Working Together to Protect
Our Common Resources
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Welcome to the second issue of The Shareholder Commons newsletter. We have received lots of positive feedback and response on Issue 1, much of it based on the conversations you are starting.
Please help us continue the momentum by forwarding this issue to others who may be interested. If you feel inspired to get involved, please reach out to me at rick@theshareholdercommons.com.
This Month’s Ramble: The Purpose of Purpose
EVERYONE IS TALKING ABOUT PURPOSE
Given that The Shareholder Commons is all about making private enterprise act more responsibly, readers might believe we would be all about the current efforts to endow corporations with greater purpose. Larry Fink, who runs the largest asset management firm in the world, used the term “purpose” 21 times in his annual letter to shareholders this year. More recently, and as I described last month, the Business Roundtable released a
statement redefining the purpose of corporations from making money to . . . , well to something better.
The spirit behind these pronouncements is certainly admirable. The idea is that if corporations are doing awful things today in the name of making money (hooking kids on new nicotine delivery devices, lending money for recovering petroleum from tar sands and buying legislators), then assigning them a higher purpose will impose a greater conscience on corporations, leading to their doing more good things and fewer bad things. I am
skeptical, however.
THE MYTH OF THE GOLDEN AGE
The corporate purpose story often includes an historical account of corporate law that starts with business corporations being created by the state to achieve a specific public purpose. The idea is that these entities were granted the privileges that a corporation enjoys—limited liability for shareholders and the ability to contract beyond the lifetime of any single investor—and in turn were obligated to
fulfill a public purpose: trading companies supplied foreign goods, turnpike companies built roads and canal companies reduced transportation costs.
But, the story goes, at some point we just started granted corporate charters to anyone who wanted to start a business, and eventually the purpose of business changed to simply earning money for shareholders—with a big push from Milton Friedman. As a consequence, this all-encompassing purpose suppressed ethical behavior, so that corporations are now willing to do anything legal to make a buck, including
warming our planet, oppressing the disadvantaged, and avoiding responsibility for taxes.
Like many mythologies, there are a few holes here. Does anyone think early Dutch and English trading companies were unmitigated forces for good? That railroads and canal companies cared about human rights and living wages? Or that all for profit entities created for general purposes (that’s how we do it today) are bad? Volkswagen had a purpose of becoming the biggest car manufacturer in the world and look what we got. Perhaps the relevant distinction is not purpose, but something more
fundamental.
PROFITS CAN BE GOOD, EVEN IF GREED IS BAD
What would it mean for corporations to have a “higher purpose” than profits in a market economy? We actually rely on the profit motive to discover the correct prices for labor, goods and services. When market economies work efficiently, they create much more wealth to go around than economies where someone in authority just decides how much grain should be grown, how many widgets should be made, etc. That’s why capitalism outperforms
communism.
The problem with corporations isn’t that they chase profits instead of “purpose.” The problem is that all profits are not equal. Some are derived from efficiency and innovation that help the world make more from less (think solar panels). But other profits are derived from circumstances where markets fail, such as when the costs of an activity are borne by people who don’t have a say (think about a
polluting factory). Government tries to protect us from the “negative externalities” involved in such greedy profits, but it doesn’t always succeed.
This problem is especially severe today, not because corporations lack purpose, but because they lack restraint and because global markets are very interconnected and planetary boundaries for social and ecological health are being violated. As a result, corporate behavior that creates external costs can lead to catastrophic effects on all markets, as we saw in the 2008 financial crisis, and as we are seeing now with increasing climate risk.
THE RESPONSIBLE AND SUSTAINABLE CORPORATION
In order to address some of the most difficult issues that face us, business should be required to seek authentic profits that come from creating real value, and to forgo illusory profits that come from exploiting costly externalities and other market failures. In a different context, I have suggested this means requiring corporations to act “responsibly and sustainably.” Here is what such a requirement might look like:
A corporation shall endeavor to:
(a) fairly account for the well-being of persons affected by its operation;
(b) ensure that it uses fair and proportionate shares of available environmental, social and economic resources and capacities and contributes fair and proportional amounts to the public good, and
(c) incorporate principles of equity so that gains from its activities are fairly shared.
