Is Good Character Important?

The great debate among ethicists is between Kantians – Deontology – and Utilitarians – interest.

Pure morality as an abstract form of thought true at all times and all places is juxtaposed against materialism and self-seeking in this world so fallen from a religious and idealistic perspective.

Business ethics and corporate social responsibility have been stuck in the quagmire of irresolvable irreconcilability between ethics and profit-seeking. How could they ever be integrated?

If one backs away from this confrontation of the intangible and the tangible, there is the approach of praxis – what works? Can a case be made that ethics “works” which does not slide all the way down into self-delusion and expedient rationalization of why what I want is the “right” thing to do?

Looking at what will work raises a perspective of science – say, laws of motion or chemistry which lead from here to there on a predictable basis.

Individual character – the ethos which drives our preferences and decision-making – might work as such a natural law. If I know your character, I can reasonably accurately predict your behaviors.

If you work for me and I know your character, I will have a sound basis for trusting or not trusting you to do what the firm wants and needs and not to get us all in trouble through your indiscretions and malfeasance.

Heraclitus said that character is fate or destiny. In the Greek, his point is more active: character is our daimon – our driving spirit, setting our course in life.

If we focus on character and if all people are helped to have good character, then the output of our social endeavors will be constructive.

The way to moral capitalism, therefore, might be through character education.

Oh, that’s just what Mencius, Aristotle, Cicero, Marcus Aurelius and Adam Smith recommended for living the good life.

PG&E Says Its Equipment Was Probable ‘Ignition Point’ of Camp Fire (Wall Street Journal)

PG&E Says Its Equipment Was Probable ‘Ignition Point’ of Camp Fire (Wall Street Journal)

Culture costs company big money. Pacific Gas and Electric (PG&E) says probably its equipment sparked the deadliest wildfire in California history.

The company is taking a $11.5 billion charge against earnings as a result. The company has warned it may not survive as a going concern. Credit agencies have stripped the company of its investment-grade rating.

But for five years the PG&E delayed a safety overhaul of the century-old high voltage line that is a prime suspect in the huge Camp fire which killed 85 people and destroyed the town of Paradise last November.

The delay reflected decisions consistent with company leadership priorities. In other words, delay flowed from core company values. Those values, part of the company’s social capital, were financially speaking a source of risk and so a detriment to, and so a reduction of, its comprehensive asset valuation. The company’s culture was a balance sheet liability (an equity loss) for its owners.

Such a loss to its present value should have been measured and recorded somewhere to provoke remedial management response.

The PG&E case reminds us of the BP accident at the Macondo well in the Gulf of Mexico, a failure of company culture which cost the company and its owners billions.

EBay Breakup Inches Closer to Realm of Possibility (Wall Street Journal)

EBay Breakup Inches Closer to Realm of Possibility (Wall Street Journal)

Is a company worth more than the sum of its parts? A classic part of financialism is buying a company to break it up and sell the parts for a total sum more than what the company is valued at. This was the raider tactic in the 1970’s and 1980’s and a private equity play ever since.

Now it is being proposed for eBay by Elliot Management and Starboard Value LP.

How should the value of the company as a whole and its various parts be determined?

Blank-Check Companies, a Hot IPO Fad, Contain Pitfalls for Investors (Wall Street Journal)

Blank-Check Companies, a Hot IPO Fad, Contain Pitfalls for Investors (Wall Street Journal)

Some people are seeking to raise cash from investors with which to buy companies and profit from their success – venture capitalism.

But what is the worth of a company that just has cash and no other assets? What can investors look to for assurance that the cash they provide will not be lost or wasted?

Again, giving a present valuation, a market price, to a future intangible is central to the creative dynamic of capitalism and to its repeated failures. An overly-optimistic price or valuation (sub-prime mortgages? CDOs, dot-coms? tulip bulbs?) draws forth wealth and wastes it, leaving investors the poorer.

These special purpose companies have little more than the intangible asset of the smarts of their managers.

Vindication of a Moral Capitalist

Two years ago, Warren Buffet teamed up with Kraft Heinz to takeover Unilever with an offer to purchase its shares from owners. Kraft Heinz was a merger of two companies, each owned by 3G Capital in Brazil. 3G’s business model is to strip costs down, leaving only sinews and so boost short-term profits. The Buffet/3G alliance proposed to do the same to Unilever and so to maximize its profitability – survival of the fittest and no remorse for those deemed expendable in the drive to spend less and less.

My friend and our supporter Paul Polman, CEO of Unilever, stood up to them, saying the Unilever strategy for sustainability would be better for shareholders in the long run than selling out to Buffeet/3G for a premium of 20% over the market price of shares (depressed due to a lower British Pound as a result of Brexit anxieties).

Well, on Saturday, it was revealed that Kraft Heinz has been forced by market prospects to write down the value of two of its brands by $15.4 billion, a hefty loss for its owners, 3G and Warren Buffet. Turns out a focus on cutting costs while ignoring shifting customer preferences has cut down the equity value of Kraft Heinz.

