There’s a very interesting and somewhat alarming highlight in the Natixis outlook survey of 500 institutional investors. They rate the number one macro risk for 2024 as “geopolitical bad actors who with one action can upset economic and market assumptions globally”.
Bad actors don’t act alone. They are enabled. They are supported. The asset management and financial community has limited room to do anything about this. But it does have influence over other political actors. And it comes back to the persistent argument over the range of concerns of a financial or business entity, and the ongoing shareholder value versus stakeholder value tussle.
The modern formulation of the shareholder value concept dates from Milton Friedman’s 1970 essay in The New York Times titled “A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits”. The doctrine has been applied ever since by exactly the kind of constituencies you’d expect. It’s now being wielded by right-wing state politicians in the US and rightist groups elsewhere, like Spain’s Vox party, to argue against “woke” alternatives such as environment, social and governance investing.
Stakeholder value has been in vigorous contention with the doctrine practically since its formulation. Take H. Jeff Smith’s study on the shareholders versus stakeholders debate in the July 2003 issue of the MIT Sloan Management Review, which states that “the incentive schema and investor recommendations at Credit Suisse First Boston and Merrill Lynch have all provided rich fodder for those who question the premise of shareholder supremacy”. Smith underlined such “evidence of the failure of the shareholder theory – that managers primarily have a duty to maximise shareholder returns – and the victory of stakeholder theory…to balance the shareholders’ financial interests against the interests of other stakeholders such as employees, customers and the local community”.
Corporate priorities are one thing but those of investors like pension funds are surely another. Pension funds inherently exist to exercise broader responsibilities than simply maximising return on investments. Applying narrowly interpreted shareholder value theory to them, especially over typical pension fund investment timeframes where exogenous shocks like climate change might occur, seems inimical to their purpose.
The US asset management industry’s readiness to kowtow to political fashion in abandoning its previous ESG commitments has been striking and, some might say, shameful. If the fact-based, fiduciary obligation-driven calculations that those policies were based on were valid once, aren’t they still valid? Should they really be thrown overboard to pander to headline-grabbing, shibboleth-mouthing populists?
Politicians may or may not have social and fiduciary obligations. Asset managers and their clients certainly do. They should be ready to speak out against those domestic bad actors who jeopardise their entire raison-d’etre and constituents at large.
