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Principles and Narratives: Where is the “There?”

The American writer, Gertrude Stein, once quipped that “There is no there there” as a way of saying nothing “there” is worth noting, thinking about or getting stressed out over.

Among elite circles in Anglo-Saxon cultures, such as the U.S., U.K. and Canada, wokeness and progressive reformation of wayward cultures and individuals has grounded its epistemology on “narrative.”  Personal narratives give us our own truths; group narratives based on race – good races and bad races – provide other truths; narratives formulated by intellectuals provide “critical” assessments of others, of culture, society, religion and politics.

So, the question for the creators and advocates of such narratives is: “Is there any there there?”

Plato had a narrative about justice in The Republic.  Karl Marx had his own narrative in Das Kapital; Adolf had his narrative in Mein Kampf; Vladimir Putin has his narrative on the Rus; and Xi Jinping has his on the Chinese.  Rudyard Kipling had a narrative on the British Empire and  before wokeness, Americans had a narrative on exceptionalism taken from the Puritans.

The Caux Round Table doesn’t have a narrative.  Rather, its founders came up with “principles” only.

So, these days, I find myself thinking what is the difference between “narratives” and “principles?”

My first thought is that narratives are encumbered by what German philosopher Jurgen Habermas calls “facticity.”  Facticity is the world of facts; it is reality at its hardest core.  Facts don’t disappear when they become inconvenient or prevent us from relaxing in our safe spaces and feeling that all is well in the world, as we have perceived it to be.

Narratives can be close to or far from facticity.  As my daughter, a high school teacher of Latin, pointed out to me, narratives come from narrators.  They are personal expressions – stories, focused conversations – which may or may not be true and may or may not have a righteous purpose in being told.  Distinctions between narrative, fiction, fable, fairytale or myth are hard to discern at times.

For example, sociopaths are great storytellers – intense, articulate and charming.

Yet, some narratives are not without value.  Greek tragedies – Antigone, for example or Shakespeare’s King Lear – are most edifying and can inspire us to become better in character or draw closer to wisdom.

Principles belong to a more abstract realm of mindfulness, one less entwined with factual reality.  They don’t need many words to give their meaning.  They often invoke inductive, right-brain insights.  Principles give reasons to act.  They are guideposts.  They can be used to govern our thoughts and feelings within our moral sense and to govern our behaviors in the world.

By the way, much of Adam Smith’s book on moral sentiments, Mencius’s recommendations, Buddhism’s Eightfold Path, Qur’anic teachings, the “word of God,” which Jesus affirmed as needed over and above our daily bread, exist in the psychic realm of principle.

Principles have a normative character, but, in addition, they do contemplate reality.  To accomplish their mission, principles need to adjust to reality, to accommodate its ups and downs, its ins and outs.

In particular, principles need to account for human nature.  Principles which are oblivious to our natures, so caught up, as we are, with devils and angels pulling us in different directions, have difficulty changing the world to align better with their aspirations.  Either well-intended principles or bad principles, both can succeed or fail as they do or do not adhere to the strivings and possibilities of our natures.

YouTube Playlists: Feedback Welcome

We’ve recently organized our videos on YouTube into 8 playlists, which can be found here.

We would like your feedback on what can be improved.

For instance, are the headings appropriate for the videos found in their respective playlists?  If not, what should the new headings be?  Should we add additional playlists and if so, what should those headings be?  What should the topics of the new videos be?  Are there any videos that should be moved to another playlist?

Your thoughts and guidance would be appreciated.

Please send your suggestions to jed@cauxroundtable.net.

Your Help is Requested – Thursday, August 4

We have recently been discussing the need to have high expectations of individuals in business and finance, as well as firms if a moral capitalism is to become successful in the real economy.

The July issue of our newsletter, Pegasus, will have a presentation of what might make for moral “capitalists,” in addition to the organizational parameters of moral “capitalism.”

