Burgess COMMENTARY

Peter Burgess

Follow Miguel A new piece on combatting short-termism in The Aspen Journal of Ideas. Full disclosure, my colleague Rebecca Darr, and I contributed to the piece. Miguel Padro Program Manager at Aspen Institute Business and Society Program http://aspen.us/journal/editions/julyaugust-2014/invisible-hand-versus-squeaky-wheel Invisible Hand versus Squeaky Wheel aspen.us I. Thinking Long... Like (2) Comment (5) Unfollow Reply Privately1 month ago Comments Marcel Bucsescu, Filip Gregor like this 5 comments

Peter Tunjic Peter Peter Tunjic Lawyer/Writer/Inventor Hi Miguel, I'm not sure the 'squeaky wheel' metaphor for analysts is correct. A wheel is at least useful. However, I wonder if it would be more accurate to describe short-term thinking as un-commercial thinking. A decision is commercial if it simultaneously meets the needs of the relevant stakeholders. Each asking what the stakeholder needs from their firm for their firm to prosper and be successful. This is the essence of the invisible hand. We get our need to be fed because the baker needs our custom. Un-commercial thinking exists where the firm satisfies a stakeholders need without it's needs being satisfied or worse still compromised. Most (if not all) decisions associated with short termism share this character. Conversely, long term thinking will generally involve reciprocity whereby the stakeholder and the corporations needs are mutually satisfied. Why would a corporation satisfy the needs of a stakeholder without a corresponding benefit? The answer goes to the the fundamental question of corporate purpose and the unintended consequence of conflating ownership of a share with ownership of a corporation. The idea that the needs of the investment industry can be met without the investment industry serving the needs of the corporation offends and perverts capitalism's most basic organizing principle. But it's worse than that. The corporation ends up not satisfying the needs of those stakeholders upon whom it must rely to have its needs satisfied. It seems to me that managerial capitalism was replaced by un-commercial capitalism. For capitalism to work all corporations (including corporations that buy and sell shares) must be free to act commercially and in their own interests as a person in their own right. Then the needs of stakeholders would be prioritised by the need of the corporation. This would see a dynamic pecking order of stakeholders based on the life cycle of the corporation. What do you think? Like (1) Reply privately Flag as inappropriate 10 days ago Filip Gregor likes this

Prof. Jean Du Plessis Prof. Jean Prof. Jean Du Plessis Professor at Deakin University Interesting thoughts, Peter, but how do you align the common purpose if the one is demonstrably driven by greed and exploitation for self-interest. I wish I could start to believe it is really in the best interests of all and seriously creating long-term and sustainable wealth for all rather than making the fat cats fatter and fatter and playing more and more with the mice to satisfy themselves before indulging in the feast and then looking for the next resource to be exploited to exhaustion? Is it really the baker needing our custom or is it the baker reaping more and more by paying less and less for the flour and wood to bake te bread and convincing all that without the bread all will be doomed? Like Reply privately Flag as inappropriate 3 days ago

Peter Tunjic Peter Peter Tunjic Lawyer/Writer/Inventor Hello Professor. The incorporated baker still needs our custom. But the incorporated baker is forced to bake with one invisible hand tied behind its back. It's arm twisted by state sanctioned rent seeking that requires that act in the interest of another rather than its own. This is the mischief that undermines capitalism and why politicians, journalists and academics encourage it is beyond me. The corporate condition aligns with common purpose when freed from servitude and defended from from the human condition. The irony is that those who were meant to guard the corporation from rent speaking are now expected to work for the rent seeker. Like Reply privately Flag as inappropriate 1 day ago

Miguel Miguel Padro Program Manager at Aspen Institute Business and Society Program Peter and Professor, very interesting comments here. Peter, thanks for the thoughts on the 'squeaky wheel' metaphor and your response to the Professor's good comments too. I'm very interested in your definition of 'commercial' activity and the importance of reciprocity. I think your definition highlights the best of what commercial activity can be. But we also need to wrestle with the dilemma that more freedom to do the right thing ( for example, to adequately reciprocate with stakeholders) might also create more opportunity for corporate management to do the wrong thing. Such is the nature of freedom. So while I agree that more freedom to do the right thing is potentially very helpful, accompanying that freedom with the right menu of checks and balances used in the right proportions is essential. This brings me back to the 'squeaky wheel' issue. (Disclaimer: This is probably more of a US problem but I have heard from a number of European-based folks who see this influence encroaching on European companies as well.) One of the most powerful influences in the current US corporate governance ecosystem is a constituency with no legal power over corporations- investment bank analysts. Their influence isn't derived from owning company stock or even from being particularly seasoned and wise, but rather because they have the power to set and reset market expectations with their earnings predictions and their reactions to company performance every quarter. They create the news that the business press then reports. This is a system design issue. If we hope to fix the system of corporate governance, this is one discrete area for improvement. Like Reply privately Flag as inappropriate 2 hours ago

Peter Burgess Peter Burgess Founder/CEO at TrueValueMetrics developing Multi Dimension Impact Accounting I am glad I read this piece, but I cannot find much of substance to get hold of ... worse I think the whole conversation about the purpose of the corporation misunderstands the fundamental nature of society and the economy. I can go on for a long time, but I will be brief. The performance of a corporation is being optimized for the benefit of financial capital and every other capital is being ignored. This is not surprising since the only metrics with substance are the financial metrics, and these metrics are talked about 24/7 by investments analysts and the media. When issues like impact on people and planet are talked about it is without metrics that are easy to understand. I argue that the purpose of economic activity (not the corporation) is to make for a good quality of life and standard of living, that is improving human capital ... and to do it in a way that does the least damage to natural capital. I consider the corporation to be a good tool or vehicle to get this done. The free enterprise system and markets are good ways to optimize for the allocation of resources ... but ... and this is important ... the markets must be using information that is right. The information that we use is only suited to optimizing for financial capital. The data and the analysis ignores the impact on all the other capitals: physical capital, human capital, social capital, institutional capital, intellectual capital and natural capital. Another matter I take issue with is the idea that a healthy economy is one that is growing, in other words where there is GDP growth. But GDP is all about flow. The state of the economy is about state as well as flow. Its like answering the question, how full is the bathtub by saying it is 15 litres per minute (the flow from the tap). There is a point when the maximum flow is good, but at some point the optimum state is no more flow ... just enough to keep things where you want them to be. There has been amazing growth of economic activity from 1900 to now. The population has gone from 1.7 billion to about 7.1 billion and standard of living maybe is 10 times as big. That's about 40 times the economic activity now compared to 1900 ... but in this time the planet has stayed the same size. Financial capital has gone up ... but natural capital is now increasingly at risk. For much of this period people have become better off ... financial capital has increased and so has human capital. But from about 1980 this has changed with financial capital increasing more rapidly and human capital remaining static (or stagnant). Financial capital has increased, and in many countries the physical capital has depreciated ... in the case of the United States the backlog of maintenance and upgrade needed is in the trillions of dollars, but not really being measured and included in the 'state' of the economy and society . We need metrics for ALL the flows, and all the components of capital. We have pretty amazing systems for conventional accounting and the increments to financial capital. We need the same sort of rigor for all the other capitals. Peter Burgess Delete 2 seconds ago