Tag Archives: Stakeholder Capitalism

Grow Or Collapse: Stasis Is Not a Long-Term Option

18 Wednesday Jan 2023

Posted by in Climate, Environment, Growth

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Growth is a human imperative and a good thing in every sense. We’ve long heard from naysayers, however, that growth will exhaust our finite resources, ending in starvation and the collapse of human civilization. They say, furthermore, that the end is nigh! It’s an old refrain. Thomas Malthus lent it credibility over 200 years ago (perhaps unintentionally), and we can pick on poor Paul Ehrlich’s “Population Bomb” thesis as a more modern starting point for this kind of hysteria. Lewis M. Andrews puts Ehrlich’s predictions in context:

“A year after the book’s publication, Ehrlich went on to say that this ‘utter breakdown’ in Earth’s capacity to support its bulging population was just fifteen years away. … For those of us still alive today, it is clear that nothing even approaching what Ehrlich predicted ever happened. Indeed, in the fifty-four years since his dire prophesy, those suffering from starvation have gone from one in four people on the planet to just one in ten, even as the world’s population has doubled.”

False Limits

The “limits” argument comes from the environmental Left, but it creates for them an uncomfortable tradeoff between limiting growth and the redistribution of a fixed (they hope) or shrinking (more likely) pie. That’s treacherous ground on which to build popular support. It’s also foolish to stake a long-term political agenda on baldly exaggerated claims (and see here) about the climate and resource constraints. Ultimately, people will recognize those ominous forecasts as manipulative propaganda.

Last year, an academic paper argued that growing civilizations must eventually reach a point of “asymptotic burnout” due to resource constraints, and must undergo a “homeostatic awakening”: no growth. The authors rely on a “superlinear scaling” argument based on cross-sectional data on cities, and they offer their “burnout” hypothesis as an explanation for the Fermi Paradox: the puzzling quiet we observe in the universe while we otherwise expect it to be teeming with life… civilizations reach their “awakenings” before finding ways to communicate with, or even detect, their distant neighbors. I addressed this point and it’s weaknesses last year, but here I mention it only to demonstrate that the “limits to growth” argument lives on in new incarnations.

Growth-limiting arguments are tenuous on at least three fundamental grounds: 1) failure to consider the ability of markets to respond to scarcity; 2) underestimating the potential of human ingenuity not only to adapt to challenges, but to invent new solutions, exploit new resources, and use existing resources more efficiently; and 3) homeostasis is impossible because zero growth cannot be achieved without destructive coercion, suspension of cooperative market mechanisms, and losses from non-market (i.e., political and non-political) competition for the fixed levels of societal wealth and production.

The zero-growth world is one that lacks opportunities and rewards for honest creation of value, whether through invention or simple, hard work. That value is determined through the interaction of buyers and sellers in markets, the most effective form of voluntary cooperation and social organization ever devised by mankind. Those preferring to take spoils through the political sphere, or who otherwise compete on the basis of force, either have little value to offer or simply lack the mindset to create value to exchange with others at arms length.

Zero-Growth Mentality

As Robert Colvile writes in a post called “The Morality of Growth”:

“A society without growth is not just politically far more fragile. It is hugely damaging to people’s lives – and in particular to the young, who will never get to benefit from the kind of compounding, increasing prosperity their parents enjoyed.”

Expanding on this theme is commenter Slocum at the Marginal Revolution site, where Colvile’s essay was linked:

“Humans behave poorly when they perceive that the pie is fixed or shrinking, and one of the main drivers for behaving poorly is feelings of envy coming to the forefront. The way we encourage people not to feel envy (and to act badly) is not to try to change human nature, or ‘nudge’ them, but rather to maintain a state of steady improvement so that they (naturally) don’t feel envious, jealous, tribal, xenophobic etc. Don’t create zero-sum economies and you won’t bring out the zero-sum thinking and all the ills that go with it.”

And again, this dynamic leads not to zero growth (if that’s desired), but to decay. Given the political instability to which negative growth can lead, collapse is a realistic possibility.

I liked Colville’s essay, but it probably should have been titled “The Immorality of Non-Growth”. It covers several contemporary obstacles to growth, including the rise of “stakeholder capitalism”, the growth of government at the expense of the private sector, strangling regulation, tax disincentives, NIMBYism, and the ease with which politicians engage in populist demagoguery in establishing policy. All those points have merit. But if his ultimate purpose was to shed light on the virtues of growth, it seems almost as if he lost his focus in examining only the flip side of the coin. I came away feeling like he didn’t expend much effort on the moral virtues of growth as he intended, though I found this nugget well said:

“It is striking that the fastest-growing societies also tend to be by far the most optimistic about their futures – because they can visibly see their lives getting better.”