We are devising a self-assessment along the lines of the Gallup StrengthsFinder and the Myers-Briggs categories of personality dispositions so that individuals can consider which of their abilities might be those of a moral “capitalist.”

You may recall our self-assessment for decision-making, the Decision Style Inventory.  We want to create something similar as a product for use by individuals and companies in self-improvement commitments.

We plan to present at this round table our list of attributes relevant to being a moral “capitalist” and get your help in thinking it through, adding new dimensions and revising what we have down on paper.

Please join us in-person at 9:00 am on Thursday, August 4 at Landmark Center to share your thoughts with us.

Registration and a light breakfast will begin at 8:30 am.

Because we are asking for your advice and guidance, there will be no charge to attend this round table.

To register, please email Jed at jed@cauxroundtable.net.

The event will last about an hour and a half.

ESG – Very Much a Work in Progress

In late May, the U.S. Securities and Exchange Commission (SEC) announced it was proposing a new regulation for the disclosure of ESG data.

Washington D.C., May 25, 2022 —

The Securities and Exchange Commission today proposed amendments to rules and reporting forms to promote consistent, comparable and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social and governance (ESG) factors.  The proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies and business development companies.

“I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus,” said SEC Chair Gary Gensler.  “ESG encompasses a wide variety of investments and strategies.  I think investors should be able to drill down to see what’s under the hood of these strategies.  This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”

The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports and adviser brochures based on the ESG strategies they pursue.  Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments.  Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts.  Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.

Thus, did the SEC, a global leader in using disclosure of material facts to improve the outcomes of financial capitalism, let slip that with ESG, beauty is in the eye of the beholder?  From a disciplined standpoint of valuation methodology, ESG is chaos on stilts.

To bring about its desired order in investing markets, the SEC’s notice of its proposed regulations is 362 pages long, not quite as long as Qur’an, but likewise a challenge to memorize.

John C. Wilcox, Chairman Emeritus of Morrow Sodali, has written a short commentary titled “Beyond ESG – An Integrated Approach to Governance, Investing and Regulation” that I wanted to share with you:

“Time for a Name Change” is the title of a thought-provoking article posted recently on LinkedIn by Stephen Davis, Senior Fellow and Associate Director at Harvard Law School’s Program on Corporate Governance.  Davis argues that the acronym “ESG” has outlived its usefulness and needs to be replaced.  Writing largely from the viewpoint of investment professionals, he suggests a new term: “360-degree investing.”  I agree with Davis that a new term to replace ESG is urgently needed.  But while “360-degree investing” works for asset managers, it does not work for companies.  Even so, Davis’s key point makes sense – “ensuring that both investors and companies take account of risks and opportunities that lie outside conventional accounting.”  To replace “ESG” for companies, as well as investors, I would propose use of the already familiar term “integrated.”  One of the dictionary definitions of integrated is: with two or more things combined in order to become more effective.  Applied to evaluating business enterprises, an integrated approach could effectively combine environmental, social and governance considerations together with traditional financial and accounting metrics.  In addition to inclusiveness, an integrated approach could lead to more realistic regulation aligned with the way businesses are run day-to-day.  Corporate managers must constantly keep their eyes on the road, juggle multiple risks and opportunities, monitor competitors, listen to customers and stakeholders, adjust to market changes and react to ad hoc events.  Managing a business enterprise is itself an exercise in integrated thinking and organization.

In support of the proposed integrated approach, here are a few points to be considered:

1. We should build on the concept of “integrated reporting” that has already achieved widespread acceptance globally.  The International Integrated Reporting Council (IIRC) has long promoted efforts to reduce companies’ siloed organizational structures and encourage holistic corporate management and reporting.  The IIRC is now a part of the Value Reporting Foundation, which also includes SASB and which through the IFRS Foundation has established the International Sustainability Standards Board (ISSB).

