Businesses’ social purpose is as a part of an interdependent society, not as exploiters of it

From Davos to the Australian financial sector, businesses and investors are having conversations ‘regaining the community’s trust’ and ‘social licence to operate’ in a manner that suggests business exists in a parallel universe to society.

That somehow a ‘social purpose’ gives companies an entry ticket to exploit communities for their commercial gain, and that this approach is acceptable.

Here’s a thought, when businesses recognise they are part of an interdependent society, then they would realise they already have a ‘social purpose’. A few actually.

  1. Businesses provide useful goods and services to customers and in return they get paid for these goods and services. Without customers the business doesn’t exist, so that is quite a good reason to look after your customers.
  2. Businesses provide jobs for people and in return those people provide skills, experience and commitment to help a business thrive. Without employees they don’t exist, so that is quite a good reason not to screw your employees over.
  3. Businesses pay (or should pay) tax based on their earnings to the government of the jurisdiction and in return they get access to decent infrastructure (power, water, telecommunications, roads etc) and educated people who can get medical help when they are sick (and healthy people are better for the economy). They may also get government agency support in establishing export pathways overseas, they may benefit from the research paid for by taxpayers at universities in developing their product and they may receive subsidies to develop those products. These are very good reasons to pay your taxes and contribute to the society in which you operate.
  4. Businesses need a supply chain to operate. Without suppliers it is difficult for businesses to operate in our highly specialised world. For example, it does not make economic sense for every business to make its own paper, have a power plant to generate its own electricity or maintain a team of tradespeople to fix the air-conditioning, do the plumbing and the like. So that is a good reason to have a good relationship with suppliers and have reasonable payment terms.
  5. Businesses may also contribute to their communities through:
    1. supporting education institutions and in return they help create their future employees and product lines;
    2. Support local sporting and other community clubs and in return that may generate custom and goodwill, which means revenue;
    3. They may invest in developing employees in remote and regional destinations where they work and in return they also get a cheaper workforce that doesn’t need to be flown in, are likely to stick in the job longer and they contribute to a stronger and economically stable community; and/or
    4. Not pollute the environment from which they earn their income.

Businesses are part of the community, they are members of the society they live in, and like all members, they have interdependent relationships in those communities. Their survival, or social licence to operate if you must, depends on it.

Of course, this all goes to custard with businesses, and the investors that provide their capital, start to think that they belong at the top of the tree of power and that they should benefit at the expense of their customers, employees, suppliers, host governments and communities.

They can sustain this for a while by taking advantage of the significant power imbalance, but after a time, people understand that this behaviour has done profound damage environmentally, culturally and socially and they start demanding something better.

Surely the social purpose of business is to contribute to the community by creating wealth through buying and selling of useful goods and services that do not destroy the environment and people’s lives, providing employment and contributing to creating a community that we all want to live in.

The finance sector, like all addicts, must want to change

Getting rich, having access to powerful people, controlling people’s financial destiny and having tangible expensive signs of status easily available to you is intoxicating. It can, like any drug, become hard to live without and encourages a muddle-headed notion that you are entitled to it, you deserve it.

The trail of destruction of this type of myopically selfish behaviour of the many in the Australian financial sector was revealed over the year-long  Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Ken Henry, Chair of the National Australia Bank, spelled it out in his testimony to the Royal Commission, that somewhere in the neoliberal takeover of the world’s markets of the last 40 years, the PURPOSE, or ends, for a business to exist was to make as much money as possible for those with access to other peoples’ capital. This became more important than providing a suitable, useful or valuable good or service that people wanted to buy.

And unsurprisingly, the Australian financial sector lost its way as it prioritised getting another hit of ‘more’. More money for themselves. More power. More privilege. More stuff.

When a business’s primary purpose or ‘end’ is to provide a good or service that is valuable to and valued by its customer, there is a clear destination. A business can measure how many times it achieves it, how it can improve on it or adapt itself to meet customer requirements. There is a clear compass.

When a business’s ‘end’ turns inward exclusively prioritise its own enrichment, then it has no external reference point, no definitive destination to be reached. More and more is better, greed is good. The end justifies any means to get there, because there is no such thing as enough.

The financial institutions preyed on people’s lack of understanding of their essentially intangible product and, in a display of breathtaking hubris and arrogance, converted the concept of caveat emptor (buyer beware) into ‘we are going to fleece the dumb suckers’ because they felt entitled to do it and it gave them another hit.

The financial institutions also gave a privileged seat to the professional investment teams that provide them the capital they need to exist. These investors, at an arm’s length away from the customers and the employees, focused solely on their investment returns, driving short-term profits to meet their own targets for personal enrichment.

