Terence Corcoran: Tie a yellow ribbon ’round capitalism
The old pink lady of Fleet Street made history of sorts this week, donning a yellow front page that contained a five-word declaration that it was pursuing a New Agenda. Despite its reputation and self-declared role as a defender of free markets, the Financial Times of London has frequently flirted with assorted compromises. But nothing matches the big yellow ribbon of newsprint wrapped around the waistline of Wednesday’s edition with a blaring headline that declared:
CAPITALISM. TIME FOR A RESET
Beneath the big black bold type was a much smaller but no less meaningful sub-headline that read: “Business must make a profit but should serve a purpose too.”
The absurdity of that statement deserves comment.
First there’s the logical meaning of the words, which is that making a profit is not a purpose. Here we have one of the world’s leading financial and business papers implying that making a profit is some strange underlying attribute of business that just happens to exist but has no special relevance in the business of running a business.
Never mind that profits are the sole indicator of a healthy and sustainable business enterprise, that profits provide dividends to shareholders and the investment capital that business invests. Profits also set the market price for investment capital and allow business to produce all the products and services that modern corporations deliver to the world’s people.
That’s the other implication of the FT’s slogan about the need to “serve a purpose,” as if all the activities of business are not in themselves purposes, as if all production and services provided by corporations were incidental sidelines that have no purpose: food, clothing, transportation, technology, medical equipment, pharmaceuticals, energy, minerals, financial services, steel, construction materials, forest products, insurance products, retail services, computers, smartphones, media, films, real estate development. None of this comes from government.
In recent months, the plot to overthrow profit maximization and shareholder primacy became more deeply entrenched in the United States and Canada
These are the purposes of what has often been described as the Anglo-American corporate model, a dynamic production machine whose variations have constantly expanded the supply of goods and services to the world’s people, and turned a profit in the process. A good summary description of corporate capitalism’s achievements appeared on this page in Philip Cross’s review of the book Big Business: A Love Letter to an American Anti-Hero.
So what is the Financial Times trying to reset — aside, perhaps, from its own stodgy image as a dreary must-read for the world’s public-sector bureaucrats?
The FT’s editor, Lionel Barber, introduced the paper’s “New Agenda” with a short blurb inside the yellow ribbon in which he manages to have his capitalism and knock it down at the same time. “The Financial Times believes in free enterprise capitalism,” he declared. But the capitalist model, he said, “has come under strain, particularly in its focus on maximizing profits and shareholder value.”
Things have changed, added Barber. What capitalism needs now is to adopt the FT’s agenda slogan: “The long term health of free enterprise capitalism will depend on delivering profit with purpose.”
Barber never explains what that empty marketing slogan means. And it is a marketing gimmick, a full-bore effort described by Brooklyn Brothers, the paper’s razzle-dazzle London/New York ad agency, as the FT’s “new brand platform.” The objective is to “provoke debate around the disruption of established corporate and economic models” so as to “bolster subscriber numbers.”
So, to summarize: The “purpose” of the FT New Agenda is to bolster subscribers and therefore revenues with the ultimate objective presumably being to increase profits so it can improve its ability to justify the US$1.3 billion price the Japanese media conglomerate Nikkei, Inc. paid for the Financial Times back in 2015.
The other backdrop to the FT’s populist marketing campaign — and perhaps the more important one — is the paper’s eagerness to jump aboard the rising movement to overthrow the modern foundation of market capitalism and replace it with a model that would install corporations as stewards of a much broader set of objectives. In this model, corporations exist not just to provide profits for shareholders but also must cater to other “stakeholders.”
In recent months, the plot to overthrow profit maximization and shareholder primacy became more deeply entrenched in the United States and Canada.
Last month, 200 top U.S. executives, members of the Business Roundtable, decided to abandon the primacy of profits and shareholder interests and “redefine” the purpose of U.S. capitalism’s greatest enterprises. The headline on its news release said: “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’.” As with the FT’s statement of “purpose,” the implication is that in the past U.S. corporations have not served all Americans.
In their statement, America’s richest CEOs — from JPMorgan’s Jamie Dimon to Amazon’s Jeff Bezos and Apple’s Tim Cook — said that “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.”
