This Ain’t Your Daddy’s Capitalism, and That Ain’t Such a Bad Thing

Has capitalism gone soft? What happened to making profits for the sake of serving shareholders? When did all these captains of industry start worrying about capitalism having to benefit society? What happened to my father’s capitalism?

In January 2018, BlackRock CEO Larry Fink caught the attention of the markets with his letter to CEOs of public companies, stating that they have a responsibility to make “a positive contribution to society,” as well as deliver profits for shareowners. Two brief quotes from his letter best summarize the tone:

To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.

Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.

Fink’s words are not an outlier. Many investors and issuers have called on both companies and investors to ensure that their capital allocation decisions and investment decisions consider more than just the next quarter’s earnings. The Committee Encouraging Corporate Philanthropy, an international forum of business leaders, has done a bit of research in this area, with reports focusing on investing with purpose, and investing in society.

The board of the institutional investing giant CalPERS has charged its staff with potentially aligning its $350+ billion portfolio with the UN’s sustainable development goals in order to embrace societal as well as financial goals.

The CFA Institute mission statement provides similar language:

To lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.

Does this mean that capitalism as we knew it is dead, or that investment organizations — including CFA Institute — have gone soft and care as much about unicorns as they do about unfettered capitalism? No.

Neither unicorns nor unfettered capitalism are real. You need to stretch the definition of a unicorn to claim they were ever real, and capitalism without constraints just leaves you in a Hobbesian nightmare that wouldn’t be good for anyone.

Today, both companies and investors have a better understanding of the interconnectedness of companies and the societies in which they operated. No company operates in a vacuum. Whether a publicly traded company or an asset management firm, all must provide a valuable product or service to their customers or clients. To paraphrase Fink, if a society sees that a company provides a service that is detrimental to the society’s long-term well-being, that company’s license to operate will be in jeopardy.

These days, externalities — or side effects of a commercial activity — are also better understood. Externalities encompass such side effects as pollution, greenhouse gas emissions, obesity, and other inefficiencies that have for many years not been factored into financial analysis, but do have an impact on society. This is the idea behind efforts such as those of The Investment Integration Project, which is trying to help investors better understand how their investment decisions impact the larger systems in which we operate.

Investors have also been pushing for and companies have started to provide more data around environmental, social, and governance (ESG) issues that have been shown to have a material impact on the value of a company. Groups such as the Sustainable Accounting Standards Board (SASB) are attempting to work sector by sector with issuers and investors to agree upon the few metrics that matter and are material so that both companies and investors can focus on the nonfinancial metrics that truly drive value instead of working their way through a  of hundreds of such metrics.

Global investors — many of them large passive asset managers — have realized that if they cannot drive value by selling securities because they are indexed, they can drive value by improving the governance of the companies in which they invest, or by working with companies to eliminate the unique risks that longer-term ESG issues present. In recent years, we have seen large asset managers around the world expand their teams of specialist who are tasked with better understanding these longer-term ESG type issues to engage with companies and create more viable long-term businesses.

In a similar manner, CFA Institute has been educating our current members and tomorrow’s financial professionals about ESG issues and the dangers of short-termism for over a decade and will continue our work in these areas.

Capitalism isn’t dead or atrophying or getting weaker. We just have a better understanding than ever before of how our asset allocation decisions — whether at the corporate or the personal level — impact the world in which we live. Taking that into consideration isn’t radical. It’s more a nice boring word your dad would like… prudent.

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Photo Credit: ©Getty Images/Luis Diaz Devesa