In order to avoid repeating this process over and over, the people with the power to change the destination must want it to change. They must accept that their short-term binge for self-enrichment will ultimately weaken the financial system. They need to accept that they are not inherently entitled to create wealth for themselves at the expense of customers and employees.

A sustained shift to a customer-focused, ethical approach to providing access to capital for businesses and people to thrive is required. Banks and other service providers must understand that there are limits on what they deserve in payment for providing that service.

And we all must accept that the drug of ‘more and more’ is not good for any of us.

Facebook’s ‘smartest in the room’ guilty of a failure of governance

The events of the past few weeks show us that somewhere, somehow Facebook’s management, board and institutional investors lost sight of the company’s most valuable asset, its users.

Or more correctly, only saw the value in how the users and their data could be mined and sold for profit, not as valuable customers. Valuable customers who may walk away or change their usage habits if their trust was lost, as happens with every other retail business. What was the users’ privacy worth?

And while the mainstream media flagellates Mark Zuckerberg, the obvious target, for the Cambridge Analytica breach, there is a marked absence of focus on the broader board’s role in this gross failure of governance.

The Facebook Board of Directors is made up of Mark Zuckerberg, COO Sheryl Sandberg, four venture capitalists, the CEO of The Gates Foundation, the CEO of Netflix and the CEO of WhatsApp. And all, as outlined in the company’s own corporate governance guidelines are “encouraged” to speak to any member of the management team about any concerns at any time.

One has to wonder how much time and energy the board spent considering the risk associated with Facebook’s known, cavalier approach to users’ personal privacy and their openness about mining their own data for revenue gain. Or were they all in the thrall of Mr Zuckerberg, perhaps the emperor with new clothes on this issue and could not manage their CEO?

When did they start to express their concerns about Facebook’s fast and loose approach on privacy? Did they consider it, or was the revenue raising possibility of its customers the only consideration? What type of culture was the board being allowed to breed and what sort of risk was it opening the company up to when its customers said enough?

It is well documented that Facebook was among the first serious wave of internet-based social media platforms that struggled early on to find a way to create reliable revenue stream that could be turned into profit. But has the hunt for revenue, and then the astounding success of their advertising algorithms been at the cost of understanding what the company’s purpose is, and who keeps them in business.

Governance is not just about ensuring and maximising cash flow. It is also about understanding the full range of risks that may threaten the viability of a company. It is worth remembering that while the number of users outside of North America and Europe are growing the fastest, the revenue stream from these regions is low. It is the more stable user groups of North America and Europe that provide the vast majority of advertising revenue. It can also be argued that the customers in these markets are the most likely to change their user behaviour if they perceive their privacy has been invaded  beyond their comfort threshold.

And what is more the institutional investment community seem blithely unaware of how they may have encouraged a culture that led to this outcome, but are quick to ‘raise concerns’ when it is already too late. Fund managers, who invest on behalf of us, are only now beginning to review their investments in Facebook due to ethical concerns, after this widely-reported breach of privacy and the harvesting of information of 50 million users. Concerns about how Facebook guarded their users’ privacy is not new. Cambridge Analytica’s particular use of the data is deeply disturbing but is not a solo event for Facebook.

AMP Capital says it has been monitoring the ‘data and privacy issues in the realm of social media’ for some time, but has it done serious risk analysis of a known issue with Facebook? From a pure business perspective, besides the actual platform, Facebook’s most valuable asset is its users and the company has had to be dragged into dealing with a myriad of privacy issues over years.

Australian Ethical said “if they formed a view they disregarded privacy, we won’t invest in them.” It doesn’t take much of a search to find Mr Zuckerberg’s view that privacy is dead.

None of what has happened to Facebook is really that surprising. All of the landmarks of this particular road to hell were well signposted – the disregard of the value of people’s privacy, the primacy of using data (known to users or otherwise) to generate advertising revenue and the lax control over who else was using that data. And if these signs were so obvious, how and why did the management team, the board and the professional investment community ignore them?

A sinking feeling tells me, that the reaping as much profit as possible, and a belief that they were the smartest people in the room, clouded all other risks and any respect and consideration for their users.

And if they want to understand how the hubris of believing themselves to be the smartest people in the room plays out, they only need to Google the hedge fund name ‘Long Term Capital Management’.

ESG issues are a sleeper risk that remain on investors’ blind side, despite what history teaches us

Casting my eye at the scattering wrecks of companies brought low by poor decision-making in the last 20 years, it can be said that there was a common theme is the prioritisation of profit-making and personal enrichment that fuelled the road to hell. Little thought was given to values that would contribute to the long-term sustainability of the company and benefit the broader community group.

