Corporate Social Responsibility Revisited Highlights

Randy Kroszner:

Welcome. I am so delighted to welcome you to a virtual global conference that Chicago Booth is having on the 50th anniversary of Milton Friedman's famous essay on corporate social responsibility. This is, I think, the first time that anyone is having a virtual global conference. And one of the wonderful things that it does is highlight the global reach that Chicago Booth has. We have campuses in Hong Kong, London, and in Chicago. In normal circumstances, we would have had a physical conference in one of the locations, but although we have the challenges of not being able to get together physically, we also have the benefits of technology that can bring us a global conversation, integrate the discussions at Asia, with the discussions in Europe, Middle East, Africa, the discussions in the Americas. And that's precisely what this conference is to do.

Randy Kroszner:

The world continues to debate the ideas that Milton Friedman put forward 50 years ago when he said that the primary responsibility of business is profit maximization and shareholder value maximization. A lot has changed in those last 50 years. A lot has changed at University of Chicago and Chicago Booth. A lot has changed in the world. And that's one of the things that we want to highlight.

Randy Kroszner:

We are here discussing Friedman's ideas, but that does not mean that everyone at Chicago Booth or alums or the world agrees with them. And probably most people disagree with them today. And many people, perhaps even most at Chicago Booth disagree. And we're going to be highlighting those points of agreements and disagreements and the relevance for the current debates today.

Randy Kroszner:

We know that just over the last couple of years, one of the largest asset managers in the world, BlackRock, has focused on corporate social responsibility and ESG, environment, social and governance issues. They need priority. The Business Roundtable has changed its statement and said, these stakeholders need priority. Well, what does this mean? How can we achieve this? And is this a good thing to achieve? These are the kinds of issues that we are going to have to discuss throughout the world today.

Randy Kroszner:

We're starting with one Nobel Prize winner, Milton Friedman here, as a kickoff for the ideas that we'll be discussing. And then we're going end in the US where I'm going to be doing a fireside chat with Oliver Hart, who's another Nobel Prize winner and is a coauthor of Luigi Zingales, one of our faculty members who takes a very, very different view than Milton Friedman does.

Randy Kroszner:

And so I welcome you to this. This is a conference that I think only Chicago Booth could do with the three campuses around the world, with the faculty, with the alums, with the ability to convene global government and business leaders. I'm very excited about bringing this to you today.

Randy Kroszner:

I'd also like to thank our exclusive media partnership with the Financial Times, another organization that has a global reach and has been very much engaged on these ideas, whether it is through their focus on books and books on these issues, the FT McKinsey Book Award that I'm one of the judges of, or whether it's Moral Money. It is a key issue, and they're a great partner to have with us in this global conversation.

Randy Kroszner:

So now what I'd like to do is turn to one of our great alums, Tandean Rustandy. He has been really an amazing entrepreneur, an amazing innovator, building one of the world's largest ceramics manufacturers from Indonesia, but at the same time being very much focused on corporate social responsibility. He's won enormous number of awards, including the Green Industry Award for his green work in building an incredibly rapidly growing company, at the same time, making sure that it is green and environmentally friendly. Tandean is a proud graduate of the executive MBA program in Asia. And we will be having after the conclusion of this part of the conference, an open talk with our admission staff, for those of you who might be interested in thinking about coming to Chicago Booth as a student. So please hold on to the end for that.

Randy Kroszner:

But not only is Tandean one of our wonderful graduates from the program, but he's also a member of the Booth Council at University of Chicago and a member of the board of trustees. His very generous support has also been wonderful in helping to build out and really build the Rustandy Center for Social Sector Enterprise and Innovation. So Tandean is someone who has deep commitment to these issues and, I think, a deep commitment to the ideas of both Milton Friedman and social responsibility. So I'd like to now turn to Tandean to give us a few introductory remark. Tandean.

Tandean Rustandy:

Thank you, Randy, for your great introductions. Everyone, when Randy asked me to introduce the conference today, I knew it would not be an easy task. Milton Friedman is a source of lots of [inaudible 00:06:18]. Friedman, once in a generation mind, he made a strong, clear arguments about the rule of a business in the world. In his view, the government should be responsible for socio and environmental welfare. He explained that the state official should ensure that [inaudible 00:06:39] and justice are distributed fairly. Friedman believed that the rule of the game will stop companies from chipping off on your team. But we all know that in many countries, it is more complicated.

Tandean Rustandy:

Let me give you some examples from my home country of Indonesia. There are three major US energy companies that have operation. All three have CSR program, but do they have a positive impact on the average Indonesian all for the longterm? It's hard to know because the companies care most about the shareholder value. Many companies carry out CSR out of obligation or to follow regulation. They do so to follow the rule and maximize shareholder value, not to necessarily help in society.

Tandean Rustandy:

My company runs five full factories, surrounded by extreme poverty. This poverty can lead to bad outcomes, like poor schools and violence. My company is often the most reliable thing standing in the way of poverty in these communities. Of course, some of my effort and that of my company, [inaudible 00:08:02] are in our self interests. We protect things like clean water, scholarship, and construction material for school, home, and worship places. In return, we get stability and a loyal workforce, which both help our bottom line.

Tandean Rustandy:

I do this work because it's good for my community and for my company, but I'm also motivated by my faith, as I am a Christian. More than a hundred times, the Bible call on us to help the poor. We say, surely, I believe that the purpose of business is not profit, but to create value and impact.

Tandean Rustandy:

Today, to be successful in business, you really have to think about being sustainable. And sustainability is all about the future. Therefore, I think an impact driven business is the wave of the future, where companies truly care and tackle issues like those surrounding environment, education, healthcare, and society to its roots.

Tandean Rustandy:

In my opinion, CSR is not as simple as Friedman make it seems to me, because I believe it is a mixture of necessity, business and a personal belief. Luckily, we are not here today for a simple answer. In the spirit of the University of Chicago, where Friedman spent his career, we are asking a big question and developing the answer.

Tandean Rustandy:

The spirit of open debate is the reason I choose to go to Chicago Booth for my MBA. It's also why I was honored to join the University Boards of Trustee and to give back. I believe that the world is complicated, and we need our best minds to make it better. This is why I support the Rustandy Center for Social Sector Innovation and the school.

Tandean Rustandy:

My faith motivate me to make the world a better place. And Rustandy Center, with Chicago Booth hearts for people committed for helping to solve social and environmental problems. It is where business tries to do more than make a profit. It is where both students strive to be a force for work for in a world that is complicated.

Tandean Rustandy:

I hope you enjoy today's speaker, who I'm sure will ask a tough question and give us no easy answer. I would expect nothing less from the home of Milton Friedman. So now I will turn it back to Randy Kroszner to begin the conference. Thank you.

Randy Kroszner:

Thank you very much, Tandean. That was a really excellent way for us to start off. And I think it underscores-

Tandean Rustandy:

Thank you.

Randy Kroszner:

... The diversity of thought that we have at the University of Chicago.

Randy Kroszner:

But before I turn to the panel, I want to ask something of the audience. And so we're going to have a poll to see whether you agree or disagree with Milton Friedman. So I'm going to take a quotation out of the article that he had published almost exactly 50 years ago. It was actually on the 13th is when his essay was published, Sunday, the 13th. And so what I'd like to do is see if you agree, disagree or uncertain about this quotation from Milton Friedman.

Randy Kroszner:

And the quotation is, there is one, and only one, social responsibility of business, to use its resources and engage in activities designed to increase its profits, so as long as it stays within the rules of the game, which is to say engages in open, free competition, wealth without deception or fraud.

Randy Kroszner:

And so let's open the poll and see what people think.

Randy Kroszner:

And while you're answering the poll... There we go. We're getting some of the results in now. You can see, interestingly, that about 60% disagree, about 30% agree, and about 12% are uncertain. It's interesting that given such a challenging issue, there are a relatively small number of people who aren't certain. People have a very clear view, and at least of the audience so far, it's twice as many people disagreeing than agreeing with Friedman.

Randy Kroszner:

And I think what's going to be interesting is to look, I'm going to do this poll in Europe, Middle East, Africa, and do this poll in the US and see how that's similar or different around the world.

Randy Kroszner:

Now, what I want to do is turn things over to our opening keynote panel. And that is going to be moderated by Henny Sender, who's a great friend and a brilliant writer, who for many, many years has been based in Hong Kong and is the chief international financial correspondent and columnist for the Financial Times.

Randy Kroszner:

And we are going to have a session that's focusing on the response and responsibility of business in the COVID crisis, and particularly in emerging markets in Asia. We are going to have on that panel, our great graduates, Ahmed Saeed, who I've worked with in government. And he is now the number two at the Asian Development Bank. And he's also going to be in conversation with Amea Ayella, who is the CEO and chair of one of the largest, if not the largest, businesses in the Philippines. So Henny, let me turn it over to you.

Henny Sender:

Thank you so much, Randy. It's a pleasure to be with you as an extended member of the Chicago family. I'm speaking to all of you from Hong Kong, where we have just had the hottest summer on record, and slowly we are coming out of the lockdown that we have been in, like so many others in Asia. And I'm going to start by asking both of you how you feel that the definition of corporate social responsibility has changed over the last few years. As I was listening to Randy, I thought, a few years ago, many more of us would have voted in support of Milton Friedman than today.

Henny Sender:

So Jaime, I'm going to start with you before turning to Ahmed and asking him a slightly different question. Thank you.

Jaime:

Thank you very much, Henny. Greetings also to my co-panelist, Ahmed, and to the rest of the Chicago Booth alumni community. Delighted to be here with all of you.

Jaime:

What a fascinating issue, Henny. I actually took the liberty of rereading Milton Friedman's statement just this morning, and I must admit he argues it so cogently and eloquently and intelligently, it must've been quite a statement when he issued it. But I think what has happened over time is that the sensitivities change, responsibilities change and people's feeling about our responsibilities and institutions also begin to shift.

Jaime:

I think it's no secret that there's much discussion about where the capitalist system has taken us, the inequality that's being generated. And I think many individuals, many institutions over the last decade and a half, or maybe even two decades have been trying in their own way to instinctively counteract these negative elements of the pure capitalist model. It's led to doing business at the bottom of the pyramid, it's led to issues of shared value of alignment.

Jaime:

And so I'm not fully aligned to the whole concept of corporate social responsibility, but I am quite aligned to the idea of private institutions aligning themselves to the national good, to the national development agenda and to a progressive view of how we should run our societies. That's where I think my ideas come in and differ, I guess, from Milton Friedman at this point in time.

Henny Sender:

Thank you so much. Ahmed, let me ask you something, working at a development institution like the ADB. When you think about the role of private enterprise in development, is it a big role or a little role? What is the right expectation of private sector and its contribution to development?

Randy Kroszner:

First of all, let me just before addressing that question, and let me just join Jaime in expressing appreciation to you and to Randy and the University of Chicago. I never imagined I'd be introduced as a distinguished alumni, so there's definitely a little bit of, "Oh, did that just happen?" But anyway, good to be here.

Henny Sender:

We'll take a vote on that on the end, Ahmed.

Randy Kroszner:

No, no. I'll be lucky to get an uncertain if we get a vote. Look, I think just to answer your question maybe briefly, and then we can go into this a bit more.

Randy Kroszner:

There's an important set of ideas about development that argues that development is driven by institutions, that the quality of the country's institutions defines its development trajectory. And often I think when we talk about institutions, we focus only on the government. But in fact, some of the most capable institutions in any country are its companies or its businesses. And the story of industrialization, of growth, the story that has led to a world that has had a billion people come out of poverty into the middle classes over the last two decades is the story of businesses.

Randy Kroszner:

And I think what's so important about that story, the idea of institutions as being at the heart of political and economic development. Something that Samuel Huntington talked about quite a bit, and one thing he talked about when he talked about institutions was institutional legitimacy. The idea that an institution has the right to exist, that it's a valuable member of society.

Randy Kroszner:

And I think one thing that's become clear is that over the decades, a narrow definition of responsibility, a legalistic definition of responsibility as opposed to an ethical and moral definition of responsibility has eroded the legitimacy of these institutions that lie at the heart of our development progress.

Randy Kroszner:

And so I guess what I would say is that I think businesses are essential to development. There is no development without business, but there is also no development without legitimate business. And as Tandean had said at the outset, the world is a complicated place. We can't reduce it to a one dimensional, even if cogently argued theory.

Randy Kroszner:

And so there's complexity and there's a need for richness. And that richness comes through, in many ways through things like morality and purpose and trust. And so I would say that business is at the heart of development, but even more importantly, reliable, trustable, ethical business is at the heart of development.

Henny Sender:

I think that's beautifully put. I must warn you both that I may not stick to the exact order of questions that-

Jaime:

Now you tell us, Henny.

Henny Sender:

Exactly. Exactly. I tell you when it's too late. But I will tell the audience that one of the things that we were talking about as we prepared for this panel was the lack of trust. And we will come back to that, both from your remarks, Jaime, about inequality that arises out of capitalism and your emphasis on the legitimacy of business.

Henny Sender:

But let's talk about the pandemic now and what is the best division of labor between governments and the private sector in the face of a challenge like a pandemic, which seemed to have overwhelmed virtually every government on the planet, whether developed market or emerging markets.

Henny Sender:

How do you both, coming from your institutional perspective, see the appropriate division of labor between the role of government, development banks which sit in the middle and private sector?

Randy Kroszner:

Jaime, do you mind if I go first because I think-

Jaime:

Please.

Randy Kroszner:

So, I just want to tell a little story.

Henny Sender:

We love stories.

Randy Kroszner:

When this crisis erupted here in March, when the government was immediately forced to make some really hard choices, as with many other lower or middle income countries, it confronted a horrible choice between lives and livelihoods. There was a clear need to lockdown, but there was also a recognition that millions of people needed to earn a daily wage to put food on the table.

Randy Kroszner:

And so the government turned to its development partners, the ADB and others to help quickly expand the social safety net. And we started rolling up our sleeves and we were working with them, working our way through budgetary regulations and figuring out how to identify the poor. And as we tried to race ahead, as best we could in the public sector, we were suddenly surprised that there was another set of actors that were way out ahead of us and who didn't wait for us.

Randy Kroszner:

And those actors were the private sector companies of the Philippines, with Jaime and his businesses taking a leading role in saying very, very early on, not what's the right allocation of responsibility? What is the long-term consequence of us taking up this right now? But saying, this is a crisis. We have the capabilities. We have the managerial talent. We have an interest in the viability of this society, not just in the viability of this commercial enterprise.

Randy Kroszner:

And so that began a process of, and I have to say, I was surprised, I said, "Oh my God, these guys are doing more than we are, faster than we are. And they have the capability to." And on the back of that began a series of collaborations where we were actually able to leverage each other for common purpose, the government, the business community, the international organization community.

Randy Kroszner:

And I think maybe, Jaime, I'll hand it off to you there because I think that for me, was a great lesson in common purpose.

Jaime:

No, thank you very much, Ahmed. You're very kind, but this was in many ways, Ahmed and I had a chance to meet in the Philippines when he was assigned to the ADB and we started talking through it. We built, I like to think a high degree of trust and so there was a lot of collaboration early on in this process, both from a discussion point of view and an action point of view.

Jaime:

I think, Ahmed, what was clear is that there was no playbook in a time like this. We all kind of could smell where this was going. And we could sense that there was going to be the possibility of a lockdown, but I don't think ever in my history in business had I ever seen a situation where not only the country was locking down, but all revenue flows globally in every other business was also going through the same thing.

Jaime:

I think we just looked internally first and our first instinct, and it was just entrepreneurial, there was no other way to look at, was to put an emphasis on our employees and the economic structure and systems around this. We instinctively felt, and I think empathy was needed at the time, like this Ahmed, that was the one that kicked in. And we said, "What are the people who are part and parcel of our ecosystem be feeling now?"

Jaime:

And we said, the first ones would be our employees. The insecurity level must be so high with respect to their financial wellbeing or health wellbeing. They want after something like this, I mean, if I'm worried and I'm worried for my institution, imagine what a person in the organization. So the first thing we did is first, we can't do anything unless we have an organization here that feels safe in every sense of the word.

Jaime:

So we basically gave them the assurance at that point that we would not be laying off anyone, that we would keep everyone as is. That we would use our resources and institutions to try for as long as possible, ride out this crisis and keep everyone safe. And so that built in an esprit de corps right up front.

