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Funds Go Green, but Sometimes in Name Only

A rose by any other name would smell as sweet but saying something is a rose does not make it one (WSJ, Sep 2021). I tell students to be wary when someone can change a number with the stroke of a pen. The same caution applies to claims: not all claims are true.

For Chobani, Allbirds, Other Coming IPOs, Greed Is Out. Do-Gooding Is In.

"A new generation of companies, including startups such as Rent the Runway Inc., Chobani LLC, Warby Parker Inc. and Allbirds Inc., are on tap to go public this fall, people familiar with the matter say. They’ll be doing it with this message: It isn’t just about the money. It is also about the mission" (WSJ Sep 2021).

I doubt that Milton Friedman  would have objected when a company's founding owners include doing good as part of their mission, even if doing good reduces value. The company is theirs.

I also doubt he would have objected when the company maintains its mission after an IPO. The shareholders know in advance what they are buying. 

The Importance of Stakeholders to Profitability

In a Wall Street Journal opinion piece denoting [the anniversary of the Business Roundtable's revised statement on the Purpose of a Corporation], the director and associate director of Harvard Law School’s Program on Corporate Governance offered evidence that the 181 CEOs who signed the statement “didn’t intend to make any significant changes to how they do business.” Rather, companies were, for example, still aligning director compensation with the company’s stock price, sending “a clear signal that shareholder value is the objective directors are expected to pursue.”

Well, of course it is. The Business Roundtable’s statement did nothing to change that. But that doesn’t mean that a business’s sole responsibility is to its shareholders. Business have always owed responsibilities to other stakeholders including customers, employees, suppliers, and communities as an integral part of their primary responsibility — to make a profit. In fact, the statement confirms that corporate management will continue to do the things that lead to profitability and — God forbid — shareholder value. 

...

I’ll even go a step beyond that and bet that none of these CEOs, at least none that still have their jobs, reported that profits declined because they were focused on the needs of stakeholders other than their investors. Something like, “Profits are down and your stock price will decline but, hey, we’re really good guys.”

(Puzder, National Review, Aug. 2021)

How ESG Stocks Perform Depends on Who Ranks Them

Determining how ESG stocks perform depends on weights used for the various inputs. (WSJ, June 2021) The market cap of a firm is easy to measure; how well it is meetings its ESG goals is not. As a result, determining whether or not the stocks of companies with high ESG scores outperform the stocks of companies with low ESG scores is difficult.

"It is a fallacy to think that if you are seeking profits, you are not serving people"

Pat Toomey defends capitalism here. A money quote follows.

"It is a fallacy to think that if you are seeking profits, you are not serving people. In fact it’s the exact opposite. Business can only profit when they satisfy customers and that can only be achieved with a satisfied workforce and good relationships with the community."

Does diversity in the boardroom increase profit?

Gray and Barry say the claim that diversity in the boardroom increases profit is not based on the evidenc. (WSJ, April 2021).

"The social purpose of a company is to find profitable solutions to the challenges of people and planet"

Have Satya Nadella, CEO of Microsoft, and Oxford economist Colin Mayer rebranded Milton Friedman's statement that “the social responsibility of business is to increase profits”? (WSJ, April 2021)

Should NASDEQ require diversity on boards of directors?

Arthur Levitt, former chairman of the SEC, says the SEC should investigate to determine what benefit, if any exists (WSJ, Jan. 2020). Here is a money quote.

"The most powerful argument for board diversity is that diversity is a social good. The most powerful argument against a board diversity requirement is that if it were manifestly good for companies, there would be no need for it in the first place. Successful companies can’t keep secrets quiet for long; if one could reliably increase its market capitalization by, say, 5% through the appointment of a diverse board, every company on Nasdaq would already meet that standard.

"The problem of board diversity is compounded by the nomination process. Searches for directors are formally structured, but in the end they depend on informal social networks where friends recommend each other. In my experience, many such searches are closer to a social-club recruitment process than a serious contemplation of someone’s task-specific skills. And as has been shown by the National Football League’s Rooney Rule, which since 2003 has required that teams interview at least one ethnic-minority candidate for all head-coaching positions, formal requirements for effort don’t necessarily lead to results.

"Since neither Nasdaq nor the SEC can reliably say that more diverse boards produce better results than homogeneous ones, the SEC should lead."

Are you willing to accept a lower interest rate to lend to green projects?

