness.

My college education largely posed a conflict between morality – deontology, like Kant’s categorical imperative – and reality – utilitarian calculation of benefits and enjoyments, following Bentham and John Stuart Mill. We were told to take sides – either the moral and impractical or the practical, though it might be immoral on occasion.

But if reality is part of morality and ethics, then the decision as to what to do is either more simple – just follow the facts – or more complicated – figure out what the facts are when much is poorly known or unknown.

Since it is said that we live in a “post-truth” age, taking reality and facts as our guideposts seems foolish and a throwback to past imperfections.

One article I just read described how certain California communities and firefighters are preparing for the coming dry months and forest fires. They have moved beyond a Greta Thunberg moment when looming catastrophe overwhelms judgment and, immobilized, we resort to emotion and denunciation. They are rather learning from reality how these fires start and spread. They are clearing dry brush and grass from the forest understory; planting rows of trees as firebreaks where fierce winds will blow; and telling homeowners not to put flammable plantings near houses.

I consider their behavior to be ethical and admirable.

Next fall, we will learn how successful these intentional efforts will have been.

In another commentary, the author, John Tierney, broke ranks intellectually with many who see the moral course of action as prohibiting the use of plastic bags. His sense of reality is that plastic bags are not the problem many say they are and, in fact, have advantages for sanitation and sustainability.

He asserts as fact – as a reality check – that most of the plastic in the Pacific Ocean does not come from more wealthy consumers, but from ships and from Asia “as mismanaged waste.”

His take on reality leads him to make certain policy recommendations. Those recommendations would seem to deserve the status of being ethical or moral, as they are designed to reduce harm.

One of the ethical principles we proposed for NGOs and other civil society organizations is to take care – to be guided by reality when trying to be moral. The principle of care is:

“A Civil Society Institution (CSI) will recognize that its policies and activities are a legitimate subject of public comment and analysis. It is, therefore, willing to engage in reasoned discourse regarding its mission and objectives, values, principles, governance, actions and means used to achieve its objectives. When engaging in advocacy, a CSI will always, in good faith, present accurate facts and truthful information. When planning its actions or executing its policies, a CSI will demonstrate enlightened care and concern for those whose interests will be affected by its contemplated actions. In case a CSI inflicts damage upon a government, international organization, corporation, or other party, it will be accountable for its actions.”

Valuation of Intangibles

Our recent round tables exploring modernization of balance sheets and valuation methodology have produced consensus that intangibles can be valuable assets of a company.

In support of this conclusion, I just read two reports in the Wall Street Journal.

One was that the stock of Morgan Stanley, Bank of America and Citigroup trade at levels still below their market valuation in 2007, before the 2008 collapse of credit markets.

Badly wounded by the 2008 crisis, Morgan Stanley and Bank of America switched business models to lessen their dependency on trading and investment banking revenue and bring in wealth management clients. Those changes in their business model – an intangible aspect of governance – did lead to increases in their stock prices. An analyst’s comment was that “some people” still put a discount on their valuation, given their line of business.

Another comment by John D. Stoll pointed out that the valuation of Peloton, a maker of exercise bikes, depended on its being able to bill itself as a “tech” company because it includes an internet feature on its stationary bikes. The company – like Uber and WeWork – sought a tech aspect to its goods which would differentiate it from the competition when “tech” companies are given higher multiples on earnings by market speculators. Thus, the intellectual property, along with access to its creators and maintainers of a program for internet access to others also using the bikes has important value for Peloton.

The CRT Principles and Reality

I have found it very helpful and persuasive to remark on when reality aligns with the guidance or perhaps even teachings implicit in our Principles for Business. My justification for doing so is that such coincidence is not by chance, but show the principles congruent with reality.

There are three recent stories which provide such congruence.

First, John Stumpf, former Chairman and CEO of Wells Fargo, was banned from working in the banking industry and fined $17.5 million by the American Comptroller of the Currency for his role in creating fake accounts a few years ago. Stumpf agreed to the ban and payment of the fine in a settlement with the Comptroller.

The alignment of reality with our principles is that not taking reasonable care of stakeholders and acting without integrity lead to losses. To enhance profitability, it is necessary to manage stakeholder relationships with due care, follow the letter of the law and then go beyond that to establish trust.

Secondly, Boeing just incurred its first annual loss since 1997. In 2018, the company reported profits of $10.46 billion. In 2019, the company reported a loss of $636 million. That drop in profits was a big hit to its shareholders. Boeing also just reported that the costs associated with its 737 Max 8 aircraft have passed $19 billion, another hit to shareholder’s equity. The cause of these losses was failure to design and build a sufficiently safe 737 Max 8 aircraft. This constituted a failure to provide customers and their customers with a quality product. As a consequence, Boeing lost money. Profit followed on customer experience.

