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I was in France last week showing two San Francisco grandchildren both a bit of Paris and two chateaux in the Loire Valley.  Unexpectedly, the trip proved to be a history lesson for me, a lesson in the globalization of our time.

The famous sights of Paris – the Louvre, the Orsay, the Eiffel Tower, Versailles – were inundated by tourists, each room flooded from wall to wall.  Lines everywhere.  Toilets in need of cleaning and replacement of tissues.  Taking the Metro was an experience in being herded.

It was the typical tourist season, which I had expected, only worse, as people from all over were putting Covid behind them and spending their money in conspicuous consumption of status goods.  But the usual crowds of Chinese tourists did not add to the congregating, as they were confined at home.  The hordes of non-Chinese were enough to overflow the city’s tourist attractions and the two chateaux.

It was almost as if most of Paris itself had become a kind of Disney theme park.

As I observed those arounds me – in the Metro; in the ticket lines; in cafes; walking the streets; filling the rooms in Versailles; lining up for a 30-second selfie documenting their presence before the Mona Lisa; and then immediately leaving her without comment – the thought entered my mind that our world has entered a new phase of globalization.

I even imagined that the Mona Lisa herself was calling out to me from behind her protective enclosure with her face seemingly more sad than in my previous visits.  In her expression, I imagined her wanting to say something about the trivialization we humans so easily impose on excellence.

I then focused for a second on the thousands walking right past, without taking any notice three Leonardo’s on the hall just outside room 70, where the Mona Lisa sits in her protective enclosure.

My grandchildren were following the crowd heading toward room 70.  I asked them to step aside for a moment so that I could show them the three other paintings by Leonardo.  They seemed a bit surprised that the museum also had such pictures, as nobody had ever made a fuss about them.  They stood a few minutes looking at them.  I felt down at not being that able to make those pictures too more a part of their awareness of greatness.

One of them, a portrait of a woman which I find more powerful that his Mona Lisa, is:

In our hotel lobby one morning, while awaiting my grandchildren to come down for breakfast, a friendly woman from New York, originally from Haiti, said to me, with a hard expression in her eyes and tenseness in her voice that, in her opinion, the crowds would even pass up a chance to see Jesus, just to put themselves before the Mona Lisa.

What a poignant way, I thought, of asking what determines worth in our culture – popularity; rarity; appearance or essence; convention; what goes viral; or the whim of the masses?  Do we have any standards of quality anymore or is quality a form of social injustice, impossible to allocate equitably to every human soul born alive.

Maybe Shakespeare was correct in concluding that “When we are born, we cry that we are come to this great stage of fools.”

The middle class and even some from the upper lower class in their retirement, at least in Europe and the Middle East, along with many Asians and not a few Latin Americans, has gone global in its aspirations for tourism.  The bounty created by the global, post-World War II “liberal democratic order” has more than trickled down from the top.  It has financed the rise of a large “Third Estate” – Le Tiers Etat – which revolutionized France in 1789 and thereafter, the entire world.

But in today’s phase of success in globalization of wealth and opportunity, those taking advantage of travel seemed to me to have little personal interest in history or art.  The ones surrounding me this past week in Paris evinced in speech overheard, in behaviors, in their rush to get on to the next cell phone photo documenting their presence at a place of renown, no excitement in the presence of greatness or where history happened.

In being carried by the crowd through the royal rooms in Versailles, I heard not one mention of “Louis XIV,” nor any voice make a comment about the France of his time or his role in history – apres moi le deluge.  Not did I hear elsewhere Napoleon’s name spoken in my presence.

In the Hall of Mirrors in Versailles, while waiting for my grandkids, I happened to look up and saw this saying above a mirror: “The king governs by himself alone.” (Le Roi gouverne par lui meme)  I had not seen it in previous visits, but thought – how apt it still was for our time.  This principle of jurisprudence applies to Vladimir Putin, Xi Jinping, Erdogan and in the opinion of some Americans, Donald Trump.  History repeats itself.  Or is it just us, never able to rise above our natures?

The phrase is the title of the ceiling painting executed by Charles Le Brun in 1661:

Le Brun’s painting is:

In any case, did the crowd in the Hall of Mirrors last week have concern to learn from French history about how our governments should be run and who should get to do what to whom?  I doubt if more than a few even looked up at the ceiling except to take a picture.