2. We need to eliminate the “zero-sum” thinking that pits ESG against traditional accounting and financial metrics.  One of the most important lessons we have learned from the emergence of ESG is that these so-called “intangibles,” “externalities” and purportedly “non-financial” factors do in fact have measurable financial impact on companies.

3. It is no longer appropriate to refer to E, S and G collectively or to treat them as a separate category of issues distinguishable from the traditional business considerations captured in spreadsheets and financial reports.

4. Instead of pitting shareholders against stakeholders, we should recognize that they share a common interest in companies’ wellbeing, financial success and sustainability.  Indeed, the new generation of millennials and GenX shareholders, together with leading institutional investors, such as BlackRock, are already asserting that ESG issues are integral to their evaluation of the companies they own.

5. We need to put an end to the pushback against ESG that is coming from a variety of sources, including academics, hardline capitalists and politicians.  Ideology and politics should not play a lead role when we are considering what is best for businesses, stakeholders and the capital markets.

6. It is time to reexamine the traditional prescriptive, investor-based definition of “materiality.” ESG has made us aware that financial materiality needs to be addressed from multiple stakeholder perspectives.

An integrated approach to materiality can best be accomplished by companies internally, using what Uber Technologies in a comment letter to the SEC on climate change describes as an individual “company-specific materiality assessment”1 to supplement legal standards.  We need to admit what has always been true: companies, not regulators, ultimately decide what is material to their business.  An integrated approach to materiality would require a more flexible legal definition, including a comply-or-explain option, that could accommodate “company-specific materiality.”  ESG has had a transformative effect on companies, redefining the corporate social compact, highlighting the materiality of E, S and G issues and introducing important new criteria, such as corporate purpose and culture, human capital management and sustainability.  Companies are learning how to factor these issues into their business strategy and how to disclose them.  Investors, in turn, are adapting to these demands and looking more deeply into the inner workings of the companies they own.  Standardization and comparability are still needed.  Regulators in the EU and the United States are not far behind with new laws and proposed new disclosure requirements.  The hope is that global regulators, NGOs and independent standard-setters, in collaboration with the IFRS Foundation and the ISSB, will work together to promulgate disclosure requirements that encourage an integrated approach to management and governance, thereby enabling companies to “tell their own story” to stakeholders and the capital markets.

Of course, the Caux Round Table simply proposes to modernize valuation methodology with the application of risk assessments of the management of stakeholders and the addition of human and social capital accounts to balance sheets.

The SEC is also investigating the asset-management arm of Goldman Sachs with respect to its ESG funds.  Regulators have concern that marketing ESG labeled funds can be a superficial way to sell financial products, not on the basis of sound risk analysis and realistic valuations, but more to address the status and reputation needs of investors to demonstrate their concern for climate change or diversity in the workplace.  Such funds facilitate the flow of capital to firms which take those concerns as their business objectives.

On the other hand, LG Chem believes that its investing in chemical recycling, biodegradables and renewable energy, in battery materials like carbon nanotubes and in new drugs for gout and some types of obesity, will find markets and drive profits.  It calls this strategy investing in “ESG values.”

Professor Diane Coyle at the University of Cambridge writes that “the movement towards ESG reporting certainly highlights important issues … But the belief that companies can solve such pressing issues – through pursing ESG standards or otherwise – is deeply flawed. …At root, demanding that companies use ESG metrics would effectively be asking private companies to legislate social outcomes.  The calls for companies to put social aims at the heart of their activities mean placing small numbers of executives in powerful political, economic and social roles.  But business leaders should not be left free to make what are, in fact, important collective decisions. … Corporate executives should consider the moral aspects of every choice they make. But some of the questions raised about corporate responsibility and ESG reporting do run headlong into political choices.”  (Foreign Affairs, Jan/February 2022)

What is the Worth of Twitter?

A recent news flash is that Elon Musk wants out of his deal to buy Twitter.  He claims he was misled as to its value and that the company has not provided sufficient data for him to assess its true worth as a capital asset.

I like using the word “worth” in such a case where a company makes money off social media.

