Once again, Kevin O’Leary is spewing ideas that put business at odds with the rest of society. Fresh from pronouncing his joy over the world’s widening wealth gap (it encourages more poor people to emulate billionaires, he says) Mr. O’Leary, who seems to relish playing the role on TV of something between Cornelius Vanderbilt and The Simpsons’ Mr. Burns, recently told CNBC’s morning audience that the only mission of modern corporations should be to maximize shareholder wealth. He claims that companies that divert resources to help make society better are a serious threat to capitalism. The only social responsibility of business is to make a profit, he says.
In reality, it is the views of people like Mr. O’Leary that pose the greatest threat to the free enterprise system.
Twice in the span of a century, and most recently beginning in 2007, capitalism has had to turn to society to bail it out and save it from its own excesses. This is further evidence that capitalism requires the support of more than just investors. Indeed, it is fully invested in how society perceives it and entirely dependent upon society’s goodwill on many different levels for its survival.
Gaining public favor and the approval of consumers is an asset that is indispensable to any successful business. Far from detracting from the maximization of wealth for shareholders, boards of directors would be guilty of malpractice if they did not take reasonably appropriate steps to ensure their companies are, and are seen to be, valued contributors to the well-being of society.
Moreover, no business can expect to stay healthy in a society that is hobbled by ills that remain unaddressed and dreams that cannot be fulfilled. Nor can investors, or society for that matter, afford to leave all the solutions to society’s problems to the frequent inefficiencies of big government.
Think of the evolution of GE, one of the most impressive long-term success stories in American business. It is no coincidence that a succession of CEOs from Owen Young to Jeffrey Immelt have felt a strong sense of responsibility to serve the needs of society and an obligation to perform in ways that garnered public approval as well as shareholder wealth.
A final test of how bankrupt Mr. O’Leary’s argument is can be seen in the actions of the leaders of capitalism and its most valued corporate institutions. Not a single one has ever publicly endorsed the idea that the only purpose of business is to maximize shareholder worth. To the contrary, CEOs are constantly hitting the podium to talk about the initiatives their companies are taking, from environmental protection to mental health, which they believe will make the world better and win the approval of the public. Many aspire to be dubbed among the top companies to work for as much as they do to be ranked as the most investor-friendly.
Having been a part of the process that has attempted to illuminate the interaction between business and society for some four decades now, I have participated in hundreds of discussions with business leaders in private meetings and in public forums. What has struck me about that experience is that it has been those who embrace an expansive view of their responsibilities whose companies have excelled and become industry — and often stock market — leaders. This is not to suggest that all companies effectively manage their social interactions; many do not. Nor is it to suggest that most companies could not do a better job of improving value to shareholders. In my experience, there are often too many vested and entrenched interests in a corporation that stand in the way of innovation, effectiveness and even profitability.
But when a genuine culture of responsibility is created within an organization, it infuses every aspect of its actions, including how it interacts with customers, employees and investors. It drives the effort to add value to every phase of those interactions. So if a company thinks it can improve the lot of some in the world, and enhance its own position in the process, such as by raising the minimum wage it pays its employees, as The Gap and other companies recently announced, or by supporting a program to provide opportunities to minority youth of the kind recently announced by U.S. President Barack Obama, few voices of opposition are heard. In a modern recasting of Charlie Wilson’s observation about what is good for General Motors, investors today know that, by and large, what is good for society is most often good for business.
Capitalism would not have survived in the past, nor will it have any chance of flourishing in the future, if left to the folly of the ill-informed thoughts of people like Mr. O’Leary. Capitalism works best, and ensures its longer-term survival, when it is driven by a wider set of values, and not just the creation of greater shareholder value. These values include bringing a spirit of enterprise to the public agenda and acting in a manner that inspires the support and respect of all the stakeholders of modern business, and not just its stockholders. Everyone needs to feel the benefits of capitalism.
No one who truly claims to support this flawed but still truly remarkable economic system could seriously argue otherwise.
Recent Fed transcripts just another sign that those in charge too often don’t get it.
