Category: Commentary

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.

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?”

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“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.”

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“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.”

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“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.”

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

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“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.”

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“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.”

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“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.

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.

On this first day of a new year and a new decade, I want to thank each one of you for your thoughtful support and your leadership in our global community.

The past few days have brought many reviews of what was notable – bad and good – during 2019 and the decade 2010 through 2019. With trends of events and the signs of our times not so auspicious, I looked askance and only briefly at most of that judgmental commentary.

What was stirring in the back of my mind was global warming and what we might do in that regard. Bad weather events seem to be increasing. There is certainty among some that industrial human civilization is the cause of our misfortune, but doubt among well-informed others that we are not entirely to blame.

Those most worried tend to blame capitalism on the usual grounds – responding to our materialism and our self-promoting ambitions, private enterprise promotes consumption. The system has been so successful in meeting human needs and wants that it has arranged for the production of energy on a vast scale. Today, our production of energy, especially electricity and in transportation, adds CO2 and other greenhouse gases to the planet’s atmosphere, trapping heat and raising temperatures. The increase in temperatures, we are told, makes for new weather patterns and accelerates dryness in certain climes, such as southeastern Australia yesterday and today. Wildfires there are immense and rainfall is down 40% from the norm.

My thoughts this New Year’s Day are: yes, industrial civilization has converted naturally sequestered carbon into CO2 in the atmosphere; that is a function of technology made possible by first research science with experimentation and then by using proven science in technology to advance human civilization; that to no longer use current technology for the production of electricity requires the invention of new technologies.

The current technologies for energy production, though largely created by capitalist societies, were also used by all socialist regimes to fuel their economics and make their electricity. The source of the problem is not a system, but humanity itself. As the American cartoon strip of the 1950s once notably said, “We have met the enemy and he is us.”

The historic role of capitalism was to jump start the industrial revolution and then, year on year, make the new form of civilization more and more technically advanced to the maximum possible scale. Markets are without question the most effective social dynamic for spreading technology and its capabilities to more and more people in every part of the world.

It is said from time to time that poor people in the U.S. today life longer and better lives than did kings and queens of yore.

So, global warming should be a call to use capitalism, not destroy it.

Market capitalism should be used to invent and commercialize new technologies to produce electricity in new ways which do not require the off-gassing of CO2.

One thing capitalism could do is invent ways of capturing CO2 and sequestering it or using its carbon in circular economy fashion so that it does not enter the atmosphere in gaseous form.

What about, then, a technological revolution in agriculture where trees and plants pull great amounts of CO2 from the air?

What about new technologies to store the energy produced from solar cells – using compressed air shifting from compression to decompression or giant weights on pulleys in mine shafts or pressurizing water so that when it is released, it drives a turbine to generate electricity or liquifying air by cooling so that when it warms, it expands to drive turbines?

Similarly, if we want our civilization to abandon cheap plastics which do not degrade, use capitalism to create and sell new technologies. BP, Dow, Coca-Cola, Danone and Unilever are investing in the chemical recycling of plastics to break them down for reuse. PureCycle Technologies has a new method of purifying polypropylene into a resin which can be used in making new products. A researcher at the University of Portsmouth has fashioned a bacterial enzyme which can avariciously digest polyethylene terephthalate plastics used for plastic bottles.

And what really has me puzzled is the widespread prejudice against the use of nuclear power. Is it certain that humanity can never invent a technology which will provide for the safe use of nuclear reactors or find secure storage for spent fuel or even come up with reusable sources of fission? I, myself, have a prejudice that the technology of the huge experimental ITER Tokamak fusion reactor in southern France will ever prove to be commercially viable or the plasma contained within magnetic fields will not someday burst its walls and melt everything it touches.

With best wishes for the coming year and decade.

Yesterday, the CEO of Boeing, Dennis Muilenburg, was discharged from his office. His story is a modern corporate morality tale. A large, profitable and respected corporation but which did not adequately manage its risks in developing a new aircraft has paid for its oversights. And, more unusual, a senior officer of the company has been held personally responsible for management shortcomings.

As a result of its own errors, Boeing has decided to shut down production of its 737 Max jet. Some 400 already built aircraft are grounded. They cannot fly until safety concerns are resolved in favor of passengers who would fly in the planes.

Boeing’s decision to take action and not just do business as usual reflects stakeholder theory. Boeing now recognizes its need to care for a certain class of remote stakeholders – the passengers who are stakeholders of Boeing’s customers, the airlines. Boeing’s financial success in the long run depends on the safety and satisfaction of those passengers. Boeing’s responsibility to those passengers arises from its obligation to sell a safe product to its customers so that those customers can provide a safe service to their customers.