We can learn from a play on words – worth can indicate cash value, but it also can indicate the intangible qualities of goodness, which are honorable, highly thought of, but not necessarily reducible to the “cash nexus” that Karl Marx was so fond of disparaging.

Twitter, on the stock market, is a highly valued cash asset, but is its business of social media worthy of our esteem and appreciation?  Is social media worthy of a great civilization?  Why should society pay a lot of money for a service that sows division, corrupts social capital and engenders low self-esteem, resentment, despair and hurt feelings in many lives?  Why not treat social media like guns, drugs and alcohol?

The root words for our modern English word “worth” are:

Old English weorþ “significant, valuable, of value; valued, appreciated, highly thought-of, deserving, meriting; honorable, noble, of high rank; suitable for, proper, fit, capable;” from Proto-Germanic *wertha- “toward, opposite,” hence “equivalent, worth” (source also of Old Frisian werth, Old Norse verðr, Dutch waard, Old High German werd, German wert, Gothic wairþs “worth, worthy”), which is of uncertain origin.  Perhaps a derivative of PIE *wert- “to turn, wind,” from root *wer- (2) “to turn, bend.” (https://www.etymonline.com/word/worth)

The root word for our modern English word “wealth” is: mid-13c., “happiness,” also “prosperity in abundance of possessions or riches,” from Middle English wele “well-being.”  Farther back, the root concept in Proto Indo-European was “wel” or to wish, to choose, to prefer, to desire.

With the narrative of wealth, our choosing to be happier is welded to the materialism of money and assets at the lower levels of Maslow’s hierarchy of human needs, not to the higher levels, where well-being flows more from our internal possession of pride, courage, love and resilience.

Musk argues that Twitter has failed in producing data on how many actual human users it has.  His challenge is that if many “tweets” come from bots and not real people, the revenue potential of the company is better projected using a lower number of “users” because bot use of Twitter won’t generate any value to the company.  Bots are free-riders.  Twitter makes its money by receiving data on human persons to be used more effectively to exploit their needs and desires through advertising to them.  Twitter accounts which can’t produce data which is wealth producing can’t add value to the company’s asset value.  Thus, Twitter’s current market value is not realistic, just what the herd of market players is willing to believe it is worth.

The simple formula for calculating the value of a firm is to project future revenues and then discount those future earnings back to the present to arrive as a net present value of future income.  A company which will most likely earn $100 in the future is worth more today than a company positioned to earn only $50 over that same span of time.

Valuation is the heart and soul of capitalism.  It is simultaneously the interdependent vascular and nervous systems of the firm and the private economy.  Valuation draws forth capital and sends it around to the different cells to energize them with life.  Valuation gathers information and processes it in order that the system’s boney structures are nourished and its dynamic muscles and ligaments can move optimally, resulting in work.  Without good valuations, there is system disfunction – chaos, loss, lethargy, the death of bankruptcy.

Turning profits into capital is often analyzed as paying a return on financial capital – dividends to owners and interest to creditors and amortization of their loans.

But a firm has other forms of capital which need tending: its stakeholders, those who keep it alive and kicking healthily, are also capital assets.  Employees – human capital – need salaries and benefits and respect; the social capital of governance and culture needs constant attention and that is a cost to the firm.  Cultivating customers with quality and attractive prices, with developing and popularizing brand appeal, is a responsible use of gross earnings.  The social capital of community needs to be kept healthy and not degraded through responsible behavior, good citizenship and charitable donations.  Managing and paying for a better environment is another use of profits to sustain a capital asset of the firm.  These expenditures on improving capital assets are costs met with gross earnings and so a factor in how the firm “profits” from its business model.

Just focusing on the “net” cash profit determined on the P&L statement short-changes the value of the company.  Not paying a return today on all its forms of capital threatens the firm’s ability to earn money in the out years.

