Here’s what I learned in law school: business corporations have only ONE(1) purpose:
To make money for their shareholders.
It might not work out, but they hafta try, which is why people «invest”: y’know, supply capital.
A nonprofit corp, OTOH, is not supposed to make a,profit, in fact it can’t if it wants that status. So you know what you’re getting into if you put any money in there, too.
IMHO, those 2 categories were good nd enough. But now we have “benefit corporations” kinda a hybrid. If you “invest” or buy shares in those corps, you know that the board may very well waste or dissipate your money, but you’re ok with that, because they’re free of the pesky obligation to shareholders, they’re free to take your money and pursue ESG objectives. In other words, the eponymous “benefit” does NOT flow to shareholders!
But even if a corp is just a straight- out business corp now, it’s no longer bound by the prime directive. THAt’S what “stakeholder capitalism” means: that the larger community, or everybody else on Earth, has a “stake” in what a big corp does, and to hell with the people who fund it.
“Stake” used to mean you had put up sump’n, originally an actual stake marking the boundaries of your land claim., or your gold watch to cover your next bet.
But now, it mens nothing, except tht you might conceivably be affected in some remote way by what the corp does.
Ladies and gentlemen,
This is twaddle.
It’s no way to run a business.
Here’s what I learned in law school: business corporations have only ONE(1) purpose:
Some states in the U.S. are catching up with the ESG crooks.
Yeh, but 35 states and DC have legalized benefit corporations (B Corps).
Agree – ideally ESG would be illegal in all 50 U.S. states and the Western world.
However, another hopeful sign is Strive Funds. Strive Funds invests in publicly traded companies, and actively persuades these companies to remove ESG provisions from their mission. Full disclosure, I own shares in two Strive Funds in my retirement account (and I am considering a third). Regarding investment advise, I believe individuals should fully TRUST NO ONE – but do their own due diligence and vet ideas with knowledgeable family members and investment advisors.
- Strive U.S. Energy ETF (DRLL)
- Strive 500 ETF (STRV)
- Strive U.S. Semiconductor ETF (SHOC) I just discovered this one – one of the benefits of participating in a high IQ blog.
See link below for detailed information on Strive Funds.
While I agree that “stakeholder capitalism” has become a stalking horse for the ESG scam, the original idea, around 20 years ago, was a reaction to self-destructive trends among management of large public companies in the U.S. as a result of their capture by the MBA cult of management by financial aggregates and optimisation without regard to increase of fragililty and tail risks.
When the whole “shareholder value” craze took off in the 1990s, exemplified by companies such as Boeing and General Electric, the idea was that the only metric that mattered was earnings per share or, more crassly, the stock price compared to the performance of market or industry sector averages. The detail that this happened to align perfectly with the incentives of senior executives whose compensation was tied to the stock price through stock options or bonus plans was, of course, not lost upon cynics.
The problem was that you can optimise “shareholder value” when it is defined in this way by a variety of strategies which include:
- Screwing your supplier base by using monopsony power to drive down their margins
- Off-shoring manufacturing of critical components and counting on just-in-time delivery rather than maintaining inventory
- Cutting R&D costs by salary-busting senior engineering staff and replacing them with less experienced but cheaper new hires
- Deferring investment in new product development and foundational technologies, using the money instead to buy back shares, giving a bump to earnings per share and share price
- Stretching out the life of existing products as long as possible rather than replacing them with new products which are less expensive to manufacture and operate and better meet customer needs
- Deciding not to invest in emerging technologies, even if they may pose a threat to the firm’s market position. “If it gets big enough to worry about, we’ll just buy them out.”
- Deferring infrastructure and capital equipment maintenance and replacement, stretching out existing facility life as long as possible, even at the cost of efficiency.
These strategies, which filled the MBA school casebooks of the era, were all varieties of eating the seed corn to bump the near-term stock price.
To see how well it worked, look at the recent history of General Electric, Boeing, or General Motors.
A successful company relies upon a variety of “stakeholders”: employees, suppliers, customers, distribution channels, financing sources, independent sales and service organisations, educational institutions that train workers and customers in the use of products, etc. When a company adopts a strategy of squeezing these long-term necessities for its health to achieve a short-term gain in its stock price, it is acting against its own self-interest and should be shunned by investors interested in long-term appreciation of capital.