Now we learn that Amazon’s Bezos is adding a Climate Pledge to his business plan and a $100-million donation to the Nature Conservancy. Where are the shareholders? Playing second fiddle, apparently, to Amazon’s employees. CNN headline: “1,000 Amazon employees plan walking Friday, saying company’s climate pledge isn’t enough.” Under the redefined corporate purpose model, Bezos the CEO seems to be answerable to employees rather than shareholders. Even more extreme is the movement to link CEO compensation to corporate efforts to tackle climate change. Coming soon? Big CEO bonuses if they cut carbon emissions but not necessarily if profits increase.
Not surprisingly, that Roundtable’s stakeholder statement sits at the top of the Financial Times’ related lead commentary Wednesday by Martin Wolf, the paper’s longtime promoter of the idea that the principles of capitalism need a major overhaul. In his commentary — “Saving capitalism from the rentiers” — Wolf holds the shareholder corporate model responsible for a range of problems, real and imagined: inequality, lower productivity, slower growth, financial crises, tax policies, income flows, excessive credit, executive greed, declining competition, trade wars.
Under the FT’s capitalism reset plan, all of this and other problems can be tackled by forcing corporations to “service broader social purposes,” in the words of big-time Wall Street corporate lawyer Martin Lipton. In a New Agenda column for the Financial Times, Lipton calls for a “new paradigm” that would “rethink corporate governance as a collaboration among shareholders, directors, managers, employees, customers, suppliers, and the communities in which corporations operate.”
Canada is already leading the anti-capitalist revolution
Canada is already leading the anti-capitalist revolution. The Trudeau Liberals’ 2019 omnibus budget legislation included revisions to the Canada Business Corporations Act that essentially mandate that federally incorporated businesses are not restricted to pursuing the interests of shareholders and instead may “consider … the following factors: (a) the interests of (i) shareholders, (ii) employees, (iii) retirees and pensioners, (iv) creditors, (v) consumers, and (vi) governments; (b) the environment; and (c) the long-term interests of the corporation.”
That last bit about long-term interests of the corporation is a direct attempt to undermine the supposed “short-termism” interests of shareholder value in favour of other less tangible long-term objectives. Lawyers at the Toronto law firm Norton Rose Fulbright, in a commentary on the new Canadian corporate law changes, suggest this is no small fiddle with corporate objectives. Short-term interests, they note, are valid corporate objectives. “Taking into account short-term interests does not necessarily harm long-term value. Nevertheless, it appears the federal government has preferred to keep directors focused on the long-term interests of the corporation.”
The Norton Rose commentary also observes that the long list of stakeholder interests assigns no priority to one over the other, which means only as the law is tested in the courts will we know how the new paradigm upsets the free market governance applecart in Canada.
The Anglo-American shareholder model is often associated with free-market Nobel winner Milton Friedman, who wrote a defining defence of profit maximization back in the 1970s. But Friedman did not invent the model, nor was he the only defender of the idea that shareholders should be paramount.
Two American academics, Henry Hansmann and Reinier Kraakman, wrote in 2001 that “The strongest and clearest claim we make is an ideological or normative claim. It says that there is increasing consensus among the relevant actors, around the globe, that what we term the ‘standard shareholder oriented model’ of the business corporation is the most attractive.”
Under the model, they said “ultimate control over the corporation should rest with the shareholder class” and managers should run the corporation “in the interest of its shareholders.”
Lipton, the New York corporate reform advocate, has been on this theme for some time. He sees the corporate reset to a new paradigm as a sensible response to the extreme corporate makeover proposed by such U.S. Democratic leaders as Elizabeth Warren. The new paradigm may be a steep price to pay for warding off Warren’s radicalism.
Friedman’s contribution was to explain why the principle of shareholder control and profit-seeking should remain paramount. Changing the fundamental purpose of corporations would transform corporate managers into a kind of “public employee or civil servant even though he remains in name an employee of a private enterprise.” Such changes effectively turn undemocratic CEOs and board directors into decision makers to achieve objectives that “cannot be achieved by democratic procedures.”
It may be, as Yvan Allaire argues elsewhere on this page, that the corporate governance revolution has little significance and that the new paradigm is benign. But that seems doubtful. The reformers, from the FT’s new yellow agenda to Lipton’s new paradigm, have much greater ambitions.