High Stakes

National Review Online, July 9, 2020

Larry Fink, Chairman & CEO, BlackRock

In a CNBC interview, former Goldman Sachs Asset Management Chairman Jim O’Neill became the latest figure to use COVID-19 as a recruiting sergeant for a preferred cause — in O’Neill’s case, “stakeholder capitalism.”

CNBC:

“People that run really successful businesses have to be thinking about something a bit more than just an outright obsession with maximization of profit and playing their own role in trying to deal with some societal challenges,” he said.

O’Neill, who is currently Chair of Chatham House, said companies could be moving into a new era of “stakeholder capitalism,” where they must act beyond the interests of their shareholders.

O’Neill [also] said politicians could find “huge political appeal” among younger voters by requiring companies to emphasize environmental issues.

O’Neill is hardly the only person to embrace stakeholder capitalism. To take just a few examples, it has been touted with dreary predictability by the Davos crowd but also by the Business Roundtable, an organization that should know better. Making matters even worse, the businesspeople pushing the stakeholder agenda include not only corporate managers (increasingly indifferent to the obligation they owe the shareholders of the companies for which they work), but investment managers, who once believed that it was their duty to grow the money entrusted to them.

There are moments when it seems churlish to object. After all, so much of this stakeholder talk is, well, just so nice. Here’s Larry Fink, a prominent advocate of stakeholder capitalism and the CEO of BlackRock, the world’s largest asset manager, in 2018: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

Why would anyone want to argue with that?

Well, link that statement to the aggressive position that BlackRock is taking on climate change, and O’Neill’s remarks about companies working with government to address “broader social goals,” and it becomes easier to see why.

The wider vision underlying stakeholder capitalism is one in which different interest groups such as employers, employees, and consumers collaborate in pursuit of mutually (if sometimes mysteriously) agreed objectives under the supervision of the state. It would never be quite post-democratic, not quite, in any likely American form, but what it would be is a variety of corporatism.

Corporatism takes many, many forms. It can range from the relatively (relatively) benign — it runs through European Christian Democracy, and it can be detected in early-20th-century American Progressivism — to the infinitely more heavy-handed. It has been an important element in the theory, if not the practice, of some variants of fascism, most notably in Mussolini’s Italy, but not only there.

Corporatism takes as its starting point the idea that society is best run through its leading interest groups, either alongside the ballot box, or, under fascism, in place of it. To fascist ideologues, it was a pathway to a harmonious national community, a “third way” that made redundant the class divisions that could tear a nation apart. Conveniently, this national community could be directed by a single party under, more conveniently still, a single leader.

A key part of the pathway to social harmony was, Mussolini claimed, “social justice” (a phrase, it seems, we are doomed to live with for eternity) and something to which the “selfish individual” will always be an obstacle. Mussolini’s claim is a reminder of the conflicting attitudes toward the individual percolating through corporatism. Corporatism rests on the assumption that most individuals are unable to protect or assert themselves on their own and so need the support that only the group (and/or the state) can bring if they are to flourish. But (to the extent that it is needed), the proof, however camouflaged, that this is a fundamentally collectivist ideology can be seen in the treatment of the individual who does feel able to strike out on his own, yet finds himself criticized (“selfish”) — or worse — for his effrontery.

And so, stakeholder capitalism comes into view. Half a century ago, Milton Friedman argued that, after taking due account of law and “ethical custom,” corporate management’s obligation is “to make as much money as possible” for the shareholders who own the company. Stakeholder capitalism, which is based on the notion that companies owe a duty to other “stakeholders,” is an attack on that principle. As such, it is an attack on shareholders’ property rights, which is to say their individual rights

Once, this might have been a fringe concern. A company’s direction is ultimately determined by its shareholders. It would have been natural to assume that they would not vote against the company’s — and thus their own — economic interest. It is true that there are more and more activist shareholders prepared to vote their shares in a way that puts ideology above profit — as they are fully entitled to do — but there are still not enough of them to make a difference, at least in their own right.

What has changed is the turn by certain large investment groups toward “socially responsible” investing (SRI) — in particular, a variant known as ESG. This means checking how actual or potential portfolio companies measure up against often ill-defined (and sometimes contradictory) environmental (“E”), social (“S”), and governance (“G”) standards, which can look a lot like stakeholder capitalism. If this is a specific selling point of some of their investment products, that is fine: Investors can choose to buy those products or not.

The problem comes when choice is removed. Where ESG-tinged investment is involved, that is ever more frequently the case. Thus, a good number of state-retirement funds, custodians of money designated for their employees’ retirement — money for the most part provided by taxpayers — have now enthusiastically adopted SRI, a decision in which neither pensioners nor (realistically) taxpayers had any say.

The growing acceptance by asset managers that ESG should not be a discrete product but part of their standard investment process will make it tricky for those looking at their 401Ks to find an option in which ESG does not lurk.

A bad situation will be made worse — for those who favor investor choice, shareholder control, or both — as companies knuckle under to the ESG warriors, even without the agreement of their shareholders, either because they fear that not to do so will cut them off from sources of capital, or that it will cost them business, or, worst of all, because it is the “appropriate” thing to do. As was evident long before the wave of companies’ committing to this or that cause during the current unrest, “woke capitalism” is not a figment of the right-wing imagination.

As I noted recently in a post on the Corner, the feds are finally taking a much harder look at ESG. In late June, the Department of Labor proposed a new rule that specifically addressed whether the fiduciary obligation imposed on pension funds by the Employee Retirement Income Security Act of 1974 (ERISA) can be reconciled with a “non-pecuniary” agenda, such as that represented by ESG investing. Answer: only with great difficulty.

