February 09, 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.

SOURCE




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