Thirdly, Goldman Sachs has given its shareholders an unprecedented look inside the company to reveal its plan for making profits going forward. For the first time ever, the company set financial targets for itself and previewed new business models to enhance profitability. The bank will offer new consumer products like checking accounts and financial management, as does its competitors JPMorgan Chase and Bank of America. Since the collapse of credit markets in 2008, Goldman’s stock has not been as highly valued as the stocks of those competitors.

In taking care of its shareholders, Goldman proposes to satisfy new customers. In its repositioning, Goldman is seeking to better manage its relationship with two stakeholder constituencies – customers who might or might not buy its services and investors who might or might not buy its shares.

The relevant principle is:

PRINCIPLE 1 – RESPECT STAKEHOLDERS BEYOND SHAREHOLDERS

  • A responsible business acknowledges its duty to contribute value to society through the wealth and employment it creates and the products and services it provides to consumers.
  • A responsible business maintains its economic health and viability not just for shareholders, but also for other stakeholders.
  • A responsible business respects the interests of and acts with honesty and fairness towards its customers, employees, suppliers, competitors and the broader community.

Brexit

Today is Brexit. The withdrawal of the United Kingdom from the European Union is historic. One way of thinking about its implications is to revert to history and culture: the Anglo-Saxons were never meant to be part of the continent. Over the centuries, they built on the fusion of Norman and Saxon cultures something unique, shaped by a unique legal system – the common law – and later by a Protestant sense of ministry – capitalism in the economy and constitutionalism in politics and governance.

Shakespeare famously put it thus: “This royal throne of kings, this sceptered isle, This earth of majesty, this seat of Mars, This other Eden, demi-paradise, This fortress built by Nature for herself Against infection and the hand of war, This happy breed of men, this little world, This precious stone set in the silver sea, Which serves it in the office of a wall Or as a moat defensive to a house, Against the envy of less happier lands,–This blessed plot, this earth, this realm, this England.”

The motivation for Brexit expressed by its proponents is a kind of ethnic exceptionalism – the economic advantages of union were not enough to offset resentment at subordination to a micro-managing, regulatory authority in Brussels. Napoleonic civil law procedures and bureaucratic norms did not wear well with common law values and traditions.

The Caux Round Table for Moral Capitalism’s Principles for Business and Principles for Government give value to internationalism and participation in global markets in order to provide value for customers, employees, investors and citizens. We would, therefore, advise the government of Boris Johnson to implement such principles from its new position of full sovereign autonomy.

Stepping back and looking at the big picture, Brexit should cause us to think about large dynamics in human civilization – what are the inter-dependencies among the economy, culture, politics and social structure? The complexities of these inter-relationships have attracted great minds – Adam Smith, David Ricardo, John Stuart Mill, Karl Marx, Emile Durkheim, Max Weber, Antonio Gramsci, Keynes, Hayek and countless contemporary historians, sociologists, anthropologists, economists and political scientists.

What we can say with certainty is that each sector influences the others. A declining economy has political, social and cultural effects. A dysfunctional culture will lead to corrupt politics and lower economic growth. Social conflict will detract from just government and economic well-being. Totalitarian government will adversely impact culture and constrain economic innovation and efficiency.

The United Kingdom going forward will need to carefully balance its exceptional culture and political traditions with sound economic policy as part of a global civilization.

Duty of Care: A Restriction on Our Consumer Freedoms

In response to my recent email on who should stop whom from deciding as a consumer what to buy and use, Don Samuels sent me a very thoughtful reply saying:

“I remember in the late 70s, sitting in smoke-filled rooms for company meetings, where our CEO chomped on a huge, smoldering cigar and leaders at various levels puffed on a dozen cigarettes, in the middle of winter, with all windows shut tight. I remember gasping for air and struggling to speak without a hitch. The health considerations of second-hand smoke were still up for debate between the scientific research and the tobacco industry, but non-smokers like me were becoming convinced that we were paying a price for our smoking-co-workers’ freedom.”

His point about concern for others as a restriction on our liberties is a very sound one.

The old adage is: my right to swing my fist ends where your nose begins.

In the 1883 English case of Heaven v. Pender, Master of the Rolls Brett ruled that: “Whenever one person is by circumstances placed in such a position with regard to another… whereby he may cause danger of injury… a duty arises to use ordinary care and skill to avoid such danger.”

I was reminded of this source of personal duty to be careful of others by the recent outbreak of coronavirus in China. It seems most likely that the virus began to infect humans in a wet market for wild animals in China. Thus, personal decisions to buy and sell in a free market imposed dangers on others and have lead to many restrictions on personal freedoms in the Wuhan region.