Jaime:

The next community were the people who are part of our ecosystem, we're a multi-business group in the Philippines. And we in turn gave them comfort that our capitalist system and our ecosystems and a series of businesses work because we all work together. There are tenants in our malls. We have suppliers. I mean, the ecosystem lives because it is integrated. That is the beauty of the capitalist system. But that same ecosystem starts to fray at the edges when you have a major pandemic of this nature.

Jaime:

So we then gave them comfort and said, look, we can't guarantee this forever, but over the next couple of months, let's cancel all tenant payments. Let's slow down on interest rate that is owed. On bills that need to be paid, let's cancel that as well. Let's all, in a way kind of symbolically hold hands, ride this out together and rebuild together.

Jaime:

And finally, and this is where Ahmed is referring to my brother, Fernando and I, that run the company together, said this is a time when, for the government to start readjusting its budgets and reacting to what is needed is a laborious process. You've got to go to our Congress, to our Senate, reallocate budgets. And I said, this is going to take a while.

Jaime:

And I said, we have a problem day one from this pandemic, a city like Manila with about 14 million people, and all the day laborers that we have will be without a job and without food right up front. So we made some phone calls and within 48 hours, we were able to harness 270 of the largest institutions in the Philippines and come up with a structure to basically start a program to put food in people's hands during this period.

Jaime:

It was an instinct that followed a little bit, the thought process I'd given. But Ahmed, we talked a lot during that time and the ADB quickly sensed an entrepreneurial verve of the private sector and said let's just latch on to this and see how we can all work together. And it was a pleasure working with a development institution, a multilateral like the ADB, where we began to harness each other's strengths, the credibility the ADB had with many government institutions, suppliers, and many others. They'd also supplied financing. And we formed the partnership.

Jaime:

So I think, Henny and Ahmed, one important idea that came out of all of this is sometimes problems that are overarching, that are more global or more national, sometimes cooperation is more needed than competition. And these are moments when harnessing a collective force becomes a very powerful thing. And that is not something that traditional economists or traditional business schools would teach.

Jaime:

Competition, of course, is the ultimate mantra, but here you have a situation where the broader problem can only be addressed by a sense of unity, a sense of cooperation and a sense of common purpose. I feel that agenda should be put a little bit higher, I guess, in academic circles, in the future, particularly as we tackle global issues, issues of climate change, issues of health, these need overarching answers.

Jaime:

But anyway, I'm going on too much. Ahmed, you've been kind with your words, but in many ways I was very impressed as well with the ADB, which is an old established institution with its own bureaucratic processes. Basically also putting the playbook aside and saying let's work hand in hand, in an entrepreneurial way to address a short term need.

Randy Kroszner:

Thank you.

Henny Sender:

When I listen to you, Jaime, what impresses me is your sense of we're all in this together and the sense of urgency that business had. You were the ones that mobilized the logistics to get food to people at a time when all the traditional channels were being disrupted. Are there lessons going forward?

Henny Sender:

In retrospect, what can the private sector do better? What can government do better? The private sector also mobilized making available protective equipment, that kind of thing. One of the things we talked about in our earlier discussions are how can governments be better prepared for the next emergency? And one of the things that you both had mentioned was the need for digital ID cards, for example. And that's better for governments.

Henny Sender:

So maybe you can talk a bit about the lessons for these kinds of public private partnerships going forward. Ahmed, you must be thinking about that a lot.

Randy Kroszner:

Yeah. Would you like me to start, Henny?

Henny Sender:

Please.

Randy Kroszner:

So I think a crisis and an emergency is different obviously from the normal course of business. And I think that in a crisis, the way the business reacted here in the Philippines and the way the officials' sector reacted was entirely appropriate and right. Everybody did everything they could.

Randy Kroszner:

And what I would say is that collaborative process is much more effective when it's undergirded by a level of trust that comes from a sense of common purpose. In the absence of that trust, it becomes very hard. In a longer term sense, where is that divide between what the government should be doing and what the private sector should be doing? That differs greatly I think from society to society, and it differs greatly depending on the capabilities of various institutions. But the one point I would make is that while there are certain things that are exclusively the province of government... Clearly government needs to be ultimately responsible for the armed forces, needs to be ultimately responsible for the administration of justice, needs to be really ultimately responsible for every obligation owed to society as a whole.

Randy Kroszner:

We have seen experiments across the world where elements of the delivery of that have been outsourced to the private sector. And what I would argue is that where that process has not worked, it has not failed because the private sector is incapable of doing it. It's failed because the private sector misconceived its responsibilities and conceived of them far too narrowly. And one of the things that I am concerned about, as we appropriately are skeptical about some of the ideas that perhaps we're overreaching, and for better or for worse, I think I'm in the 59% that said that strong statement by Milton Friedman wasn't defensible in today's world, it's important we don't throw the baby out with the bath water. We have to correct the system, but not reject the system. And I think that's a very important distinction.

Jaime:

If maybe I can build on that Henny, because I think Ahmed is completely right. The definition of where our responsibility lies, it's a gray area. I don't think there's any kind of a black or white system here. But if we become too narrow, as Ahmed hints at, in our definition of our responsibilities, then we all end up just sitting on the side and watching problems happen or not addressing solutions. I think the moment you have a broader point of view where we are part of civil society, that the business sector has a role to play in building trust and addressing some of the pain points that we have in our development needs, then you begin to start changing a philosophical mindset that your institution has a bigger responsibility than just to the shareholders.

Jaime:

It has a responsibility to its society it's working in. And societies are all different. A developed economy is very different from a developing economy. Trust gets built in different ways. The needs are different. And Ahmed said something very interesting at the beginning about whether institutions are strong or weak in the area where you are working. I come to the conclusion that many businesses have lost trust over the years. And way back, I guess when I came back from my own studies, I felt there an equation missing in emerging market context about the engagement of the private sector in addressing some of the national development agendas. As you moved on in time, issues of inequality then became a buzzword in the developed world, but we've been facing these things in the developing world for some time now.

Jaime:

Issues of inequality have been prevalent in countries like ours, and we've been sensitive to them. It only became a buzzword in the developed world much later on. So, we had, all of us, been wrestling with models in our way of doing business that would help address bridging those pain points. And I think not to have empathy and not to understand that capitalist system has been an extraordinary engine of value creation, but at the same time has left a lot behind in countries like ours, has made us very sensitive. So to go to specific examples, it was more than a decade ago, maybe a decade and a half, that the idea of doing business at bottom of the pyramid began to sort of get traction at academic institutions. And I remember sitting with a professor and listening to this argument, and it completely transformed me.

Jaime:

I said, "This way of thinking is what will make us relevant as institutions in countries like ours where the income disparities are huge." We've got to find business models that empower people at different income levels that, that give them the same access to products and services that traditionally other higher income groups could get access to, and change the business models that makes this relevant and profitable. It was not about social responsibility. It was about changing a business model that became more inclusive. And this has been around in emerging countries, Henny, now for some time. This is nothing new. It's just become a new thing in the developed world where the movement of globalization has really disenfranchised so many people, particularly in manufacturing. But in our part of the world, we've been sensitive to these issues. We just didn't quite have all the tools to address them.

Jaime:

So to go back, I think the capitalist system as defined by Friedman is an extraordinary engine, extraordinary engine of innovation, of growth, of job creation. But all of us I think have a responsibility, on our own, not just the government, to address the pain points that are created by it and see if we can use business methods, not just social interaction, but embed some of those solutions into the way we do business. And you can see it now in the way people now pay attention to, I mean, it's not just about profit and energy. It's about creating a pollution-free environment.

Jaime:

The waste that gets created out of things now gets taken into account. All of us are beginning to look at sustainability models and sustainability reporting, as opposed to just the numbers we have to show to the SEC. I mean, this is the right way to go, Henny. And Ahmed, in our conversations, I think we see eye to eye on all these issues. Businesses have to take on this broader responsibility of contributing, I guess, to society in a more positive way. And that means taking on more responsibilities than was initially defined by our friend, Milton Friedman.

Randy Kroszner:

Henny, do you mind if I just-

Henny Sender:

I'm going to come back to those long-term challenges shortly, but a question popped up from a friend of mine, University of Chicago alumnus Louis Miranda in India. And he's talking about civil society and the role of civil society, which made me think about one of the earlier things I was saying, when I'm not sure how meaningful the distinction is of developed markets and emerging markets at a time like this. So I wanted to ask you, Ahmed, how do you cultivate a culture of civil society? And one of the sad things to me about the US today is how in the face of this pandemic the social cohesion is actually fraying. We aren't all pulling together. One of the things that struck me listening to you is, for example, you worked with the church and NGOs in the Philippines. How do you nurture the civil society to play a role in the face of these overwhelming unexpected crises?

Randy Kroszner:

When I first moved to the Philippines, I remember calling my sister and saying, she was asking me, "What is it like?" And I hadn't lived in this country before. And I said, "You know what? Everybody's really nice." And she said, "What do you mean by that?" I grew up in the DC suburbs. And I said, "It actually reminds me of the 1980s." And what I meant by that was that society had a sense of common purpose. People had a shared identity. They may have different religions. They may have different philosophies. But they actually had a common ethic and sense of collective purpose. I think that's reflected in what you're seeing Jaime say about how his business reacts. It was reflected in how the church and NGO communities and civil societies reacted in the face of COVID. And so I think ultimately, society matters in many, many ways.

Randy Kroszner:

Development is one of them. And how do we foster healthy societies? It is an individual responsibility in the first instance. Every single individual has a responsibility to conduct themselves in a manner that is consistent with the wellbeing of their society. And that sense of individual responsibility I think gets translated to different responsibilities for different collective actors. So if you are in the legal profession, you should have a commitment to justice. If you are in the medical profession, you have a commitment to health. If you're in business, you don't have a commitment to short-term profit, you have a commitment to prosperity. And if we define our collective responsibilities appropriately and our individual responsibilities appropriately, then I think over time we create a society that is organically healthy and that responds well when hit with crisis. I'm not sure if that addresses your question, Henny, but I don't know that there's any simple answer to that question.

Henny Sender:

Some of the comments and questions that we've seen relate to short-term and long-term. And I wanted to ask both of you, but I'll start with Jaime, about whether you think in the wake of COVID we are more focused on long-term challenges. I mean, if you think about health more broadly, just think of all the countries that never experienced malaria 20 years ago, but now with global warming, you're seeing malaria in parts of the world where you never used to see it. How concerned are you, has COVID focused more attention on these longer-term challenges or diverted it?

Jaime:

Actually both, Henny, would be my answer. Let me start with a long-term challenge. Everything negative in life always has a silver lining. I'm a believer in that. And our country has tremendous capabilities on the software side. By software, I mean the nurses that we produce, the doctors that we produce are globally respected. We have nurses and doctors working in a global setting. But we've never had... As an industry, the healthcare industry, while we have pockets of excellence has, never been a universally-focused component of our society. There are many weak spots, which has allowed of course groups like ours to enter on the private side and try and plug some of those gaps. But certainly this crisis has put a focus on how far behind we are on the healthcare side, how much we have to do, and that health-related-

Henny Sender:

And this is we broadly?

Jaime:

We broadly, the country. I'm saying that it's an industry that has not been given the attention it deserves and deserves far more support. So that's the positive side. And I think, Henny, we will never go back to looking at the industry in the same way again. I think there will be a renewed focus on both the government side and the private sector side to try and address some of the pain points that we've had during this crisis, the lack of facilities, the lack of planning, the level of sophistication needed to deal with pandemics, the methodologies, the training, everything that goes with it. So that's the long term. Interestingly enough, a pandemic like this has also brought out a lot of short-term thinking, and I think for the better. Ahmed and I were just discussing how we had to throw our playbooks aside and not go by process, and just say, "What do our instincts tell us at a time like this? How do we address pain points? And let's just be a little entrepreneurial."

Jaime:

And that involved a lot of short-term action, addressing issues, combining ourselves with others, finding out what a problem was and being able to address it, changing our models of behavior with respect to distributions of goods and services. This was all short-term instinct. And in a crisis like this, sometimes the horizon has to shorten. I know that sounds a little counterintuitive. But if you go for some long-term thinking in the middle of a crisis, you're just going to lose all momentum. So there's been this odd thing of a need to just adjust to the changing circumstances fast, without too much planning. And then there's this kind of new realization that health-related issues could bring a country down, could bring a people down, could create mass unemployment, and that we have to create a structure that will basically preserve this for the long term. And those two things kind of were happening hand-in-hand, and both as valid as each other.

Henny Sender:

I mean, so there was a question from the audience that had to do with how your group thinks about ESG. And could you talk about it in concrete terms? And I'll pile on one question and piggyback on that question to ask you, how do you build support internally? And you used the word momentum. Is there a momentum in the board, in the various constituencies, "Yes, we need to think about ESG more and our definition of ESG needs to change"? And if you could be as specific as possible.

Jaime:

Yeah, absolutely. ESG, you either believe in the philosophy or you don't. In other words, I think what's happened over the years in a group like ours is each of the CEOs, each of the people in leadership positions share a similar philosophy about the role of business. And we purposely allow people with that type of philosophy to rise. And so that starts to permeate an organization, both at the board level and at the management level. ESG is something we've believed in. We've discussed I think here with Ahmed about some of the broader responsibilities we have as institutions.

Jaime:

And whether it's ESG-related, whether it's sustainability-related, whether it's aligning ourselves to the UN development goals, all of them speak of a role for business, as Ahmed so eloquently said earlier, that has a broader responsibility to basically produce value-added profits, products, and services that are contributing to society and not deteriorating it. ESG has three components of it, obviously an environmental one that's now become fundamentally important to the way we all work. Trying to hit a carbon-neutral series of processes in the way we run our businesses is our way as institutions to contributing to the world. On the governance side, we've all fully understood the, in progressive circles, how the proper governance, be it at the country level or at the private sector level-

Jaime:

leads to the kind of solutions and answers that are sustainable in the longterm. And finally, I'd like to make one point, which is we've got to get our metrics to start jiving with these ideas of ESG, Henny. All of us that go to school who have been educated, particularly in places like Chicago Booth, we like metrics. We like finding ways of measuring ourselves. I think our metrics as institutions have to evolve. Ever since I started working, it's only those numbers that we have to represent to the stockholders and the SEC that have been valid. Yet, increasingly we're looking at our business to be far more accountable in every sense. But yet, those financial numbers are the only ones we measured ourselves with.

Jaime:

And I was listening to Al Gore the other night in a GIC of Singapore talk. And he was making references to [Cusnick 00:00:54], the economist, and how GMP came to be and how Cusnick himself was against the idea of GMP being the only arbiter of growth and well-being. And yet, there it became the only arbiter. And so I think as financial institutions, we have to broaden our metrics so that people then follow them. Issues of sustainability I think have to be accepted and integrated into our reporting. And we have to look at our role in society as institutions far more holistically in the way we contribute from an employment point of view, from an environmental point of view, from a progress point of view, from an innovation point of view and take this into account in the formula. But metrics, I think, are increasingly important. And I think we're behind in measuring all these things and motivating people to follow those metrics. Anyway, I've gone on too long, Henny. Thank you.

Henny Sender:

No, no, no. It's a very interesting point. Ahmed, I want to turn to you now and ask you whether both particularly the longterm goals of the ADB are on a different trajectory as a result of this pandemic.

Randy Kroszner:

Yeah. I think that there's no question that the pandemic has made real for us the risks of such events. And it's something that I think we've already always known at some level, but in the wake of this crisis looking back and realizing this wasn't a onetime flash in the pan. We had MERS. We had SARS., We've had other near pandemics, or we've had regional epidemics. And so it's very clear that countries are going to need the capacity to manage these sorts of events because they seem to be coming with increasing frequency. And they have absolutely, as we're living through it right now, we're not even close to being through it, enormous, enormous consequence.

Randy Kroszner:

And so for an institution like the ADBS, absolutely it changes our focus. It makes it clear to us that this area, which was always part of what we did, is going to be incredibly important. And also, at the end of the day, our clients are the governments, and we are responsive to their priorities. And I think they appropriately have increased their focus on health, on the capabilities of healthcare systems, on their capacity to analyze health related events and to toggle between data and policy, which to take a very simple example, none of our economic models knew how to incorporate epidemiological data. We had static economic models. So how did we do our first cut of modeling at the ADB? It was let's assume a six month travel lockdown. There was no way to integrate that with actually a model about disease incidents. And so I think we built up that capacity as have other institutions.