What began as a short-term fix to Boeing’s profitability concerns has now metastasized into a possible question of firm survival.

In order to save capital in bringing a new short haul aircraft to market to compete with Airbus, Boeing decided to upgrade the existing 737 design and not start from scratch in designing a new plane. Cash flow pressures caused by production delays in manufacturing the 787 Dreamliner drove the decision to save money in bringing the new 737 aircraft to market. But adding larger, more efficient engines to the standard 737 body and wings gave the new model, the 737 Max, excessive lift in flight, forcing the nose up and threatening a stall of the engines. Boeing’s response to this design flaw was to add software which would override the pilots and push the plane’s nose back down should such unwanted lift occur.

In two accidents, the software worked as intended, but inexperienced pilots tried to keep the plane level and both times the affected planes, responding to the software and not the pilots, nose-dived into fatal crashes.

Boeing’s decision to add large engines to the existing chassis was penny wise, but very pound foolish. The decision and the steps then taken to offset its shortcomings made for an escalation of corporate irresponsibility.

Boeing initially placed too much emphasis on financial metrics and not enough on what is actually a more strategic consideration – the ability of the company to deliver safe products. The company’s management lost sight of its core purpose. Profit is not the purpose of a company, but only the derivative, second-order consequence of performing its mission well.

Had Boeing back then built for itself a culture around stakeholders first and foremost, a culture which believed in the August statement of the Business Roundtable or the December Davos Manifesto 2020 of the World Economic Forum (or which managed according to our Principles for Business), the 737 Max most likely would not have been built and a better, safer aircraft would have been produced in its place.

It was my surprise and honor to receive yesterday this letter from French President Emmanuel Macron. I had sent him a copy of my book Moral Capitalism after our round table at the National Assembly on valuation. I’m delighted that his personal vision seems in such harmony with our mission.

My rough translation of his letter is:

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President of the Republic
Paris, 9 Dec 2019

Mr. Stephen B. Young
Global Executive Director
Caux Round Table for Moral Capitalism

Mr. Director:

You have had the friendliness to make me stretch in an exemplary dedication with your book Moral Capitalism.

I send you lively thanks for sending your work of reflection on the necessity of returning an ethical dimension to capitalism out of concern for serving the common good.

I had the occasion to affirm before the ILO in Geneva last June 11 and then in the G7 summit in Biarritz in August, that deregulated capitalism, due to the lack of regulation, has generated such disequilibriums as menace our democracies.

We must therefore profoundly evolve market economies. To this end, enterprises have a decisive role to play in internalizing their externalities and align as well their interests with the common good. Ethical principles which you have promoted, will, when applied, achieve in this cause.

In sending you my thanks for this contribution to reflection which constitutes your work, I pray you to believe, Mr. Director, in the assurance of my best sentiments.

(Handwritten in English at the bottom: Thank you so much for your soul and your thoughts, All the best)

Emmanuel Macron

I was asked for my thoughts on Boris Johnson’s dramatic victory in last Thursday’s parliamentary election. Not in a position to discern most realistically what might have been the determining ideas in the minds of British voters as they chose candidates to elect, I thought rather of how the general result might be assessed from the critical standpoint of our vision of social justice.

Of course, the election was about Brexit – a particular concern of a particular nation state. A working majority has formed among Britons that believes that they should belong to a nation that could and would set its own course in world history, just as it has done for centuries. The majority vote was a return to the familiar, an expression of an identity which provided reassuring purpose for the collective and substance and meaning for those it inspired as members of that collective.

Our principles for business and government have little to say about the goods and bads of nationalisms. But they do reflect what I would call the laws of nature or what some call the reality principle. There are consequences of behaviors which are real and can’t be avoided, whether the U.K. is part of the E.U. or not.

Thus, markets and capitalism follow the reality principle, not our dreams and whimseys. There is less demand for higher-priced goods and services than for lower priced goods and services. Getting the same quality good or service for a lower price attracts buyers, so seeking to produce goods and services for lower costs will increase sales. Sourcing of goods and services will move to lower cost environments. Innovations will disrupt conventional business arrangements. Quantity of supply determines our marginal utility preferences and our demand curves. Those who have assets do better in the long run than those who don’t. You can tell people what to do with their lives and have them thank you for it only for so long.

So, one reflection on the election is that after Brexit, the U.K. will be more wealthy the more it participates in the global economy. As Adam Smith discerned, the ability to profit grows with the size of the market – a bigger market for suppliers lowers costs and a bigger market for customers expands gross sales. Thus, our Principles for Business hold that it is ethically responsible for a company to go international. World trade makes us all better off and expands the scope of our ability to choose.