Compound Growth

A far better discourse on growth’s virtues is offered by Veronique de Rugy in “The Greatness of Growth”. It should be obvious that growth is a potent tonic, but its range as a curative receives strangely little emphasis in popular discussion. First, de Rugy provides a simple illustration of the power of long-term growth, compound growth, in raising average living standards:

This is just a mechanical exercise, but it conveys the power of growth. At 2% real growth, real GDP per capital would double in 35 years and quadruple in 70 years. At 4% growth, real GDP would double in 18 years… less than a generation! It would quadruple in 35 years. If you’re just now starting a career, imagine nearing retirement at a standard of living four times as lavish as today’s senior employees (who make a lot more than you do now). We’ll talk a little more about how such growth rates might be achieved, but first, a little more on what growth can achieve.

The Rewards of Growth

Want to relieve poverty? There is no better and more permanent solution than economic growth. Here are some illustrations of this phenomenon:

Want to rein-in the federal budget deficit? Growth reduces the burden of the existing debt and shrinks fiscal deficits, though it might interfere with what little discipline spendthrift politicians currently face. We’ll have to find other fixes for that problem, but at least growth can insulate us from their profligacy.

And who can argue with the following?

“All the stuff an advocate anywhere on the political spectrum claims to value—good health, clean environment, safety, families and quality of life—depends on higher growth. …

There are other well-documented material consequences of modern economic growth, such as lower homicide rates, better health outcomes (babies born in the U.S. today are expected to live into their upper 70s, not their upper 30s as in 1860), increased leisure, more and better clothing and shelter, less food insecurity and so on.”

De Rugy argues convincingly that growth might well entail a greater boost in living standards for lower ranges of the socioeconomic spectrum than for the well-to-do. That would benefit not just those impoverished due to a lack of skills, but also those early in their careers as well as seniors attempting to earn extra income. For those with a legitimate need of a permanent safety net, growth allows society to be much more generous.

What de Rugy doesn’t mention is how growth can facilitate greater saving. In a truly virtuous cycle, saving is transformed into productivity-enhancing additions to the stock of capital. And not just physical capital, but human capital through investment in education as well. In addition, growth makes possible additional research and development, facilitating the kind of technical innovation that can sustain growth.

Getting Out of the Way of Growth

Later in de Rugy’s piece, she evaluates various ways to stimulate growth, including deregulation, wage and price flexibility, eliminating subsidies, less emphasis on redistribution, and simplifying the tax code. All these features of public policy are stultifying and involve dead-weight losses to society. That’s not to deny the benefits of adequate state capacity for providing true public goods and a legal and judicial system to protect individual rights. The issue of state capacity is a major impediment to growth in the less developed world, whereas countries in the developed world tend to have an excess of state “capacity”, which often runs amok!

In the U.S., our regulatory state imposes huge compliance costs on the private sector and effectively prohibits or destroys incentives for a great deal of productive (and harmless) activity. Interference with market pricing stunts growth by diverting resources from their most valued uses. Instead, it directs them toward uses that are favored by political elites and cronies. Subsidies do the same by distorting tradeoffs at a direct cost to taxpayers. Our system of income taxes is rife with behavioral distortions and compliance costs, bleeding otherwise productive gains into the coffers of accountants, tax attorneys, and bureaucrats. Finally, redistribution often entails the creation of disincentives, fostering a waste of human potential and a pathology of dependence.

Growth and Morality

Given the unequivocally positive consequences of growth to humanity, could the moral case for growth be any clearer? De Rugy quotes Benjamin Friedman’s “The Moral Consequences of Economic Growth”:

“Growth is valuable not only for our material improvement but for how it affects our social attitudes and our political institutions—in other words, our society’s moral character, in the term favored by the Enlightenment thinkers from whom so many of our views on openness, tolerance and democracy have sprung.”

De Rugy also paraphrases Tyler Cowen’s position on growth from his book “Stubborn Attachments”:

“… economic growth, properly understood, should be an essential element of any ethical system that purports to care about universal human well-being. In other words, the benefits are so varied and important that nearly everyone should have a pro-growth program at or near the top of their agenda.”

Conclusion

Agitation for “degrowth” is often made in good faith by truly frightened people. Better education would help them, but our educational establishment has been corrupted by the same ignorant narrative. When it comes to rulers, the fearful are no less tyrannical than power-hungry authoritarians. In fact, fear can be instrumental in enabling that kind of transformation in the personalities of activists. A basic failing is their inability to recognize the many ways in which growth improves well-being, including the societal wealth to enable adaptation to changing conditions and the investment necessary to enhance our range of technological solutions for mitigating existential risks. Not least, however, is the failure of the zero-growth movement to understand the cruelty their position condones in exchange for their highly speculative assurances that we’ll all be better off if we just do as they say. A terrible downside will be unavoidable if and when growth is outlawed.