Randy Kroszner:

So yes, absolutely the pandemic has changed our priorities. It's made health much more important. The other thing I think it's done, and this is the longterm that we haven't been able to turn to yet, but we can see it, it's made it clear that events that are predicted do happen. And there are other things, climate change being foremost amongst that agenda, that people are looking at and saying that this can be a catastrophic big event for the planet. There is a real risk. And I think for us at the ADB, one of the things that this pandemic makes us realize is that such events are real risks and we have to move with speed and with alacrity to address them.

Henny Sender:

That is so thoughtful. Do you think, though, especially in capitalism, that you can hope that the incentives will be there for a longer term perspective? Because now, the incentive still on Wall Street is short term profitability, three month profitability. Companies tell their shareholders, "We're taking a longterm view. We're investing in this and that. You won't see the payment for five years," and shareholders say, "Fine, goodbye. We're dumping your shares now. We'll see you in four and a half years." Is there the right incentive structure?

Randy Kroszner:

I think the system's changing, Henny. And I think you alluded earlier to Larry Fink and to BlackRock. And I think they're a good example because they have come out with a mission statement as an organization and said, "Our purpose is in our organization is to help more and more people enjoy financial independence." I think it's important to distinguish between that and a series of statements about stakeholders' rights. Our workers have rights. A sense of purpose, I think, is increasingly something that is acceptable on Wall Street in American business. And I think that's all for the health of the system. And I think it's a lesson we've learned. I think we for several decades deluded ourselves into thinking that we could define our responsibilities very narrowly. Those of us who were old enough watched Wall Street in the '80s, and when Gordon Gekko said, "Greed is good," we didn't think he was a good guy. And maybe we didn't think it was exactly right, but we gave him more credit than he was due. And now we know that.

Randy Kroszner:

And I genuinely think, Henny, that the tide is turning. It's a big shift. It's going to turn slowly. Just to take the survey at the top of this discussion, I don't think 20 years ago 60% would have disagreed at the University of Chicago alumni University of Chicago event. Certainly, when I was at the University of Chicago, 60%, at least in the business school, 60% of my colleagues would not have disagreed with that statement. And so I think things are changing. It takes time, but I think we're moving in the right direction.

Jaime:

Maybe just to add to that, Henny, if you'll allow me, building on what Ahmed said, you mentioned ESG earlier. This falls under the category of governance. And I think this is the challenge, particularly for the large publicly listed companies with a wide shareholder base. How do you create from that very strong base of institutional investors a governance structure that focuses on the future, Henny? I think one thing that I think has been advantageous to many companies in Asia, particularly the ones that have family groups of stockholders, is generally, generally you have models where a family group or a family group with one or two other shareholders have a controlling stake in the company and can define the governance structure with a more longterm outlook. I worry about the widely held corporations. I realize I'm walking on dangerous territory here. I've had this discussion before, and I don't mean to malign widely held companies.

Jaime:

But the challenge for widely held companies is, how do you create a governance structure and a CEO incentive plan that focuses on the longterm? If you think about all these institutions with a broad base-

Henny Sender:

I think that's a great point.

Jaime:

... yeah, with broad base, you bring a CEO in and you're telling him, "Make a difference." What happens if he goes to the board in this widely held company and says, "You know what, guys? We better hold off here a little bit. Let's give this two years and do these things, focus on the long term"? They'll kick him out. T they'll kick him out one way or another after five years because that is the momentum that sometimes begins to take place in widely held companies. They need action. They need results. However, when the governance structure reflects a more balanced ownership with perhaps a couple of leading stockholders who can sit it out and not be forced to have to move to action immediately, you sometimes get a little bit more of that longterm focus. I'm speaking, obviously, in generalizations. I don't mean to malign the widely held company. But that is a challenge I think widely held companies face. How do you create a governance structure that can ride out and have a point of view that's longterm and will not either punish a CEO or the governance board for inaction and for a focus on the long term, when sometimes people feel that short term action is needed? It's a challenge. It's a challenge.

Henny Sender:

We only have a few minutes left, and we've spent so much time talking about trust as it applies to the corporate world. But there's also a lot of lack of trust of governments these days. And partly, there seems to be more support for small government, that governments become wasteful, self-perpetuating bureaucracies. Ahmed, you've experienced all worlds, private sector, bridging development institutions, government. Is lack of trust a big problem for governments? And how do you make governments more responsive to the challenges in this world today when most politicians think in terms of two-year election cycles or four-year election cycles?

Randy Kroszner:

I think that's a really difficult question. But clearly, there's a trust issue in our societies at large, and it's not confined to government. It cuts across all sorts of organizations. As I said earlier, I do think that we have to earn that trust, but I think individuals, each of us, every day. But as a Jaime indicated in the example he used, which I thought was great, about large widely held companies, there are structural impediments to success for those who behave in a longterm way. And I don't have any quick or easy answers, to be honest. Maybe returning to the business context, one thing I would say is that earlier, you were talking about how developed countries maybe can learn from the example of emerging market's businesses, the example of what Jaime was talking about.

Randy Kroszner:

And I guess what I would say is that in many ways, they have to learn from their own example because they've forgotten where they started. And businesses and government in the developed world as well as in emerging markets originally began as trusted institutions in many cases and then defined their interests too narrowly. And I think over time as we begin to define those interests broadly again, I think that it is certainly that trust is recoverable. It will take time, and there are sticking points in places where there are structural impediments to that process. But I do think it's possible, if albeit not easy.

Henny Sender:

Thank you. All right. Unfortunately, our time is coming to an end. I wanted to tell both of my panelists that we've had a lot of questions and a lot of comments as ever UChicago panel does, a lot of how do we actually do this. And hopefully, you will stay tuned and you'll have a lot of answers in the next panel. Thank you so much for making my job as moderator such a pleasure. And now I will turn it over to Calvin, who is in Singapore. Thank you, both.

Jaime:

Thank you very much, Henny. Ahmed, thank you too.

Randy Kroszner:

Thank you so much, Henny. Thank you, Jaime. And thank you to the University of Chicago.

Henny Sender:

Always to the University of Chicago.

Randy Kroszner:

Thank you.

 

Calvin Chu Yee Ming:

Welcome everyone to our second panel on how COVID is making the case for sustainability. So I had actually prepared a housekeeping note to invite all of you to ask questions via the chat group. I think there's no problem with asking if all of you guys be interested to ask questions, it seems like it's a very active panel as well.

So a good community here. So just encouragement to use the Q&A box if you want your questions to be seen. I will also encourage you to keep your questions as succinct as possible. It will be easier for the panelists to answer it, and also if you find it necessary, to include your name, your job function, and your organization or your industry, if it helps to add context to your question.

To bring the topic of CSR to how recent changes brought about by COVID are making the case for sustainability, we have with us here three absolute powerhouses in this space. Swee Chen was, until last year, chairman of Shell Companies in Singapore, and serves on the boards of CapitaLand, Singapore Airlines, Singapore Power, Woodside Energy, and the Legal Services Commission. She chairs the National Arts Council, the Institute of HR Professionals, and the Global Compact Network in Singapore. Swee Chen is a graduate of the Chicago Booth Executive MBA program, and in my past conversations with her, she's always been a very strong proponent of proper sustainability.

Seema Arora is Deputy Director General at the Confederation of Indian industry, or CII. She pioneered the creation of services on sustainable development within CII, where she designs innovative products and frameworks to build a business case for Indian industry to invest in sustainability and CSR. She's a member of the World Economic Forum, Global Future Council on Biodiversity Action Agenda.

Katherine is the Chief Operating Officer and Head of the Policy and Secretariat Services Department in the Listings Division of the Hong Kong Exchanges and Clearing. She chairs the Hong Kong Securities and Investment Institute and is advisor to a Hong Kong Foundation, director of the World Wide Fund for Nature, Hong Kong, a fellow of the Aspen Institute, and a member of the Hong Kong Academy of Finance.

Swee Chen, Seema, and Katherine, thank you so much for being here today. COVID-19 has revealed how fragile the world is. I think many of us in business are dealing with insufficient cash buffers, disrupted supply chains, weakened public institutions, even our very social contact is shaken. What was remote and hard to factor in Booth terms, factoring in MPV, is now very concrete. People now feel the direct impact of our actions and there are close parallels that COVID-19 has with, for example, climate change. Both a predictor with certainty in a future timeframe and our global impact, both feel like they have the control or have a coordinated response for, but yet everyone is susceptible to it. So with so many stimulus packages and a clear need to reinvent entire sectors and jobs, COVID-19 is also an opportunity to pursue new sustainable green growth opportunities. So we've... Let's get, perhaps, started first, for the first 15 minutes, I will start with a few questions. I will just be looking out for questions from the group to see how I can, I guess, advocate for all of you.

Swee Chen, Seema, Katherine, have you recently detected any serious shifts in boardroom conversations on the role of the corporation? Or any new commitments to social impact?

Swee Chen Goh:

In all of the boards that I'm in, sustainability is getting the right level of conversation. And so your question, if I answer the basic one, is sustainability getting the attention at board level? The answer is "Yes." But the question is "So what?" and, "What's next?" And I think this is one way, then it begins to vary, where we would then test the commitment of boards of the corporations in what levers they want to pull to drive the sustainability agenda for each of the corporation.

So I think while the discussion is happening, I think in some boards, the depth of the discussion that translates from the conversations into actions, into the strategy of each of these corporations, I think that still needs some work in some of the boards that I talk to.

Calvin Chu Yee Ming:

Thanks, Swee Chen. Seema or Katherine? How has your experience been?

Seema Arora:

Hi, good evening from India.

Yes, of course, I think we see an increasing, I would say, realization amongst industry that sustainability is an important issue. And, of course, this pandemic itself has probably shown that a large-scale disruption can put companies into a lot of risk. And now we see that companies are beginning to understand that a disruption like climate change, which would be even larger than what this pandemic is, is probably on the horizon. And therefore, we do see—and I would say this is amongst the self-enlightened companies, I would say—we cannot generalize and say that every company is starting to understand it, but we do see that the self-enlightened companies are starting to have conversations, are starting to look at these issues much more, you know, deeply. Again, I agree with Swee Chen that how deep they want to go differs from company to company. So some would basically be only limiting themselves to cost-reduction issues. For example, energy efficiency, water consumption. Some would be looking at deeper and broader issues, systemic issues, like biodiversity loss, climate change. So every company is still, I would say, at a phase where they're evolving their understanding. Some have gone farther, but many are still at the initial stages.

Calvin Chu Yee Ming:
Thanks, Seema.

Katherine Ng:

I think from a Hong Kong perspective as a regulator and reflecting the views of the market, sustainability and ESG has been at the forefront of a lot of the conversation. So it really helps from... we, as a regulator, have mandated every single company to have a conversation around ESG and sustainability at the board level. So we are seeing a lot of change and, whether it's forced or not, we as a regulator, we've more or less kind of forced that conversation upon the board, because we think it's an important conversation.

So whether we are seeing change, yes, absolutely, because they have to from the mandatory perspective. But I think we are getting a lot more buy-in as well. Some of the boards, at least, have come to us and said, "Look, thank you, you know. Previously, we don't know what we don't know. We don't know what we haven't measured." And at least putting it on their board agenda has forced them to think about it. If they don't think it's a problem, or if they don't think it's a risk, they don't have to do anything about it. But as a starting point, at least the boards in Hong Kong is actively engaged and ESG and sustainability is on every single board agenda from this year, actually. This is right hot off the iron, so it's from 1st of July this year that Hong Kong has mandated every single company to have ESG sustainability governance, and discuss at the board level.

Calvin Chu Yee Ming:

I love that topic on the role of government. And also I think Katherine, you're bringing up a very important and interesting point about measurement I think people are thinking about as well. I'll also be curious later to ask you a bit about what drove the government to be willing to mandate it, but in the meantime, I think what I'm hearing is that across the board—across all three countries—the level of awareness, especially among the board level, is there and I think that's encouraging news.

I suppose to Swee Chen's point, the more... now that we're aware, to take action I think what's really important is to find an impetus. So what I'm wondering about is, if you're talking about corporate boards, what do you see to be some of the clearest links or the best evidence of drivers that you've personally experienced, that really demonstrably link CSR, ESG, or sustainability to tangible business returns, such as profit growth or shareholder value? You know, in other words, where have you seen the most compelling case, ideally the business case, for sustainability?

Swee Chen Goh:

I think, if I may, perhaps beyond the boardroom as well. … These days, our conversations are dominated by discussions on COVID-19, and there are, you know, when you look across board, there are about 1.2 billion jobs that are quite susceptible to climate changes—and these are primarily, you know, the ones that need stable, healthy environment. And, you know, you could see that in the agriculture sectors, in health sectors, fisheries, farming, and all those. And you imagine tourism, and you can see how almost every single sector has just been so impacted by what we're going through now. And interestingly, ILO, the International Labor Organization, released a report last year, and that report was called the “World Employment and Social Outlook.” And it said that, by the year 2030, about 24 million jobs would be created as a result of the focus on sustainability. And that's a really major point because when we can create the jobs—that is, when you can create consumption—and that's when you can generate a strong dynamic economy. And that correlation is just so important that we mustn't lose sight.

The second correlation I wanted to bring up is bees. So I'm talking about drops in bees. And bees... You know, I read an article and it talked about the increase in the number of bee thefts in California. And that got me curious. And as I duck in, and... 80% of the world's almonds come from California. And the way you get the nuts eventually is pollination that is facilitated by bees—and because of pesticide, climates, for whatever reason, the population of bees have really reduced. And so bees, for pollination of these really valuable crop, and we, you know, if you look at the price of almond—it really has increased quite tremendously—what was taken for granted, right, bees for pollination, and it was free, you now have to pay. And agriculture group like Olam International buys beyond ... between 2.5 billion to 3 billion bees just to pollinate their farms. And, you know, when you look at that, that is when you can really see the direct correlation of sustainability actions and the impacts on value, on shareholder values. So bees would be two, I thought, quite pertinent examples I wanted to make.

Calvin Chu Yee Ming:

Very interesting. Thanks, Swee Chen. Seema or Katherine, have you seen, maybe at the enterprise level, any kind of returns directly? For example, you know, some of our research has shown when employees get more engaged, when customers might be willing to pay a premium or so, like a brand share, or you have a more resilient value chain, what has played out in the Indian context?

Seema Arora:

Yes, in the Indian context also, we see several drivers that drive companies. Of course, regulation is a big driver—and I know you want to talk about that later—but that remains to be a single largest driver in terms of pushing companies to embrace sustainability. But there are companies who have, beyond regulation, understood the business case by looking across their value chain.

Let me give an example just like Swee Chen gave. You know, and it's also from the agri-sector, you know. Companies in the agri-sector, as we know, are deeply impacted by sustainability issues, be it water, be it land degradation. So one of the companies in India, the ITC group—which is into agribusiness—actually works a lot with the farmers. Basically helping farmers to get more out of their plot of land, also developing strategies for all farm income, so that they are not just dependent on the farm. What it does is provides information, provides education, and then also provides the right kind of market linkages—and itself, the company is a large buyer of those products from the farm produce. And they have set up something called, which many of you might know, initiative called e-Choupal. The e-Choupal, at the village level, gives information to the farmers about agriculture practices, weather forecasting, about insurance of their, you know, of their crops, and then also the right price. And the farmers can choose to sell their produce to ITC, but they can say sell it to anybody else also. What that has done is actually created much larger, I would say, wallet size in the rural population. And ITC is also an FMCG company. So on top of it, ITC is able to sell a lot of its consumer durable goods to the farm community because the size of the wallet has increased. So here is a company, and there are several such examples, where you understand the business case because you embed sustainability into your business model: far and few, needs to be many more, but a growing breed of such companies.

Calvin Chu Yee Ming:

You know, in the Indian context, I think Seema we were chatting about how the law mandating 2% profits to be contributed to CSR has heavily driven the role that companies have in tending to the needs of their communities. Maybe we can move to the point on regulation. And Katherine, I would love to hear from you; what we were talking about earlier. Was it maybe more of the moral imperative that drove the thought exchange to put out this mandatory disclosure standards? Or did you all see at the stock exchange a financial economic imperative were companies to embrace ESG reporting?

Katherine Ng:

I think from our perspective, we look at ESG and sustainability as a risk management exercise. It's very hard—I mean, we've heard some really good ideas from Swee Chen and Seema—but it's really hard for me to force a company to profit. And we would love for them to profit. But I think from a regulatory perspective, I'm looking at ESG and sustainability from an internal control risk management perspective.

Calvin Chu Yee Ming:

Hmm.