Buffet’s Berkshire Hathaway investment company then had to book a loss as well – a $3 billion write down last year arising almost entirely from their equity interest in Kraft Heinz.

Polman’s moral capitalism business model has been vindicated. Unilever is better off – and its owners, employees and customers – under his stewardship than it would have been if Kraft Heinz were running it. Paul worried about all stakeholders first and foremost and how to make the company sustainable for the long haul.

Intense to the point of viciousness, cost-cutting does not invest in keeping up with the times, with responding to competition, new customer tastes or fading allure of old brand names. This is what I described as “brute” capitalism in my 2004 book, Moral Capitalism. Failure to invest properly compromises future ability to earn profits reliably, thereby lowering present discounted cash flow and company value.

The failure of the 3G Capital business model points to the need to re-think how we calculate the financials of business success over the long run.

A Very Early American Rejection of Intolerance

The intransigence of American political leaders leading to the recent partial shutdown of our federal government shows intolerance of the views of others.

Stalemate in the United Kingdom between those who want their nation to remain in the European Union and those who don’t also shows narrowness of spirit in reaching out to others.

Thirdly, the rise of populist resentment and prideful visions of our own tribe as better than yours also reflects this constriction of empathy and care.

The Caux Round Table for Moral Capitalism’s Principles for Government call for government to be a trust for beneficiaries. This presumes a moral sense open to the needs, concerns and views of those reliant upon public power to do them justice.

In 1657 in the young American colony of New Amsterdam, Governor Peter Stuyvesant issued an edict proscribing Quakerism. In the small community of Flushing, now a part of Queens in New York City, citizens refused to obey the Governor. Their letter of remonstrance (PDF) makes the case for openness to those of good heart and goodwill.

Why Socialism Falls Short

The cover of this week’s Economist magazine features a discussion of millennial attraction to Socialism. But the track record of socialism in reality is dismal in advancing human happiness. Why might that be?

A good place to start in analysis is human nature. Not everyone does a good job in building up and exercising their Moral Sense. Especially when, as economists say, they can extract rents from the economy due to their political positions. If you live off rents – cash which just flows to you, come hell or high water, why be accountable to others, who are pestering you about your shortcomings? Whether French aristocrats under the Bourbons or today’s tenured faculty or civil servants, those who extract rents are walled-off from the stresses and strains of ordinary life.

In public administration, this aspect of bureaucracy is called public choice theory. It seeks to explain why bureaucrats on average don’t provide good personal service to the public or, rather, put personal advantage over the common weal.

A recent example of rent-extractors at work is the demise of the A-380.

Government bureaucrats and a government-led company, Airbus, could design and build a remarkable airplane the A-380. But they could not get customers to use it. So they had to stop making it.

Ultimately the values of ordinary people – where they chose to fly -did not provide enough money to pay for the making of more such giant planes.

Second, it may also be that high tax (Socialist) administrative regimes encourage rent-extraction behaviors. A recent commentary in the Feb 20 Wall Street Journal assembled data to illustrate the point that American states which collect the most taxes don’t deliver high quality infrastructure. In these administrations public employees and union members aligned with the ruling party collect a growing share of tax revenues.

So, for example where Europe and Japan can build subway tunnels for between $160 to $480 million per mile, New York City paid $2.8 and $2.1 trillion per mile to extend two subway lines. Unionize tunnel workers earned $111 an hour in New York while Detroit paid $38 per hour and Germany $40.

Wealth extraction in the form of zoning regulations restricting construction of apartments increases housing prices to the advantage of those with higher incomes.

From The Wall Street Journal: Key Investors Are Unhappy With SoftBank Tech-Investment Fund

Key Investors Are Unhappy With SoftBank Tech-Investment Fund — The Wall Street Journal

How much is a company worth? How much is anything worth?

Prices are the basis for all transactions; they make businesses succeed or fail; they favor some and exclude others; they are the basis for contractual agreements which provide capitalism with its fundamental morality and capacity to respect human dignity.

But prices can be nominal. Prices can be illusions as to real worth. Prices can be set out of stupidity or greed or fantasy.

There can be disagreement about prices – a nominal price has no truth to it, only the chance that someone else will accept it as reasonable or the basis for a deal.

For example, see story above.

Investors in the fund from Saudi Arabia and Abu Dhabi think that the Vision fund incorrectly valued companies in which it invested capital – over estimating their “real” worth.

Who’s to know?

 

‘Moral Capitalism,’ the Kennedys and Minnesota in The Star Tribune

‘Moral Capitalism,’ the Kennedys and Minnesota – StarTribune.com

My job for the Caux Round Table is to promote ethical principles for business and finance. And when one of “those” Kennedys wants to work on your idea for the good of the country, it’s a special gift.

Now, what’s important here is not me or my book, but the Minnesota roots of the idea of Moral Capitalism the book explains.

Read more of Steve’s editorial at the link above.