End of Week Notes
Paradigm Shift
Investors and corporations must work with government and civil society to solve problems
Sustainable investing and stakeholder capitalism represent a new paradigm that redefines the purpose of investing and of the corporation. The dominant paradigm of the past 40 years has been based on the belief that the purpose of the corporation is the narrow pursuit of profits for shareholders. That notion has been supported by investors demanding the pursuit of shareholder value through quarter-by-quarter growth regardless of the effects on other stakeholders.
In the 21st century, the great externality of climate change has driven home the point that the shareholder primacy model is simply not sustainable. So too has growing inequality, a bad situation that has worsened during the COVID-19 pandemic, and a host of other ESG issues. So too have the Internet and social networks that allow stakeholders to learn and communicate and remember in ways that were never possible before. Companies can no long turn over any instance of bad corporate behavior to their PR teams with the simple order to “get this story out of the headlines,” because the story takes on a life of its own on-line where stakeholders are informed and networked, and every incident is archived. In the new paradigm, rather than spin a bad story after the fact, it’s just better to make sure bad corporate behavior doesn’t happen in the first place. Investors are shifting towards a longer-term view that is aligned with the sustainability concerns of other stakeholders. As investors expect more-responsible corporate behavior and a focus on long-term sustainability, public companies are starting to adjust to meet those expectations.
Bigger picture, the shift to a new investment paradigm parallels what is happening in American politics and policymaking. The old investing paradigm can be seen in many ways as a product of the Reagan era, which was characterized by deregulation, tax cuts for the wealthy and corporations, and a weakening of organized labor, all supported by the growing influence of corporate money in politics. Tax cuts for the wealthy and the lower interest rates that came with the taming of inflation forced investors into the stock market, where they expected companies, without the added burdens of regulations and taxes and a weakened organized labor movement, to efficiently generate profits. Corporate managers could focus on delivering for shareholders, often at the expense of workers and other stakeholders, and with confidence that they could use their political influence to avoid paying for externalities via regulations.
Every so often we experience a shift like the one that is happening now. The old ways of doing things have become no longer fit for purpose and are replaced with something new that is more relevant to addressing current challenges. Call it a paradigm shift. It happened in 1933 with the New Deal and the activation of the federal government to address the Great Depression and then to build the American middle class. It happened again 48 years later in 1980 with the Reagan Revolution. Now, another 40 years later, it appears we’ve entered a new era that must address problems like climate change and growing inequality that the previous paradigm helped create. The changes we’re experiencing in the investment world are part of it.
For a discussion of the policy ramifications of the new paradigm, check out this piece by Bloomberg Opinion columnist Noah Smith:
Mitch to Corporations: Shut up and profit!
These bigger picture shifts help explain the hand-wringing on the Right and, no doubt, in a lot of C-suites, about whether corporations should be involved in “politics.” I place the term in quotation marks because of the absurdity of the notion that corporations were somehow not involved in politics before now.
Reacting to the groundswell of corporate leaders coming out against Republican voter-suppression laws based on the Big Lie that the 2020 election was fraudulent, Senate Minority Leader Mitch McConnell (R-KY) this week offered a “warning to Corporate America” to “stay out of politics”.
But during the old regime, corporations were more heavily involved in politics than ever before. In so doing, they followed the blueprint laid out in 1971 by future Supreme Court Justice Lewis Powell. In a memorandum to the U.S. Chamber of Commerce, Powell, then a corporate lawyer, argued that corporations should take a more aggressive and direct role in politics through political spending along with the creation of sympathetic think tanks and media outlets. And that’s exactly what they did during the Reagan era.
What seems to have confused Sen. McConnell is his understanding of corporate political involvement as being fundamentally instrumental — focused on issues of immediate self-concern to a particular company or industry. Campaign contributions tend to lean Republican and certainly towards Powell’s recommended support of “free enterprise” think tanks, but they also give to (mostly incumbent) Democrats so they can have access and exercise influence.
But today, at the dawn of a new era, corporate leaders are speaking out on systemic issues, like racial justice and voting rights, that their previous support for Republicans helped create. It makes sense for them to do so purely from the perspective of self-interest. Simply put, “political instability isn’t conducive to orderly business”, writes Victor Ray in the Harvard Business Review. And so now, finally, they’re saying enough is enough.
As JPMorgan Chase CEO Jamie Dimon wrote this week in his annual letter to investors:
“The problems that are tearing at the fabric of American society require all of us — government, business and civil society — to work together with a common purpose.”
Finally, on the question of whether speaking out is going to hurt business, most Americans want corporate leaders to take a stand. According to a JUST Capital survey taken last year, more than two-thirds of Americans believe “CEOs of large companies have a responsibility to take a stand on important social issues.”
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