'Stakeholder Capitalism' & Democracy: Choose One; Yield & Human Rights: Choose One -- The Capital Note

Statue of George Washington overlooking Wall Street in Manhattan, January 20, 2016 (Mike Segar/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: ESG (again), Renminbi revival, the economics of vending machines, the economics of the Spanish Flu, and Finland holds the line.


The “socially responsible” investment (SRI) bandwagon trundles on.

The Financial Times:

It is rare to see the chief executives of the rival “Big Four” accounting firms on the same stage. In September, however, that occurred.

The reason? The World Economic Forum convened a meeting of the leaders during the UN General Assembly week, where they thrashed out a common accounting framework for environmental, social and corporate governance.

Sadly its name — stakeholder capitalism metrics — is unmemorable. It is also hard to summarise: there are 21 core metrics, or 34 supplemental ones, split into four buckets (prosperity, people, planet and governance).

The idea behind this initiative by the WEF International Business Council, is clear, however. For the first time, the Big Four will harness their collective muscle to create long-awaited consistency in how companies inform investors (and themselves) about their behaviour in relation to ESG norms.

While it is true that the idea of having some consistency in the way that E (environmental), S (social) and G (governmental) “norms” are defined makes some sense, even if bundling them together does not, this should only be of relevance to those who wish to manage their portfolios on ESG lines, it is clear that the ambition of this group is to bully companies to submit to their agenda. And, as we noted in a Capital Note last week (when looking at comments from JPMorgan Chase and other banks), the “Big Four” accountants are not the only bullies on this particular playground.

I wish I could say that I was surprised that the World Economic Forum (“Davos”) is “convening” a meeting of this sort, but the WEF has never been lacking in self-importance. And, as a reminder, the WEF is currently pushing its “great reset,” which gives some idea of the direction that these “norms” are likely to take.

As another reminder, the WEF has been elected by (checks notes) no one.

In a powerful (and intriguing — read the whole thing) article for Newsweek, Vivek Ramaswamy warns:

“Stakeholder capitalism” takes decisions that should be democratic out of the hands of the people. In order for CEOs to pursue the interests of “stakeholders,” they must decide which stakeholders to prioritize over others. Should companies charge consumers higher prices for goods if it helps stave off climate change? Should they infringe on users’ expectations of privacy if it pleases the Communist Party of China? Whether to prioritize the interests of employees, the environment, the U.S. government or a foreign government is a normative judgment—one that belongs to America’s citizenry at large, not to a small group of unelected corporate elites. I made this argument in February, and subsequently others have made similar points.

This raises the question of how to hold corporate leaders accountable when they take unilateral social action in the name of “stakeholders.”

“Stakeholder capitalism” or democracy: Choose one.

And, not to single out (overmuch) JP Morgan, I couldn’t help noting this from Fox Business:

JPMorgan CEO Jamie Dimon reportedly cut bonuses for upper-level employees who were not on working to advance the bank’s diversity mission.

During a conference on Friday, Dimon said he cut some workers’ extra pay because they “did nothing to help” diversity efforts, as reported by Financial Times reporter Laura Noonan.

A spokesperson for JPMorgan told FOX Business that it launched a new accountability framework linking diverse hiring and retention to compensation decisions.

“We’ve always taken our commitment to equality, diversity and inclusion seriously,” the spokesperson said. “To help drive change, we launched a new accountability framework this year to link diverse hiring and retention to year-end performance and compensation decisions for members of the Operating Committee and our most senior leaders. You can attribute this to JPMorgan Chase.”

The company announced on Thursday that it planned to make a long-term $30 billion commitment to advance racial equity, especially for the Black and Latinx communities.

“Systemic racism is a tragic part of America’s history,” Dimon said in a statement. “We can do more and do better to break down systems that have propagated racism and widespread economic inequality, especially for Black and Latinx people. It’s long past time that society addresses racial inequities in a more tangible, meaningful way.”

The plan includes funding, equity and loans.