Borrowers get slightly lower interest rates when they sell "so-called green bonds" (WSJ, Dec. 2020). The difference, called the greemium, means that lenders receive a lower interest rate. I am confident that corporations will be more socially responsible when being responsible results in lower costs and higher prices.

Another dim view of stakeholder capitalism

"Since profits result from increasing revenue and cutting costs, businesses that put profits first have to work hard to give customers more while using less. In short, profits are an elegant and parsimonious way of promoting efficiency within a business as well as society at large.

Stakeholder capitalism ruptures this process" (WSJ, Dec. 2020).

The writer identifies four reasons that CEO's might sign on to the Great Reset.

1. Some people ... may simply prefer that firms take politically correct stances and don’t consider the cost. 
2. Others may think it looks good in a press release and will never go anywhere. 
3. A third group may aspire to jobs in government and see championing corporate social responsibility as a bridge.

4. Finally, there are those who think they can benefit personally from the reduced corporate efficiency. As businesses redirect cash flow from profit-directed uses to social priorities, lucrative positions of management, consulting, oversight and more will have to be created. They’ll fill them. This is rent-seeking, enabled by the growing confluence of business and government, and enhanced by contemporary social pieties.

How to improve accountability for social responsibility

Edmansand and Gosling point out flaws with focusing on purpose rather than profit and offer a suggestion about how to increase accountability for corporations pursuing purpose (WSJ, Dec. 2020).

The case for having women on the board

 

WSJ Oct. 2020

Will money managers increase diversity?

"David Swensen is the veteran investment chief of Yale University’s $31.2 billion endowment. Earlier this month, he told the dozens of firms that manage Yale’s money they would be measured on their progress increasing the diversity of their investment staffs" (WSJ Oct. 2020).

Let's conduct a thought experiment. Suppose that the executives face incentives that encourage them to maximize returns on the money they manage. 

1. If executives know that diversity increases returns, would Yale need to measure progress on increasing diversity? Would the threat of moving to another company align the interests of Yale and the money managers?
2. Under what conditions would the threat compensation improve the alignment the interests between Yale and the money managers?
3. Under what conditions would the mandate and compensation misalign the interests?

Does having labor sit on the board increase wages?

  

This paper says that the answer is,"No".

I predict that Starbucks will report more diversity in its workforce by 2025

"Starbucks Corp. SBUX -0.68% said it would mandate antibias training for executives and tie their compensation to increasing minority representation in its workforce" (WSJ Oct 2020). 

Let's conduct a thought experiment. Suppose that the executives face incentives that encourage them to maximize profit (or value). 

1. If executives know that antibias training and minority representation increase profit, would Starbucks need to mandate antibias training and tie compensation to increasing minority representation? Would the mandate and compensation improve the alignment the interests of the executive and owners?
2. Under what conditions would the mandate and compensation improve the alignment of the interests of executives and owners?
3. Under what conditions would the mandate and compensation misalign the interests of executives and owners?

Does serving stakeholders also serve shareholders?

This opinion seems to say that the answer is, "Yes" (WSJ, 2020).

Virtue Signaling or Real Change?

This editorial argues that the recent statement by CEOs at the Business Roundtable is more show than real (WSJ, August 2020).

Words v. action

In a commentary published by the WSJ (Dec. 2019), two researchers present evidence that "Business Roundtable signatories aren’t leaders in socially conscious environmental, social or governance practices or stakeholder orientation." 

Their conclusion: 

"The charitable explanation is that signatories are signaling their intent to change their ways. But there is no obvious way to test those intentions. As of now, signatories don’t walk the walk. Keep a close eye on whether that changes."

Planet Money talks about "doing good"

This excerpt from a Planet Money newsletter (Sept. 2019) describes two studies that examine the impact of and reasons for corporations acting in socially responsibly ways.  
Two key findings are:

1. "[W]hen a company says it's dedicated to helping disadvantaged children, they can pay much less and get much more."
2. "[C]orporations use their charitable giving in politically strategic ways, giving more money to influential congressional districts when it suits their purposes. [The authors] call it 'tax-exempt lobbying.'"

John List, a coauther of one of the papers, offers three conclusions.

1. "[R]easons [exist] to be cynical about corporate social responsibility." 
2. "[Y]es, [the] research shows that 'people generally want to do good.' 
3. [T]his includes those corporate executives who signed that statement saying their companies are about more than just profits." 
4. "[T]he real reason for their recent statement, like other efforts to paint themselves as a force for social good, comes down to dollars and cents."