Wednesday28 August 2019 ★ FINANCIAL TIMES 9Opinion
investor base of more socially responsi-
ble companiesshifts over timetowards
longer-term investors who don’t worry
as much about boosting quarterly
returns. Sovereign wealth funds and
large pension funds areincreasingly
divestingfrom companies that do not
meet social standards.Some $30tn
(more than one-third) of global investa-
ble assets — are now managed by
socially responsible vehicles.
Considering the interests of all of the
stakeholders that surround them will
force company executives to manage
multiple goals and look beyond the
single-minded focus of the financial bot-
tom line. Done badly, this could divert
attention and lead to suboptimal out-
comes on all goals. But the work of psy-
chologists and moral philosophers sug-
gests that humans are capable of accom-
modating multiple values at the same
time. Given what we know about the
way cognitive biases can distort
decision-making, having multiple
objectives might actually help.
The Business Roundtable’s announce-
ment is a strong indicator ofits political
will to address the conflicting interests
of various stakeholders. But ensuring
that this is not merewindow-dressing
will take skill. There are no easy solu-
tions that have not been implemented
already. To start, managers must
become better at identifying the trade-
offs in their business models. Then they
should treat them as opportunities for
innovation and rethinking the way they
do business.
In the past, corporate social responsi-
bility was often focused solely on mak-
ing the business case to shareholders for
investing a broader range of stakehold-
ers. But this approach risks making only
incremental changes, because the need
to produce profits still dominates.
Instead, we need to think of stake-T
he Business Roundtable, an
association of leading US
chief executives, last week
announced plansto repudi-
ate a singular focus on the
interests of shareholders and instead
pledged to “deliver value” to all stake-
holders. This is a big step for a group that
had previously argued that stockhold-
ers were “paramount” and the “inter-
ests of stakeholders are relevant as a
derivative of the duty to stockholders”.
And, it is a necessary one.
In one day this month, Greenland lost
11bn tons of ice. In one week, the US
experienced four mass shootings. In one
year, the world sends21bn tons of textile
wasteto landfills. In one decade, OECD
countries have madealmost no progress
on the gender wage gap. Corporations
are implicated in all these problems,
and so must be part of the solution.
The Business Roundtable’s about-face
takes guts. At the same time, these chief
executives are facing a new reality as
stakeholders make their voices heard in
new ways. “Clicktivists” are creating
social media storms about company
mis-steps; consumers are shopping with
their values; and millennial workers are
walking away from jobs at companies
that don’t behave responsibly.
Even shareholders want more than
financial performance.BlackRockchief
Larry Fink’s recent letterto the heads of
the companies in which his group
invests makes this clear by demanding
that companies have purpose as well as
profits. Research also shows that theAre companies right to abandon the
shareholder-first mantra?
This is an opportunity for
real change. There are noeasy solutions that have not
already been implemented
holder trade-offs as innovation chal-
lenges. Let’s say garment workers are
spending dangerous amounts of over-
time at their sewing machines. Rather
than simply complying with factory
safety standards, companies should
rethink the way they design products
and place orders so that time pressures
don’t mount.
If you use toxic glues to assemble your
running shoes, then you should invent
an assembly process that substitutes 3D
stitching for adhesives. In other words,
this is not about incremental change. It
is about transformation. Thoughtful
companies will flourish in this more
complex world.
The Business Roundtable announce-
ment is an important first step; now
CEOs must follow up with concrete
action.The writer, a professor at the University of
Toronto’s Rotman School of Management,
is the author of ‘The 360º Corporation’YesBalancing
interests will spur
business to be
more innovative
NoStraying too far
from focusing on
profits would be a
serious mistake
It is not as though society
has conferred privileges onbusinesses in return for
which they must do good
Sarah Kaplan
Geoffrey Owen
outcryabout these opportunity deserts.
ButDuncan Exley, author ofThe End
of Aspiration?,is exasperated at thecon-
flict between those who prioritise com-
munity or class and those who want to
liberate talent and potential. He points
out that the things you need to do are
the same on both sides.There is a base-
line of economic securitywithout which
very few will be able to rise —a stronger
safety net would serve both the collec-
tive and the individual, as would a strat-
egy to boost neglected areas, making it
unnecessary to “leave to achieve”.
He is also in favour of the talent
schemes Labourdisavows because they
tackle class segregation and change the
mix of the elite, whoset the policies. His
case studies of social mobilityshow
“posh friends raise your aspirations”,
disrupting the idea of a “pre-ordained”
station in life. But the desireto have
prospects should be recognised as uni-
versal. As with other strands of the UK’s
political debate, polarising arguments
are far from helpful.[email protected]versation since the Brexit referendum —
the plight of “left-behind” areas, where
prospects are poor, has become central.