Ubiquitous Guilt: EEOC Disparate Impact Liability

22 Thursday Sep 2022

Posted by in Discrimination, Regulation

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A key part of the Civil Rights Act of 1964 was Title VII, which dealt with employment discrimination. Title VII applied only to intentional discrimination, but it didn’t take long for the Equal Employment Opportunity Commission (EEOC), the agency charged with administering Title VII, to find ways to expand the scope of its enforcement mandate under the law. The EEOC eventually managed to convince virtually all parties, including employers, employees, job applicants, attorneys, and even the courts, that the law prohibited employment practices having disparate impacts on groups protected from actual discrimination under the law. Predictably, this warped reinterpretation created severe distortions to the efficiency and fairness of labor market outcomes .

Another Rogue Agency

On the EEOC’s complete and erroneous reimagining of Title VII, Gail Heriot’s “Title VII Disparate Impact Liability Makes Almost Everything Presumptively Illegal” is a must read. Heriot is a Professor at the University of San Diego School of Law and is a member of the U.S. Commission on Civil Rights. This post attempts to summarize most of the important points in Heriot’s paper, so if you don’t have time for Heriot’s paper, read on. All errors are mine, of course!

Heriot provides an incredible case study on the dangers of regulatory overreach. She first discusses the EEOC’s blatant usurpation of Congressional power:

“It is hardly surprising that EEOC officials would undertake to publish answers to the questions they were hearing repeatedly…. But publishing such ‘guidances’ also had the potential to spin out of control. The temptation would always be to use them to establish what the EEOC staff wanted the law to be rather than what it was. Instead of interpreting Title VII in good faith, guidances would soon become quasi-legislation—disguised as interpretation, but in reality imposing new duties on employers not found in Title VII itself.

None of this should be surprising. It is in the nature of bureaucracy. It naturally seeks to expand its powers, often beginning by occupying niches that are otherwise unoccupied. Over time, a little power often becomes a lot of power. What is surprising is how upfront EEOC officials were about their tactics in accumulating that power.”

Having gone this far, one might be tempted to ask the EEOC what limiting principle they actually apply to determine whether various employment and hiring practices are permissible. Are level of education, industry experience, and tests of physical and cognitive faculties verboten? The answer that is there is no consistent, limiting principle. Instead, Heriot says the EEOC “picks its battles” (see below). She also describes the EEOC’s adoption of a so-called “four-fifths rule”, which is about as arbitrary as it gets. It means the EEOC will challenge an employment practice only if it leads to a selection of any protected group at a rate less than 80% of the most-selected group. That is, the “disparate impact” must be less than 20% to rule out a challenge. This rule appears nowhere in Title VII.

Job Qualifications? You’re Guilty!

Unfortunately, as Heriot takes pains to demonstrate, it’s virtually impossible to identify a hiring guideline or method of employee assessment that does not have a disparate impact. The examples she provides on pp. 34 – 37 of her paper, and on p. 40, are convincing. Furthermore, the EEOC’s “four-fifths” rule hardly narrows the potential for challenge at all.

“Selection rates of less than four-fifths relative to the group with the highest rate are extremely common. Just as everything or nearly everything has a disparate impact, everything or nearly everything has a selection rate that fails the ‘four fifths rule’ for some race, color, religion, sex, or national origin group.”

So the EEOC is allowed to operate with tremendous discretion. Again, Heriot says the agency “picks its battles”, focusing on challenges to screening tools like “written tests, physical strength and endurance tests, criminal background tests [sic], high school diploma requirements, personal credit histories, residency requirements, and a few others.”

This regulatory environment encourages employers to keep job requirements vague, sometimes to the point at which potential applicants might not be sure what the job qualifications really are, or exactly what the job function entails. One upshot is that this makes it harder to detect and prove actual discrimination, and it often leads to more arbitrary decisions by hiring managers, which may, in fact, involve real discrimination, including nepotism and/or cronyism.

Unbiased Intent Doesn’t Matter

Heriot points to a disastrous decision by the Supreme Court that, perhaps unintentionally, helped legitimize the concept of disparate impact as legal doctrine, and as a valid cause of action by plaintiffs against employers. In Griggs v. Duke Power Co. (1971), the Court rejected the premise that an employer’s innocence with respect to their intent to discriminate was an inadequate defense of an employment practice that had adverse consequences to a protected group. Heriot quotes the opinion of Chief Justice Warren Burger:

“… good intent or absence of discriminatory intent does not redeem…. Congress directed the thrust of the Act to the consequences of employment practices, not simply the motivation.”

It’s as if the Court convinced itself that adverse consequences prove actual discrimination, even when there is no intent to discriminate. The Court also emphasized that it’s decision was based on “general deference” to the EEOC! And this was years before the unfortunate Chevron Doctrine (judicial deference to administrative agencies on interpretation of law) was formally established by the Court. Heriot and others assert that the decision in Griggs would have astonished the authors of Title VII.

