When Michael O’Leary and Warren Valdmanis They both met for the first time in Bain Capital's offices in Asia and were more or less conventional members of the finance profession. Yet years later they would co-author a book in which they would argue that American-style capitalism – including a "meatheaded" obsession with short-term gains – does great harm. They argue that our economic system urgently needs a fresh start.
In her latest book Responsible: The Rise of Citizen CapitalismThey argue that Adam Smith-style invisible hand capitalism is ineffective and out of date, and that corporations need to reorient themselves to serve more than just shareholders (who, in their opinion, are not particularly well served). either).
Both authors, who were on the founding team of Bain's first fund for investing in social impacts under former Massachusetts Governor Deval Patrick, also spoke capital on the rise of ESG (environmental, social and governance) investments, the divestment movement (and whether it is actually working), the Business Roundtable's promise to end the primacy of shareholdersand where companies – and investors – can be most effective.
This interview has been compressed and edited for reasons of clarity.
You talk a lot in the book about the skepticism or utter cynicism that ordinary people – especially those in the investment world – have about ESG and socially responsible investing. Was that where you started?
Valdmanis: I admit that I was skeptical. I was trained in this invisible hand idea by Adam Smith: If you just dedicate yourself to creating more valuable businesses and creating shareholder value, it will have a positive impact on the world. So I didn't feel the need to put a social adjective in front of it. But I quickly realized a few things through efforts with Governor Patrick. The first is that the invisible hand (idea) is really attractive, but it doesn't always work that way. I think, frankly, even Adam Smith, if you read his work carefully, you will find that he did not even intend it as it is currently understood and used. But I've also found that there is enormous potential at the interface between the social and the commercial. I think we have this meatheaded short term ism in our economy that prevents even companies from realizing what is sometimes in their long term interests.
O’Leary: I don't think we saw how this generational gap really shows in many people's fundamental views of capitalism. You see the proportion of Millennials and Gen Zs who are in favor of capitalism or have a positive view of capitalism, which has fallen from two-thirds in 2010 to only about half today. And I think millennials just approach these questions with a different perspective. You ask people: "Is sustainability or ESG important for investing?" And nine in ten millennials will say, "Yes, of course you should think about environmental and social issues in your investment portfolio." And 40% of baby boomers, maybe less, will agree. I think you approach the question from a slightly different angle – I think with less skepticism – if you are of a younger generation.
I was impressed in the book with the way you talk about what you call this "rational hypocrisy" that businesses have to deal with.
O’Leary: Today, when you are the CEO, you have a demand from shareholders to maximize profits. You have a demand from all of your stakeholders to do good for people. And when you face these conflicting requirements, it is much easier to forge good works than to counterfeit good returns. As a result, they display a kind of rational hypocrisy in which they say different things to different audiences. The best proof of this would be any company that publishes two different annual reports: a 10-K and then a Corporate Social Responsibility report or a sustainability report for all of their stakeholders. And often there is no relationship between the two.
I look at the crisis of confidence in our economy, in which three quarters of people don't trust big business. People don't trust company leaders. So you put the clock back to last December before the pandemic hits. In some ways, in an eleventh year of economic recovery, it's so easy for CEOs to say, "No, we're good for shareholders. We're good for stakeholders. We're good for workers. We're good for everyone. The chance, the The pandemic presented to business leaders is in times of crisis – then they can actually show what they meant by their commitments, and they can show that when they said that their workers are the most important thing in their business … Prove it.
You both emphasize the long term and even say quarterly earnings updates should be eliminated. We have seen this massive, massive boom in the stock markets, just as the American economy sees millions of unemployed. Do you think the dichotomy of this is sinking in?
O’Leary: There have been two major disconnections in our economy. The first major disconnect was between productivity and workers' wages, with productivity increasing but wages remaining unchanged. You look at your average wages over the past 50 years in America, and despite the growth in GDP, despite the growth in productivity, this has not gone down on most workers.
Valdmanis: And they were in lockstep from 1945 to 1973! Lockstep! These two things moved together. Productivity and wages moved together for almost 30 years.
O’Leary: What you are addressing, however, is that second decoupling in the past few months where the stock market has appeared to have defied gravity to grow even as unemployment rises, even though productivity and GDP growth have been flat to low. And you look at this – no wonder two-thirds of Americans don't believe that the financial system is good for society. And I think that is the hope of this stakeholder capitalism movement that if you understand a company not as a collection of assets that belong to the shareholders, but as an organization, a group, we will be able to re-establish that connection of people, including employees and customers, as well as suppliers and voters.
You point out in the book that many of us are actually shareholders through your pension, through your retirement savings, and yet this connection really seems to be broken. When did that happen?