Interesting… Expense ratios are just a little above the seemingly equivalent iShares:
DRLL - 0.4% vs IYE 0.39%
SHOC - 0.41% vs SOXX 0.4%
STRV - 0.0545% vs IVV 0.03%
The story is compelling, at least on the surface:
I wish they had equivalents of broader ITOT, IXUS, etc.
BTW, I completely agree with the OP: ideally, corporations must maximize value for shareholders under constraints of the law and regulation provided by the government. But, what about lobbying?
This is evidence that “Stakeholder Capitalism” is not an oxymoron – in reality, it is fascism, the merger of the political elite and the business elite (with the political elite calling the shots while the business elite reward the political elite for making the right calls).
Are there large investors who don’t take a long-term view of a stock price?
Incredibly, it seems like there ARE such investors, now. With the B Corps, it’s like,” Finally! Instead of just GIVING my money away to a non-profit, I can ‘invest’ in a ‘business corporation ‘ with a Board of Directors who arent really accountable to me for my money, but to whom I can out-source my virtue-signaling! They’ve got a much bigger budget for that than I do. Trust the experts!”
When does an “investor” become a “speculator”?
Arguably, any real investor indeed has to take a long-term view of stock prices (and dividends too), where long-term means years. But much capital/savings these days are invested on behalf of the actual investors by money managers – agents who have their own agenda which may or may not correspond to the interests of the actual investor. These agents tend to behave more as speculators, looking towards the quarterly return they will report. What is important to them is buying stocks for which there are likely to be greater fools to whom those stocks can be sold within a rather short time period. In this environment, fashion (eg ESG or DIE) can be a significant factor.
I am fortunate to have been educated over the past 20 years by my friend Tony Deden. Here is an interview with him by Grant Williams, if you are interested. Tony founded Edelweiss Holdings, a small, under-the-radar private investment company in 2001. It is no longer open to “US persons” due to the punitive war on middle class wealth being conducted by the rulers of the erstwhile “land of the free”; I am grandfathered. Edelweiss is truly unique. Tony has taught me the essential difference between understanding my role as an “owner” vs. an “investor”. He likens the majority of today’s investors as renters rather than owners - with all that implies.
I am fortunate to be an owner of this small, principled company domiciled in the Channel Islands. It never advertises and only accepts those who are like-minded. The small companies we own all trade very thinly, as the companies are chosen, in large part, by the deeply entrepreneurial nature and practices of their owners=managers. None of our companies’ managements has any interest in the next quarter’s share price. Owners we seek think generationally and share our low time preference. Most wish to leave a going concern for the next generation, not ‘take the money and run’. We also own substantial gold - in the vault in Switzerland - as a store of value. From time-to-time we convert gold to additional, rare, companies like those described.
The small management team are all fellow owners of Edelweiss based in Zurich. There are thus no management fees or trading fees, only fixed nominal redemption fees for share liquidation; Accordingly, there are are also no conflicts of interest, as exist in every other managed investment account I have ever heard of. As I said, I am fortunate to be among the owners.
Here is an interesting development, as if a decision maker at Vanguard was following this forum:
The law should be that the custodian of a passive fund cannot vote the shares held.
Almost by definition, a passive fund doing anything active is a violation. When I invest in a passive fund, I expect it to be passive.
One focus of criticism has been the effort known as the Net Zero Asset Managers (NZAM) initiative, launched in late 2020 to encourage fund firms to reach net zero emission targets by 2050 and limit the rise in global temperatures. As of Nov. 9, NZAM counted 291 signatories representing some $66 trillion in assets under management.
“We have decided to withdraw from NZAM so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks—and to make clear that Vanguard speaks independently on matters of importance to our investors," Vanguard said in the statement.
Exxon did an analysis some years back, considering the slow (~1%) growth in global demand for oil and the more rapid (~7%) annual decline in oil production from existing wells. The conclusion was that about half the oil the world will need in 10 years will have to come from new projects – wells & fields that are not currently in production. Other analysts have pointed out that the world is grossly under-investing in those highly necessary new oil projects.
Perhaps Vanguard senses a major investing opportunity? Contrarians get rich … occasionally.
“Backing out of this thing is simply Vanguard blowing with the winds of constant change. They don’t have a strong personality like Fink to champion a cause,” Wiener said.
Seriously, though, in the light that it is difficult to vote on each of ~5000 companies in VTSAX, I hope that Vanguard and possibly every other MF/ETF firm will provide a menu of simple choices of priorities for the holders of their funds
Don’t mess with TEXAS!