Heriot also discusses changes in the treatment of “business necessity” as a defense against complaints of disparate impact. It is generally the employer’s burden to show the “necessity” of a challenged hiring practice. “Necessity” was the subject of several Supreme Court decisions in the 1970s and 1980s, but the Court stopped short of requiring an employer to show that a practice was “essential”. In one case, the court shifted some of the burden back onto the plaintiff to show that a practiced lacked necessity. In 1990, there was concern in the Bush Administration and Congress that the difficulty of proving business necessity would eventually lead to the adoption of racial quotas by employers in order to prevent EEOC challenges, though the authors of Title VII had staunchly opposed quotas. While the original hope was that the Civil Rights Act of 1991 would resolve questions about “business necessity” and the burden of proof, it did not. Instead, it can be said that it legitimized disparate impact liability, with conditions. The standard for proving necessity, based on Court decisions, evolved to become more strict with time. There are cases in which courts seem to have left the EEOC to define “business necessity”, as if the EEOC would be in a better position to do that than the business itself!

Inviting Discrimination

Heriot devotes part of her paper to the perverse effects of disparate impact. When employers are faced with prohibitions or the threat of action against a certain practice, whether it be tests of aptitude, strength, or screening on criminal or credit records, they may abandon those devices and opt instead for “informal” proxies. The use of proxies, however, often leads to instances of actual discrimination, whether born of conscious or unconscious bias on the part of hiring managers.

Heriot provides a number of examples of the proxy phenomenon, some of which have been confirmed by empirical research. For example, an employer interviewing candidates for a job that requires math proficiency might reasonably use a test of math skill as a key criterion. If such a test is prohibited, the hiring manager might be tempted to hire an Asian candidate, since Asians have a reputation for good math skills. Similarly, an applicant of West European ancestry might be favored for a position requiring excellent grammar skills, absent the ability to explicitly test grammatical skill. Candidates for a job requiring a certain level of physical strength could be evaluated by various tests of strength, but barring that, a hiring manager might be inclined to hire based on gender.

When criminal background checks are prohibited, employers might be tempted to use proxies such as gender and race as a substitute. Likewise, if it’s forbidden to check a candidate’s credit record to gauge reliability, other proxies might lead to discrimination against members of protected classes. Needless to say, these kinds of outcomes are precisely the opposite of what the EEOC hopes to achieve.

As Heriot further notes, the outcomes can be much systematic and destructive than a bit of one-off discrimination in hiring, promotion, pay raises, or task assignment. These may inflict damage reaching well beyond having the wrong people gaining favorable labor market outcomes. For example, an employer might choose to relocate operations to a “safer” or more affluent community, barring an ability to perform criminal background or credit checks. Or businesses might decide to substitute capital for labor, given the interference in their attempts to identify the best job candidates. The difficulty in screening also creates an incentive to automate, just as premature automation is becoming more common with rising wage floors imposed by government.

Killing Jobs and Competition

Like many forms of regulation, however, large firms in less competitive industries are usually better positioned to survive EEOC scrutiny than smaller firms in competitive markets. Indeed, we often see large market players embrace regulation because it gives them a competitive advantage over smaller rivals. In this case, we see large firms adopting their own diversity, equity, and inclusion (DEI) goals. This is not solely related to the threat of EEOC challenges, however. Private lawsuits alleging discrimination or disparate impact are also a concern, as is pleasing activists inside and outside the company. Nevertheless, as Christopher Rufo reveals, there is growing push-back against the corporate DEI regime. Let’s hope it continues to gain traction.

Unconstitutional Executive Discretion

Heriot also dedicates part of her paper to constitutional issues related to the EEOC’s broad discretion in the application of disparate impact to employment practices. For one thing, disparate impact is a direct source of discrimination: when members of “protected groups” are awarded opportunities based on the possibility of disparate statistical outcomes, it means the majority candidates are denied those opportunities, no matter their qualifications. This is outright discrimination, and it’s instigation by a federal agency constitutes an explicit denial of equal protection under the law.

It should be no surprise that many consider disparate impact actions against employers to be denials of due process. Furthermore, when a federal agency like the EEOC exercises broad discretion, the so-called non-delegation doctrine should come into play. That is, the EEOC makes judgements on matters that are not necessarily authorized Congress. Thus, there are legitimate questions as to whether the EEOC’s discretion is a violation of the separation of powers. Granted, the courts have long deferred to administrative agencies in the interpretation of enabling statutes, but the Supreme Court has taken a new tack under Chief Justice Roberts. In some recent decisions, the Court has relied on a new “major questions” doctrine to place certain limits on executive discretion.

Conclusion

Hiring? Creating jobs? Better not get picky about checking your applicants’ skills and backgrounds or you risk liability for contributing to the statistical malaise of one, or of many, protected groups. That’s how it is under “disparate impact” rules imposed by the EEOC. The success of your business be damned!