A broad anxiety hangs over the whole
political scene; that the UK’s internal
migration, where jobs and universities
pull young people towards the prosper-
ous cities, further weakens struggling
communities. So an agenda that encour-
ages the talented or ambitiousto aspire
—to a degree or an apprenticeship at a
blue-chip employer, for example — has
fallen out of favour. As Rachel Reeves,
an economist and Labour MP for Leeds,
observed at aFinancial Times debate:
“It’s not just about getting people out of
those towns.”
The 2016vote was divided most
starkly along educational lines, which in
many cases mirrorgeographical chasms
in terms of opportunity. In parts of Lon-
donthat voted Remain, 70 per cent of
school places offer an education that
makes a significant positive difference
to results. In the north-east of England,
where the Leave vote was overwhelm-
ing, there are virtually no such high-
performing schools.There should be an“perverse”, pointing out: “We’ve got a
very long way to go on equality of
opportunity.”
The backlash against the concept of
social mobility is telling, though. It
stems partly from the left’s dislike of
politicians who have been in govern-
ment for a generation— and, yes, there
is a clear continuum from New Labour’seducation policies, through the coali-
tion years, to now. In the Corbyn-
McDonnell analysis,that wasunder-
pinned by an individualism that must
be rejected along withneoliberal
economics.
But switching the focus of Labour’s
policy and rhetoric to tackling broad
patterns of inequality also chimes with a
transformation in Britain’s political con-fight about aspiration and meritocracy
in the UK — not least because exam
resultstend to mapso depressingly on
to patterns of economic deprivation.
In June,the opposition Labour party
signalled it would drop social mobility
as a policy goal.Party leader Jeremy
Corbyn noted the degree of consensus in
recent yearsacross all parties for build-
ing a system to “allow talented and
hard-working people to succeed what-
ever their background”. This, he said,
had “failed, even on its own terms”, and
Labour wouldinstead aim for social jus-
tice.John McDonnell,shadow chancel-
lor, was more outspoken: “Behind the
concept of social mobilityis the belief
that poverty is OK as long as some peo-
ple are given the opportunity to climb
out of it, leaving the others behind.”
Only a few people reacted to this
remarkable swivel, calling it “anti-aspi-
ration”. They includedJustine Greening,
the comprehensive-educated Conserva-
tive former education secretary from
Rotherhamwhose backgroundmakes
her an outlier in her party’s upper eche-
lons. She found the Labour moveA
mid the UK’s annual fret
over exam results, this
summer has seen an
increase in fears that the
nation’s education system
condemns a “forgotten third” to failure
— roughly the proportion of 15 to 16-
year-olds who fail to gain a standard
pass in GCSE English and maths.
The argument pits headteachers con-
cerned about a long tail of demoralised
young people,with no clear path into
subsequent education or training,
againstministers who pushed through
reforms designed to ensure “rigour” —
their buzzword. Proper assessment,the
latter camp insists, will always rank
people by their achievements. But the
face-off ispart of a broader politicalSocial mobility is no longer an aspiration on the left
In Labour’s analysis,the
concept isunderpinnedby an individualism
that must be rejected
But how has this shift come about?
The business community is under-
standably concerned by the low esteem
in which companies, especially big com-
panies, are now held. This is in part a
consequence of the 2008 financial crisis,
which provoked justifiable anger at the
behaviour of banks. But there is also a
wider perception that many of the
world’s ills — rising inequality, stagnant
or falling wages, and environmental pol-
lution, among others — are due to the
activities of profit-maximising corpora-
tions, and that these ills can only be cor-
rected by radical changes in the way
businesses are run.
There are things that companies can
do to improve their image. But in doing
so they should be careful not to concede
too much. They would do well to take
note of remarks made some years ago by
David Henderson, the late British econ-
omist. His critique of a growing enthusi-
asm for what was then called corporate
social responsibility equally applies to
today’s view that companies should
focus on “purpose” as well as profits.
InMisguided Virtue, Henderson
argued that the case for CSR rested on a
mistaken view of how a market econ-
omy works. Advocates, he wrote, were
wrongly assumingthere was a disjunc-
tion between profitability and the inter-
ests of society.
If we want to measure the contribu-
tion that a business makes to the general
welfare, there is an obvious solution.
Henderson wrote that we should put a
value on the benefits that arise from its
operations, and then subtract the asso-
ciated costs. In his view, “the benefits to
people in general are indicated — not
precisely measured but clearly indi-
cated — by what they are prepared to
pay for what it produces and sells — that
is, by the revenues accruing to the
business”.T
hepronouncementby the
Business Roundtable, a
group that represents CEOs,
that companies should
downgrade the interests of
shareholders in favour of employees,
local communities and society at large
reflects a significant shift in thinking.