The blindness of entrenched interests to the looming forces that threaten to disrupt their legitimacy and the lives of those who depend upon it is the defining failure in the governance of major institutions today. Some work diligently to overcome that obstacle. Most do not.
This was, and in many ways remains, a principal cause of the near collapse of the world’s financial markets in 2008, the economic downturn that continues to play havoc with countless lives today and the growing economic divide that threatens both the existence of the middle class and longer term social stability. But this imperviousness to the restless arc of reality did not begin with the folly of Wall Street and the subprime mortgage fiasco nor did it end when the Dow Jones hit record heights. It is alive today in our healthcare and education systems and in the loss of privacy at the hands of over-reaching governments and corporations that alternatively demand more personal information while failing too often to protect it. Its fingerprints are found all over the institutions of democracy that are rapidly losing public respect. It taints the interactions of governments and businesses each day with young people, the elderly and ordinary working families and causes too many to feel weary and resentful at getting the short end of the deal from those who seem immune from any accountability for their actions.
And it will continue to see the world stumble from scandal to crisis until major corporate and public institutions are distinguished by governance standards and ethical values that place primacy on the dignity and worth of individuals and not the self-aggrandizing conveniences of their leaders.
Just released transcripts from 2008 show that the U. S. Federal Reserve misjudged the extent of the looming financial crisis that was unfolding, as we feared. In 2007, we began to express serious reservations about whether the Fed knew what it was doing. That theme continued on these pages in a series of postings under the Fed category over the ensuing years of the worst recession since the Great Depression. We offered a glimpse of what was ahead in November of 2008.
There will be many casualties before the full extent of the great unfolding 21st century credit debacle is over. There have already been a few CEOs who are taking a very well paid early retirement. More will follow. Some companies will not survive. The stock market will continue to experience unsettling jolts, like its more than 600 point drop this week. But, unfortunately, it will be the ordinary consumer —not the central bankers or the treasury luminaries or the credit agency raters or the boardroom directors who permitted this fiasco and were blind to its early signs— who will suffer most from the turmoil and setbacks that lie ahead.
The transcripts also show that Timothy F. Geithner, then President of the New York Federal Reserve, was also viewing the world through rose-coloured glasses, rejecting any suggestion that the big banks, whose CEOs comprised his board of directors, were under-capitalized. We broke new ground in 2007 and 2008 in our analysis of the governance failures and weaknesses of the New York Fed. We were the first to bring these issues to public attention, and continue to view those failures as a major, and still much underreported, factor in the financial meltdown that shook the world.
Years later, these continue to be among the most popular postings at Finlay ON Governance. This coda, of sorts, on the great economic crisis of the 21st century prompts us to make some further observations about its cause and their continuing effects.
One of the most disaster-plagued boards in corporate America has done it again. Right after the results of a third quarter that offered the first glimpse of a turnaround, it announces the departure of its CEO and COO the next day. It is a classic case of how not to handle a seminal change, if that’s what it is. No responsible board would permit a situation where the CEO is gone by noon after a sudden announcement in the morning, unless there is something terribly wrong. An orderly period of transition to help investors become acclimatized to the new faces typically occurs. The number one and number two executives never leave at the same time, unless the board is oblivious to the effects of harmful conjecture and divisive speculation, which is what the market will always resort to in the absence of credible and timely information. That’s been happening all day with Citigroup.
These pages have offered much criticism of Citigroup’s governance and leadership for many years. It has been a rolling disaster since the demise of Sandy Weill. Its stock still bears no relationship to what it once was, and is down some 90 percent under Vikram Pandit. The bank lags the performance of its peers. Its board has constantly misread red flags and warning signs has had a tin ear when it comes to how it is being perceived by regulators, investors and retail customers. Admittedly, there are new faces in Citigroup’s boardroom, but this latest event does not contribute to investor confidence and there is much speculation that lurks behind the departures, to say the least.
What is happening at Citigroup may be totally above board. But it is a clumsy way to handle it. And in that regard, nothing has really changed at Citigroup.