Gail Heriot’s excellent paper details the way in which the EEOC transformed the meaning of its enabling legislation, expanding its reign over employment practices across the nation. She demonstrates the breadth of disparate impact rules with examples showing that virtually any attempt at systematic screening of job applicants can be held to be illegal. Your intent to hire the most qualified candidate without bias doesn’t matter, under an insane Supreme Court decision that buttressed the EEOC’s authority. As Heriot says, “… everything is presumptively illegal”. She also describes how disparate impact liability leads to employment decisions based on proxy criteria, which often lead to actual (even if unintended) discrimination. Further unintended consequences are the possibility of larger job losses in minority communities and less competition in product and labor markets. Finally, Heriot delineates several constitutional violations inherent in broad EEOC discretion and the enforcement of disparate impact.

One day a court challenge to the EEOC and disparate impact liability might rise to the level of the Supreme Court. Justice Antonin Scalia expected it, but it still hasn’t come before the Court. It should! Another way to do battle against the EEOC’s scourge is to challenge corporations who cow-tow to activists and to the EEOC with their own DEI initiatives. This manifestation of stakeholder capitalism is a cancer on the wealth and productivity of the U.S. economy, resting side-by-side with disparate impact liability.

The Vampiric Nature of “Stakeholder” Capitalism

21 Thursday Jul 2022

Posted by in Capitalism, Human Welfare

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When so-called “stakeholders” are in charge of a company, or when non-owner “stakeholders” receive deference to their various goals from management, the actual owners have been displaced and no longer have control. That represents a kind of taking in which managers are complicit, failing to keep proper vigilance in their duty to maximize value for shareholders.

Ceding control to stakeholders represents a severe dislocation in the principle-agent relationship between owners and corporate management. Virginia Postrel is on-point in her discussion of the failures of “stakeholder capitalism”, but she might as well just say that it isn’t capitalism at all! And she’d be right!

Stakeholder capitalism represents a “theory” of the firm that accepts an array of different goals that often stand in conflict. This is the key point raised by Postrel. She cites Michael C. Jenner’s 2010 paper on stakeholder theory in which he notes the impossibility of maximizing any single-valued objective in the presence of a multi-dimensional corporate objective function. Thus, stakeholder objectives nearly always subvert management’s most important responsibility: maximizing value for owners.

And just who are these “stakeholders”? The designation potentially includes just about anyone and everyone: managers, customers and potential customers, suppliers and potential suppliers, employees, the pool of potential job applicants, union organizers, regulators, community members and organizations, local governing bodies, “underserved” populations, anyone with a grievance, environmental activists, and the children of tomorrow. Sure, owners are part of the broad set of stakeholders as well, but as Jenner more or less noted, who’s got time to maximize profits in the face of the myriad “claims” on company resources by the larger, blood-sucking hoard?

George Will aptly refers to stakeholder capitalism as “parasitic progressivism”. In fact, in his opening sentence, he notes that the very term “stakeholder” is a form of semantic infiltration, whereby the innocent (and ignorant) adoption of the term is a gateway to accepting the agenda. Will also notes that management deference to stakeholders violates fiduciary laws intended to protect owners, which include worker pensions and 401(k)s, as well as small investor IRAs, charitable organizations, and insurance companies funding life insurance policies and annuities.

This behavior is not merely parasitic — it is truly vampiric. Once bitten by the woke zombie corpses of stakeholder capitalism, either from within the organization or without, the curse of this deadly economic philosophy spreads. Human resource organizations impose diversity, equity, and inclusion training, rules, and hiring practices on operations. Suppliers might be imposed upon to not only deliver valued inputs, but to do so in a way that pleases multiple stakeholders. Woke fund managers, upon whom the firm might rely for capital, will insist on actions that promote social and environmental “justice”. It can go on and on, and no amount of appeasement is ever sufficient.

Unfortunately, there really are activist investors — actual stockholders — who encourage this misguided philosophy. If the majority of a firm’s owners wish to be accountable to the whims of particular non-owner stakeholders, that’s their right. Other investors would be wise to sell their shares… fast! Wastrels and incompetents have blown many a great and small fortune over the years, but capital markets are well-equipped to punish them, and eventually they will. Get woke, go broke!

The best way for a firm to maximize its contribution to society is to do its job well. That task involves producing a good or service that is valued by customers. By doing it well and efficiently, shareholders, customers, employees and society all win. This is the magic of mutually beneficial trade! Produce something that customers value highly while being mindful of tradeoffs that allow resource costs to be minimized. In general, the customers extract surplus value; shareholders extract surplus value; suppliers extract surplus value; and employees extract a surplus value because they receive wages at least as high as the lowest “reservation” wages they’d find acceptable. Here are some comments from Don Boudreaux on this general point:

“… regardless of how well or poorly managers are at running their companies in ways that maximize share values, there’s every reason to believe that managers will be much less competent at running their companies in ways that adequately satisfy ‘stakeholder’ interests. Not only is the definition of ‘stakeholder’ inherently open-ended and ambiguous, even the most skilled managers have no way to know how to trade-off the well-being of one set of ‘stakeholders’ for that of another set.”