Katherine Ng:

We would all love kind of greener and better social standards, but I think it's harder for a regulator to go out there with a ... financial regulator that is, a stock exchange, to go out there and say that, you know, "You need to reduce your emission because we at the stock exchange want Hong Kong to be more environmentally friendly," because that's not the mandate that I have. Risk management is a mandate which I have. And we look at kind of ESG, CG... I think in the COVID Hong Kong, there was some social unrest last year, it was hard for people to come to work. So we've looked at the whole … a lot of companies have started thinking about their ESG risk last year, and the ones who prepared themselves for virtual meetings, getting online—thinking about, you know, when there's large-scale disruption, how to continue to operate their business—have fared much better during the COVID, I think we're seeing. Because they had a little experience last year—and if they were minded and thought, you know, how it could potentially impact their business in the long run—they would have gone out there to think about their business model and how to weather not COVID specifically, because we didn't know COVID was coming, but a disruption to their business model.

So I think the whole thing about, you know, even though it's hard for us as a stock exchange, for the company, tangible return is hard to measure. But protection to the company and protection, you know, identifying their material risks and protecting against those material risks and kind of having second lines about how to operate has definitely shown the differences between a well-prepared, well-managed, and a company who's thought about their business strategy and their risk against one which hasn't, in this environment at least.

Calvin Chu Yee Ming:

Mmm hmm. Absolutely. So we've seen in the capital markets, a good flight towards ESG investments. Started off a lot, I think, because of this risk reduction and I wonder if ... because we are Booth, we are always interested in data, this is an open question to all of you, if from the risk side: Do you all see this as more of a precautionary aspect? Or have you all actually seen any empirical evidence to demonstrate that companies that were to embrace ESG methods or sustainability or CSR, in fact happened to have more resilient, say, supply chains, or more resilient operations? Have any of you come across any good data around this?

Seema Arora:

I can only tell you about a few anecdotal evidence. I wouldn't say that it's well-researched at the moment. [Laughs.]

But we do know from our work with a few Indian companies who were looking for, you know, capital from across borders, let's put it that way—where they've they wanted to, you know, leverage investments from around the world—they were clearly asked about, you know, their ESG performance. And they came to CII to understand, you know, how can they actually demonstrate good ESG performance. And of course, they already did sustainability reporting, but this was beyond just sustainability reporting, and even saying that how they are, you know, putting some practices in case. So certainly we see that, you know, even in a country like India, where companies are seeking investments, they are finding, they are being asked questions about, you know, what is their ESG performance.

The second thing I can say is that even in the case of some of the Indian companies in the renewable sector—of course, it is also the fact that it is true that in the renewable sector, a lot of incentives are still there from the government as well—but we find that their performance and their ability to attract investments from overseas has been much higher than the conventional energy companies.

Calvin Chu Yee Ming:

Hmmm.

Seema Arora:

And again, this is probably a demonstration of the fact that they are a private investment from the companies in India going into renewable energy sector. But for scale, they are able to leverage a lot of outside investment as well, and much more than the traditional thermal power companies are able to.

Calvin Chu Yee Ming:

Excellent. Excellent. That's a nice story. More broadly on the point about regulation, I was wondering if any of you have comments on where you see policymakers, regulators, or exchanges that you feel might need to play a heavier role for companies to embrace sustainability more widely? You all see any opportunities here?

Swee Chen Goh:

I think some of the existing ones like sustainability-linked loans, and this is where regulators ... So take, for instance, Dow Jones Sustainability Index, right? And where loans can be a bit more attractive if companies have demonstrated performance against some pre-agreed indices under the Dow Jones Sustainability Index. So for real estate, it could be against the GRESB, the real estate in sustainability business indices as well. And I think this is one where, you know, you get to a place where there is a win-win. You encourage the companies to put some focus on sustainability factors, and at the same time, it gains, and then it gains to like a lower cost of capital, for instance. And it's also a business opportunity for banks as well. I think that's the most apparent one that I could make that direct correlation to.

Calvin Chu Yee Ming:

Hmmm.

Swee Chen Goh:

And regulators play an exceedingly important role. So in Singapore in, I believe, in 2018, sustainability becomes mandated for the listed companies.

Calvin Chu Yee Ming:

Hmmm.

Swee Chen Goh:

And this is the one that has driven that groundswell of conversations, discussions and awareness and visibility as well in the Singapore-based boards. And it's, as I said earlier on, I think the question then is, "What next?" Now that you've produced a report, now that you see where you can ... what levers you can pull to do better in sustainability, how deep a company's then willing to go to take a leadership position, be it in emissions or social performance governance. I think it's one where there is no two ways about it, you have to do something. But then the choices are around, you know, gender diversity, for instance, in board. How far do you want to go to demonstrate commitment?

Calvin Chu Yee Ming:

Mmm. Mmmm hmmm. So you're bringing an interesting point about just reporting and disclosure. And I'm also curious about whether any of you might see regulators playing other kinds of role: for example, things to do with taxes, for example, or listing criteria, for example—or maybe as, perhaps what we were suggesting, putting in place certain standards for different parameters of ESG aspects. Any thoughts about this? What else could regulators consider?

Katherine Ng:  

Okay, I'll talk a bit about it since I'm the only regulator here. I think Swee Chen is absolutely right. I think the regulator has put, in Hong Kong and Singapore, have put ... forced a boardroom conversation around ESG. So now we're thinking about the next steps. As an exchange regulator, as a regulator of listed companies, I'm very conscious that I'm the regulator of 2000 companies: ranging from the very large companies to very small companies with resources constraints. So we've done what we can at the regulator level, we've done a lot of training, we've explained to the smaller companies, you know, how you can do ESG in-house and ESG is actually not as scary as you think. If it's material risks, then you have to manage it—and in any case, whether I, as a regulator, tell you to think about ESG or not.

So the key to materiality, we try to help as much as we possibly can … I don't think it's just a one-way, where the regulator can kind of ram it through the company. We need to develop a kind of ecosystem. I think investors need, it's just as important for investors to kind of articulate what they're looking for from ESG perspective. What do they want companies to tell them? How are they assessing the ESG information? I think it's fair to say that in Asia, generally, not that much ESG information is channeled into the ultimate investment decision—especially for the smaller companies. If you take kind of Bloomberg or Reuters or MSEI as a proxy of how investors are interested in ESG data, typically, out of the 2000 listed companies in Hong Kong, Bloomberg, Reuters, etc. will only cover 300 or 400 companies. They will only have ESG data on 300 or 400 companies, which means that investors—most of the institutional investors—are only interested, might be interested in these 300 or 400. So we need to work out how to educate the investors as well: you know, to tell them why does ESG matter? I think the bigger investors can take a lead on that and, you know, tell them, you know, how ESG will ultimately affect the fate of the company.

So that's, I think, something we should do. And on diversity and all that, I think regulators need to play a part. There are listing criteria we have around ESG and diversity, let's say gender diversity. A lot of this is quite new; I mean, as of last May last year, just over a year ago, every single company who comes to list in Hong Kong has to have a diversity policy and need to have at least one woman on board. I mean, generally, if there's a single-gender board, it's all-male board. So we've said that, "Look, if you're a single-gender board, you need to come up with a plan—a very concrete plan, a measurable plan, including timing and target—of when you will make your board diverse, in particular by gender." So at least all the listed companies which come to Hong Kong to list, they promise in their prospectuses that they've undertaken in their prospectuses that they will nominate at least a woman on their board in the next two or three years. So through that, I think we will push through gender diversity. I think, we are definitely looking at it from a, you know, better risk management perspective more than anything else. And we do firmly believe that a diverse board will ultimately lead to a better managed and more sustainable board in the future, more sustainable company in the long run.

Calvin Chu Yee Ming:

Mm, mm. You know, you're bringing up some important points of how it takes to get on the journey. I think you were mentioning education, you were mentioning some concerns about costs. There was a question that I think was, there was a comment about how to introduce CSR in a time of crisis, where everyone is tightening their belts as well. What I'm wondering about is, in your experiences, what have been some of the biggest challenges or barriers you've encountered in shifting towards more sustainable business? Things like corporate pressure; reporting, corporate quarterly reporting, for example; or costs of measuring impact, for example; mindsets. How do you work to overcome this? What were some of the biggest challenges and how do we work to overcome them?

Seema Arora:

So maybe I can just give a little insight from India. I think some of the biggest challenges that we face is non-uniformity of policies around certain areas. We have … and I mean to say that, you know, if you really want companies to drive sustainability deeper, different policies around water, energy, land use, they need to “talk to each other” and they need to be interconnected. We find that, you know, generally, in regulating different areas, there's no integration of these policies, and that doesn't drive action of companies in a coherent manner towards sustainability. So this integration is very important and I feel like this is a barrier that needs to be discussed and maybe looked at.

The second is that, I think there are no metrics available to account for the true value of nature that you are actually using. So the natural capital valuation fee, which is new, I know—but unless you actually develop good metrics on natural capital and social capital, again, you're not going to overcome that barrier, which we say that, you know, the boards will focus on financials because you're not giving them, or you're not asking them also, through regulation, to say that: What is it that you're doing to the social capital, to the natural capital? Here is the ecosystem that provides you these matrices for you to take stock to understand that this is how you may be using it. So some of these issues are very important if we want to move.

And I think already mentioned, this was already mentioned, the links to sustainability and ESG are not clear in financial terms; we have to really make that link as well. So in my view ... and finally, it was mentioned that the awareness of the shareholders on sustainability also … I know investors are there, but some investors in Europe and North America, and maybe even in Hong Kong and Singapore are. But if I look at India, very few Indian institution investors or retail investors really understand sustainability or ask for this information. So these are some of the barriers that we see in India actually for the sustainability action to scale up.

Calvin Chu Yee Ming

Absolutely. Thanks, Seema.

Swee Chen Goh:

I am actually more optimistic. You know, the barriers are there, there is very little doubt about it. You know, I was in a recent conversation and, you know, and that conversation, there's always the perception that you need to put money in, in order to ... so it's a zero sum game when it comes to sustainability: That has been the perception. But, you know, the bee story—you know, something that you had taken for granted in the past, right?—where you have bees just naturally pollinating your plants, and now you have to spend money on bees and, you know, the three billion bees that Olam buys, it amounts to millions, tens of millions of dollars, right? So there is a cost to it. And the cost is not necessarily the cost to be sustainable, but the price that you have to pay if you are not sustainable.

And Morningstar, I think it was in August if memory serves me well, released a report and say for the first time, assets and the management of investments that are focused on, or has follow sustainability, has exceeded $1 trillion, right?

Calvin Chu Yee Ming:

Mmmm.

Swee Chen Goh:

And so investors are waking up. And you see oil and gas companies with high level of concerns around stranded assets are now making investment decisions—including potential price of carbon—and you hear numbers that by the year 2050, the price of carbon could even exceed $100 a ton. So these are all serious threats to businesses, you know, if they don't take action now. I think the triangle of, you know, delivering growth and financial growth, doing well for the community and the society that you depend on—whether it's for consumption, for workforce, or whatever—and then running the right way through proper governance and all those … these are all interlocking. You know, if you look at them as rings, they are interlocking rings, they are Borromean rings, that once you break one, the whole thing just doesn't work at all. And I think more and more businesses are realizing it.

Of course, there's also a group that will take a longer time but, you know, I am more optimistic that while the barriers, as you said, there is this groundswell of awareness and that strong desire. And hopefully, this pandemic will bring about or accelerate that change as well. So, you know, through ... this is one of the few times where the public sector money put into recovery of the economy is one of the highest ever. The Just Transition Mechanism in Europe, all have, the majority of them have conditions tied to sustainability for either the grants or loans.

Calvin Chu Yee Ming:

Mmhmm, absolutely. I'm hoping that some of the stimulus packages in Asian countries can also be tied to green growth. And on that point, you know, as you are talking about some of the benefits, for example, reducing risk that we talked about, attracting investors, I think it's also maybe useful to add perhaps one more ring, which is just the notion of shared value, right? Where hopefully there are revenue opportunities as well, attractive business opportunities that being more sustainable might bring about for companies. What I'm wondering about is whether any of you might have seen or might suggest what could be some attractive business opportunities? You know, in Singapore, for example, we have an aging population, so things like elder care, we are pushing hard on sustainability; so things like circular economy or renewables or carbon services. … Do any of you see good investment opportunities in this space?

Swee Chen Goh:

I said that all sectors are good investments. I don't have a view there, Calvin.

Calvin Chu Yee Ming:

Okay.

Seema Arora:

I think in India, of course, because as you know, a lot of our social indicators are still very low and we're still a developing country … we see a lot of opportunities in investments that companies can grow with if they also look at the social sector. Just taking an example of the pandemic itself, as you know, a lot of things are ... almost everything is now done digitally. And we see a lot of companies actually coming in and investing in education, which would be digital now, right? And they see this also that providing education to people who do not normally have access to education—because sending teachers to remote areas in villages where they do not want to go is more difficult—but if we have, and we are beginning to have, good broadband connectivity across the country, and we can, through these digital models of providing education, by investing in those, maybe provide very good quality education.

Similarly, healthcare. This pandemic is all about health, lives and livelihoods as we call it. And this has thrown up a big opportunity for companies to really look at and redefine healthcare systems; where investments in healthcare and reaching, again, the healthcare at an accessible cost to communities which do not have access, can be both good for the communities as well as good for the companies who are trying to expand their markets.

Calvin Chu Yee Ming:

Hmmm.

Seema Arora:

Skill development in India has been a big area because as you know, we have a very big population and we have to, you know, also create a lot of jobs, and skills is a major thing. And so there are huge number of companies who invest a lot in building skills, and then we also find that those skilled people are people whom they can use for, you know, their own businesses as well to grow their businesses. Similarly agriculture, so I think there's huge number of examples here, where companies in these value chains are finding now that if they invest along with their, you know, own sustainability issues to minimize the risks and to get more access—to build more trust with communities—they're able to grow their business as well.

Calvin Chu Yee Ming:

Thanks. Thanks for the many rich examples, Seema. We are slightly more than midway through our conversation, and I just want to, again, to remind everyone, if you have questions, just feel free to shoot it out so that I can try to attend to many of them.

There was a interesting question, which ... there were a couple of things about just the whole notion of ESG reporting or sustainability reporting. So a couple of things were about, “How do you actually measure the impact of your CSR? How do you justify it to your board, for example?” It is, as perhaps we were talking about earlier, possibly a bit of a costly exercise. It can take some effort. So how do you report what should, we should be the right metrics? How do you avoid this? Are people at the moment. ... What is your assessment of the scene where do you see companies sort of going through the action of just checking tick boxes? Or are they really looking at it as a framework or as a tool to materially improve their business? So I just wonder if, generally, our panelists have any comments about the whole aspect of impact reporting?

Katherine Ng:
I think, well, we do a lot of review at the exchange about how companies are reporting their ESG. So maybe perhaps I should start, you know.

Look, tick box exercise, we've always gone out and said that look, "Tick box exercise is not going to help anybody." Our ESG framework, at least in Hong Kong, encourages you to do materiality. There's no point measuring or complying or writing kind of huge narrative and policy about certain issues or risks which are not material to use. So we've done a lot of effort and education. I think maybe as part of the Chinese community or Chinese upbringing, if you're asked to comply or explain on the issues, most boards or most people will try to comply. They'll think that explaining is an inferior option. I think that takes a bit of educating around, you know. It’s box ticking is not what ... nobody wants box ticking at the end of the day; materiality assessment is most important at the beginning. And I think we need to give listed companies—whether from us or from investors—that there's no shame in saying that certain ESG issues are not material to you. So I think that message needs to be reiterated to give them the confidence and to avoid the box-ticking exercise.

There are some … I mean, look, I can't lie and if you look at it, there are box ticking and very kind of copy-and-paste of policy, ESG policies out there, but it's only because I think, you know, deep down, I do feel that it's only because those matters are unimportant to the company, and they're complying for the sake of complying—so let's get rid of those. And on the cost of CSR, we've also gone out a lot, you know, educating people. It's important for you just to do CSR, but there's a fine line between kind of giving out shareholders' money for the sake of CSR. So you need to balance, and you need to explain why your CSR is important as part of your business strategy: How is it affecting and helping your business strategy, and how does it relate to you? So giving out money, we always tell them that, “Look, giving up money, I don't know, to Community Chest or any other charity and say that's your CSR, it's not going to help investors at all.”