In the Orsay museum, tourists from all over did not stop before masterpieces by Van Gogh other than to take a photo.

The experience brought to mind the disdain and resentment of “new money” and “the middle class,” the dreadful, even deplorable, gaucheness (as an appalled Hillary Clinton castigated Donald Trump’s supporters in 2016), which dominated the tastes of pre-industrial aristocrats in France and England in the opening century of capitalist accumulation.

The Marquis de Condorcet, Henri de Saint-Simon and Auguste Comte created elitist socialism to elevate the masses properly, not to let them make it on their own through the uncouth experiences of labor and trade.  Even Karl Marx was appalled by the boorishness of the early capitalists, giving them the caricature of being only “Mr. Moneybags” and bitterly recoiling against the “cash nexus.”

Charles Dickens, who wrote of and for the rising middle class in England, denigrated a capitalism gone too far by creating his character, Ebenezer Scrooge, and then sharply contrasting Scrooge with the Christian morality of grace at Christmas time.

It was not only the economic inequality brought about by the economic prowess of capitalism which drew forth a felt need to control the tide of history, but the threat of a crass bourgeois geist taking over and degrading our humanity that called into action those with ideas for the prevention of or, if needed, the remediation of such a baleful contingency.

My question is: Has capitalism, through globalization, now brought that unseemly tiers etat with its banal, collectivized id to global prominence with the “embourgeoisement” of our civilization?

For over two centuries, work or perhaps more precisely, “labor,” has been lifted up as the Achilles’ heel of capitalism.  The essential narrative of Marxism and derivative socialisms is that capital exploits labor and workers deserve much better than what they get from free markets.

Recently, a focus on social injustice and Thomas Piketty’s documentation of the inequality between the very rich and the rest of us has continued to pit labor against capital.

As one American writer and commentator on social class, F. Scott Fitzgerald, said to another writer, Ernest Hemingway, that “The rich are different from you and me.”  Hemingway supposedly replied “Yes, they have more money.”

Was Hemingway inferring that “money,” all by itself, bestows status and elevates us up the social hierarchy?

I recently read a report by Allysia Finley of the Wall Street Journal’s editorial board on research on what happened when some “poor” people were given free money.

The findings are here:

Did pandemic stimulus payments harm lower-income Americans?  That’s the implication of a new study by social scientists at Harvard and the University of Exeter.

Liberals argue that no-strings-attached handouts encourage better financial decisions and healthier lifestyles.  The theory is that low-income folks become more future-oriented if they’re less stressed about making ends meet.  The Harvard study put this hypothesis to the test and found the opposite.

During a randomized trial conducted from July 2020 to May 2021, researchers assigned 2,073 low-income participants to receive a one-time unconditional cash transfer of either $500 or $2,000.  Another 3,170 people with similar financial, demographic and socioeconomic characteristics served as a control group.  The trial was funded by an anonymous nonprofit.

Many received cash allocations from the American federal government in the form of a card:

Participants earned an average of about $950 a month and had $530 in unearned income (e.g., food stamps).  About 80% had children and 55% were unemployed.  Over 15 weeks, they were surveyed about their physical, mental and financial well-being.  Forty-three percent also agreed to allow researchers to observe their bank balances and financial transactions.

The top-line result: Handouts increased spending for a few weeks—on average $26 a day in the $500 group and $82 a day in the $2,000 group—but had no observable positive effect on any individual outcome.  Bank overdraft fees, late-payment fees and cash advances were as common among cash recipients as in the control group.

Handout recipients fared worse on most survey outcomes. They reported less earned income and liquidity, lower work performance and satisfaction, more financial stress, sleep quality and physical health and higher levels of loneliness and anxiety than the control group.  There was no difference between the two cash groups.

These findings contradicted the predictions of 477 social scientists and policymakers the researchers surveyed.  That’s not surprising.  Most liberal academics and politicians believe government handouts are the solution to all problems.  If transfer payments were a ticket to the middle class, the War on Poverty would have succeeded long ago.

The researchers posited that perhaps the cash payments weren’t generous enough to generate a positive result.  “Receiving some, but not enough money may have made their needs—and the gap between their resources and needs—more salient, which, in turn, may have made them feel distressed,” they write.

“Needs” is a subjective term.  The theory is that low-income people who got handouts became more stressed when they realized they still couldn’t afford everything they “needed” or more likely, wanted.  If that’s true, simply giving people even more cash would surely lead to the same problem.