In its commentary on the proposed rule, the DOL commented:

Providing a secure retirement for American workers is the paramount and eminently-worthy, ‘‘social’’ goal of ERISA plans; plan assets may not be enlisted in pursuit of other social or environmental objectives.

The overarching idea behind the new rule is to make clear “that fiduciaries may never [my emphasis added] subordinate the interests of plan participants and beneficiaries in their retirement income to non-pecuniary goals [such as SRI].”

In a useful discussion of the proposed rule (and the commentary that accompanied it) the law firm, Dechert, observed:

It is not just the apparent effort to create greater permanence on questions concerning ERISA and ESG that is striking; it is also the arguably skeptical tone more generally adopted by the DOL about the merits of taking ESG (and other similar non-pecuniary) considerations into account when investing retirement assets. Although it is difficult to predict precisely what form any final rule may take, it is perhaps noteworthy that the DOL has provided a limited 30-day comment period for the Proposed Regulation. The seriousness with which the DOL views this matter is also reflected by an op-ed written by the Secretary of Labor in support of the regulation. We also note our understanding that there is anecdotal evidence that, in recent months, various DOL offices have been investigating ESG-related practices.

So far as the “tone” goes, there is nothing “arguably” about that skepticism. It is also worth noting a Wall Street Journal op-ed by Secretary Scalia, not least in this passage: “ESG investing often marches under the same banner as ‘stakeholder capitalism,’ which maintains that corporations owe obligations to a range of constituencies, not only their shareholders.”

The Trump administration might be expected to put obstacles in the way of SRI, which takes a leftish tack, but, judging by his reference to stakeholder capitalism, it is clear that Scalia sees that its threat is to more than pensions.

Writing for Bloomberg Opinion, Matt Levine gets close to identifying what is at stake. He notes how the biggest asset managers (and they are very big) are, by insisting that their portfolio companies match up to ESG criteria, beginning to assume a quasi-regulatory, or even governmental function. Asset managers are starting to find themselves “in the business of making big collective decisions about how society should be run, not just business decisions but also decisions about the environment and workers’ rights and racial inequality and other controversial political topics.”

In a country where, as Levine points out, “capital is mostly allocated by a handful of giant institutional asset managers,” their “quasi-regulatory decisions” will “have a lot of weight, and companies will generally try to follow them.” The effect of this will be magnified in the U.S., where corporations are so powerful.

In Levine’s view, the government is pushing back, making, as he puts it:

[a] political statement about the separation of powers: No, says the government, we are in the business of furthering social goals and policy objectives. The people making environmental, social and governance decisions should be the government, says the government; the asset managers and pension funds had better stick to making money.

Indeed, they should. Moreover, the government is democratically elected, and subject to innumerable constitutional, bureaucratic, and legal brakes. As Levine explains, its “regulatory process is formalized and full of checks and balances, [but] the institutional investors’ process is ad hoc and proprietary.”

That the Trump administration has begun, however belatedly, to challenge, on one front anyway, stakeholder capitalism is encouraging, but matters may change dramatically for the worse after November’s elections. A Biden administration, which would undoubtedly be very comfortable with a corporatist-style assertion of group interests over individual rights, would find both the theory and agenda of stakeholder capitalism most handy: The DOL’s proposed rule would not last long with Biden in the White House. And the line of defense represented by fiduciary obligations may be overwhelmed in the case of investment firms by fancy legal footwork and, in the case of many companies, by the voting weight of large newly “socially responsible” investment groups, often with immense quantities of proxy votes under their control.

The reduction of a company’s shareholders to just another class of stakeholder will accelerate. As a result, corporations will, over time, rally behind (to use Jim O’Neill’s phrase) “broader social goals,” devised, in all probability, by the state and favored unaccountable activist groups. The latter, as supposed representatives of supposed stakeholders, will, especially when acting with radicalized workforces — Google workers, for example, demanding that “their” company stops selling its technology to the police — and with, in many cases, managements who are either woke or pretending to be, will have at their disposal the power and (so long as it lasts) the wealth of corporate America.

While American companies have not been reluctant to influence the political process — far from it — their motive has mainly been driven by the bottom line. That has limited both how far they have gone and the policy areas into which they have intruded. But if, as would be the case under stakeholder capitalism, creating shareholder value is reduced to a subordinate goal, everything changes. Managements are left free to sign their companies up for an ideological crusade (which is what woke capitalism is), made all the more dangerous if fought alongside a like-minded government that appreciates the usefulness of allies subject to little scrutiny and no democratic constraint.

We have already seen harbingers of how woke capitalism will operate, merciless to its employees — the firings of those who express the wrong views at work, the firings of those who express the wrong views outside of work — and merciless to those outsiders who do not toe the line: the advertising boycotts, say, by Coca Cola, Hershey, and Unilever and hundreds of other companies to punish Facebook for not doing more to “curate” speech. And then there are the millions spent on donations to the likes of the Southern Poverty Law Center, doubly questionable for having been made with shareholders’ money.

There have been other harbingers of how woke capital works when intertwined with stakeholder capitalism, such as when a company’s managers, or those to whom they defer, decide that as “socially responsible” actors they can no longer deal with certain customers, whether it’s banks refusing to lend to certain firearms manufacturers, or JPMorgan Chase curbing lending to coal firms. Finally, there are those cases where a YouTube, Twitter, or PayPal simply will no longer deal with a certain client whether for reputational reasons, supposed breaches of terms of service, or sometimes, it seems, for having the wrong opinions. Taken as a whole, however, such decisions, which can be devastating to those affected, have one particular thing in common. As the decisions of private companies they are subject to limited outside review and, very rarely, to any meaningful appeal.

That’s an opportunity that a future Democratic administration will not let pass by.