Where does the responsibility for achieving sustainability lie?
Some think the road to sustainability will be paved by large, publicly traded corporations. There’s a certain logic to this thinking: The combined total revenue of the 2021 Fortune 500 corporations “… generated $13.8 trillion in revenue, or some two-thirds of the U.S. economy.” If these corporations, so the logic goes, were to transform themselves into businesses that create triple bottom line value, then perhaps the human race will forestall its extinction.
But will this work? There is certainly a growing movement on the part of large, publicly traded corporations to adopt Environmental, Social and Governance (ESG) measures. According to an article in the Wall Street Journal: “…assets managed in the U.S. under a sustainable, responsible or impact-investing umbrella have grown dramatically in recent years, to $11.6 trillion in 2018 from $8.1 trillion in 2016 and $3.7 trillion in 2012.” While this is good news, a far more powerful force is at work, one that has nothing to do with concern for justice or saving the planet. This force has to do with what motivates corporate leadership and the realities of our hollowed-out economic system.
The Great Recession
Starting in 2007, the global economy found itself in what would later be called The Great Recession. In the US, the credit system – the thing that drives economic activity – had effectively ceased-up: capital was not flowing. By 2008, attempts by the Federal Reserve Bank, the nation’s central banking system, to get the economy moving had failed. Lowering short-term interest rates, the overnight rates charged by the central bank to lend money to other banks, was not working. At the time, lowering interest rates was the only tool known to the central bank to free-up capital. And since that tool wasn’t working, American ingenuity called for coming-up with something new.
The FRONTLINE documentary, The Power of the Fed, reveals what the central bank did to free-up capital: It performed an experiment on the entire US economic system. Had it done nothing, or so the story goes, the whole of the system would have collapsed and we would have found ourselves in a depression. Depressions a feature of the capitalist system. They’re like the seasons: They come and go with a certain periodicity. Yet, somehow, those running the central bank in 2008 thought depressions were things smart folks – those who invent cell phones, Facebook and streaming video – ought to be able to eliminate.
The central bank’s great experiment is called Quantitative Easing – QE for short. QE is an Orwellian term for creating – out of thin air – capital. The Fed controls the presses used to print Benjamins, and because it has this power, it is the only institution that can pump money into the system. Since banks were not lending money, even though they could borrow it at essentially zero percent interest, the Fed stepped in and made more money available through their grand experiment called QE.
QE is no longer an experiment, but rather a practice. It works like this: The Fed buys-up assets, such as bonds, using fiat currency. Buying assets is a way to put money into the financial system. It lowers long-term interest rates, which in turn makes it easier for corporations to take on more debt. Taking on debt, which is a way to gain access to capital, is supposed to make it easier for corporations to expand operations. Capital, or the commodity form, is the life blood of this system. It’s used to invest in such things as making new products and building new factories, both of which are supposed to translate into more jobs.
QE sort of works. In 2008, when it was first tried, money started flowing and corporations took on more debt. But what large, publicly traded corporations did with their new found money is another story, one best labeled an “unintended consequence.” Rather than invest the money in expanding operations, many of these corporations used it to buy back stocks.
Stocks are a commodity, and when there’s a lot of them floating around, their price tends to be low. So, when a corporation buys-up its own stocks, the number of stocks in circulation goes down thereby driving up the price of those that remain in circulation. Buying back stocks does not create anything; it does not create new products; it does not build factories, and it certainly does not create jobs. What it does is increase share price. As Milton Friedman taught, it serves the purpose of the corporation, which is to create shareholder value. Stock buybacks are also a lot easier than taking the risk of developing new products, or heaven forbid, building factories in the US. And because CEOs are compensated in stock, and rewarded for high share price, stock buybacks puts money in their pockets – lots of it.
Today, QE and stock buybacks have become a mainstay of our failing economic system; so, too, are astronomical debt loads, most of which are being taken on by the central bank, which means it’s borne on the backs of taxpayers. As we confront coming-out of the pandemic, and watch as the central government is preparing to pump trillions more into the system, we ought to wonder where this will all lead. Although we seem to have deluded ourselves into thinking depressions are a thing of the past, this may not be the case. In other words, it’s likely we just kicked the can down the ol’ road.
Detached from Reality
The financial system – the thing that is supposed to advance the common good through capital – is detached from reality. What else could explain how the stock market soared to new heights, while the entire economic system essentially shut down in the spring of 2020? Was it because investors somehow saw a “silver lining” in no economic activity? Hardly! The financial system is now a fake, magical world that simply aggregates wealth to a shrinking number of people. That corporate leaders live off of this system speaks volumes to just how unhinged from reality they have become.
Are the “captains of industry” to blame, or are they simply caught-up in a system not of their making?
Sustainable business is predicated on systems thinking; it recognizes that all we see is emergent from that which preceded it. Those who lead large, publicly traded corporations are shaped and enculturated by the present system.
Sure, some work “outside of the system”. These are the folks who see and therefore cannot unsee; they know – as in seeing deeply – such things as climate change, social injustices and just about all the rest that plagues humanity is the result of human behavior, behavior that is shaped by a system of beliefs and theories about the world. These folks, however, are few and far between. By their nature, they are counter-cultural. The trouble is the time that’s been wasted by those caught-up in magical thinking cannot be remade. The need to become sustainable is far more pressing now, than it was ten years ago; it now demands far more work than ever before.
To understand what shapes the behavior of those who lead large, publicly traded corporations necessitates understanding their enculturation. It’s also important to keep in mind that CEOs and the rest of corporate management are folks largely conformed to the status quo. Their ability to envision something completely new, or counter cultural is constrained. Ask anyone who’s worked for a large, corporate entity and you’re likely to hear, “That’s just the way things are done around here.”