Dimon’s job is to maximize shareholder return, not to act on behalf of “society.” To return to Ramaswamy’s argument, the way, in a democracy, that society decides how it is to be run (and, for that matter, how to remedy the consequences of the wrongs of the past) is through elections, not by the actions of a corporate board.

As I have noted before, two principles seem to be on their way to the scrapheap:

  1. A company’s duty is to its shareholders.
  2. Environmental (or other “social”) policy should be the responsibility of democratically elected governments, not a cabal of corporations, activists, NGOs, representatives of the “international community” and politicians too arrogant to go through the usual legislative channels to pursue their agenda.

As if to underline the latter point, Pope Francis is joining the ESG fray in order to pursue his own climate change agenda.

America magazine:

The pope called on investors to exclude companies that do not taking into account the environment, as have many faith-based organizations already have.

Socially responsible investing and stockholder activism, he said, can make companies see “the unavoidable need to commit themselves to the integral care of the common home.”

The pope recommended divesting from stock in “companies that do not meet the criteria of integral ecology and rewarding those that are making concrete efforts in this transition phase to put at the center of their activities criteria such as sustainability, social justice and the promotion of the common good.”

From this pope, such sentiments are not particularly surprising (and, in many respects, they tie into a long strain of Catholic teaching), but more interesting (to me) was that he was delivering this message at Countdown Global Launch, TED’s “first-ever free conference”.

Featured hosts included:

Jane Fonda, Don Cheadle and Al Gore, with speakers including Prince William of Britain and Ursula von der Leyen, a leading European Union official [to be fair, she’s the EU’s top bureaucrat].

Prince William!

With scientists, climate activists, actors, singers, poets, politicians and comedians, the program looked at the state of the environment, predictions about how little time is left to alleviate climate change and about the role of individuals, businesses and governments in taking action.

Turning wearily back to the FT:

While accountants are not usually seen as the source of ethical or environmental revolutions, the hope is that this move by the number-crunchers will create a ripple effect.

Perhaps accountants should just stick to their job.

— A.S.


With returns all but nonexistent in Western fixed-income markets, investors are turning to Chinese bonds in a desperate search for yield. Foreigners have bought up debt renminbi-denominated at a record pace this year, despite perennial concerns about debt buildup in the Chinese economy. Accelerating the flow of funds is positive economic data out of China, which many see as evidence that the country has succeeded in combating the pandemic.

In addition to economic fundamentals, technical factors have also increased investment in China. Last month, the FTSE Russell became the third major index provider to add Chinese securities to their benchmarks. Western policymakers, most notably Senator Marco Rubio, have opposed China’s inclusion on human-rights and transparency grounds. But in a world of zero interest rates, fund managers seem to believe that the comparatively high returns on Chinese securities are worth the financial and ethical risks.

Foreign inflows have led to a rally in the renminbi. The Chinese currency is up more than 5 percent against the dollar since late May. Meanwhile, trade concerns have all but receded. While investors wary of trade tensions between Washington and Beijing have been positioned defensively for the past few years, the growing likelihood of a Biden presidency has assuaged their fears. As Gavekal Economics point out:

After US and Chinese officials met in late August and reaffirmed their commitment to the “phase one” trade deal, the renminbi extended its gains. The market seems increasingly confident that neither the US nor China will take any steps in the near term that will have a significant impact on currency markets, such as sanctioning financial institutions or imposing more tariffs.

— D.T.

Around the Web

The economics of vending machines.

The Hustle:

Three months ago, Jalea Pippens — a phlebotomist at St. John Hospital in Detroit — had her hours cut.

In the midst of the pandemic, the 23-year-old found herself in dire need of a second income stream. One night, while scrolling through search results for “ways to make extra money,” she came across vending machines.

The daily minutiae of owning a vending machine seemed a bit dull: buying bulk candy at Sam’s Club, stocking machines, collecting weathered bills and buckets of coins. But Pippens saw an opportunity to be her own boss.

