Thursday, February 01, 2018

‘Larry’s Letter’ is muddle-headed

Corporate social responsibility has been a leftist demand for a long time but it is very pernicious.  If companies lose focus on their business challenges, they will make themselves and everybody else poorer.  A company's only responsibility is to deliver a good product at the lowest possible price.  And that's not easy.  Introducing other considerations will undermine the whole mission of the company.

And the argument below does not focus entirely on corporate social responsibility. The aim of having "a strategy for long-term value creation and financial performance" is entirely laudable. And that seems to be the aspect that business leaders have rightly endorsed.

I note use of the tiresome Leftist term "stakeholders", which is used to assign unearned power and influence to outsiders of some sort. The term appears to come from card games, where several people may have money on the outcome of a game, but how many people are stakeholders in a business?  Only the shareholders and employees, it seems to me.  Customers may be observers but they are not stakeholders. If a company goes broke they will normally just choose a new supplier for their needs.

And what's this rot about "reimagining" capitalism?  Capitalism is not the product of anybody's imagination.  Soviet Russia was that and we know where it led.  What we see as capitalism today is simply the balancing of many forces and interests -- an "invisible hand" if you like.  Is Larry Fink going senile or is he just wilting under the weight of Leftist disapproval?

A growing movement of senior business figures, economists, and powerful investors from across the globe is calling for capitalism to be reimagined so that companies everywhere serve a social purpose.

The charge is being led by Larry Fink, the founder and chief executive of the world’s biggest asset manager, Blackrock. The investment house has $6.3 trillion (£4.5 trillion) under management, making Fink arguably the single most influential investor on the planet.

Fink detonated a bomb in boardrooms everywhere earlier this month with a letter to the bosses of all the companies it owns shares in, saying they could no longer afford to focus simply on profit.

In what is being referred to as “Larry’s Letter”, Fink said that they would need to start demonstrating a strategy for long-term value creation and financial performance. Understanding a company’s effect on the wider world was also vital, he said.

“Society is demanding that companies, both public and private, serve a social purpose,” Fink wrote. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate,” the letter said.

The thrust of Larry Fink's letter was backed by major corporate bosses, including Pepsi's chief executive Indra Nooyi
The call was backed by several big names at Davos including Indra Nooyi, boss of PepsiCo, and Carlos Ghosn, chairman of car giant Renault-Nissan-Mitsubishi.

Mrs Nooyi lamented the emphasis on short-term financial performance. “If you focus on the long-term, investors accuse you of being impatient and are highly critical.” Mrs. Nooyi said. “If you are doing something truly strategic, it invokes criticism. You are accused of being Mother Teresa.”

Mr Ghosn agreed. “Young companies don’t have to worry about short-term results, but if we had negative quarterly results, we would be crucified,” he said.

Mrs Nooyi said: “Finance and accounting has trumped strategy excessively. The whole world is ratio and accounting driven.” Shareholders “blindly look at numbers”. She added: “A bunch of number crunchers put out a spreadsheet and think that is strategy.”

Mr Ghosn added: “Every day we see CEOs fired because shares didn’t move in the last year. Short tenure is a big problem.” However, he predicted that Fink’s letter will “spark change in the financial community”.

Theresa Whitmarsh, of the Washington State Investment Board, one of America’s biggest institutional investors, claimed “companies with a myopic focus on short-term earnings are sowing the seeds of their own destruction”. Long-term investment would boost returns, she said.



Businesses already serve a social purpose

Iain Murray gives his take on Fink

BlackRock CEO Larry Fink’s letter to CEOs demanding that their companies “serve a social purpose” is the latest example of what economist Milton Friedman dubbed a “muddle-headed” approach to economic activity.

The approach is muddle-headed because businesses already serve a social purpose simply by doing business. McDonald’s provides the most nutrition at the lowest price the world has ever seen. Google exists “to organize the world’s information and make it universally accessible and useful.” Even your local hairdresser helps people feel good about themselves — surely a social service in these troubled times.

There are even more obvious ways businesses serve a social purpose. They employ people, providing needed income at the right time and often fostering career opportunities. They bring people together, bolstering communities. They allow for the development of transferable skills, thereby providing real world learning too often overlooked in schools.

Above all, businesses create wealth, which is distributed among owners, workers and indeed customers. Lowering prices after you make good profits is an example of wealth sharing with customers.

We also know that wealth and health go together. Generating wealth doesn’t just mean people can afford more stuff but that they can live longer, healthier and happier lives.