Not surprisingly, the statement was
promptly criticised by theCouncil of
Institutional Investorson the grounds
that it “undercuts notions of managerial
accountability to shareholders”.The business’s costs, meanwhile, can
be defined as the value of what could
have been produced if the resources
that the business used had been
deployed elsewhere. In this view, “prof-
its are the difference between the two
flows, revenues minus costs. Hence they
are a prima facie measure of the good
that a business is doing for people in
general”.
When businesses concern themselves
directly and predominantly with prof-
its, they are not showing excessive
regard for owners as distinct from stake-
holders. Nor are they slighting other
worthy objectives or allowing greed to
govern its actions. Prioritising profits
means focusing on the most obvious
value to society. The idea that a com-
pany’s main contribution to society
comes from other aspects of its activi-
ties not directly related to profitability
derives from a fundamental misunder-
standing of what business does.
Of course, this is not the whole story.
There are various reasons why profits
may be a dubious or unreliable measure
of a company’s contribution to the gen-
eral welfare: distortions in the tax sys-
tem, a lack of competition in the rele-
vant market, lax regulation that allows
firms to offload some of their costs on to
others. There are also situations in
which companies should “do the right
thing” even though there is no legal obli-
gation to do so and the decision may
lead to reduced profits.
Companies should always behave
responsibly, and should be seen to do so.
But Henderson’s arguments about
profits are a useful corrective to some
fashionable ideas about what compa-
nies are for.
It would be a serious mistake to
assume that the contributionthat a
business makes directly to the welfare
of society is largely independentof its
profitability. It is equally wrong to
conclude that society has conferred on
businesses certain privileges in return
for which they must do good works that
are not related to profitability.The writer is head of industrial policy at
Policy ExchangeD
espite all the attention that
is paid to the ups and downs
of the big stock indices, pri-
vate markets are where
much of the action is.
Last year, companies in the US
receivedtwice as much investment—
$2.9tn — from private sources than they
raised in the public equity and debt
markets, and academic studies have
found that the average private equity
and venture capital fund has signifi-
cantlyoutperformed the S&P 500in
recent decades.
That creates a potential problem for
ordinary Americans who want to save
for retirement, home purchases and
higher education. Today, more than 98
per cent of US households are prohib-
ited from investing in private equity and
venture capital funds, and their 401(k)
retirement plans cannot invest in these
funds either.
Meanwhile high-net-worth individu-
als with more than $5m in assets, and
institutional investors, including uni-
versity endowments and sovereign
wealth funds, are reaping the benefits of
these booming private markets.
The rules are designed to protect
retail investors from being burnt by
risky strategies, charged unexpectedly
high fees or locked into investments
that they cannot sell. But studies suggest
that such restrictions are misguided. A
2017 study by Voya Financial found that
private equity investingreduces the risk
of an investment portfolio through
diversification.
Securities and Exchange Commission
chairman Jay Clayton is considering eas-ing these restrictions. This summer, the
SECput out a reportexploring ways to
expand safely retail investor and retiree
access to private equity and venture
capital. The comment period on the
proposal expires next month.
The Committee on Capital Markets
Regulation, which I chair, believes we
have the answer. The SEC should allow
retail investors to put money into public
closed-end funds that primarily invest
in private equity or venture capital
funds — so-called funds of funds. These
funds and their advisers are registered
with the SEC and generally listed on
exchanges, which makes it easier for
investors to sell their shares.
Such public closed-end funds are also
subject to mandatory disclosure
requirements about the private funds
that they invest in and the fees charged
by those funds. This addresses concerns
about the transparency of private
equity investing. Furthermore, the
managers who run the closed-end funds
are sophisticated investors who have a
legal duty to select funds that are good
for retail investors. Together, these pro-
tections will insure that retail investors
are not left to fend for themselves.
We believe retirement savers are also
missing out because they cannot invest
in private markets. Defined-benefit
pension plans offered by government
employers are presently able to invest in
private equity, but company-provided
401(k) defined contribution plans gen-
erally do not. Based ona recent Boston
College analysis, we calculate that an
investment in defined benefit plans
would have outperformed one in the
401(k) plans that avoid private equity
by 29 per cent over a 30-year period.
Allowing retail investors to invest in
funds of private equity funds would
solve the problem for people who save
through individual retirement
accounts. But there is another barrier
for those who use company-provided
401(k) plans. Most of these plans avoid
investing in private equity because they
fear lawsuits claiming the funds are too
risky or the fees are excessive. The
Department of Labor, which regulates
such plans, should make it much harder
to bring meritless claims.
The SEC’s consultation is a good first
step. It is time to give middle-class
Americans the same investment oppor-
tunities as institutions and the wealthi-
est 2 per cent.The writer is professor emeritus at Harvard
Law School. John Gulliver, executive direc-
tor of the Committee on Capital Markets
Regulation, also contributedRetail investors
should be able to
access private
equity funds
Hal
ScottRetirement savers are
missing out because theycannot gain from these
booming markets
INEQUALITY
Miranda
Green
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