A second reflection is that British voters seemed to have chosen a middle way in politics and economics as the formula for national happiness. They have rejected the extremes of right and left and settled on something akin to moral capitalism – private enterprise conducted with stakeholder responsibility and with government investing in needed public capitals – physical, social and human.

Our friend and counselor, Paul A. Volcker, passed away this week at age 92. Most recall him as the determined Chairman of the Federal Reserve Board who broke the back of inflation in the late 1970s and early 1980s. Paul was an archetype of an older kind of leader – taciturn, blunt, insightful, always probing for the underlying facts and the truth of things and events. He was an idealist without starry eyes, that rugged kind of American mind which never lost sight of aspirations but, wisely, always grounded his hopes and dreams in reality.

I would visit him in his New York office from time to time to get his advice and thoughts on financial capitalism. I always left our conversations the wiser for his observations and admonitions.

He brought me up short one time. I walked in and he was slouched back in his chair behind his desk. As I was sitting down across from him, he looked me coldly in the eye and asked with a grim expression: “Steve, are you preparing the funeral of the United States yet?”

I was stunned. I had come to him for answers to my country’s problems only to find him not sanguine at all about America’s future.

I responded: “Mr. Volcker, I don’t do funerals.”

He smiled and said “Good.” And we started talking about strategic options to get more constructive outcomes from Wall Street.

Paul established the Volcker Alliance to bring together experienced and practical minds to improve two important infrastructures – public service and financial services. He had sensed that the aggrandizement of our bureaucratic state had abandoned a culture of true public service and had become too dependent on rational expertise and too absorbed with technicalities and self-righteous pedantry. Government had cut itself off from the people it was hired to serve. He wanted moral reform in schools of public administration.

He believed that Wall Street had crossed some Rubicon to inject too much speculation into financial markets. Such financialization serves financiers and those with liquidity much more than it does the real economy and middle class. Had his instincts been followed, the world would have avoided the 2008 collapse of credit markets.

I will personally miss Paul Volcker and I fear that all of us will have a harder time of it without his moral courage and wisdom pointing us in the right direction.

Years ago, while an undergraduate and hanging out with friends in Students for a Democratic Society, I read about the history of socialism and studied with the noted American Marxist scholar Barrington Moore his dismissive, even bitter, take on capitalism as intentional, systemic extraction of the surplus from peasants and workers. I remember vague references to the general strike as a tactic of institutional change where the “people” refused to participate in the elite’s system of extraction.

Last week, I was in Paris for Bruno Roche’s conference on the economics of mutuality. My time there was then diverted by the need to adjust to a “general strike” called for Thursday December 5th. The strikers were the people; the oppressor was the Macron government. I did not want to risk a trip to Amsterdam on the 4th to see colleagues there for fear that the railroads would not run in the evening for my return to Paris if the workers walked off before the official time for the strike had begun.

On the 5th, public transportation was not available; streets were empty of traffic; stores were closed; taxis were unavailable. You could walk around looking at closed shop windows until you got bored and returned to your hotel. A few stores for tourists were open near Montmartre, not far from our hotel.

An avenue near our hotel was filled with people in protest – walking, singing, carrying signs, all quite well behaved. But there I was in the streets of Paris thinking about uprisings of the past – the capture of the Bastille, the 1832 insurrection made vivid by Victor Hugo in Les Miserables, the Commune of 1871 – real instances of acting on the idealism of the “people” taking national destiny into their own hands. I realized I was in the middle of French history repeating itself. What could be academic and the stuff of fiction was an actuality.

Why a general strike? As I understood the issues, President Macron wants to reduce retirement benefits out of fiscal prudence. The age of retirement for many workers would be pushed back from age 50 and their monthly retirement benefits would no longer be the equivalent of full salary. Public transport workers object. They like retiring young and having the state maintain them quite comfortably.

Then, I was told that students also objected. They were quite visible among the strikers. They very much like the idea of early retirement for the older generation to make those jobs available for themselves. They like giving older workers incentives to retire early.

I was watching a general strike demanding entitlements, not an end to oppression. But then, of course these days, being denied what one desires is, a priori, cruel-hearted oppression on the part of those who are to pay for the entitlements, a hardship for the dispossessed not to be tolerated.

The moral question of who should be entitled to how much of what and on what terms of reciprocity – what should be given in exchange for the benefit – is a difficult one for me.

Secondly, it’s not at all clear to me how systemic entitlements can ever be provided if wealth is not created to finance them. And how can such wealth be created without enterprise and the sale of goods and services at a profit?