So you need to always tie it back to your business strategy. And on the right reporting metrics, that's where I think, again, we need feedback from the investors, from the readers, and from the stakeholders. It needs to be a dialogue. I don't think it's a one-way conversation. There needs to be, I think, as a whole, CSR or corporate governance or ESG: better two-way communication between the producer of the report and the people who actually use it. So again, I think communication is key and investors need to engage in order, I think, for the CSR and sustainability and ESG reporting to improve as a whole.

Calvin Chu Yee Ming:

Thanks, Katherine. Any other thoughts about reporting the practical aspects? What should we report from [indecipherable]? Seema?

 

Seema Arora:
Yeah, so on reporting, of course you know, in India, there's different kind of reportings that is required by law, and there is also voluntary reporting. So there's voluntary reporting where companies [that] choose to do GRI-based reporting, the stock exchange requires the top 200 companies to start looking at integrated reporting. It's a soft kind of law, so we see a lot of company interest now in integrated reporting; there's also business responsibility reporting; there's a framework, a national voluntary guideline, on business responsibility, so there's reporting around that. There's reporting around CSR. So there's a whole lot of reporting that companies in India have to do.

Now, the quality of reporting certainly remains a concern. I think that is something that ... So reporting for the sake of reporting is all right, but actually the process by which behind the reporting is more important than us. CII, we do a lot of awareness with our members how to be doing materiality new reporting. How do you make sure that stakeholders are consulted? And therefore you get the material aspects and then report on those. I just also want to comment on the CSR thing and, you know, spends on CSR and impact, you know, of CSR. As some of the audience might know, India has a mandate that companies have to spend 2% of their profit on corporate social responsibility. And in the Indian context in law, corporate social responsibility here means actually spending it for the community, not on your business, right?

Of course there is something called strategic CSR where you see that you invest in communities whereby you get the trust of those communities and you can actually, you know, they become also your partners rather than just being a recipient of your charity. And there is a requirement that there's a board level committee which actually monitors this CSR spend. Of course, input-based spending, according to us, is very limited. It cannot tell you the impact. So we have been working with the government to say that, how do you actually also monitor the impact of this spend? So if so many Indian companies are spending 2% of their profit, what is the change that we are bringing about? And we are trying to get into place an impact measurement framework to understand the social economic value of these investments as well. A lot of capacity-building has to be done of the companies to do that. So in India, the reporting landscape is pretty complex because there are several layers of reporting required. And that means that sometimes companies have a little bit of fatigue of reporting—and therefore we also want to make sure that the redundancy in reporting actually goes away over the period of time. That would help companies.

Calvin Chu Yee Ming:

I think that's a really important point and, Swee Chen, I would love to hear your perspective from Singapore as well. And, you know, when we talk to some companies, especially those which are global in scope—even the clients, for example, some factories and, for example—working with brand number one and brand number two, they will have their own separate standards and the company has to undergo its sustainability reporting twice, for example—and get accredited with different agencies as well. So I'd love to hear if Swee Chen or any of you have other thoughts on reporting, especially on how the definitions, the sentiments, the context, could be different for reporting, or for even this whole broad space of sustainability across our three different countries, Singapore, Hong Kong, and India.

Swee Chen Goh:

Yeah, I agree. One thing Katherine said is sometimes the sustainability report, it's taken as an exercise that you do every year and it's cut and paste; and it's delegated to a group that has a brand on their head that says “sustainability”; and there is then no follow-up accountability to what commitments are made in those reports. And I think this is where regulators then can play a role in really holding companies who have made commitments in the sustainability report to hold them accountable to show progress—and I think that will really help step up the attention paid.

You know, the earlier panel talked about new ways of measuring success, and I think that is really important. If anything at all, maybe a really clever Booth alumni could think about what return on sustainability measure could look like. In one of the companies that I'm quite involved with, that's one of the things that we want to do: a return on a sustainability measure that goes beyond financial outcomes. And I remember a speech—this was by Robert Kennedy in 1968 and at that time, I think the measure was gross national product—and it was a very eloquent speech to students from the University of Kansas, where he said the GNP measures ... you know, it does not measure the beauty of debate, it does not measure the destruction of the sequoia trees. It does not measure the health impact of cigarettes and all those things. And I think we should go back to some of these fundamentals around how do we report success beyond the financials?

Calvin Chu Yee Ming:

Hmm.

Swee Chen Goh:

Yeah, so what... And I think one important measure could be the creation of good quality jobs.

Calvin Chu Yee Ming:

Hmm.

Swee Chen Goh:

That could be a good measure, a measure of, you know, in terms of ... the obvious ones will be efficiency. Energy efficiency…

Calvin Chu Yee Ming:

Hmm.

Swee Chen Goh: ...water efficiency; while they may seem rudimentary, these are quite important to just put in front of the board and say, "This is how much water we use, and our goal is to reduce water utilization by a certain level." A lot of times we talk about carbon: Water is just as important. I talked about biodiversity example with agriculture earlier on, and depending on the sector that you are in, we could pick on what are these fields that matters to that industry and really track those.

Calvin Chu Yee Ming:

Hmm.

Swee Chen Goh:

So if you look at, you know, a lot of stories about the use of water in textile—the use of water in, say, beer production—and say if you want to go through a place where it's heavily populated, where it's a large consumer segment for your product, and say if it's in the manufacturing of beer, and there is just not enough water resources? You'd better focus on some R&D to see, you know, how can I produce a can of beer with a lot less water than I do today?

Calvin Chu Yee Ming:

Absolutely. Well, you know, if you think about how this materiality can translate ultimately to those kinds of success measures—financial or otherwise—it feels to me sometimes like the entire organization has to embrace it. And I can't help but wonder if sometimes things could be lost in translation from the board to the management, and then down to every last worker. If there was a way, for example, for all workers to embrace at all levels, to be able to embrace what sustainability or corporate responsibility or ESG means in their respective job scope—and interpret that accordingly—it feels to me almost like it's the way there is a large trend now for digital transformation. I'm wondering about what it would take for organizations to create this intra-organizational movement for sustainable transformation. You know, have you all seen any good examples of companies that have embraced completely and have gotten, empowered all of their employees, or even their partners and vendors, to be able to embrace some of these concepts in their respective roles?

Katherine Ng:

Think you're talking ... I mean this is not just about ESG. It's not just singly about sustainability or ESG. It's about kind of the culture of the company and whether the board is accountable and how they're communicating with their stakeholders: And one of the important stakeholders is employees, as a group, is an important stakeholder; suppliers are important stakeholders. So I think it's what we need to do is ... not fear, but I find is that you need to win them hearts and minds of the board of directors—you need to win the hearts and minds of the very senior people for it to filter down. They need to be convinced. And I think once they come ... I'm afraid kind of this is a journey. They need to see the actual effect; and they need to kind of hear from investors why it matters; and they need to learn, I don't know, where are the mistakes or benefits for themselves’ and reinforce and keep going and believe it; and filter the information down. It's really down to the culture of the company, I think.

Calvin Chu Yee Ming:

Hmm. Hmm. Swee Chen or Seema, have you all come across any good practices in exactly what Katherine is saying? How do we win the hearts and minds of these board members and subsequently the rest of the teams?

Seema Arora:

So just to give one example, and it's an example from a large Indian two-wheeler manufacturer company, and which would probably bring to life what is being discussed. And this is a story that goes back 11 years when the auto-manufacturer got a show-cause notice from the pollution control board—that one of the suppliers of the auto manufacturers got a show cause notice. And because they were following just in time, the manufacturer, the OEM, was at risk of closure because of one of the largest supplier of a component being closed down. So they put into motion by talking to us—they, of course, first came to CII, that, "How can you help us? Because our supplier is going to be shut down." They then put into motion a process, and this is where the board decided that instead of just, you know, firefighting, we want to put into place an institutionalized mechanism of working with our suppliers and de-risking the supply chain from environmental and sustainability issues.

What started was, this started a vendor development program on sustainability, green vendor development program. I'm talking nearly about 11 years ago. Initially, the vendors would not even sign up, right? They would be like, "Why should we even sign up?" They had to create a business case. They showed that how the vendors could reduce their costs by looking at issues of energy efficiency, environment efficiency, etc.

And now, in nine years time, across their supply chain—level one, level two, level three—it's an institutional process. Every year they sign up 40, 50 companies in the supply chain who reduce their, you know, environmental impacts, their footprints: They de-risk themselves. And this has become a culture. Every world environment, these suppliers are standing in front of the other 300 suppliers, and are been recognized in saying, "These are the front runners." And in fact, they are given even, you know, preference when the companies buying from their supplier. So this is the cultural aspect, this is the management taking a decision that we want to institutionalize practices like this. And this is actually a very powerful tool, actually. If companies start adopting this, you can have large-scale transformation. That actual one was 400 to 500 medium, small-scale industries through this.

Calvin Chu Yee Ming:

Hmm. Hmm hmm. So I'm hearing a lot about costs, benefits, especially cost savings. You know, I'm learning so much from all of you, time’s really flying. Maybe we can try to squeeze one last extensive question, right? I'm wondering about what kind of advice you all might be able to offer to business leaders here thinking about accelerating their corporation's sustainability journey. It could be a tip. For example, there is a trend for a role of a chief sustainability officer. It could be about what you might wish every company should be reporting on: if there's one measure that everyone should report on. What is one tip that you would recommend?

Swee Chen Goh:

Yeah, Calvin, I will try to answer the previous question and this one together with an example. But if I may start first with, you know, this is ... what we're seeing now, right, is this great moment of dislocation of the kind of economic and social systems that we were familiar with, and you almost have to throw all the rule books, right, away and say, "You know, how do you address?" It's a once-in-a-generation opportunity to say, you know, “How do you build a world that is better for a broader set of stakeholders?” And I want to bring an example of one of the things—and this was when I was in Shell, running a business.

In that business I run, every year we spent a few hundred million dollars on advertising and a lot of times, you know, the advertising is, you know, to just push the product forward. And one day a group of us just got together and said, "You know, this is quite a large sum of money. Is there a way we can extract greater value from this sum of money by doing good and still serving the purpose of what, you know, advertising money would do?"—which is to, you know, gain consumer loyalty, more sales and all those things.

And I just want to bring an example of one project, and this was done in Pakistan. You know, one of the customer base are truck drivers. And in Pakistan, if you could see the trucks and the kind of distances they run with the trucks, it's quite a challenging job. And one of the things we wanted to do was to set up in truck stops eye-check tests.

Calvin Chu Yee Ming:

Indeed.

Swee Chen Goh:

And you will be amazed. Three quarters of the drivers needed glasses, and didn't know about it. And you imagine how dangerous that is …

Calvin Chu Yee Ming:

Indeed.
Swee Chen Goh:

… driving long distances, sometimes low visibility with bad eyesight. And it only cost about $2,000 a station in a truck stop, and you can imagine the amount of loyalty that was gained as a result of that. And what also happened, it didn't stop there. Eye specialist heard of the program and they wanted to be part of it; they wanted to contribute. And this is one where, you know, we can be creative in the resources that we have to do good and to do well.

Calvin Chu Yee Min:

Mmm. I love that example, Swee Chen. Thank you for that. We are actually running pretty much out of time. I feel like we could go on for so much more. We've covered everything from bees to textiles to agriculture. I think maybe just to try to summarize this: I think generally, it seems like the awareness has gone up. I think there still remains a need to educate investors, especially I think some of the key benefits are around more resilience. Tighter integration will lead to, I think, lower costs, and I think to the idea about how you can go forward is other than measuring things in a more integrated fashion; and working with the regulator, it's also about integration and integrating also into the culture of the organization to be in the hearts and the minds of the boards and the teams.

So thank you so much, Swee Chen, Seema, and Katherine. It's a real pleasure. For these past couple of hours, it just reminds me of the rigorous data-driven approach to what business does: just signature Booth. For those of you who may not have come to Booth and have enjoyed the quality of this conversation, you might be curious about Booth programs. So I'll mix that when we address broader questions that you may have about the Booth experience. I'll hand our time back to Professor Randy Kroszner who will share more on this, and also close off the session for today.

On behalf of all the panelists here, thank you so much. Randy?

Randy Kroszner:

Thank you so much, Calvin and panelists, and also thank you to Tandean Rustandy, to Henny Sender, and to Ahmed Saeed, and Jaime Ayala for, I think, some really, really spectacular discussions.

I think we got into the meat of the matter. What are the appropriate metrics? How do we measure these things? How do we make sure to hold people accountable? And then we also want to measure the impact. So we've held them accountable, but is it for the right objectives? These are really key issues that I think are very, very important for shareholders, as well as broader stakeholders. Very important part of the debate that Milton Friedman kicked off 50 years ago. I'm so delighted to have been able to be part of this.

And as Calvin had said, we encourage you, those who are interested in these issues to hang around for the next 20 minutes or so. We're going to have our admissions team be available to talk to you about our different programs at Booth—particularly the executive MBA program, but a whole variety of programs, degree, non-degree programs, other activities we have at Booth—so you can hear more about the debate on these ideas and so many more.

Thank you so very much. And for those of you who will be joining us in the evening in Asia, we will be convening in the London campus in about one hour. Thank you so much. Bye bye.

- Greetings. I'm Randy Kroszner, I am the Deputy Dean for Executive Programs at the University of Chicago Booth School of Business, and I am speaking to you from our spectacular new London campus, that as you can see, is just a stone's throw away from St. Paul's Cathedral. We have actually been in London for 15 years, and to commemorate that, we have moved to a larger and more spectacular campus here. We really want this to be the hub for intellectual activity and business activity, right in the heart of the City of London. And really, it will be our main touchstone for all of Europe, Middle East, and Africa. In particular, what we're gonna be focusing on today is corporate social responsibility revisited. We're gonna be discussing the ideas that have been debated so intensely over the last 50 years, since Milton Friedman ignited the debate with an article almost exactly 50 years ago to the day, actually on Sunday was the 50th anniversary of that article, about what should be the business of business. Should it just be about shareholder value maximization or should it be about broader social purposes? Obviously that's a very, very lively issued today, and there are different approaches around the world. This conference is a virtual global conference that highlights the reach of University of Chicago and Chicago Booth with our campuses in Hong Kong, London and Chicago. The conference started earlier this morning with a number of panels in Hong Kong. We're gonna be having discussions today in London, and then it will go on to Chicago right after this. And what I think we're gonna be able to do is highlight how the world has evolved and how thinking has evolved since Milton Friedman put forward his famous proposition, that the one and only one purpose of business and responsibility of business is shareholder value maximization. You're gonna see the incredible diversity of use that University of Chicago has on that. I think a lot of people still associate our views with Milton Friedman and certainly Milton Friedman is an important part of University of Chicago, but many, or perhaps even most of the faculty members at Chicago and Chicago Booth, would not agree with Milton Friedman today, and you're gonna hear from a number of them. In particular, here in the London part of the panel, you'll be hearing from Raghu Rajan and Marianne Bertrand, and you'll be hearing from others if you go onto the U.S. part of the conference. And I really think it's only something like Booth that can do this, 'cause we have campuses in these three regions. We have the alums, we have the faculty, we have the network to bring together people to have robust conversation on one of the most important and interesting things that is happening in business today. In our conference, at kickoff in Hong Kong, we heard about the importance of ethics. Actually, there was a very important discussion by the number two at the Asian Development Bank, who's one of our graduates, and the CEO of the largest company in the Philippines, about the importance of ethical and moral legitimacy of institutions, whether they're governed institutions or private sector institutions like corporations. We also heard about how laws have been changing and regulations have been changing. In India, corporations are required to invest 2% of their profits in environment, social and governance issues. We've heard from the Hong Kong Stock Exchange about how now, as of December, all companies listed on the Hong Kong Stock Exchange must have a board level discussion of their impact and disclosure of that. In Europe, we see the European Union trying to encourage pension funds and other long-term investors to go into corporate social responsibility investing. And in the U.S., going in exactly the opposite way, with the Department of Labor discouraging fiduciaries from moving in that direction. Lively debate, completely different views around the world, and I think it's only Booth that can bring all these together to inform that debate for you. As I mentioned, we're here in London for our 15th year, and to commemorate that, we have a new campus, and I want to show you a short video to describe this wonderful new campus right next to St. Paul's. At Chicago booth, we take a global approach to business. We have campuses in Hong Kong, in London, and in Chicago. We've been in Europe for more than a quarter of a century, and we've had a campus in London for 15 years. To mark that milestone, we are opening this spectacular new campus, right in the heart of the City of London, just a stone's throw away from St. Paul's Cathedral. I stand before you in front of this incredible wall of our Nobel Laureates, a century of innovative thinking of people, not just taking the world as given, but wanting to change the world, always asking questions and always questioning answers. On our faculty, we have a wide variety of viewpoints. We go from Eugene Fama, Nobel Prize winner for his contributions to efficient markets, to our most recent Nobel Laureate, Richard Thaler, who takes a very much behavioral economics point of view. We have both of those at Chicago Booth, and we don't give you the answers, what we do is we raise the questions, we take different approaches, and we want you to work through the answers. Our new campus right at the heart of the City of London is at the intersection of a whole variety of communities. Tech community, entrepreneurship community, finance community. It's gonna be part of the University of Chicago Global Entrepreneurs Network, where we bring people together from around the globe, to try to think about what's next, what's new, how to shape the future. We want this new campus to really be a hub for innovative thinking and I look forward to welcome you here at our new campus. All right, great, thank you, thank you very much. And so just before turning to our first speakers, I wanted to start off with a poll because I wanna see how many people in the audience agree or disagree with Milton Friedman. And so Milton Friedman, as I said, put it very starkly in his article 50 years ago, that the one and only one purpose of a business is to maximize shareholder value for the shareholders. So it's responsibility of business to use its resources, to engage in those activities, to increase profits, but it must also engage in open and free competition without deception or fraud. So I'd like to run a little poll right now of how many of you agree, disagree, or uncertain about that today. And then I can give you the results of the poll in Asia to compare and contrast with that. What I wanted to mention is that after these sessions, because we are going to hear from Raghu Rajan and Andrew Hill just after this, we are then going on to Marianne Bertrand, a faculty member who has done an incredible amount of work on diversity inclusion, and that would be at around two o'clock, London time, and then at roughly three o'clock London time, I'll be doing a fireside chat with Mark Carney. And I think that will be very interesting to get his perspective on what corporate social responsibility is. And so we can now share the results. Actually, what's very interesting, it's very, very similar to what we had in Asia. Very few people are uncertain, which is surprising to me, because it's such a big picture question that I would think more people wouldn't be quite sure, but most people have a very clear view. Only about, in Asia, was 12%. Here in Europe, Middle East, Africa is 15% are uncertain. The vast majority, roughly 60%, both here and in Asia, said that they disagree, and between 25 and 30% in Hong Kong and here in London have said that they agree. So it seems it's sort of 2:1 disagree versus agree. I think that's very interesting that it's similar in Asia and Europe, Middle East, Africa, but that most of the people participating actually don't agree. And so now what I'd like to do is turn the conversation over to Andrew Hill. We are very pleased to have an exclusive media partnership with the Financial Times, another organization with great global reach. Andrew is, I'm sure very well-known to all of you, is the key person on management and business thinking in the Financial Times. I'm also very delighted to be able to work with him as a judge on the FT McKinsey Book Award panel. And so Andrew, take it away.