While that may not be as rousing as “purpose,” it might be just what we need. For how such a regime might be imposed, check out this article that explains our theory of change.
Report from the Field: Responsible Ownership Discussion Moved Due to Irresponsible Ownership
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The 2019 Berkeley Sustainable Business and Investment Forum was scheduled to take place last Friday at the Haas School of Business. Due to the hot, dry and windy weather (of which we will see more as global temperatures rise) and the utter failure of PG&E to mitigate climate risk through grid maintenance, there was no power in much of Northern California, including Berkeley. Through some incredible last minute magic, the conference was relocated to downtown San Francisco.
I was fortunate to moderate a panel titled “What if Universal Owners Voted Their Beneficiaries’ Interests?” that included Anne Tucker of Georgia State Law School, Jim Hawley of Truvalue Labs,
Larry Hamermesh of Penn Law’s Institute for Law and Economics and Lisa Lindsley of Majority Action.
The panelists wrestled with some difficult questions, but the discussion underscored the fact that the beneficiaries of pension and mutual funds are often hurt when companies pursue profits without regard to social and environmental costs. We focused on a hypothetical involving the vaping industry—the most profitable course for such a company may destroy value in the rest of the economy, and that surely hurts workers saving for retirement through index funds, who will suffer if governments and
insurance companies bear excess burdens dealing with another generation of tobacco addicts.
If you want to learn more, follow these links:
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This Past Weekend: Political Spending and Universal Ownership Conference
Political spending by corporations is arguably the root cause of most of the social and environmental costs that profit seeking corporations impose on our economy. Corporations try to rewrite laws and regulations to improve their ability to take short cuts to
greedy profits (see the Ramble above) without having to account for the real costs of those profits, as explained in this article by Justice Leo Strine and Nicholas
Walter:
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[C]orporate [political] expenditures will be made with the singular objective of stockholder profit in mind, and therefore
will be likely to favor policies that leave the corporation with the profits from their operations, while shifting the costs of those operations (including of excessive risk taking or safety shortcuts) to others.
Workshops:
Investors Needed
As you can see, discussions of the importance of the universal owner perspective are accelerating. One of our immediate tasks is development of a platform of substantive requirements (see “Potential Guardrails” in this deck) that we believe that every large company should meet in order to ensure that their profits do not come at the expense of critical social and environmental systems or as a result of exploiting vulnerable communities. We are organizing workshops for climate and political spending guardrails. If you are interested in
participating in (or sponsoring) either of these workshops, please contact us.
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Upcoming Webinar: Universal Ownership and Climate
Vanderbilt Law School, together with the Environmental Law Institute, is holding an important event that will be live streamed. Professor Michael Vandenbergh, one of the world’s leading experts on climate mitigation through private governance, will be leading a panel discussion on the
implications of the universal owner for climate mitigation. From Professor Vandenbergh:
The concept of the universal owner is an intriguing new idea, and it has the potential to drive climate mitigation regardless of what happens in the 2020 election. Vanderbilt is teaming up with the Environmental Law Institute to host a webinar on the topic on October 22, and the sign-in information is below. I hope you’ll participate virtually even if you can’t make it to Music
City.
More information here.
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Working to make business sustainable can be fun. If you don’t believe me, watch this video.
Thanks to B The Change for this nice interview that gave me a chance to explain what we are trying to accomplish at The Shareholder Commons.
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The Part Where We Ask For Stuff
Are you frustrated with the lack of progress in the fight for real change in the way business is done? I am: I left my job and pledged a minimum of one year of pro bono work to make The Shareholder Commons a reality, but I need some help. Here are some ways to be part of the
solution:
- We need some early supporters willing to serve on our advisory board who can open doors for financial support from foundations or others. Please pass this on to anyone in your circle that you think would be interested in helping us get serious early traction.
- Let us know if you know of opportunities for speakers or panelists at events that would benefit from The Shareholder Commons perspective.
- Forward this to friends and colleagues who might be interested, and if you have not already done so, subscribe, follow us on Twitter and just generally let us know you are out there.
- Let us know what you think of the newsletter, and whether you have any content you would like to contribute.
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That’s it for this month. Onward, friends. And don’t forget to breathe.
Founder, The Shareholder Commons
Fellow, B Lab
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