BP’s Gulf disaster revealed a history of shaving the safety margins to maximise profit, a multitude of banks with their trading scandals which revealed a blatant disregard for the law and belief that self-enrichment trumped all things, the many multi-national companies that shuffle money to avoid paying a reasonable tax in countries where they enjoy the benefits of stability and certainty that a decent tax base funding infrastructure, education and health provides.

It is heartening to see that a recent survey by the CFA Institute of more than 1,500 investment portfolio managers around the world are taking more interest in environment, social and governance (ESG) issues but the underlying value set remains the same. It is telling that 61% of respondents would only be willing to pay 50% or less of what they spend in independent verification of financial statements on independent verification of ESG reporting by companies. Just 11% would spend as much in ESG verification as they would on financial verification.

It is also heartening that, according to Management Today, Mark Hafaele, the Chief Investment Officer at UBS has had a change of heart and recognises that companies that take ESG seriously can deliver share price growth and profitability. According to an interview in Management Today, Mr Hafaele noted that the consideration of ESG issues can de-risk investment returns.

It is fascinating, however, despite the rich lessons history has to offer, the professional investment industry still places far more value in reviewing the financials of a company – which can be a very creative story, rather than the reporting on environment, social and governance matters which can reveal much better a company’s approach to a broader stakeholder group and genuine understanding of a risk wider than ‘will this affect my share price this quarter’.

It is myopic also that most conversations about risk are associated with some sort of mathematical modelling and an analysis of numbers. Unfortunately, the impact of human decision making, driven by their underlying values is very difficult to create a data set around, except if you learn from history and consider philosophy. Ignoring what cannot be inputted into a mathematical model and measured means you increase your risk of being blind-sided by the inevitability of human fallibility driven by a set of values that promote fear and greed.

Companies benefit from paying tax far more than it burdens them

The Australian Government is celebrating after getting its signature policy of company tax cuts through the Senate. The core of their argument is that a lower tax regime will attract more international business investment and create more jobs.

The argument conveniently ignores the reality that companies are one of the major beneficiaries from a robust tax regime that directs expenditure in a way that develops opportunities for all. Access to a well-educated workforce, high-quality transport infrastructure, reliable power supply and government funds not only removes risk from any business enterprise, it also adds to their bottom line.

The post-war German and Japanese economic ‘miracles’ are testament to decades of government expenditure in developing high-end engineering, technology and other value-added industries to allowed the countries to compete and thrive in the global economy.

Each country ended World War II with their infrastructure destroyed and their intellectual property pillaged by allied governments. The post-war rebuilding of Germany included massive spending on technological research and development and today, Germany continues to spend government funds on scientific research and development, which is exploited by German companies through the publicly underwritten IP transfer Fraunhofer Institutes.  The link between publicly funded scientific research and GDP growth is undisputed, both sides of Australian politics support the recently created National Innovation and Science Agenda (NISA).

Well-funded academic institutions engaged in long-term research is an excellent laboratory of ideas for companies which do not wish to have empirical research on their balance sheet, but certainly want to profit from it.

Companies also benefit from a well-educated workforce, which requires major government investment and expenditure in an education system that can produce literate, numerate people who can go onto technical colleges and universities to develop all of those skills useful to companies.

Sovereign risk remains a key investment decision parameter because trying to develop anything in a country with a poorly educated workforce, poorly developed road infrastructure and intermittent and unreliable energy sources is difficult. Companies operating in countries with robust taxation systems are mostly relieved from the burden of generating power for their operations, building of roads and other infrastructure to get goods in and out of their operations and creating a telecommunications system to be able to operate the IT.

The focus on reducing company tax rates to bolster profits and share price in the short term suits the professional investor community, who invest our retirement and savings money on our behalf.  They are rewarded for investing in companies that have artificially inflated profits now, at the expense of longer-term growth.  The dominant narrative of profits for shareholders is more important than any other driver ignores the broader benefits that taxation provides to businesses and to the investees themselves.

Indeed, many of the ageing baby boomer generation, so in love with the idea of individualism and wealth as a reflection of morality, may wish to consider how beneficial it is to them to live in a country with an extremely good health system. And perhaps ponder the fact that it is money raised through the taxation system that allows us to have well-trained clinical and administrative staff across the health system, from hospitals to GPs to nurses that visit the homes of the elderly and unwell.

It is reasonable for the Australian community to request all businesses to pay a decent amount of tax when they profit enormously from a stable political environment, a workforce that has access to an education regardless of their personal wealth, an infrastructure system that allows them to deliver their products to market and an energy source that doesn’t drop out in every storm.

The value of the tax system to the community goes beyond the profit for a few.