 

- Thank you very much, Randy, and hello, everybody. Thank you for joining us. And the way this panel is going to work is that I'm going to introduce Raghu Rajan shortly, and he's going to talk, deliver a few remarks over about 10 or 15 minutes, and then we're going to discuss some of the implications of what he's told us. And what I'm really hoping is that you will also contribute with questions, which you can submit at any time, and I will try to weave those into our discussion. Raghu and I last met and chatted in 2010, after his book "Fault Lines" won the FT Business Book of the Year Award, and we were then in the immediate aftermath of the financial crisis. And he told me at that point that part of the answer to repairing the fault lines that he'd identified in the global economy has to be the private sector stepping up in positive ways. So we'll be discussing a little bit how that's evolved and what that means in today's context. And let me, therefore, hand over to Raghu, over to you to tell us a little bit more about how you're thinking has developed since.

 

- Thank you, Andrew, and we've heard from Randy about the 50th anniversary of Milton Friedman's famous article. These issues have come more to the floor recently with the pandemic. Every social problem we had before has been exacerbated by it. We have rising inequality in many places. Many of the frontline workers are, you know, workers who earn low incomes, while people like us stay at home and do work remotely. There are many left behind communities which have been hit hard, many countries. The poorer countries in the world, Peru, India, Bangladesh, being hit by the pandemic. And we have climate change from the terrible pictures we see of California red sky. We have paralyzed governments also, governments really can't seem to get their act together. And in this kind of environment, there's enormous pressure on corporations to do more than making a good widget to move away from what Milton Friedman argued. And to some extent, the Business Roundtable in 2019 had dissipated these pressures and came up with a statement which said, essentially, I quote, each of our stakeholders is essential. We commit to deliver value to all of them for the future success of our companies, our communities, and our country and code. Now, in a sense, who could disagree with this statement? There's an interesting piece in one of the Financial Times articles where the Shell corporate CEO's daughter asked him, "Oh, you're such a good corporation. "Why don't you sell out everything "and give all your money to Greenpeace?" And the reality is in the Business Roundtable statement, since Greenpeace is a stakeholder, you know, its success would be assured if Shell sold out and gave all the money to Greenpeace. What prevents that? Is the statement anything more than a vapid statement? And unless, you know, a statement makes trade-offs and tells you how to behave in making those trade-offs, it's vacuous. If everyone is essential, no one is. So in a sense, this Business Roundtable statement is not to everyone, and in that way, not to no one. And there's a study by Wharton professor, Tyler Wry, which seems to suggest this in fact is the case. Now I've looked across the internet for this study, it's been reported widely, I haven't found the actual paper, so take this with a pinch of salt because I can't vouch for the paper, but the headline numbers from the paper are that those who signed the Business Roundtable statement in the first few weeks of the pandemic were almost 20% more prone to announce layoffs or furloughs, and they were less likely to donate relief efforts, less likely to offer customer discounts, less likely to shift production to pandemic-related goods. And the summary statement is that signing the statement had zero positive effect. And in some sense, when Milton Friedman wrote 50 years ago, it was as if he was addressing this latest statement by the Business Roundtable. And I quote, he said, "Businessmen, believe they are defending free enterprise "when they declaim that business is not concerned "merely with profits, "but also with promoting desirable social ends "such as providing employment, "eliminating discrimination, avoiding pollution "and whatever else may be the catch words "of the contemporary crop of reformers," end quote. And then he says this is pure undiluted socialism, and then has his famous statement. There's only one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game. That is it obeys the law. Now you wanna think about what Friedman was reacting to, to put that statement in context. He was reacting to the Johnson administration, exhorting corporations to stop raising prices in an attempt to combat inflation. He thought that was the national duty of corporations, the corporate social responsibility. And Friedman was doubly or triply incensed by this. First Chicago believes prices are important, and he felt that tampering with prices would create more distortions. Also, given his view of how inflation emerged, he thought it would do nothing to combat inflation because inflation was driven by the macro policies of the Johnson administration, which he disagreed with. And in effect, corporations were being pressed to remedy the deficiencies of the government. That was what he was reacting to and he believed that decisions driven by politics rather than the market was socialism. Hence his statement. Now, you know, it's 50 years later and it's time to reassess. And I would argue that Friedman has a point, he makes sense, but to a first approximation. And so we have to elaborate further to get closer to what is appropriate. Now, I wanna go through what is in favor of him and then give the con immediately after. First on the economic front. Economists would tell you shareholders are residual claimants. They capture the present discounted value, as some of our alums know, of long-term profits. So if you think of everyone else who contributes to the firm as fixed claimants, maximizing shareholder value, you wanna call it long-term shareholder value. Most of us think shareholder values is supposed to be long-term. Maximizing shareholder value maximizes the value of the corporation to society. Now that clearly means that we don't run the firm into the ground for the benefit of shareholders. We do all the good things that people want us to do. We are nice to, you know, workers because workers are essential to the firm, make investments with our property, including long-term investments, like in pharmaceuticals research. It's not about, you know, making every decision in the short-term, in favor of shareholders, that may run the farm into the ground, it's about the long-term. Now, you know, as we go through into the modern era, we have questioned the statement a little. Shareholders are not always the residual claimants. Anybody who knows the conflicts between debt holders and shareholders know as a firm gets closer to distress, the residual claimants are really the debt holders rather than the shareholders. Continuing to make decisions in favor of shareholders at that time could actually reduce the value of the firm. But more important today, there are others who have made long-term investments in the firm. In any human capital intensive firm, workers have made tremendous investments in the firm, and often they become partners in the firm. Sometimes they're explicit shareholders, sometimes they should be implicit shareholders. So thinking about the firm this way, about those who've made long-term investments, implies that it is not always appropriate to choose shareholders over these other claimants. Sometimes they're residual claimants and it makes sense to favor them. How do we get to that part from a pure shareholder value maximization perspective? Another pro of Milton Friedman's statement is that relative to the, you know, vague vacuous statement by the Business Roundtable, it may be relatively easy to monitor management when it has a well-defined goal, such as shareholder value maximization. You know, if I'm told basically to be good to anybody, how do I prevent management from giving away the firm to Greenpeace? Not clear. With shareholder value maximization, much more clear. Again, one can dispute this because, you know, courts have often refused to intervene in the decisions of corporations because they say even what constitutes shareholder value maximization is not absolutely clear. Therefore, we defer to corporations, we allow them to use their business judgment. So this is a argument in favor of Milton Friedman, can also be overstated. A third argument, and this is an argument that is often emphasized, is when management focuses on maximizing shareholder value, it creates the value that shareholders can then decide what to spend on. In other words, it's not management which decides on corporate social responsibility, giving to charity, giving to your favorite football team, but their job is to maximize the value, then the shareholders take that money and spend it, the shareholders personal preference, which should matter, it's their wealth, they are the bosses of the managers, they should decide whether they give it to charity or to their favorite political parties. So that is, again, a powerful argument. Recently, Oliver Hart, who will speak at this conference, and Luigi Zingales have argued even that is a little problematic, because think about Walmart shareholders. Walmart, you know, sells guns, or used to sell guns, and you know, that creates crime, you know, depending on how much you believe in the NRA. If guns create crime, what Milton Friedman would say is let Walmart sell all the guns it can to generate profits, those profits will go to shareholders, they can spend that money in fighting the NRA or compensating the victims of gun crime. And something Zingales would say, well, isn't a shorter route, given that shareholders have this preference, to just stop selling guns and not first sell the guns and then prevent the crime that results from that, which may be much costlier, much more expensive? Similarly, there are situations where workers have preferences, which conflict with shareholder value maximization. Most recent example, Google's employees basically went against Google's involvement in Pentagon-supported programs that used artificial intelligence and video imagery to target drone strikes. They said, you know, this is bad, this is evil, we don't wanna be part of it. And essentially Google went in favor of its employees, believing that they were more important than shareholders. And finally, Milton Friedman thought that there was a political argument for shareholder value maximization, which just keeps the role of the government and the role of the corporation separate. He thought that was important because he felt that corporate social responsibility was a backdoor way for special interests to push what they could not through parliament, and therefore, make rules for the firm, which, you know, they could not in the normal course. And in some sense, this is a very important argument because it says that sometimes these pressures can be anti-democratic rather than pro-democratic because you're frustrated in Congress or in parliament, you try and push the stuff through the back door by directly targeting corporations. Now, the reality is, you know, not every political pressure comes through parliament. It is naive in some sense, and this is the con to this argument, to believe that the only way that corporations should be affected politically is by action through legislation. There will be groups that will build up, especially if you're consumer facing, in order to change the way you behave. There will be pressure groups even within the firm, as we just saw with Google's employees, that change what the firm does. So it is somewhat naive to believe these interest groups will actually, you know, not affect the firm and you have to take that into account. And that leads to what I think is the deepest problem with Milton Friedman. These are all issues with his statement, but the deepest problem with this statement is shareholder value maximization is totally turning a tenure to politics. It sounds sinister, it sounds pro-rich, it sounds evil, even if it maybe the right thing to do for society under many circumstances. So what's the alternative? And I would argue that, you know, it's clear what the alternative is, and firms have been doing it for a long time, not every firm, but it's important they articulate it. And the alternative, in my view, is to maximize the value of long-term investors in the firm. This is different from the Roundtable, Business Roundtable statement, in that you can identify who these long-term stakeholders are. If you are a firm with a lot of impulse customers, they're not your long-term investors, they come in and buy as they wish. If you have, however, long-term employees, they are long-term investors because their sweat equity is embedded in the firm. Similarly, shareholders, long-term debt holders, long-term suppliers, these are long-term stakeholders, and the firm can decide what the set of these firms are. And it will say that when I am forced to choose between these two, I will choose the action that enhances the overall value of these stakeholders more. So sometimes I will favor employees. In the case of Google, it valued its employees more than it valued that contract with the Defense Department. So this has actual bite. You can identify your key stakeholders, state that, and what is important is once you say that, those stakeholders feel their interests are gonna be taken more into account, and therefore, they will act accordingly. And what this does is in the long run, this maximizes shareholder value. So for example, if a firm says I'm gonna be trusting towards my workers and work on their behalf, they respond more by choosing that firm over others, that firm attracts more talent, they demand less pay because they trust the firm to not a squeeze them in bad times, and they respond by going the extra mile for it. The problem is, you know, like shareholder value maximization, this idea of maximizing the value of long-term investors is very sterile, and so it needs a more politically-appropriate appellation. For example, our objective is to maximize societal value, but the details matter. Who do we consider as important relevant parts of society? And that's really what we should talk about. Let me stop here. I have some views on corporate social responsibility. Let me turn to Andrew and leave this to the discussion.

 

- Thanks very much for that, and we've already got some questions coming in, so I'll try and weave some of those into our discussion as we progress. And one of the things, I went back to look at "The Third Pillar," your book from last year, and there you kind of paraphrase Friedman and his supporters are writing that instead it being a sin, avarice was now a duty. I'm sort of paraphrasing some of the extreme views, and obviously the title of our session is shareholder value evil? And you've already suggested that it sometimes sounds evil and can be applied in ways that some people would construe as evil. But, I mean, for a while, in the '90s, early 2000s, we've been suggesting that shareholder value was problematic, sounded a bit heretical then in business circles, and now it's virtually a radical not to have the view that it's problematic. So is that in itself this pendulum swinging the other direction, is that itself a problem? And are we leading ourselves back into virtually the situation that freedom reacted to where there is completely--

 

- It is, it is because I think that there is a good rationale for separation. Let the corporation do what it's good at, making good widgets, let the government do what it's good at, which is responding to the needs of the people, and when you force corporations to traverse that, be very careful because the structures you have to govern that are very different from the structures you have to govern government. And, you know, one example. You say that corporations should do more in bad times for the community and the people around them. So let's say a corporation gets into charity, okay? Giving people stuff in the community they operate in. Now, for government, it's very clear how they should behave. They should give equally, they should treat people, you know, all people in the same way, and there are structures, elections, so on, to turf it out if it doesn't behave in that way. But the corporation is doing something which is in a space where there is no governance. What should determine its giving? It'll say all my giving is voluntary, and there is no structure to say I shouldn't give to whites, not blacks, or blacks, not whites. It is possible for the corporation to get into trouble. It's also quite possible for the corporation to cause trouble in this. The point is you have to be very careful when you enter areas where you substitute for the government and that we don't recognize as easily. We say, yeah, yeah, they've got the resources, let them do it, but we don't know that they have the appropriate incentives, the appropriate governance structures, because all of those were targeted at a different problem, making good widgets.

 

- One of the things that you said back in 2010, when we were talking about your previous book "Fault Lines." I mean, you paraphrase there, if I remember correctly, the Friedman view, but you said at that time that you thought that increasingly the public isn't satisfied with just the idea that companies should equal create non-poisonous products and services and not create risk for the system, that they wanted something more. And I wonder if in this pendulum swing, you think that the public role, as probably defined as stakeholders, is playing more of a part here in dictating to companies or in guiding companies for what to do.