The police powers of the state have long been accepted as reaching far enough to restrain our personal choices in order to decrease risks of harm to the health of others.

When Consumers Make “Stupid” Decisions, Who Should Stop Them?

One hundred years ago this past January 17, Americans tried to elevate the moral quality of all citizens with the passage of a criminal law. They prohibited, on pain of punishment, the production and sale of alcohol. The social experiment lasted 13 years during which time much crime was committed through the illegal production and drinking of alcohol.

Alcohol was deemed to be a good without merit to the extent that individual judgment was not deemed sufficiently potent to cause consumers to give up drinking beer, wine and spirits and so force producers out of business for lack of customers. The state was given the responsibility of making such decisions for individuals.

The law was draconian and totalitarian, though passed with majority support. The ideology, more a theology, put forth to justify such an abridgement of individual freedom believed that God would bless and protect only a community of righteous people. Since the drinking of alcohol was deemed unrighteous, a nation of drinkers would not receive God’s blessings. To save American, therefore, in God’s eyes, people had to be made to be righteous.

The effort to impose morality by law is commonplace among our species. Most criminal laws are justified by a moral norm, say, thou shalt not kill. In Imperial China over the centuries, filial impiety was illegal. Under legalized Sharia rules in some countries, people are punished for, say, blasphemy. Chairman Mao made the unrighteousness of wrong thinking an offense leading to re-education under state supervision. China today uses coercion to re-educate Uighur Turks in Xinjiang province to “uplift” their beliefs and habits in line with government preferences.

But the human spirit is such that laws can’t instill morality. People are contumacious, which is to say that they, at times, choose immorality or consumption of un-meritorious goods and services over the socially proposed “right” way to live.

Today in the U.S., old laws against same-sex marriage, sodomy and use of marijuana have been repealed. The people’s will changes and so the law changes accordingly.

The new movement associated with Greta Thunberg on climate change or to impose a Green New Deal on the greedy, selfish and rich has overtones to me of using the state to impose morality. I doubt the efficacy of any such attempt.

Which leaves us with the problem of just how to minimize bad choices and encourage wisdom, prudence and mercy among our kind.

Capitalism in Royal Robes?

A recent commentary by Bagehot in the current Economist put a twist on post-modern capitalism. The comment was on “Megxit” as an expression of the current geist.

Bagehot wrote: “The Sussexes are doing something new. They are embracing capitalism in its rawest, most modern form: global rather than national, virtual rather than solid, driven by its ineluctable logic, constantly to produce new fads and fashions.”

And then noting that: “This type of capitalism is the inverse of feudalism. In feudal society, you are bound to your followers by mutual bonds of obligation. In 21st century capitalism, you accommodate followers in order to monetize them.”

Commoditizing royalty is just an extension of middle class consumerism and fits with Thorstein Veblen’s theory of conspicuous consumption, where what you buy is what you are. Marx’s disdain for the cash nexus which corrodes all moral relationships still seems apt.

New Wisdom is on the March!

A few days ago, Larry Fink, Founder, Chairman and CEO of BlackRock, sent his 2020 letter to corporate CEOs. Once again, his understanding of what success in modern capitalism requires aligns with our Principles for Business. His prescriptions also align with the recent statements on stakeholder capitalism from the Business Roundtable and World Economic Forum.

Mr. Fink said the goal of his management of funds entrusted to his company is to achieve “long term value.”

This year, he focused his concern on how climate change will impact the costs of capitalism and the valuation of firms. He wrote:

“Climate change has become a defining factor in companies’ long-term prospects. Implications of physical climate risk is deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth.

Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?”

“From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs and demand across the entire economy.”

“As we approach a period of significant capital reallocation, companies have a responsibility – and an economic imperative – to give shareholders a clear picture of their preparedness.”

“These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”

“Our investment conviction is that sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors.”

“In a letter to our clients today, BlackRock announced a number of initiatives to place sustainability at the center of our investment approach, including: making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; launching new investment products that screen fossil fuels; and strengthening our commitment to sustainability and transparency in our investment stewardship activities.”

“The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society. As I have written in past letters, a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients – these companies may maximize returns in the short-term. But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value. By contrast, a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society. Ultimately, purpose is the engine of long-term profitability.”

“Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.”

We are pleased to have Larry Fink’s analysis so supportive of our work.

A Wise Paper on a Japanese Approach to Moral Capitalism

In our recent San Francisco round table discussion on valuation, George Hara of Japan made a very telling presentation of what he calls “public interest” capitalism as a more sustainable and productive way of creating wealth for society. His presentation can be found here.

Mr. Hara’s approach to stakeholders is consistent with the Japanese ethical principle of Kyosei, which contributed to the development of our Principles for Business and so is in complete harmony with our advocacy of a moral capitalism.