Trump’s Twitter tirade is for his domestic supporters, Australia is irrelevant to him as an ally

We as Australians are wasting our time being offended about US President Donald Trump’s Twitter tirade about the refugee deal with Australia.

We are not the audience he is targeting when he makes those remarks. His audience is his core supporter base who elected him in his domestic market of the United States. The ones that he hopes will prop up his popularity, or ratings if you will, and make him seem like a strong and decisive man putting America First.

This is his main interest, ensuring that HE comes first in everything. How many people showed up to his inauguration, how many people think he is terrific and on and on.

As Australians, let us not waste energy on being outraged about the content of his Twitter remarks or fall for his tactics of shock and awe on social media which are designed to distract and generate chatter.

Let us focus on the fact that his action reveals little respect for us as an ally and no respect for conducting diplomatic relations with courtesy and discretion. President Trump knows we are smaller than the US in population and economic size, and therefore, like many garden variety bullies he likes to pick on the easy target of the smaller kid. That is the quality of the man.

Our geographic position in Asia Pacific and our stable liberal democracy means we are strategically important to the US, and if nothing else, that should command some respect. If, however, the US Commander-in-Chief believes we are not worthy of respect, then perhaps this is the time for us to reflect on how we conduct ourselves in relation to the alliance going forward.

Australia’s future is wedded to the stability and success of the Asia Pacific region, not the success of US.

We must remember that for the next four years, the President of the United States does not believe Australia is worthy of being treated respectfully in the public forum, and that it is a reasonable diplomatic position to attempt to bully us.

We must now tread with caution, be our own counsel and be careful not to thwart our own long-term interests in pursuing our habit of always supporting this particular larger friend. His back is turned to us, he is only interested in performing for his supporters at home.

We miss a powerful opportunity if we believe the story that the wealthiest 1% has power over us

In Yuval Noah Harari’s book Saipens he suggests that one of the reasons that homo sapiens became the dominant human species was because of a Cognitive Revolution about 70,000 years ago that enabled us to imagine.

Not just imagine, but create stories that large groups of people believed because they provided a sense of meaning, belonging and/or order. Like the notion of gods that reward the good and punish the bad.

Or, perhaps more relevant to where we are now, that wealth has some moral value and wealthy people deserve political power whether they have demonstrated an interest in leading for the people rather than themselves.

These stories and ideas allowed people and groups to be bestowed with a belief of great power. And for stories supporting these ideas to go unchallenged. For instance, an often repeated ‘truth’ at the moment is that the wealthiest 1%’s accumulation of assets means they dictate how the world should be run. And this in turn creates a sense of hopelessness among the remaining 99% that nothing can be done.

But it is not really the case. There is another version of this story.

Those of us who live in countries where we are fortunate to be able to save for retirement or have governments which invest to fund pensions own more of the market than you think. Those living in countries with sovereign funds, which represent many countries including some of the poorest, also own a substantial percentage of the market.

Sovereign funds were initially developed by countries that generated revenue from their oil and gas reserves as a way of funding economic and infrastructure development in their country, to ensure intergenerational wealth transfer and to stabilise revenues. These funds buy foreign exchange, bonds and shares in companies, units in mutual funds and private equity and venture capital funds as well as directly investing in infrastructure.

It is quite hard to find information on how much of the market sovereign wealth funds and other public funds, such as government pension funds, own but the Sovereign Wealth Fund Institute, based in the US provides information on more than US$30 trillion under management.

Retirement funds also invest in equities, bonds, venture capital and private equity, and we own a lot of the businesses that make up the economies we live in. Even if it is only a handful of shares it is still an ownership stake and that stake has a voice. In the US market alone, in 2013, households, mutual funds and sovereign funds owned 70% of the market, according the Federal Reserve and Goldman Sachs. That should be more than enough to sway the vote.

In the same way as a democratic vote gives you a voice in politics, being a shareholder should give you a vote about the governance of a company. The word ‘should’ is a very important point in this scenario. Most of ‘votes’ are decided by the professional institutional investors that look after our money. The professional investment market has not shown much interest in representing the views of the ultimate owners of capital and many companies only really listen to the institutional investment community.

This institutional investor community doesn’t make any effort to consider the values of the people it is happy to make exorbitant amounts of money from. They presume that because they are the professionals, their view, and the view of their very similar peers around them, is the ‘right’ view about investment and that the only thing their customers are worried about is profit maximisation. And mostly, we defer to them because the jargon all sounds so complex and watching sport is more fun.

If we want the world to change, to become fairer, then we must start demanding that the institutional investors that manage money on our behalf, invest for the long-term economic benefit of all not short-term profit. And stop believing the story that we don’t have any power.