She partnered up with her boyfriend and another business partner, bought a vending machine on Facebook Marketplace for $1.6k, and plunked it down at a local auto parts store, where it now grosses $400 per month…

Holding the Mannerheim Line (2.0)


Squeezed between an unpredictable US and a ruthless China, the EU has started to pursue what it has termed “strategic autonomy”.

Symptomatic of this trend was the initiative of France, Germany, Italy and Poland presented to the European Commission’s Executive Vice President Margrethe Vestager, in which the four countries demanded that the EU speed up the creation of European flagship companies earlier this year.

In its recent issue (FIIA 117), the Finnish Institute of International Affairs calls actions like these the emergence of strategic capitalism.

“In contrast to the free market capitalism that has prevailed during the past decades, by resorting to geo-economic measures, governments are imposing conditions under which goods, services and technologies can be traded,” the Finnish institute wrote.

In this kind of scenario, Finland, which is an open economy that depends on exports, is feeling lonely. Even the UK, a former defender of free markets, is out of the club.

Finland wants to believe in competitiveness and does not want to take the road of customs, protectionism, state aid and subsidies, EU Minister Tytti Tuppurainen (SDP) told Helsingin Sanomat on 3 October in an interview.

The EU is moving towards a fortress-like structure where smaller economies might be in danger of being trampled on, according to Tuppurainen. This kind of sentiment is one other smaller EU member states may very well share.

It’s an ill wind . . .

Financial Times:

Instacart, the US grocery delivery company, has interviewed investment banks to advise on a public listing, as it looks to capitalise on a boom in business during the pandemic.

The San Francisco-based company said on Thursday that it had raised $200m in new funding led by existing investors Valiant Capital Management and D1 Capital, bringing its valuation to $17.7bn, including the new cash.

Instacart’s fundraising came as it held discussions with banks about a long-awaited public offering, which could come as soon as the first half of next year, according to people with knowledge of the talks. The company declined to comment.

Random Walk

From August, a National Bureau of Economic Research paper on the 1918 influenza pandemic and its lessons for COVID-19.

A long read, but well worth it.

A couple of nuggets (my emphasis added):

In the United States, a brief V-shaped recession coincided with the pandemic. Velde (2020) uses high-frequency time series data (often weekly or monthly) to examine the immediate economic impacts of the pandemic. Industrial production dropped 20% from July 1918 to January 1919 but rebounded quickly. Relative to August of 1918, ten-cent stores and dry goods/clothing stores saw a decrease in sales. Drug stores showed a modest increase in sales in October and larger decreases as the pandemic ended. Mail-order catalogs saw an increase in sales, an increase Velde attributed to an “early Amazon effect.” Employment indices from Ohio, Massachusetts, Wisconsin, and New York show that employment fell between 7 and 15% during the pandemic, but all recovered by the end of 1919….

Taken together, the evidence suggests that the 1918 pandemic was not a major determinant of U.S. stock market volatility.The brevity of the recession and the lack of stock market volatility raises the question: why were the concurrent effects of the influenza pandemic on the U.S. economy so modest in 1918 and so large during the 2020 COVID-19 pandemic? First, the U.S. had a lower mortality rate in 1918 than most of the world… Second, the pandemic in 1918 occurred in a time when infectious disease was a common cause of death. Americans in 1918 may have become accustomed to the risk of dying from infectious disease in a similar way that many modern-day Americans are accustomed to the risk of dying from heart disease. Third, although there were non-pharmaceutical interventions during the 1918 pandemic, they were not as severe as the social distancing laws that were implemented in the spring of 2020. Many businesses and schools in 1918 either did not close, or did so only briefly. Fourth, the demand for munitions for the war may have prevented the closing of businesses and factories…

It is interesting to speculate whether the generally higher vulnerability of Americans to infectious disease in the early decades of the last century (and not, incidentally, just the early decades) left them better placed, psychologically, to ‘live with’ a pandemic than we seem capable of doing today.

— A.S.

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