Now, for capitalism to be sustainable, profits must be channeled into capital.  Just making profits is not capitalism, only extracting rents.  Taking profits out without using them as a return on capital is eating the seed corn.  That is stripping assets of long-term value, turning a firm into a wasting asset, like oil in the ground.  Heedlessly extracting rents is akin to rushing headlong into the tragedy of the commons.

Thus, we can learn a lot about capitalism from the Elon Musks of the world.

The Murder of Shinzo Abe

Yesterday’s murder of Shinzo Abe, former Prime Minister of Japan, is one more disturbing “sign of the times.”  Along with Putin’s invasion of Ukraine, with tactics that prioritize destruction of the civilian environment; Covid; China’s hegemonic military intrusion into the South China Sea; the collapse of public support for President Joe Biden in the U.S.; the resignation of Boris Johnson as Prime Minister of Great Britain; and the success of populist autocratic nationalisms, such an individual act points to systemic destabilization in the current era of human history.

Which leaves us, once again, to ask the question: “What is to be done?”

If what the Biden Administration touts as the “liberal world order” is in decline, what will take its place?  The old Athenian realism that, “The strong do what they can, the weak suffer what they must?

Can we find and have the skill and fortitude to construct a new reality of social justice for all?

But how does one overcome destabilization?  Where can be laid the foundation for system and reliable expectations of life, liberty and the pursuit of happiness, both individual and communal?

The Caux Round Table was founded to consider meliorating capitalism, creating for that purpose ethical principles for business.  It then recognized that capitalism lives within a cocoon or chrysalis of government and so advocated ethical principles for government, as well.

The third sector of civilization is society – families; civil organizations of church; healthcare; education; philanthropy; and other mediating structures of journalism, rotary clubs, etc.  We have, therefore, suggested ethical principles for civil society organizations.

On learning of former Prime Minister Abe’s murder by a 41-year-old individual male, as a learned reflex, I thought immediately of previous assassinations of political leaders – Abraham Lincoln, the Archduke Franz Ferdinand – or the sectarian murders carried out by Islamist extremists.  In those cases, the motivations had in origin in some political or religious grievance.  But what if this murder was not political in any sense?  What if it was just the craving of a dysfunctional man living uncomfortably with his anger and resentments?

I then thought of John Hinckley and his attempt to kill President Ronald Reagan.

In recent mass shootings in the U.S., the perpetrators have been isolated, alienated males from dysfunctional families, young loners drifting aimless through life.  To me, they seem overwhelmed by some psychosis, which breeds in their minds a compelling narrative of victimization and justified rage, which legitimates their psychosis as a rational response to life, as it has impinged on them.  One such destabilized young man then takes his revenge, I suppose, first on his mother and another on his grandmother and only after that on innocent, young children.

Which leads me to ask: do we also need ethical principles for a moral society?

Such a society, I presume, would not be dysfunctional or destabilized.  It would be neither nihilistic, nor theocratic.  It would sustain an equilibrium between the individual and the collective, using one to check excesses in the other.

As American philosopher William James proposed, “The community stagnates without the impulse of the individual.  The impulse dies away without the sympathy of the community.”

ESG – Salvation or Wishful Thinking? Monday, July 18

I sense a shift in the geist where ESG is concerned.  What just a few years ago was touted as the way forward for capitalism is more and more moving to the margins.  Please join us at 9:00 am (CST) on Monday, July 18th for a Zoom round table on ESG – what does it really mean and what can it accomplish?

From my perspective, ESG is just the most current mantra for finding a way to have capitalism without negative side-effects.

As the industrial age emerged in the early 19th century, the common law of England and America responded by creating the law of negligence – taking responsibility for the harm you cause when you fail to use due care.  Later came causes of action in warranty and strict liability for defective products.  Statutes were enacted to enhance the contract rights of workers and to protect consumers and to limit the market power of monopolies.  In the 1930s in the U.S., financial capitalism was required to truthfully disclose all facts supporting or reducing the value of securities.