An important and primary element of enculturation is education, and in our day, one can be assured that running a large, publicly traded corporation requires an MBA. Additionally, those running today’s large corporations didn’t just arrive on the scene, but were schooled close to thirty years ago – at least. Back in those days, MBA programs essentially mimicked the greatest of all MBA programs, that of the Harvard Business School.
Duff McDonald chronicles the Harvard MBA in his seminal work, The Golden Passport. McDonald’s insights into the history of business education, and how it is that Harvard came to dominate the schooling of America’s elite business leaders, helps understand why CEOs find it so easy to simply buyback stocks, rather than do the “right thing”. A Harvard MBA grinds into the person who receives one two seminal principles: Friedman’s primacy of shareholder value and Jensen’s agency theory. These two principles are the bedrock of thinking behind how corporate leaders make decisions about where to invest, what to market and all the rest that goes into running a single bottom line business. That the primacy of shareholder value and Jensen’s agency theory have been found to be morally bankrupt is not news. The problem is that these principles linger in the minds of many, especially those who have managed to “climb the greasy pole of corporate leadership” and now make so much money as to afford houses large enough to store commercial airliners.
All of us share the traits of being human. The thing that sets us apart from all other living creatures is our highly evolved consciousness. It’s also the thing that makes us the most dangerous. What we do with our consciousness – the window through which we perceive the world – is, with a few exceptions, up to us. As individuals, we need to work at this. In popular parlance, this work is called becoming “mindful”.
We also need to recognize that what we perceive is not necessarily reality. This notion stands in contrast to what many seem to think. In this age, one is able to justify the statement, “My reality is just different from your reality.” This is incorrect. Reality is the concrete world around us; it includes physical facts, such as the point at which water boils or freezes. It also includes inferences about such things as how governance works in a particular country. For example, the US – a society that claims to be democratic – shows many signs of being an oligarchic kleptocracy, wherein a relatively small group of wealthy people manipulate and control the levers of government to maintain their status within the state. These perceptions are arguable with facts; they are not things that exist solely in one’s mind.
The author, Jim Taylor Ph.D., writes in a recent Psychology Today article: “Perception acts as a lens through which we view reality. Our perceptions influence how we focus on, process, remember, interpret, understand, synthesize, decide about, and act on reality. In doing so, our tendency is to assume that how we perceive reality is an accurate representation of what reality truly is. But it’s not. The problem is that the lens through which we perceive is often warped in the first place by our genetic predispositions, past experiences, prior knowledge, emotions, preconceived notions, self-interest, and cognitive distortions.”
To get a sense of how this relates to the decision-making processes used by those who run large, publicly traded corporations, we need look no further than a recent Harvard Business Review article. In, Why So Many CEOs Don’t Realize They’ve Got a Bad Jobs Problem, authors Katie Bach and Zeynep Ton list a number of reasons top managers seem to be unable to perceive the reality faced by their frontline workers. The third reason on the list is titled, “They’re out of touch.”
Bach and Ton write, “It’s not just the data that executives are missing out on; it’s also the reality of their workers’ day-to-day lives. When we break down workers’ basic living expenses using a living wage calculator, executives are often surprised that even workers making what executives think is a ‘good wage,’ like $15 an hour, fall short each month. These executives are mortified when we share how hard it is for their workers to get by — like the dedicated, high-performing employee of a senior care company who had to put off her surgery for a work-related injury because she couldn’t afford to take the two to three weeks off (and didn’t have enough sick leave).”
When one’s work-a-day world consists of donning a pair of Gucci shoes, a Brooks Brothers suit, and then riding in a chauffeured limousine to a job that consists of telling others what to do, is it any wonder it’s hard for that person to perceive the reality of someone working for $15 per hour? It’s certainly understandable how a CEO could be so out of touch. But if this system is to function in a manner that brings about at least a modicum of justice, shouldn’t this same person be held to account for being so insensitive, so mindless?
The increased interest and movement toward adopting ESG reporting standards is certainly a promising thing. Corporate leadership is increasingly becoming aware – as are the rest of us – that things are not right. This is how movements take shape. But in this case, we have a problem of unprecedented proportions: Our globalized behavior – the way in which we’ve organized work and provide for ourselves – is now threatening the very survival of the human species. Time is running out. When we consider the magnitude of our problems, relying on what amounts to a small, ruling cabal to undertake a transformation on their own is far too risky.
Today, the economic dominates all things. If doing something cannot make money, it’s just not worth doing – at least that’s the dominant way of thinking. This “by any means necessary” paradigm – the idea that doing anything at all must generate profits – is at the root of our problems. Until we can effectively reassert democratic principles over the economic, we will continue to struggle against ourselves, rather than changing the system that so dominates our lives.
“The journey of one thousand miles starts with a single step”, so the Taoist saying goes. Reasserting democratic principles doesn’t start in Washington, it starts right here in our community. It starts when we get active and organize ourselves to make change – locally.
One example of what could be comes from Portland, Oregon. In 2016, the city of Portland passed an ordinance that places a surtax on CEO pay. The tax is based on the ratio between the compensation paid to the CEO of a publicly traded corporation and that of the lowest paid employee. When this ratio exceeds a set amount, the corporation is taxed. The revenue generated by this tax, while not significant in relation to the city’s total budget, helps pay the bills.
The point here isn’t about the size of the tax’s revenue, but rather the signal this initiative sends. This relatively small jurisdiction asserted itself, and through democratic means, took a small step toward a more just world. We have a long way to go, but Portland’s example is one that ought to be emulated in our community.