By Gary Mullins
Correspondent, Economics Undergraduate
Private corporations – the means of production – are the backbone of any capitalist society. Without them, the manufacturing and distribution of goods and services would be wholly inefficient. Medicinal breakthroughs, engineering feats and scientific advancements arise not only from the capacity of brilliant human minds, but also from the socio-economic environment that encourages innovation and productivity.
The corporate environment is necessarily cut-throat. Competition fosters productivity and encourages progress. The modern-day tech titans have surged inexorably to the top of the corporate world, crushing the bellwethers of bygone eras. General Electric, the once-sprawling conglomerate, is the archetypal case in point. Founded in 1892 by Thomas Edison, its aviation, energy and finance business formed a structurally integral cog in the 20th century American capitalist machine. Its recent subjugation at the hands of the FAANGS (an apt acronym for the largest technology companies in the western hemisphere – Facebook, Apple, Amazon, Netflix and Google) is part of the natural evolution of a capitalist society. General Electric has long been outstripped by innovative tech-driven disruptors; failing to adapt to the ever-changing business environment. Nonetheless, its precipitous demise has proven to be more than a tad Darwinian. Survival of the fittest and all that.
For the past half-century, one of the most recurrent maxims in any corporate earnings report is to maximise ‘shareholder value’, that is, to focus purely on the bottom line, on profits. Indeed, for over three centuries, economists have extolled the virtues of self-interest and free-market capitalism – David Ricardo, Friedrich Hayek and Adam Smith are conspicuous examples. More recently, Nobel laureate Milton Friedman ardently defended free-markets, describing the pursuit of anything other than profit-maximisation as ‘pure and unadulterated socialism’. It is in the pursuit of profits that capital can be allocated efficiently; that the economy can find an equilibrium; that all parties can be better off. Adam Smith contended that ‘it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.’ 18th century Britain was not the corporate metropolis that we see today, however Smith’s aphorism rings resoundingly true – albeit substituting butcher, brewer and baker for banker, broker and board member.
It is noteworthy that nowadays the hunt for corporate profits has manifested itself in a multitude of unflattering, if not effective, ways. For example, empirical evidence and logic dictates that equity buybacks put upward pressure on share prices. Executive remuneration is often directly linked to share prices, thus incentivising the inflation share prices using short term measures rather than implementing long term, sustainable processes. Furthermore, the proliferation of mergers and acquisitions in recent years has only invigorated sprawling conglomerates and market consolidation. Such artificial growth is often (though not always) detrimental in real terms and corporations should instead opt for inward-looking growth through research and development. As was the case for General Electric, a flurry of ill-timed and ill-advised acquisitions has proved ruinous to its shareholders and over 300,000 employees. The amalgamation of many distinct entities has led to disparate business needs, a lack of cohesion and frictions so stubborn that even one of America’s most preeminent corporate bastions appears unable to overcome them.
As the global economy becomes increasingly driven by corporations, which in turn are increasingly driven by profit-maximisation, there appears to be dwindling concern for the everyday-consumer. Further, with more and more corporate behemoths inhabiting the concrete jungles of New York, Hong Kong and London, where lies the incentive to protect the distant, disadvantaged, discouraged and disabled? If ethical ventures are not in the best interest of shareholders – at least in terms of short-term pecuniary recompense – are corporations naturally shirking their social responsibility? More to the point, in a capitalist society, do corporations have any social responsibility to shirk in the first place?
In 1819, the American Supreme Court ruled that corporations were legal persons, protected by the Constitution – effectively loosening the reins and allowing corporations to be ‘good citizens’ only if they voluntarily chose to be. Notwithstanding such disentanglement of corporate actions and consequences in the decades and centuries prior to Friedman’s call for shareholder primacy, executives always had a raison d’être extending beyond that of the bottom line. There are many examples of companies exercising their power in socially responsible ways. In 1914 Henry Ford, perhaps the most seminal manufacturing magnate in modern industrial history, increased the minimum wage of his employees to a heretofore unparalleled $5 a day and simultaneously capped the working day at eight hours. Furthermore, Andrew Carnegie – industrialist, philanthropist and once America’s wealthiest man – gave away ninety per cent of his fortune in order to built public libraries and ‘to promote the advancement and diffusion of knowledge and understanding.’