In the 1970s, investors were prodded by social activists to direct their capital away from firms which were not socially responsible and consumers were encouraged to take their trade elsewhere.  In the 1980s, the quality movement here taught companies how to give better value for money to customers and engage employees to become more proficient in creating such value. In a re-emphasis, companies were encouraged to see the intangible ways of enhancing financial value by taking better care of stakeholders.

In the early 1990s, the need for ethics was introduced in business schools to reframe the culture of decision-making in for-profit firms.  Then came advocacy of the strategy of corporate social responsibility.  In the early 2000s, the approach to changing the outcomes of capitalism looked at measuring and reporting impacts – the Global Reporting Initiative.  The Sustainability Accounting Standards Board was formed.  Then, the United Nations Sustainable Development Goals were promulgated to induce private firms to devise and deploy business models which both satisfied consumer needs and provided public goods in addition.

In 2019, we were advised that private firms needed a purpose, other than just making a profit.  We heard of conscious capitalism, common good capitalism, inclusive capitalism and the economics of mutuality.

The latest iteration is ESG – environment, society and governance.  What is meant by society and governance is none too specific.

What, then, is the role of ESG investing and reporting?  Please help us understand what is going on.

To register, please email jed@cauxroundtable.net.

The event is free and will last about an hour.

June Pegasus Now Available!

Here’s the June edition of Pegasus.

In this issue, we include an article on opportunity costs and another on recentering moral capitalism.

We also run the MBA Oath, which was founded in 2009 in the aftermath of the financial crisis by graduates of the Harvard Business School to be a Hippocratic Oath for managers.

I would be most interested in your thoughts and feedback.

Technology and the End of Climate Change

My optimism that technology can save us from disastrous climate change (just as it gave us the run up to potentially disastrous climate change) is rewarded when I run across reports of constructive innovations.

A Swedish steelmaker, SSAB, is building a plant that a year ago refined iron ore for the production of steel with the emission of water vapor.  Oxygen atoms must be stripped from iron ore to get iron.  Then, iron is transformed into steel.  SSAB’s new plant uses hydrogen instead of CO2 heavy coke, hydrogen separated from water by renewable energy.  Then, the hydrogen is heated to about 1,600 degrees Fahrenheit and injected into a furnace containing iron ore pellets.  The hydrogen combines with water in the iron ore to form water vapor, leaving behind “sponge” iron. The “sponge” iron is melted with recycled scrap to make steel.

The traditional steel making process produces 8% of the world’s CO2 emissions.  SSAB proposes to use electric furnaces to turn iron into steel.

Secondly, there is a systemic problem with electricity transmission grids moving green electricity.  The grids use alternating current, which must oscillate between 50HZ and 60HZ. With fossil fuels and nuclear power maintaining that stable oscillation by the inertia of the generating turbans of older plants.  With wind and solar power, there is no or too little inertia in the grid.  So, flywheels need to be added to the grid to provide the needed inertia.

In Scotland, a new plant has been built housing two giant flywheels, each of which weighs 194 tons and rotates 500 times a minute.  But existing fossil fuel stations could be repurposed to house flywheels and generate inertia for the grid.

Thirdly, researchers at MIT have soaked an order-eating clay used in cat litter with a copper solution.  The resulting compound can capture methane from the air and convert it to CO2, which is a less harmful greenhouse gas.  Devices containing this helpful compound can be put in the vents of coal mines and cattle barns to absorb methane.

If methane emissions were to be reduced by 45% by 2030, projected warming would be reduced by ½ a degree Celsius by 2100.

Another clay, zeolite, has tiny pores which permit it to function as a filter for methane.

Fourth, Alphabet (Google), Meta, Shopify and Stripe and the sustainability practice of McKinsey have pledged $925 million over nine years to buy technology which would remove CO2 from the atmosphere.  It is estimated that humanity needs to remove 6 billion tons of CO2 a year from our atmosphere by 2050.