If businesses already serve these important social purposes, what is Fink getting at? He talks about “governments failing to prepare for the future” and how companies leave themselves vulnerable to activist campaigns.

So he doesn’t like the results of the political process and wants to see special interests force businesses to provide results he favors. If not, he would presumably argue that businesses should stand up to special interest bullies and respect our political system.

That’s why Friedman also called corporate social responsibility “subversive.” He was right.



Kochs rally donors to spend more to protect business gains

Harry Reid will be fuming

The Koch brothers and their network of wealthy donors have a lot to be happy about after the first year of the Trump administration. And they plan to spend hundreds of millions of dollars to help ensure they stay happy.

“We’ve made more progress in the past five years than I had in the last 50,” declared Charles Koch, the 82-year old billionaire, addressing a group of about 550 donors who gathered in Indian Wells for the Kochs’ winter policy and politics weekend seminar.

But this era of gains, which brought them a massive tax cut, a queue of conservative federal judges, and an administration full of friendly regulators, could all be gone if Democrats claw back control of the government.

So the vast network has pledged to devote around $400 million toward politics and policy in the midterms to hold the GOP majorities in both chambers. That’s 60 percent more than the network spent in 2014, when Republicans picked up nine seats in the Senate and 13 seats in the House of Representatives.

The sum includes $20 million that Koch and his brother David plan to put behind efforts to popularize the $1.5 trillion tax cut. The network spent $20 million last year pushing the legislation.

“We have a ways to go,” said Koch, teeing up his Big Ask to the well-coiffed group of donors who contribute at least $100,000 a year to Koch-aligned groups. “So my challenge to all of us is to increase the scale and effectiveness of this network by an order of magnitude. By another 10-fold on top of all the growth and progress we’ve already made. Because if we do that, I’m convinced we can change the trajectory of this country.”

The Republican takeover of the federal government has long been a priority for the Kochs. Now, after spending years fomenting distrust of government, they must defend their gains. They need to sell.

And selling government policies is different from criticizing them, they’re learning.

“We were explaining the negative consequences of a law that had passed,” said Tim Phillips, the president of the Kochs’ political arm Americans for Prosperity, reflecting on the group’s efforts to mobilize voters against Obamacare in previous years. “This year we’ll be explaining the benefits of good policies in many cases.”

Voters have been skeptical of the tax law in part because much of the benefit is focused on businesses like those run by the Kochs and their allies. The tax cuts directly benefit Koch Industries by $1 billion to $1.4 billion a year, according to a recent analysis from Americans for Tax Fairness, a liberal advocacy group.

“They stand to benefit by massive amounts more than what they’ve spent,” said TJ Helmstetter, a spokesman for Americans for Tax Fairness.

David Dziok, a spokesman for Koch Industries who attended the weekend events, said he is “skeptical” of the numbers but didn’t say they were wrong.

“The tax-reform legislation is going to affect our businesses in different ways, and that’ll play out in time,” Dziok said. “But we are confident that it’ll be good for businesses big and small, and all American taxpayers.”

A major focus for the Koch network — known formally as the Seminar Network — is state legislation, with an aim to remake the nation’s education system via referendums and new state laws. The Kochs are particularly enthusiastic about education savings accounts: a mechanism that upends traditional K-12 education by, in some cases, giving parents lump sums they can use to pay private schools or even online institutions to educate their children.

A top priority for 2018 is in Arizona, where a measure allowing education savings accounts for all students goes on the ballot in November. Arizona Governor Doug Ducey pushed the idea and attended the weekend seminar to chat with donors about it.

Success in Arizona would have “a ripple effect” felt across the country, explained Jorge Lima, executive director of the LIBRE Initiative, the Kochs’ Hispanic outreach arm that has been playing an increasing role with the network’s education measures in states.

A similar bill is moving through the New Hampshire Legislature and is supported by Americans for Prosperity.

These efforts are the latest in a roiling education debate and face headwinds. Last month a school board in Colorado voted, 6 to 0, to end a private voucher program, which teachers unions hope is a sign that voters are showing skepticism for such policies.

The Koch network is not completely aligned with the Trump administration, to be sure. The Koch network largely supports free trade, for example, putting it at odds with the “America First” rhetoric of President Trump.

On Saturday evening, Phillips raised the issue with Senator Thom Tillis of North Carolina, who was a panelist at one session. “Do you feel comfortable that Republicans will maintain that free-trade majority that they have?”

“I do,” Tillis assured donors gathered in a ballroom.

The Kochs didn’t support Trump in 2016, though they have strong ties to Vice President Mike Pence and key members of Trump’s staff and Cabinet.



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