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Seth Klarman, the renowned founder and CEO of the $ 30 billion Baupost Group hedge fund, recently delivered a speech on the ramifications of shareholder rule.
"Business schools have sometimes taught that maximizing shareholder value is the Holy Grail, the only center of interest for corporate management," he said. "So I wonder if management should focus solely on the course of action of a society, which is itself ephemeral, and do everything in its power to levitate it. in the long run what could it possibly bring in? And does anyone really think that shareholders are the only constituency that matters: not the customers, not the employees, not the community, nor the country, nor the earth? "
Klarman delivered the speech at a dinner celebrating the opening of Klarman Hall at Harvard Business School on Oct. 1.
Klarman is an avowed value investor, which means that his money management involves buying shares of companies that he believes are cheap compared to their peers. This is a philosophy used by other industry heavyweights, such as Warren Buffett and Joel Greenblatt, senior director and cochief investment officer at Gotham Funds.
Read more: An unauthorized copy of Seth Klarman's investment Bible for which Wall Streeters is paying thousands of dollars was up for grabs on Kindle for $ 9.99
It is therefore logical that he supports an approach that creates long-term value. But his speech said that the notion of shareholder primacy, as it has been practiced for 40 years, is an obstacle to the health of the economy and society in general.
"A capitalist economy must be judged not only on the overall economic improvement driven by its innovation, but also on the design and strength of the social safety net that protects the sick, the underprivileged or those who simply fail in their lives. particular environment, geography, industry or trade, "Klarman said.
What is the role of companies in society?
The debate over the search for short- and long-term value and its connection with the responsibilities of public corporations has been prolonged for many decades.
In the aftermath of the Great Depression, economist John Maynard Keynes wrote in "The General Theory of Employment, Interest, and Money" that the US stock market was encouraging publicly traded companies prefer short-term gains – benefiting temporarily from their short-term share, which benefits both their businesses and society as a whole. This frustrated Keynes and the Keynesians who followed.
But for free market economists like Milton Friedman, who published "Capitalism and Freedom" in 1962, there was no need to differentiate between the short and the long run. For Friedman, the only social responsibility of a company was to make the most profit possible, as long as it complies with the rules. A free market would reward the best companies that would take care of all stakeholders.
US leaders and politicians adopted Friedman's ideas in the 1980s, and US judicial precedents reinforced the idea that public companies existed to maximize the profits of their shareholders.
This debate, however, resumed with the 2008 financial crisis and this time, the other side took a new impetus. Klarman is not the only billionaire to claim a change.
In 2013, investor Paul Tudor Jones, for example, co-founded Just Capital, which measures the value of public companies for all stakeholders, not just shareholders. It launched an exchange-traded fund in partnership with Goldman Sachs earlier this year. On the corporate side, more and more large companies like the food giant Danone are seeking status of "B Corp" (the "B" means "benefit") – this certification proves that they have received high marks from the company B Lab, established in 2006, which measures the social benefit of a company.
And in particular last January, Larry Fink, CEO of BlackRock, wrote in his annual letter to the CEOs: "To prosper over time, each company must not only generate financial performance, but also show how it makes a positive contribution to society. ".
At the New York Times DealBook conference in October, Fink is defended against accusations of criticism, such as Wall Street Journal columnist Holman W. Jenkins Jr., that he was simply attempting 39; be in vogue or "buy indulgences" to the public. As Fink explained, the demand from customers motivated by customers and employees has become so strong that he has written his letter to improve the performance of his customers.
There is evidence that this is more than a mere intuition. The Boston Consulting Group found that companies that pursue initiatives that benefit from ESG (environmental, social, governance) indicators improve their bottom line. Fink said that in the near future – as early as the next five years – all investors will measure the value of a company with the help of ESG measures.
Where is Klarman
Although Klarman called for an improvement of capitalism in his speech, he did not consider his suggestions radical.
He specifically mentioned Senator Elizabeth Warren's Accountability Act as something he found too radical. According to Warren's proposal, companies listed in billions of dollars should have a federal charter allowing them to create value for stakeholders other than shareholders, and 40% of the members of its board of directors. administration would be elected by their employees.
According to him, companies should determine how they will develop more responsibly before regulators do it.
He noted that "when capitalism remains uncontrolled and unexamined and the leadership is seduced by a narrow and shortsighted perspective, the pendulum can quickly shift into directions where the benefits of capitalism are expected and its flaws exaggerated, thus leaving its future even more darkened and uncertain. " . "
"While it's hard to see how the proposed settlement would solve the problems I've discussed tonight, it's exactly the type of proposal that companies will face when complex issues do not arise." are not examined, and when the character, sound values, restraint and long-term thinking fails to take over ".
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