This is very nearly a restatement of Jenner’s conclusion, but Jenner’s applies even when managers know specifics about the tradeoffs. Generally they don’t! Remember too that the firm, its shareholders, suppliers, and its employees are all subject to taxes on their surplus values, so their contribution to society exceeds their own gain. Moreover, many firms are already regulated precisely because lawmakers believe government has an interest in protecting larger classes of “stakeholders”. But beyond meeting regulatory requirements, to further insist that firms devote less than their remaining energies and resources to doing their jobs well, and to ask them to focus instead on the varied interests of external parties, whomever they might be, is ultimately a prescription for social harm.

A monster child of stakeholder theory is so-called ESG scoring. ESG stands for Environmental, Social, and Governance, and the scores are intended as “grades” for how well a firm is addressing these concerns. Proponents claim that high ESG’s are predictive of future returns, but that’s true only if lawmakers and regulators look upon these firms with favor and upon others with disfavor. ESG is basically a political tool. Otherwise, it is an economically illiterate notion foisted upon investors by political activists embedded in “woke” financial institutions like Blackrock and Bank of America. There be some real vampires! As David Henderson and Marc Joffe write, ESG fuels higher prices and obstructs economic growth. That’s because it formalizes the effort to serve “stakeholders”, thus raising the cost of actually producing and delivering the good or service one naturally presumes to be the firm’s primary mission. The shareholders pay the cost, as do customers and employees.

When I hear business people talk reverently about serving their “stakeholders” (and when I hear naive investment advisors wax glowingly about ESG scores), it sends up huge red flags. These individuals have lost sight of their valid objectives. They should be trying to run a business, not serving as a grab-bag for other interests. Serve your customers well and efficiently so as to maximize value for shareholders. Do so within the bounds of the law and ethics, but stick to your business mission and the parties to whom you are ultimately accountable!

ESG Scoring: Political Tool Disguised as Investment Guide

30 Wednesday Mar 2022

Posted by in Capital Markets, Corporatism, Environmental Fascism, Social Justice

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ESG scores are used to rate companies on “Environmental, Social, and Governance” criteria. The truth, however, is that ESGs are wholly subjective measures of company performance. There are many different ESG scores available, with no uniform standards for methodology, specific inputs, or weighting schemes. If you think quarterly earnings reports are manipulated, ESGs are an even more pliable tool for misleading investors. It is a market fad, and fund managers are using it as an excuse to charge higher fees to investors. But like any trending phenomenon, for a time, the focus on ESGs might feed-back positively to returns on favored companies. That won’t be sustainable, however, without legislative and regulatory cover, plus a little manipulative help from the ESG engineers and “Great Reset” propagandists.

It’s 100% Political, 0% Economic

ESGs are founded on prioritizing objectives that have little to do with shareholder value or any well-understood yardsticks of financial or operating performance. The demands on company resources for scoring highly on ESG are often nakedly political. This includes adoption of environmental goals such as fraudulent “zero carbon” impacts, the nebulous “sustainability” objective promoted by “green” activists, diversity, inclusion and equity initiatives, and support for activist groups such as Black Lives Matter and Antifa.

Concepts like “stakeholder value” are critical to the rationale for ESGs. “Stakeholders” can include employees, suppliers, and customers, as well as potential employees. suppliers, and customers. In other words, they can be just about anyone in the broader community, or more likely activists for “social change” whose interests have but the thinnest connection to the business’s productive activities. In essence, so-called stakeholder capitalism amounts to a ceding of control over corporate resources, and ultimately confiscation of wealth from equity owners.

Corporations have long engaged in various kinds of defensive actions, amounting to a modern-day trade in indulgences. No one will be upset about your gas-powered fleet if you buy enough carbon offsets, which just might neutralize the impact of the fleet on your ESG! On a more sinister level, ESG’s provide opportunities for cover against information that might be damaging to firms, such as the use of slave labor overseas. Flatter the right people, give to their causes, “partner” with them on pet initiatives, and your sins will be ignored and your ESG will climb! And ESGs are used in attempts to pacify leftist investors who see the corporation as a vessel for their own social objectives, quite apart from any mission it might have had as a productive enterprise.

Your ESG will shine if you do business that’s politically-favored, like renewable energy, despite its inefficiencies and significant environmental blemishes. But ESGs are not merely used to reward those anointed as virtuous by the Left. They are more forcefully used to punish firms in industries that are out of favor, or firms refusing to participate in buying off authoritarian crusaders. For example, you might be so berserk as to think fossil fuels and climate change represent imminent threats of catastrophe. Naturally, you’ll want to punish oil and gas producers. In fact, if you are in charge of ESG modeling, you might want to penalize almost any extraction industry, with certain exceptions: the massive extraction and disposal costs of renewables will pass without notice.