More plausible, the payments made work less rewarding, which reduced feelings of personal well-being.  Cash recipients reported less earned income and felt worse about their work.  It’s no surprise that people who received a large percentage of their monthly income for doing nothing were less motivated to work and less satisfied with their work.  Earning a paycheck can give workers a sense of personal agency that encourages them to make better financial and health decisions.  Receiving a handout may do the opposite.

As for financial outcomes, poor people often struggle to manage money and this is one reason why many remain poor despite receiving plentiful government assistance.  Merely giving people more money won’t make them better stewards of it, as the study showed.  In some cases, people spend more than they receive and become overextended.

Bad outcomes are the bane of life.  This is true for all systems – social, political and economic.  We try to arrange outcomes – personal and collective – that are pleasing; happy; rewarding; entertaining; educational; pleasurable; etc.  And so, rather naturally, when things do not work out to our satisfaction, we tend to seek who is responsible for the disappointment or the harm done.

By common sense, fault follows power to the source of wrongdoing.  Those who can, should.  Those who did are responsible.  They are the authors of our misfortunes.

In the early decades of capitalism, early socialists started pointing fingers at capitalists for the shortcomings of market outcomes, in particular their greed and love of money.  If prices are too high, it is the fault of capitalists.  If employees are paid too little, it is the fault of capitalists.  If products are shoddy or dangerous or services are deficient in meeting our expectations, it’s skimping or cutting corners to make more money, which is the cause of poor business performance.

This incautious habit had a notable ancestry in Rome with the question “Qui bono?” always to be considered when seeking who was responsible for what had happened.

The Biden Administration has adopted this placing of blame.  If gas prices are too high, it is because oil companies refuse to lower prices to help their customers get through a rough patch in global economics.

But who is responsible and for what?  How do we allocate responsibility in capitalism?  When is greed ok and when is it excessive?  What do employees deserve to be paid?  Is a wage an entitlement or the market price, given competition and opportunity costs, for a good job well done?

Recently, the European Parliament approved 2 laws to place responsibility on Big Tech for 1) anticompetitive behavior and 2) providing illegal content.  The Digital Markets Act will impose new obligations – duties, responsibilities – on a small number of digital giants to restrict what they can do with online messaging, digital advertising and the app ecosystem.  The Digital Services Act will put the responsibility on companies, not users, to eliminate illegal content and other speech acts which regulators regard as harmful and give users an avenue to register with the companies’ complaints about curating content.

The Parliament had in mind a vision of what good outcomes are to be expected from the digiverse, so it allocated responsibility in ways it thought would promote those outcomes, making companies more responsible and users less so.

But the laws set up potential conflicts between the companies and users.  Some users may feel that they are unjustly prevented by the companies from saying what they want.

In a lawsuit in the U.S. state of West Virginia, a judge ruled for companies that they were not responsible for harm done by opioid consumption.  Local government has argued that under the law of causing a public nuisance, three large distributors of opioids were responsible for the opioid crisis in the state.

The court ruled that multiple actors caused the opioid epidemic, not the drug distributors all by themselves.  The plaintiff governments did not prove that the drug distributors caused the epidemic, saying that “overpricing by doctors, dispensing of excessive prescriptions by pharmacists and diversion of drugs to illegal use” were “intervening causes beyond the control” of defendant companies.

So, with respect to capitalism nationally and globally to change incentives material and moral for those who are responsible for ‘bad” outcomes, we first need to identify the responsible parties, all the defendants in the chain of causation that the result objected to.

Aristotle, notably, thought there were 4 different kinds of causes at work in the world: the material, the formal, the efficient and the final.  Courts in negligence cases in the U.S. can allocate responsibility severally among defendants depending on how much they each differently contributed to the harm done.

When we think of outcomes, we need a more complicated calculation of cause and effect than some owner or company stood to make a profit.

I recently read a review of a new book critical of capitalism – The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era.

Naturally, any book with the title of “rise and fall” with reference to an “order” reminds me of William Shirer’s The Rise and Fall of the Third Reich, a study of evil institutionalized.

I found the concept of the rise and fall of an order used to denigrate free markets annoying.

First is my skepticism of the intellectual process of fashioning critical hypotheses in order to expose abuses of power.  I find the methodology trite and a diversion from understanding reality. “Critical” frameworks, depending on the assumptions and presumptions of the critic, easily degenerate into mere narrations, hard to clearly separate from fictions and fables.