 

- It is, I mean, and you know, a lot of that is good. I think that, you know, one of the temptations, and we've had this discussion in class is, you know, companies should not go beyond the letter of the law. And this is, you know, very close to the Friedman view. If you want companies to be responsible, pass a law. Then all companies have to obey that law and you don't get a situation where, you know, some companies are disadvantaged because they're more responsible than others. If you want emissions to be brought down, let everybody adhere to the new emission rule, pass a law. And there's a lot going for that, right? You cannot tackle climate change by individual companies adopting more sustainability norms. The best way to do it is to have, you know, a global, common taxes, the favorite measure that economists have, but, you know, whatever. Global regulations on all companies, that will affect all companies but get us to where we need to go. But the problem with individual effort is that, you know, take Unilever and its sustainability push under Paul Polman. And initially, it was very successful, and this is the value of looking ahead, because there was a move, as you said, from the public, we want more sustainability. There's a move from the employees, we feel we're doing good by moving ahead of where society is to tackle this really tremendous problem of water, climate change, et cetera. And it actually allowed them to discover new products and new ways of selling old products. So their soap was being, their detergent, washing detergent, was being sold as not so much, we're going to get your clothes clean, which is how it's been sold for 200 years or 400 years, but it was how it allows you to give your kids freedom so that they can get dirty and then you can wash it. And that campaign had a lot of success. The problem, however, is that at some point they discovered one company doing it even through its supply chain, so it was not enough. And then they went further into let's move the UN, let's move governments, et cetera. They were going beyond their remit. Shareholder values increased for quite some time initially, but then stagnated relative to their competition when it was felt they were going beyond the remit. The point, I think, is that it's good to anticipate where society is going. That allows you to invest for the future, and that's beneficial for shareholders, beneficial for society. It also makes you stay well within the law, which I think is where companies should be. However, you run the danger of going too far, of going off the reservation, so to speak.

 

- So let me just ask, we've got lots of questions coming in, so I want to devote much of the rest of the time to those, but one bit of COVID-related thought. I mean, clearly since the beginning of the pandemic, and we've seen in an interesting way, a lot of the behavior by companies that one could categorize possible ways of corporate social responsibility. So we've got some companies simply fighting for survival, some companies devoting their resources to supply health services or to manufacture products that are useful in fighting the pandemic. Some obviously amping up their core business, in the case of pharmaceuticals companies searching for a vaccine, and some simply just giving money or resources to good causes and a few ignoring it altogether and saying I just need to make money so I can survive here. And I wonder if you think the crisis is going to, in any sense, change the view or is changing the view that people have about the role of corporation in society.

 

- Well, I think it will. Now, I would say this is a reasonable outcome where we have differences across companies. So think of the company which is deeply hit by the pandemic and has very thin resources. At this point, the best thing it could do is focus those resources on survival, because in surviving, it provides a decent job for its workers, it continues making that widget, which people buy. So it's providing effectively a good product that customers want. Its survival may be the best way it sort of lives for the future. On the other hand, take these big five with, you know, the fangs with tons of cash. This may be a time that they invest in the future. They obviously are trying to attract talent from each other and they have the ability to go beyond the basic remit and to do a little more. Amazon has the ability, for example, to do more for its various suppliers, some of whom may be struggling small and medium business units, and it could, you know, find ways to provide them more credit to last through the pandemic. That will get it more loyalty because people will know it can be a source of insurance rather than just a platform, and that is an investment for the future. Now, again, it doesn't wanna go overboard, it wants to go only so far as this is valuable for it, but it has an implicit stake in the future of its suppliers, and therefore there's nothing wrong in it investing its excess cash net. So, you know, different strokes for different folks, this is a good time for that to play out. The one size fits all thou shalt invest so much in your supply at this point doesn't work because some don't have the resources others have. So, you know, those who have more will invest more and benefit from that, and those who have less, perhaps the best thing to do is to focus on what they have and focus on that.

 

- It does seem to me that it has made lots of businesses, and indeed their customers and suppliers, recognize that they are part of an overall system, going back to some of the systemic issues you raised in the first book, by showing them in a sense, that if they don't tend to their supplier, they may actually just be cutting off a source of their future prosperity. I'm very old, yes, very.

 

- I agree entirely with that, and that's my point about, you know, when you make long-term investments in each other, you essentially have implicit equity stakes. And the mistake that, or the missing part in Friedman, is recognizing these implicit equity stakes are as important sometimes as the explicit equity stake. And therefore, you have to weigh the implicit equity stake. Do I benefit by letting my supplier die or do I have to invest in my supplier now so that our partnership can continue? And sometimes that's the way of actually maximizing my shareholder value also, by investing in this other equity to the detriment in the short run, it may seem, of my shareholders. So we need a more expensive view, but that doesn't mean that I have the same responsibility to that, you know, a person on the street rendered homeless as my government has. It is important the government do something about that person, it is important that, you know, that person be supported, but there is the right agency to do that. That said, if I am the corporation and there are no government in sight and there is this homeless person on the street, humanity requires me to go and do something for that person. So I'm not advocating sort of conscienceless corporations, I am advocating a relative division of responsibility.

 

- So I just cherry picked some of the questions and I apologize in advance for those whose questions don't get answered, but we've touched on a lot of these points already. And so there's a question here about customers and being stakeholders in the business, and obviously a source of profit, and are their preferences enough of a countervailing force to make the corporation act in a way that meets nonprofit moral objectives? And this reminds me a little bit of something that was put to me last year when the FT was writing a series I lead about the company of the future and purpose in companies, and there was some pushback, particularly from Steve Denning, that commentated about the fact that, Peter Drucker, another great thinker, had simply said that the purpose of the company was to create and keep a customer, which might be a sufficient single objective to drive the company in the right direction.

 

- Well, it depends, and I think my formulation gives you a sense of when it matters and when it's not. When my customer invests in me, think of influencers on a platform. These are important people creating content. Think of the people who, you know, have scores of followers, you know, millions of them and, you know, produce content. Those guys have made enormous investments, are critical to the future of the company. If they move, they take their business elsewhere, that's problematic for me, and so I wanna keep them happy. And if I have to be sensitive, if I have to do something or the other, I will weigh that. I would seriously think about that and maybe express, you know, views in that light. So some companies, for example, will make statements about transgender bathrooms, because a lot of their customers believe in that and they risk losing them if they don't make the appropriate statement on those. And it could go either way, depending on what the customer view is. So sometimes you're dragged into the political arena because of the nature of your customers. A lot of Facebook's advertisers, another source of customers, recently talked about a strike, or actually went on strike, because they didn't agree with the policies by which, you know, Facebook was screening some of the other customers. So there is a power here, undoubtedly, and you cannot ignore it, but you will choose based on who is more important to you in the larger business that you're focused on. And so it is inevitable, and what I'm saying is Friedman appears to say you can ignore all this, but you can't. Even if this is not through legislation, this is part of your business, and so you have to not do it and make the appropriate choices. Now, you know, there will be the rare business where the business owner will have a personal view and say, this is what I'm gonna do regardless. You know, that's his choice as owner, but as a manager, it probably doesn't make sense to follow your personal conscience in how you react to these things. Friedman was right, you are the employee of somebody else, and you should follow that in trying to figure out what makes most sense.

 

- Right, let's just touch on government. One of the questions here is the extent to which you think government should influence corporations to focus on ESG, the new trio of letters that is soon to slightly eclipse CSR, as an objective, and how difficult is this to do? And I'd perhaps like to expand on that, pulling on your experience in India, where I clearly know that the relationship between corporations and society and government is rather different from that in Europe or the United States, or possibly in the rest of Asia.

 

- I think that, I mean a lot can be termed ESG, and India has this 2% of profits go to ESG, and everybody is trying to get that 2% because it seems like there's no guidance on how that 2% should be spent. The savvier corporations are saying we're reinvesting in our employees, basically relabeled their training as ESG, and the less savvy corporations, basically are hounded by every NGO there is, why don't you give to my cause? it's not clear to me that's the best way of using ESG funds. It's also not clear to me how a government essentially says you have responsibility for all this. In a sense, it's admitting that it hasn't done enough. Now, I think there are ways corporations can work here, but I am a little worried sometimes by the ways we get some of the sustainability without the appropriate rules in place. Let me give an example. There's this big move, and I'm sure Mark Carney will talk about that, on pressurizing lenders to stop financing coal projects. And you know, there are many big banks which are now saying we will never finance coal projects. The World Bank has said that, et cetera. Now, where are coal projects to be found anymore? New coal projects? Almost always in poor countries, which have large coal resources. So effectively, when you say we will not finance coal projects, you're making much harder for these poor countries to finance coal projects, and that's a good thing because maybe they should go to renewable resources, et cetera. But that's also part of a dialogue because the poor country argument is you rich countries spend so much time putting pollutants in the atmosphere, and now you're telling us we should stop coal projects when you have all your coal projects running. You're not shutting them down, but you found this backdoor way of stopping our coal projects by stopping to finance them by blacklisting every bank that does it. Shouldn't this be part of a dialogue rather than a backdoor way through which you use ESG to force us to stop it? And the end result may be the same, that poor countries stop funding. They're the worst hit by the environment, they would want to stop funding coal projects, but it is their bargaining chip. It is their bargaining chip because then they get resources to start putting into, for example, solar projects or wind projects. But what you've done is eliminated their bargaining chip. Remember in 2010 or whatever, rich countries said, we're going to send a hundred billion every year, to the poor countries, to help you finance climate change actions. Nobody seen that hundred billion, it vanished, and it's not gonna come back post-pandemic. But now there are a lot of crusaders who want to pressurize the poor countries, but they're using sustainability as the way to do it. They don't realize, some of them are very good-hearted, but they don't realize that effectively they're taking a bargaining chip off the table for the poor countries. So this is why I say sometimes the narrow focus tends to miss the larger point. Climate change is better discussed at the international level. How are we gonna do this? We need more dialogue there. Corporate action is not sufficient, it's not gonna be enough to fill it, and sometimes can actually prevent more effective larger action.

 

- So it's sort of tangential to this question about, you know, the maximization of societal value. So obviously climate change, part of that, where you say intergovernmental action may be the more the appropriate way to handle it, but so the question is how does a corporation address how it reflects or reproduces ingrained societal racism or sexism where laws aren't able to solve those societal problems that we see coming from the U.S. right now?

 

- I think it should internalize not just where society is now, but where it's going. And society clearly seems to be going to a place where, well, first I think diversity is an inclusion, very important, even from generating a workplace, which is more vivid in terms of ideas, in terms of capacity to generate value. So it is intrinsically valuable, but also society is going there and will judge you, and this is the point, today we judge companies, we judge countries, we judge heroes based on the norms of today, rather than the norms of yesterday. Our companies today will be judged on the norms of tomorrow, rather than the norms of today, which is why it is important to stay well within the law, rather than skirt the law, because judgments will be made on the basis of what you should have done rather than what you were required to do. And so I think it's just good business, at this point, to try and anticipate where it's going, but also I think it's good business because diversity and inclusion makes sense. And so I think companies will strive for it, in fact many companies have done a very good job in this and have recognized the value from having, you know, the maximum access to talent that they have, and sometimes nurturing talent for the future, rather than just taking as given what there is in the marketplace. So all this, I think to my mind, is in a good way and is appropriate for companies to think about this.

 

- And clearly one of the ways in which the Milton Friedman principles got distorted and exaggerated to the disbenefit of shareholders within executive pay and the ways in which managers, agents of the shareholder, supposedly rewarded themselves. So one question here is whether executive pay restraints needed to encourage greater equality and demonstrate greater social responsibility, if that has sort of got a signaling mechanism that's useful, or are we back to the Friedman idea that you've got to have your managers properly working for the shareholder?

 

- Look, this is a place where I think it's hard to, you know, it's easy to go to the extremes, and pay is good, it's not the only thing. And one example of where pay matters is if you pay everybody like bureaucrats, which is how, in India, we pay our public sector bankers. They get a fraction of the pay the private sector bankers get, and I do think it affects the talent that can be recruited into the public sector, and it affects the management quality. Now that's because private sector pays, at the managerial level, is 10 times sometimes the pay at the public sector. And so large pay differences obviously affect who can attract talent and who cannot. However, I think, you know, is it the case that we need these enormous payouts to get management to put out, to put effort, et cetera? Probably not. There is some place in between paying everybody as bureaucrats and paying everybody as if they're private entrepreneurs making, you know, all the contribution to the firm, there's some in-between place. So incentives matter, pay matters, it's not insignificant, it's not the only thing. And so corporations can be a little more careful about how they pay. They don't need to match every last paycheck in the business. And certainly this idea of, for example, in the middle of the pandemic, we need to pay these guys to keep them on. Where are they gonna go at this point? You know, it's a pandemic, people are very anxious about hiring at this point. So you don't need to pay every one of your top management, to keep them on at this point, enormous amounts.

 

- I mean, there's a wider question here about wider wealth inequality. I mean, how do we bring the issue of wealth inequality into determining the purpose of the corporation? Asks one question.

 

- Well, I do think that, you know, inequality is a problem. I would not think that the primary way to solve inequality is to get equal pay in the corporation or across corporation. Much of the inequality is between corporations rather than within corporations. This is, you know, the work that Bloom and others have done. And somewhat that reflects significant productivity differences between companies. If that is the case, then really the issue is how do we equalize productivity differences between companies? And you get then into more arcane issues, like how do we allow knowledge to flow more easily between companies so that productivity differences are equalized? Rather than how do we clamp down on the pay at Google because it's so much higher than the pay at the local hardware store. So I think there are lots of deep issues there, but I would, I'm always, you know, a advocate of leveling up rather than leveling down. How do we get more capability, more productivity, to the bottom man? You can see, I mean, in the pandemic even, if you had a college degree, you're much more likely to do better during this pandemic than if you didn't. So how do we get more education? How do we get more skills to those who don't? Recognizing that this is a hard problem, but recognizing we have new tools of dealing with it. My book, "The Third Pillar," is a lot about how the community is extremely important in the process of directing capabilities, and in communities that are breaking down, much harder to get the basic skills that you need or to transform your skills as the world is changing, much easier in flourishing communities. How do you sort of change the nature of the community? That's part of the solution.

 

- We're nearly out of time. I wanted to ask one last question myself, which relates back to the sort of Business Roundtable question that you raised in your talk. It seems to me one of the risks is that once you've got the Business Roundtable making lawfully declarations, and then seeing not then, according to the research, you mentioned to the acting on those declarations, that brings cynicism and then that destroys any of the good things that you might get out of a pendulum swing away from extreme share. Is cynicism in this world a danger to the wider positive societal value objectives that you've laid out for corporation?

 

- I mean, it's good and bad. I think that the free pass we gave these platforms, trusting that they young bosses, you know, we do no evil, was a good metric and it was sufficient governance. And now we've seen, you know, all the problems associated with letting them determine the rules completely. So cynicism was good here because it saw that a platform can change the elections. What goes on Facebook and who puts it can change an entire election. That's problematic. So cynicism is good there. But then cynicism, if every business action is viewed cynically and large corporations, as a matter of course, are seen as bad rather than a lot of decent people trying to do good in a way that they think best, or if we think that every organ of the government, the federal reserve, everybody else is really working in the interests of a small group of people, then it becomes much harder for these entities to do their work. A lot of the prosperity post-World War II was the sense that leaders knew what they were doing and that the consensus in favor of free trade was the right one. That yeah, some people will get hurt, but by and large, this is moving us in the right direction. Now, obviously that had problems eventually, but now we've gone to the other extreme and saying, none of the economic policies make sense, let's question everything. Let's move towards, in some cases, socialism, in some cases, varieties of fascism. And there were reasons why that consensus helped, because we didn't have to revisit these old debates. So there's good and bad in the cynicism. I think we will find a new consensus. Cynicism is important to finding that new consensus, but it's also important for our leaders to build that trust again, to regain that trust, and we will have to go through a bunch of rotten leaders to get there, but to build that trust again so that the cynicism becomes again unwarranted and we move together once again. But I think we'll get there, but it will take some work.

 

- Thank you, Raghu, for ending on that very positive, optimistic note, and thank you for all your insights. Apologies to those of you whose questions didn't get answered, we could've gone on for a lot longer in there and gone into more depth on any one of them. May I urge you to stay tuned for the next panel moderated by Caroline Grossman, Executive Director and Adjunct Assistant Professor of Strategy at the Rustandy Center for Social Sector Innovation. She'll be talking with Chicago Booth, Marianne Bertrand and Mekala Krishnan of the McKinsey Global Institute about the vital topic of how to use data to attract diversity and inclusion. So let me just thank Raghu again and Randy in Chicago Booth for this opportunity to discuss these still highly relevant issues 50 years on. Raghu, thank you. Thank you and I hand it over.

 

- Thank you.

Caroline:

I'm really excited about the conversation we have planned for this session around using data to track corporate diversity and inclusion. Particularly in the last few months, the terms diversity and inclusion have really received increased and necessary attention among corporate leaders around the globe.