O’Leary: 137 million Americans own stocks, either directly or through a pension fund or through a mutual fund of someone like Vanguard or BlackRock or loyalty. So we have this financial system that is very distant, very anonymous, and very mediated. I think of my mother, a teacher in a public school. She has a pension fund, investment managers who are advised by investment advisors who ultimately invest in companies that then make an impact on the world. And that is a very long, complicated process to go from my mother – who is the ultimate beneficiary, the ultimate shareholder – to the ramifications these companies are having. So it's no wonder that almost nothing can get through this long, complicated system except the payline.
My favorite example is that you take something like inequality and roughly three quarters of workers think CEOs get paid too much, right? No wonder considering the ratio of CEO to median wages. Yet each year shareholders have the right to vote on executive compensation packages and each year 97% of them are passed with more than 90% support. There is simply no correlation between most Americans' actual beliefs, interests, and values and what is actually expressed in our companies.
One of the other things I wanted to ask about is the types of paradoxes you highlight here – how you end up with Milgram-Nixon syndrome. But can you explain what it is first?
O’Leary: We initially found it in one Comment area from a Financial Times Items. It was so in tune with the issues that we saw we needed to expand it. And the way I would describe it, how is it that we have a system in which companies, as you know, take actions that no one will approve of and that you do not stand for anyone's values. How can this be possible? The answer is, we have a system where CEOs say, "We work for shareholders, and shareholders want to maximize profits." Stanley Milgram was a social scientist at Yale who had researched research showing that people will do almost anything when they believe they are only acting as agents for someone else – when they are essentially obeying orders. Here's how CEOs say, "We follow the instructions to maximize profit."
Now return to these shareholders. They are so distant from the decisions companies make every day that they say, “We can't possibly be responsible because we own hundreds or thousands of stocks through index funds or our stocks through our pension fund. We have very little visibility or exposure. We may not be held responsible for what companies do. "Nixon's defense during Watergate that he might not be responsible. He runs the entire government of the United States. How could he be responsible for what a small group of people do on his behalf?
And then you combine these things together. CEOs claim that they are not responsible for following orders. Shareholders claim that they are not responsible for being too far removed from actual actions. They have an economy where the money is passed around until Poof, It disappears.
You start the book with a responsible mine owner and finish the book with a man whose business was mostly coal while he ran the business (formerly) Duke Energy CEO Jim Rogers), but you cite both of them as examples of responsible, purposeful leadership. Although they were affiliated with companies that sometimes don't get a particularly positive association.
Valdmanis: If the only companies we think are good or virtuous companies are your solar panel manufacturers in Tanzania, this is not how we are going to fix capitalism. When you drive a Tesla In West Virginia, it's likely a coal-powered Tesla because the electricity that runs off comes from a coal-fired power station. So we need to figure out how to hold all types of businesses accountable, not just those that already look pretty responsible. One of my problems with investing in social impact is that when you set too narrow boundaries on what you think is acceptable to invest, you are really limiting the influence you can have.
What do you think of the Business Roundtable's commitment last year to more than just be accountable to shareholders?
Valdmanis: I would say listen, it's wonderful when BlackRock's Larry Fink writes a letter and says, "We care about stakeholders." It is wonderful when the BRT makes a statement, as it did last summer, that it cares about stakeholders. This can only be a good thing up to a point I think. Interestingly, immediately after this statement, the question is the advice of institutional investors published a statement That means, "Yes, but let's remind you that shareholders own companies and companies ultimately serve shareholders. And by the way, what does this statement mean?"
I actually think that's a really good question. What does this statement mean? A statement of good intentions is great, but it needs action to be taken or there is a risk of cynicism developing. So I think that this group has a great chance of translating this statement into practice with a concrete action that is right in front of them, which is why they are not adopting it World Economic Forum standards on ESG measurement? The big four accounting firms believe this is possible. They know it matches what they said and they don't have to do it all at once. This could happen over time. We spoke with a prominent voice in the BRT. He called us after reading our book. And I believe these intentions are real. I think these are good people who want to change their business. I think sometimes they just don't know exactly what to do.
What happens if we don't "save capitalism" in your words?
Valdmanis: If you are a capitalist and believe in this system in general, now is the time to fix it. Because I think many of the problems that arise here don't go away and will only get worse if left unaddressed. And the worse they get, the more likely the people who say, "We have a way to solve this, it's called government" – the more likely the government will get into areas where it doesn't really has the tools to fix it, but will try anyway. And that could be that the baby is thrown away with the bath water. And I think that's really dangerous. So I come from the perspective of a real believer in our system, but also a real believer, that it is in the interests of people like me, of capitalists, to save the system from itself.
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