All these machinations occur despite the huge uncertainty surrounding flimsy, model-based predictions of warming and global catastrophe. Never mind that fossil fuels are still relied upon to provide for most of our energy needs and will be for some time to come, including base-load power generation when intermittency prevents renewables from meeting demand. The stability of the power grid depends upon the availability of carbon-based energy, which in fact is marvelously efficient. Yet the ESG crowd (not to mention the Biden Administration) seeks to drive up its cost, including the cost of capital, and these added costs fall most heavily on the poor.

ESG-guided efforts by activists to deny capital to certain segments of the energy sector may constitute antitrust violations. Some big players in the financial industry, who together manage trillions of dollars in investment funds, belong to an advocacy organization called Climate Action 100+. They coordinate on a mission to completely transform the energy industry via “green” investments and divestments of presumptively “dirty” concerns. These players and their clients have huge investments in green energy, and it is in their interest to provide cheap capital to those firms while denying capital to fossil fuel industries. As Arizona Attorney General Mark Brnovich writes at the link above, this is restraint of trade “hiding in plain sight”.

Manipulation

ESGs could be the mother of all principal-agent problems. Corporate CEOs, hired by ownership as stewards and managers of productive assets, are promoting these metrics and activities, which may not align with the interests of ownership. ESG’s are not standardized, and most users will have little insight into exactly how these “stakeholder” sausages are stuffed. In fact, much of the information used for ESGs is extremely ad hoc, not universally disclosed, and is often qualitative. The applicability of these scores to the universe of stocks, and their reliability in guiding investment decisions, is extremely questionable no matter what the investor’s objectives. And of course the models can be manipulated to produce scores that suit the preferences of money managers who have a stake in certain firms or industry segments, and who inflate their fees in exchange for ESG investment advice. And firms can certainly engage in deceptions that boost ESGs, as already discussed.

Like many cultural or consumer trends, investment trends can feed off themselves for a time. If there are enough “woke” investors, ESGs might well feed an unvirtuous cycle of stock purchases in which returns become positively correlated with wokeness. Such a divorce from business fundamentals will eventually take its toll on returns, especially when economic or other conditions present challenges, but that’s not the answer you’ll get from many stock pickers and investment pundits.

At the same time, there are ways in which the preoccupation with ESGs dovetails with the rents often sought in the political arena. Subsidies, for example, will be awarded to firms producing renewables. Politically favored firms are also likely to receive better regulatory treatment.

There are other ways in which firms engaging in wasteful activities can survive profitably, at least for a time. Monopoly power is one, and companies often develop a symbiosis with regulators that hampers smaller competitors. This is traditional rent-seeking corporatism in action, along with the “too-big-to-fail” regime. Sometimes sheer growth in demand for new technologies or networking potential helps to conceal waste. Hot opportunities can leave growing companies awash in cash, some of which will be burned in wasteful endeavors. ESG scoring offers them additional cover.

Cracks In the Edifice

John Cochrane notes a fundamental, long-term contradiction for those who invest based on ESGs: an influx of capital will tend to drive down returns in those firms and industries, while the returns on firms having low ESGs will be driven upward. Yet advocates claim you can invest for virtue and superior returns. That can’t outlast real market forces, especially as ESG efforts dilute any mission a firm might have as a productive enterprise.

Vladimir Putin’s brutal invasion of Ukraine has revealed other cracks in the ESG edifice. We now have parties arguing that defense stocks should be awarded ESG points! Also, that oil production by specific nations should be scored highly. There is also an awakening to the viability of nuclear power as an energy source. Then we have the problem of delivering on Biden’s promise to Europe of more liquified natural gas exports. That will be difficult given the way Biden has bludgeoned the industry, as well as the ESG conspiracy to deny it access to capital. Just watch the ESG hacks backpedal. Now, even the evangelists at Blackrock are wavering. To see the thread of supposed ESG consistency unravel would be enough to make you laugh if the entire conspiracy weren’t so grotesque.

Closing

The pretensions underlying “green” initiatives undertaken by large corporations are good mainly for virtue signaling, to collect public subsidies, and to earn better ESG scores. They are usually wasteful in a pure economic sense. The same is true of social justice and diversity initiatives, which can be perversely racist in their effects and undermine the rule of law.

Ultimately, we must recognize that the best contribution any producer can make to society is to create value for shareholders and customers by doing what it does well. The business world, however, has gone far astray in the direction of rank corporatism, and keep this in mind: any company supporting a sprawling HR department, pervasive diversity efforts, “sustainability” initiatives, and preoccupations with “stakeholder” outreach is distracted from its raison d’etre, its purpose as a business enterprise to produce something of value. It is probably captive to outside interests who have essentially commandeered management’s attention and shareholders’ resources.

When it comes to investing, I prefer absolute neutrality with respect to out-of-mission social goals. Sure, do no harm, but the focus should remain squarely on goals inherent in the creation of value for customers and shareholders.

