The Slipperiness of Stakeholder Capitalism
Plus Filling the Void, Greedflation and the Rumbling Banking Crisis
The Slipperiness of Many Goals
In a previous newsletter (“Should Companies Be Political?”) I said the following:
Popular conceptions of capitalism are shifting, with many people considering a company’s responsibility to a wider group of stakeholders, like employees, local communities, the environment and the wider economy.
My personal politics likes a lot of this. In particular, the increasing acknowledgment that environmental sustainability is a responsibility of corporations too. However, I don’t think we acknowledge the trade-off we’re making and the risk we’re creating if we advocate a multi-stakeholder approach.
Often the winner in this move is the CEO and senior management. In a more “1980’s” version of capitalism, when we measured CEOs against a single goal of maximising shareholder value, it was a crude yardstick, and didn’t produce ideal societal outcomes, but it had the distinct advantage of being simple and measurable.
Whereas before the CEO could get fired when the share price dropped, they now have the flexibility to argue that they’re doing a good job because they were balancing shareholder value against the interest of some other group of stakeholders. It’s a lot of extra wiggle room, which reduces accountability and concentrates power.
There is huge uncertainty in the shift from a single metric to a multitude and the trade-offs involved. Most of these trade-offs manifest as a power struggle. There is simplicity in a single metric, but multiple-metrics give space for the question of who gets to decide what metrics are important, and how they rank against one another.
I worry about this when we (rightly) point out the flawed over-reliance on GDP as a single metric, for example.
New research from the National Bureau of Economic Research published this week documents this trend and substantiates the idea of multi-metric approaches as deflection.
Using natural language processing, we identify corporate goals stated in the shareholder letters of the 150 largest companies in the United States from 1955 to 2020. Corporate goals have proliferated, from less than one on average in 1955 to more than 7 in 2020.
We find goal announcements are associated with management’s responses to the firm’s (possibly changed) circumstances, with the changing power and preferences of key constituencies, as well as from management’s attempts to deflect scrutiny.
Goals also do seem to be announced opportunistically to deflect attention and alleviate pressure on management.
NBER: What Purpose Do Corporations Purport? Evidence from Letters to Shareholders Link
Filling the Void
What man actually needs is not a tensionless state but rather the striving and struggling for a worthwhile goal, a freely chosen task.
-Viktor E. Frankl, Holocaust survivor, “Man’s Search for Meaning”
In his best-selling book “The Four Hour Workweek” author Tim Ferris lays out a set of strategies that people can follow to boost their productivity, allowing them to minimise their hours worked while maintaining (or growing) their income. I quite enjoyed the book and his strategies, but one element I found fascinating was that he dedicated almost a third of the book to the topic of “Filling the Void”. What do you do when ultra-productivity gains you a huge amount of free time?
His belief is that without something to intentionally dedicate our time to, most of us will just end up filling our week with more work. Whether that’s because we’re workaholics, we feel social pressure not to be lazy or just because it’s the “done thing,” he believes it’s something to be actively worked against.
Even if you think that’s just salesmanship for the rest of the book, the question is an interesting one, especially when applied to the economy as a whole.
It strikes me that at a time of record high global GDP, when productivity has never been higher, money is something we should be caring about less and less, with more focus on our families, projects, community, impact and spiritual lives.
But it seems the opposite is true, as a survey from the Wall Street Journal this week found that:
“Patriotism, religious faith, having children and other priorities that helped define the national character for generations are receding in importance to Americans”
NYT: Money Is Up. Patriotism and Religion Are Down. Link
Tim Ferriss: Filling the Void: Thoughts on Learning and Karma Link
Central Banks are Recognizing “Greedflation”
Last week we discussed the success of “Corporate Greed is Causing Inflation”, as a counter-narrative to “Wage Spirals are Causing Inflation”. This has been the view of prominent progressive politicians, commentators and economists, but not so much of central banks. It seems there have been some small changes on that front. In a recent interview with the New York Times, Fabio Panetta, Member of the Executive Board of the European Central Bank said
“There’s a lot of discussion on wage growth,” Mr. Panetta said in an interview this week. “But we are probably paying insufficient attention to the other component of income — that is, profits.”
In the week that their own research showed that corporate profits “increased by 9.4% [in Q4] and contributed more than half” of inflation, you may think the statement “we’re probably paying insufficient attention” from a single executive board member is a little bit tepid… and you’d be right!
But it’s nothing compared to the wishy-washy statement from Bank of England Governor Andrew Bailey in an interview this week:
“When companies set prices I understand that they have to reflect the costs that they face. But what I would say, please, is that when we are setting prices in the economy and people are looking forwards we do expect inflation to come down sharply this year and I would just say please bear that in mind.”
Compare that to his comments last year ago about wages:
"I'm not saying nobody gets a pay rise, don't get me wrong, but I think, what I am saying, is we do need to see restraint in pay bargaining otherwise it will get out of control."
"We are looking, I think, to see quite clear restraint in the bargaining process because otherwise, as I say, it will get out of control. It's not at the moment, but it will do."
Of course, ensuring markets are competitive and profiteering isn’t destructive isn’t the role of the central bank, but what they say about inflation and its drivers carries huge weight.
Guardian: Bank of England boss urges firms to hold back price rises or risk higher rates Link
FT: Central bankers warn companies on fatter profit margins Link
NYT: Are Big Profits Keeping Prices High? Some Central Bankers Are Concerned Link
CBS: U.S. companies just had their best year since before most of us were born Link
ING: Never waste a good crisis – a profit-price spiral in Germany Link
ECB: “Interview with The New York Times” Link
The Banking Crisis Rumbles On
Silicon Valley was the second largest banking collapse in US History. The third largest also happened in March, the collapse of Signature Bank. Joseph Politano describes:
although both banks had concentrated depositor bases, a large share of uninsured deposits, and had sustained significant losses and deposit outflows in recent quarters, Signature did not make the same kind of large unhedged bets on long-term assets that crushed SVB when interest rates rose. Instead, it had a more concentrated exposure to New York commercial real estate and private equity lending markets and was a key player in the crypto industry, all of which made it weaker than most but stronger than SVB in the current market environment.
As a sign of the heightened level of fear, more than $286bn has flooded into money market funds, presumably out of deposit banks, as they are presumed to be safer. Given that the largest run in US History was on money market funds, this doesn’t make me feel much safer.
Joseph Politano: What Killed Signature Bank? Link
FT: Money market funds swell by more than $286bn amid deposit flight Link
The Economist: “After Credit Suisse’s demise, attention turns to Deutsche Bank” Link
No Renaissance of Union Membership in the US
After a year of high profile activists and collective actions, the amount of Americans in unions is flat year-on-year, at 10.1%
Bureau of Labor Statistics: Link