To be sure, myths, fairytales, stories, parables even, can enlighten, give us metaphors, teach ethics and inculcate moral lessons.  But understanding systems, especially human systems, which amalgamate culture, psychology, politics, economics, self-interest, faith, ambition and lassitude, demands a different order of thought than emotionally provocative storytelling.

I am particularly put off by contemporary critics of capitalism who concoct an ideal type of order given the name of “neoliberalism.”  To be sure, neoliberalism, as described, is a perfect foil for socialism.  Neoliberalism is perverse when socialist ideals are more directed to equality of comforting outcomes for individuals, entitlements to better living systemically provided by the reigning power structure of one’s society.

The project to disparage “neoliberalism” strives to marginalize, through defamation, non-state sources of authority, power and opportunity – free markets, private property, religions and individualism.

What most annoys me about the term “neoliberalism” is how it covers up a correct understanding of the intellectual origins of what is being rejected as unhealthy for human civilization.  What is now called “neoliberalism” or microeconomics, with its use of price and marginal utility theory to control supply and demand and its acceptance of profit as rationalizing correct decision-making, began with Herbert Spencer in his 1851 book, Social Statics.

Spencer’s thinking, now largely forgotten, was, until recent decades, most known as social Darwinism, an extreme form of individualism, where survival through competition was the goal of every person born alive.

In the late 19^th century, Spencer’s thinking was adopted by people like Andrew Carnegie and William Graham Sumner in the U.S. as a moral and intellectual foundation for the industrial revolution and the modern economy based thereon.

Spencer and those who followed his thinking, though, broke with Adam Smith in a very important way: they rejected the moral sense as a powerful braking mechanism restraining human self-assertion.  In the tradition of Aristotle and Cicero in the West (and of Mencius in China), Smith had written a psychological/sociological study of the moral sense with the title of The Theory of Moral Sentiments.  Smith’s guidance could be named as “enlightened self-interest” or “self-interest considered upon the whole.”

Any economic system which provides scope for individuals using their moral sense cannot fairly be called “neoliberalism.”

Now, to me, the crux of the argument between those who want “neoliberalism” and those who want more outcome determinate actions from government is who gets to extract rents from the economy?

Neoliberals want to minimize rent extraction by government and so tolerate the risk of sub-optimal rent extraction by owners of private property in private, free market transactions.

In particular, neoliberals tolerate lower wages for workers and anti-neoliberals want government to check such preference in using the proceeds of firm earnings by setting wage standards and empowering unions to bargain with firm owners over wages and working conditions.

Anti-neoliberals tolerate lower economic growth and innovation so that government may extract rents to provide entitlements to citizens – retirement stipends; healthcare; education; subsidies of various sorts; salaries for administrators; and expenditures on public good infrastructures, such as roads and bridges and a transition to clean energy generation.

Both sides argue over where, along a continuum of totally free and capricious private power at one end and totalizing monopolies of government power at the other, a society should seek to optimize its well-being.

Neoliberalism is also faulted for encouraging globalization of markets, the better to hamstring and weaken national governments, the principal source of effective power to reign in the galloping herds of neoliberal wealth creators.

The reviewer, Robert Kuttner, faults Presidents Clinton and Obama for seeking that point of optimization too close to the individualist end of the continuum.  Kuttner welcomes President Biden’s turn away from neoliberalism, but with Biden’s low standing in popular opinion and with a large majority of Americans reporting that they fear the nation is on the wrong course, it might be premature to declare the progressive left (socialist) the victor.  Nonetheless, Kuttner asserts that “Neoliberalism has indeed been discredited as both theory and practice.”  Yet, in believing that the cause of neoliberalism is a cabal of self-serving plutocrats, Kuttner also affirms that “… because of the residual power of financial elites and their intellectual allies, the appeal of market fundamentalism is far from dead.”

This, he says, leads to a time of confusion and conflict, quoting Antonio Gramsci: “The crisis consists precisely in the fact that the old is dying and the new cannot be born: in this interregnum, a great variety of morbid symptoms appear.”

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.

Here’s the July edition of Pegasus.

In this issue, we include an article on the moral capitalist and another asking what are governments for.

We also added some cartoons.

I would be most interested in your thoughts and feedback.

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.

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)

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.