Friedman’s extensive oeuvre has stood at the forefront of modern macroeconomics for seven decades, yet his call for a singular focus on profit-maximisation is facing reprisal. Executives appear to be replicating the charity and philanthropy of Mr Ford and Mr Carnegie. Indeed, the dearth of corporate responsibility and ethical investing may be coming to an end. In recent years, executives have become decidedly more vocal when it comes to ethical issues. The modern chief executive must embrace both business and social challenges if they are to succeed. They must act as the lodestar for social responsibility; admonishing morally reprehensible pursuits and serving justice – or they must appear to be doing so in any case.
Make no mistake, the corporate shift from profit to ethics was borne out of necessity rather than desire. Following the financial crisis in 2007, confidence in capitalism crumbled. In the relentless pursuit of profit, the solid foundations of the entire financial system had grown tired and flimsy. Wall Street became a breeding ground for excess, for greed and for negligence. Younger generations have fallen out of sync with the centre-right and centre-left, instead seeking refuge amongst those on the extreme ends of the political and economic spectrum. Not since the Second World War has there been such European social unrest. Macron, Merkel and May, and all that they stand for, are being challenged by the vivacious and aggrieved youthful generation.
Against the backdrop of such social disquiet, step up corporations must, and step up corporations have. Many fund managers have updated their investment strategies in an attempt to tilt away from controversial stocks such as tobacco, armaments and non-renewable energy. Man Group, the world’s largest listed hedge fund, plans to organise some of its funds such that it avoids these contentious industries altogether. The credit rating agency, Moody’s, recently revealed that the growth of sustainably and socially-labelled debt had grown exponentially. Some $8bn of sustainability bonds and $5bn of social bonds were issued in the first six months of 2018. It is estimated that green bonds – intended to encourage sustainability and to support environmental projects – constitute about two per cent of the global fixed-income market.
Of course this is reason for cheer, however, it is only prudent to question the motives of powerful executives as they sit atop their ivory towers. It appears that the proliferation of ethical and social investing has more than a touch of the Machiavellian to it. The market for sustainable investing is still overwhelmingly eclipsed by the market for more profitable ‘sin’ assets. Paying lip-service to social causes, while concurrently maintaining a tight grip on profits, is the ulterior dual mandate of the modern-day executive. After all, it costs nothing to merely speak fervidly of the great grievances in the world. Indeed, Machiavelli’s political treatise warned that ‘everyone sees what you appear to be, few experience what you really are’ – a tenet that remains astonishingly prescient 500 years after its first publication.
Even if fallacious, perhaps such contrived altruism is simultaneously beneficial to the many and to the select few. The rise of ethical and social investing is real; the numbers speak for themselves. The concerns and attitude of the general populace are in constant flux and corporations must adapt or else find themselves relinquished to the pages of history with General Electric. Profit-maximising executives are not to be scorned upon, they are but the product of the capitalist society to which we owe so much of our advancements and innovations. The rejuvenation of social and ethical investing has not occurred in spite of corporations; it has occurred because of corporations. Machiavelli’s proclamation to evoke an image best-suited for one’s self-interested endeavours forces corporations to constantly mould and remould their strategies to match the will of the people and the times in which they live. We are living in a time where social injustices are increasingly the cause of unrest. An incidental consequence of adaptive, machinating corporations is that social and ethical investing can prevail in the equilibrium of a capitalist society – without disturbing Smith’s omnipotent ‘invisible hand’.
Featured photo provided by Sarah Harte/The Independent