It’s Time to Make Woke Corporations Hurt!

12 Wednesday May 2021

Posted by in Corporatism, Social Justice, Virtue Signaling

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It’s a BLM discount! You need only shout the magic words! Ah, but if “woke” corporations are sincere in their avowals to help end racial injustice, there is so much more they can do! In fact, let me describe an idea so good and rich that we really must partner with Black Lives Matter and Antifa to bring it on!

Yes, we know how much the social justice warriors of corporate America care about diversity, inclusion, and eliminating unconscious bias. Also, in their business practices, they are eager to avoid “disparate impacts” on “protected classes” of individuals. However, if they want to get serious, they need to put real money where their mouths are. The Fuzzy Logic blog (FLB) suggests that we dare corporations celebrating “wokeness” to offer free products and services to people of color (POC)!

There is a strong rationale under current law for a slightly less drastic version of this proposal. For example, in 2019, the median household income of African Americans was about 60% that of whites, but Disney charges blacks and whites the same admission price to their theme parks. That means it costs a black family proportionately more of their income than a white family to spend a day at the park in Orlando. That, my friends, is a disparate impact!

I’m not aware of any legal challenges along these lines, but it’s not as if “one price” is a business necessity, which would otherwise offer Disney a defense against such a claim. Disney already offers discounts to seniors and other groups. But why wait for the EEOC to take action when Disney can demonstrate its high-mindedness and good faith by offering race-based discounts right now?

It would be fun to see how the company reacts to pressure for that kind of action. Based on income disparities, the company could discount tickets by 40% to African Americans and by about 26% for Hispanics. Discounting should be extended to Disney Plus subscriptions as well. Those discounts can be revisited each year with appropriate adjustments until such time as income parity is achieved.

In reality, differential pricing is practiced broadly by American businesses. It’s called price discrimination, and it is generally legal. Higher prices tend to be charged to market segments with less elastic (price-sensitive) demand, and lower prices are offered to segments with more elastic demand. It is a rational and often profit-maximizing approach to pricing, but its practice tends to be more subtle than discriminating on price with respect to race or ethnicity. It’s safe to say that pressure to do so would be disruptive and unwelcome to these firms. So I still like the idea!

But again, FLB’s post goes much farther: given past injustices, why limit the reparations to a correction for the disparate impact of pricing? Something more radical is needed as this is a matter of conscience, not merely a legal hurdle to neutralize income disparities:

“These companies (and the many thousands more engaged in this woke crap) must put their own profits where their big, fat lying mouths are. There will be no government bailouts for them; they must pay for their part in condoning and pushing white supremacy for the past bazillion years, and they must pay with their own wealth, wealth they say they accumulated on the backs of black and brown people.”

Therefore, FLB insists that Disney should offer free admission and streaming on Disney Plus to certain racial and ethnic minorities for a period of several years…and free accommodations at Disney Hotels! What a tremendous show of good faith in wokeness that would be!

We’re picking on Disney, and it’s not alone in its professed racial consciousness and pursuit of equal outcomes. There are so many others! Coca-Cola could issue coupons redeemable at full price through a program of outreach in minority communities. Delta Airlines could institute a program of “Black Life Passports” to bona fide African Americans (meaning one must identify as such!) for discounted or free fares. Bank of America will probably want to exceed the minimum requirements under community banking law by offering free banking services and heavily discounted account management fees to African Americans. Amazon will no doubt want to offer free Prime memberships to certain minorities and perhaps throw in some freebies at Whole Foods as well. And Apple has plenty of merchandise to give away. Why wait for Joe Biden to offer free phones in the run-up to the 2024 election like his old boss did?

You probably won’t be happy about this proposal if you’re a corporate shareholder, but then you should not be happy to have witnessed increasing management preoccupation with social justice, and you should not have been happy as your “agents” lost sight of their fundamental missions as business organizations: to produce something well and thereby do well for customers and shareholders. The sad consequence of “stakeholder capitalism” is that everything a business is supposed to do gets done worse.

I recently discussed the assignment of “scores” to public companies for their focus and performance on environmental, social, and governance (ESG) factors. These ESG scores are used by “woke” fund managers and advisors to select or rate stocks. I personally have no wish to invest in companies seeking to boost their ESGs, but you can read all about that at the link. For our purposes here, ESGs might serve well as a tool for identifying entities most in need of pressure to offer discounts and freebies to POC.

It would be great to see agitation against the woke-most corporations for race-based discounts and free products. Perhaps a broad discussion of the idea would prompt social justice warriors to get on board. It might provide some laughs, but the real hope is to shake the corporate wokesters from their virtue-signaling stupor. Most shareholders wouldn’t like race-based discounts, of course, and that’s part of the idea. A conceivable defensive maneuver for our “target” entities would be a lobbying effort for government action such as tax-financed reparations. That won’t necessarily be cheap for them or their shareholders, however. Get woke, go broke!