Caroline:

Research and data must play a role when it comes to implementing D&I strategy that actually moves the needle on equity. If you don't collect data, it's hard to diagnose how your company's performing. And if you don't track data, you won't know how you're improving. A necessary complement to putting a diversity and inclusion plan in place is using research and data to ensure change is actually happening. Our two panelists today offer that complementarity, a two-way lens. Chicago Booth Professor, Marianne Bertrand, and Mekala Krishnan, Senior Fellow at McKinsey Global Institute.

Caroline:

Much of Marianne Bertrand's research on this topic uses data to quantify the effects of racial and gender bias and to understand which mechanisms work better than others. And because many firms are in early stages with these topics and may not have great data, it's also useful to have Mekala's voice on what this looks like in practice today.

Caroline:

Before I introduce our panelists and we kick things off, here are some logistics for today, which should be similar to the last panel, if you were on for that conversation. Our panelists will begin by discussing a series of questions moderated by me. Then we'll leave time to take questions from all of you, and I may weave them in throughout. So, don't be shy on asking your questions so I can monitor them and bring them up as they are relevant to our discussion. If you have a question, please submit it via the Q&A chat function within Zoom. We will try to get to as many questions as time allows. Although, as Andrew just said in his conclusion, we could stay on all day, but we won't.

Caroline:

So, now let me introduce our panelists. Marianne Bertrand is the Chris P. Dialynas Distinguished Professor of Economics at Chicago Booth. She is an Applied Microeconomist, whose research covers the fields of labor economics, corporate finance and development economics. Marianne is a research fellow at The National Bureau of Economic Research and the ER in the US, the Center for Economic Policy Research and the Institute for the Study of Labor. She's Faculty Director of the center that I lead, the Rustandy Center for Social Sector Innovation at Chicago Booth and is the Faculty Director of the Poverty Lab at the University of Chicago Urban Labs. Finally, Marianne is Co-Editor of the American Economic Review.

Caroline:

Mekala Krishnan is Senior Fellow at the McKinsey Global Institute, MGI, McKinsey's business and research economics arm. Her research focuses on topics related to inclusive growth and economic development, including climate risks, globalization, productivity, growth in advanced economies and women's role in labor markets. Mekala's a member of taskforce at The Hutchins Center on Fiscal and Monetary Policy at Brookings and serves on an advisory board for the Sibley School of Mechanical Engineering at Cornell, of which she is an alum. She's also a board member of the Global Fund for Women.

Caroline:

With that, please join me in welcoming Marianne and Mekala. I would like to first jump in and ask about hiring practices. Marianne, I talked in my introduction about the fact that if you don't collect data, it's hard to diagnose issues at an individual company. If you don't track it, you won't know you're improving. Much of Marianne's research on this topic uses data to quantify the effects of racial and gender bias and understand which mechanisms work better than others.

Caroline:

So, Marianne, in your landmark Racism in a Resume Study with fellow Booth Professor, Sendhil Mullainathan, you broke ground in 2003 and put numbers behind how hiring managers' prejudices can result in biased hiring decision. For background, the study sent 5,000 fake resumes to real employment ads. The resumes were identical, except for the name. Applicants with White sounding names received 50% more callbacks than applicants with African American sounding names. This was the only difference. The only difference in the resumes was the name.

Caroline:

This research has been replicated in multiple settings and nationalities, and the results are always more or less the same. Marianne, what are some policies that companies can implement to help facilitate unbiased hiring practices?

Marianne Bertrand:

That's a huge question. What I would say is that the work that we did at the time, which as you said, Caroline, was replicated in many, many countries around the world focusing only on minorities and documenting the same finding, that work itself has inspired some policy response. I think the most common one has been anonymization of resumes. That's something that several European countries have put in place.

Marianne Bertrand:

The other thing that it has inspired is some discussion of doing some scorecards for corporations. You can imagine using the same method that we did to try to document the existence of bias or differential treatment of minorities and having government kind of doing those kind of audits on corporations and be able to highlight which corporations are or not being biased. It's kind of a naming and shaming process.

Marianne Bertrand:

I heard some countries, in fact my home country, Belgium, discussing a policy response. I don't think it has been adopted, because there's been a lot of pushback, I think understandably, by corporations that would not want to be named and shamed. I think these have been the most immediate responses to the kind of work that we have done. I think what's important to keep in mind is that this is just the tip of the iceberg. I mean, what we document in this research that you highlighted is just really the first step of the recruiting process. That's just getting your foot inside the door.

Marianne Bertrand:

After you've done that, you're still going to have to go through interviews and kind of selecting job applicants. So, all of those methods that I described, like the anonymization method, may help in terms of that first step, getting your foot inside the door, but really does nothing in terms of controlling the kind of biases that would emerge in the next steps of the recruitment process.

Marianne Bertrand:

When it comes to that, I think there's not much on the policy front, on the kind of government policy front that I've seen. It's more matter, I think, until enough corporations deciding to have a more robust process for recruiting employees that is as free of implicit biases as possible.

Caroline:

Thank you. Mekala, in your work at McKinsey, as you tackle these questions, what are the most common questions that you are being asked relative to diversity and inclusion?

Mekala Krishnan:

Thanks Caroline, and thanks for the opportunity to speak. It's great to be having this conversation, and as you said, a very important and timely one. We've been over the years, since about 2015, doing an extensive body of work, particularly focused in the US. There's also other pieces of research we've been doing across the world that has surveyed companies on their diversity and inclusion practices.

Mekala Krishnan:

The first think we've done is we've actually cataloged how different companies perform through the talent pipeline and organizations, all the way from entry level to senior management, and created databases off the pipeline of talent. Which is, as to your point about data, it was shocking to me that doesn't exist in companies or regularly track it. It's something that we've tried to do through some of our survey work. Then we've also on the flip side asked questions of both companies as well as employees on their diversity and inclusion practices.

Mekala Krishnan:

As we've been doing that work, as well as more broadly talking to companies about this topic, I think there's a few themes that regularly emerge. The first most basic question is, we don't understand what our pipeline looks like. Most companies, a few years ago, I think now this is starting to change, most companies that we speak with had no idea about what diversity are split by different categories, by gender, by race, by sexual orientation, so on and so forth. They had no sense of what that looked like. At the entry level, they had no sense of what that looked like down through the pipeline. Of course, as we all know, what you don't measure, you can't manage. So, their ability to actually manage this didn't exist. That's kind of one theme of questions we always get.

Mekala Krishnan:

The second theme of questions we always get, and I'm sure we'll discuss this as we go through this, is what do you actually do to manage this issue? What are the types of practices I should put in place to address any of these of these problems? That's a really broad question. It ranges all the way from, should I be doing 20 things? Should I be doing one thing? Should I be doing five things? Is there a silver bullet out there, a set of a few things that I could do to really move the needle? What really matters to drive change? Where should I focus?

Mekala Krishnan:

These are really big questions for a few different reasons, because number one, it ties to first understanding where in that pipeline there are challenges for your particular organization. As we look at companies in healthcare, for example, their issue is not so much getting women into the door. Their issue is much more once women are in the door, how they promote the organization. Whereas if you think about tech companies on the other end of the spectrum, their issue is attracting talent and hiring talent in the first place. Right?

Mekala Krishnan:

So, there's a question about, what are actually the key issues that an organization faces and understanding that. Then there's also a strategic and philosophical component to this, which companies sometimes struggle to grapple with. What is the vision for how they want to progress on diversity and inclusion? Do they care about all forms of diversity, some forms of diversity? Do they have a sense of what they want to prioritize now versus later? Do they want to prioritize representation? Do they want to prioritize inclusion?

Mekala Krishnan:

So, many, many questions that companies come to us with all the way ranging from issues of data and understanding their statistics on these issues, but then also thinking about implementation.

Caroline:

Mekala, you just sliced that set of questions around what should we do in two interesting ways. One was around industry and the fact that different industries face very different issues. Your examples were tech and healthcare. Then another is what the company's strategic agenda is. Within industries, do you find that peer companies often can have very different strategic agendas relative to diversity and inclusion, or is there a commonality?

Mekala Krishnan:

Yeah, that's a really interesting question. I think it's a little bit of both, I would say. If you were in the tech industry today, I don't think anyone in the tech industry will say that attracting talent is not an issue for us. Attracting diverse talent is not an issue for us. I think what started to happen in many industries is, because this topic has started to be elevated, at least the recognition of what the key issues are is relatively similar across industries.

Mekala Krishnan:

I think on the other end of the spectrum is things like financial services. It's been interesting to see that the whole industry dialogue in financial services has started to focus on women in leadership positions. Marianne, I'll be curious if, as you've been speaking with companies, if you've seen something similar. The whole conversation has shift to, how do we progress women in leadership? Also questions around, how do our products and services help us reach diverse customers?

Mekala Krishnan:

There's been a lot of external orientation to that industry as well, not just focusing on within the four walls of the organization. In some sense, I think we are seeing some patterns emerge across different industries on what are the key issues that are top of mind for that industry. Really, I think that's a function of some competitive pressure. If your peer is talking about this issue, then you should be talking about the issue. Then some of it just has to do with the features of the industry. Things like financial services in retail and CPG are very consumer facing industries. So, they tend to take not just an internal orientation but also an external orientation.

Mekala Krishnan:

Having said that, within each industry, I would say there are companies that are more at the leading edge, companies less at the leading edge. I don't think anyone has cracked this problem, because it's obviously a very hard problem that we've lived with for centuries, maybe. I think within industries, you do see a spectrum. You also see different types of practices that companies are putting in place, different ways that they may be prioritizing it, different ways that they may be communicating it to their employees. I think some of there are quite industry specific themes that we see as we talk to companies.

Caroline:

One possible lever to pull that may make sense for more some industries more than others is the question of quotas. On the topic of hiring, quotas have been adopted in a few countries, especially here, for those of us who are in Europe as they're tuning in, and recently in the US in the State of California. Proponents see quotas as mechanisms to increase gender and racial diversity, but they can also lead to concerns like tokenism. Research, including some by you, Marianne, suggests that quotas suggests that quotas aren't a panacea. Based on the data you've seen, what's your take?

Marianne Bertrand:

Yeah, so we studied a few years back, the first gender quota policy that was adopted in Europe, and that was in Norway back at the beginning of the millennium. I think the main way to summarize what we saw in the data is that quotas didn't really do anything bad, but they are not the kind of transformative tool that I think companies may be looking forward if they're really trying to improve diversity.

Marianne Bertrand:

I think the summary of the finding of the work that we did ... Again, just so everybody's on the same page, Norway just very similar to a lot of other European countries after it passed a law that forced publicly traded corporations to have 40% of women on their board. There was a lot of pushback by corporations that were basically saying, "We're never going to be able to find women with the kind of talent that is required to be on the those corporate boards."

Marianne Bertrand:

What we found was that corporations were clearly wrong when making that statement. We were able to document the qualifications of the women that were appointed to the board once the companies were forced to find 40% of women on the board. These women were, if anything, more qualified than the very few women that were on the board prior to the quotas being put in place.

Marianne Bertrand:

... So those companies managed to find very qualified than the very few women that were on the board prior to the [inaudible 00:00:04]. So those companies managed to find highly qualified women to serve on these boards, which means that once you force the companies to look probably beyond the standard network that they have, let's call it the old boys network, there are a lot of qualified women to fill in those positions. So that's really, I think, the good news about what we found in the context of this quarter reform. What is, I think, the less optimistic message is that if you believe that this is a policy that is really going to make a difference, that's going to be transformational for women's opportunities inside of corporation, you really have to hope that there will be spillovers of these quotas beyond the corporate boards. Corporate boards are very, very few individuals. So the idea theoretically is by appointing movement to the boards, you may have more women joining the C-suites, more women rising in the operational ranks of the organization. And then what we do is basically check the data to see whether that was happening. And there was really no sign of that.

Marianne Bertrand:

So bottom line, yes, you can. By forcing companies to look for women, they're going to be able to find highly qualified women to serve on the board. But you should not expect that this kind of policy will be transformational in terms of bringing more talented women at the top of organizations. So the main take away for me is that there was a sense in a lot of European countries that, "Okay, we have these quotas in place. That's it. our job is done, and we've achieved gender diversity in the corporate sector." And that would be a really, really big mistake. And I'm very sorry. I have my nine-year-old that is walking around.

Mekala Krishnan:

My two-year-old may make an entry as well.

Marianne Bertrand:

Sorry about that.

Caroline:

2020.

Mekala Krishnan:

Yeah.

Caroline:

That's where we are.

Marianne Bertrand:

And I guess what I'm just saying maybe that's bringing us in a different direction is that when I think about the issues of gender, I think gender is quite different for me than racial minorities and the representation. When it comes to gender and the representation of women in the corporate sector or in the higher paying jobs, in many ways I think that the key difficulties are not so much biases but really have to do with the structure of work, really have to do with what just happened today. Kids are walking around the home and the other responsibilities that women may have that make it very difficult for them to succeed at balancing the work and the family responsibilities. We can talk about that. We can talk about that later.

Caroline:

Well, I'm actually [crosstalk 00:18:41]... Oh, go ahead.

Mekala Krishnan:

So yeah, just to add a couple of thoughts, Marianne, because I completely agree with what you just said. I feel like with quotas, people arrived at quotas as a panacea, as the silver bullet. And it's great that it has led to increase representation on boards, but really not had the kind of spillover effects that people had hoped. And in fact, our research would suggest two things that I think are of interest to this conversation. The first is there is a lot of work out there including boards that correlates performance in lead, correlates representation, excuse me, in leadership positions with corporate outcomes. And of course, it's correlation, not causation. But interestingly, that correlation doesn't really hold, at least as far as our data would suggest when you look at women in boards. If you think about appointing women in boards as a corporate performance driver, our data doesn't suggest that it actually is so not really helpful even from that standpoint.

Mekala Krishnan:

I think the second is when you look at the corporate pipeline, it's really interesting to see that as quotas have been implemented, you see this funnel go down way from entry level to C-suites and then a jump up at the end for boards as we've put quotas in place. But really, that funnel, if you look at the data carefully from our survey of North American companies, where do you see the funnel drop off is really that first promotion. So from the entry level to that first manager role is where you see most women fall off. And of course, for some companies, it might be the end of the funnel. But on average, if you're focusing your efforts at the end of the funnel, you're not really solving the issue, which is enabling women to make that first promotion.

Mekala Krishnan:

I think the second thing that was really interesting with that data is that first promotion, people came to us to say, "Okay, the reason that women are dropping off at that first promotion point is that's the age where they want to leave the workforce to have children, and so it's women leaving companies." But actually when we looked at the data, attrition rates for women and attrition rates for men were essentially the same. It was the promotion rates that were quite different. So what's happening is that women are getting stuck at that first entry level. They aren't progressing through the funnel, whereas the common zeitgeist is that women want to leave the workforce to have kids. But we aren't really seeing that, at least when we look at data in North America and Europe. It may be different than other countries, but in those two regions, we aren't really seeing that in the data. And this, again, emphasizes why data is so important.

Marianne Bertrand:

So that's super interesting, and this is about data to study diversity and inclusion. This is the call out for more corporations to make the study of the funnel and how it evolves available because absent the ability to look inside of corporations and see the funnel that you're able to see by your consulting work, it's really hard for us researchers to bring additional insights. One more thing I will say is that what you described is somewhat different from what I've seen in other data set. So there's a lot of really, really good research that documents that it's not so much women want to leave the workforce to have children, but really document the dramatic effect that having children, the birth of a first child has on the career opportunities of women. So it is not being done, unfortunately, focusing solely on the kind of woman that would have the potential to lead corporations. It's done on a much broader side of the populations, but the data is remarkably striking, which is you see the career of men and woman evolving really in [inaudible 00:22:25] with one another up to the point of the birth of a first child. And this is really the point where women start experiencing very rapid losses and really never fully recover.

Mekala Krishnan:

Yeah. No, I completely agree with that, actually. We've done some work that has... This is, again, simple correlation analysis, but it correlates the time that women versus men spend on unpaid care work, what we call unpaid care work, things like childcare and household work, and correlate that with labor force participation rates, correlate that with relative rates in leadership positions. And there's very, very strong relationships between the two. One of the things that our surveys of employees have also found is the number one challenge that women cite is what they call the double burden syndrome or the fact that they're working both in the workplace as well as in the home. So I think it is significantly impacting women's experience in the workplace. I think it's just that the idea that women prominently drop out is not true it's that they are struggling to manage both work in the workplace, work in the home. It may be limiting how many hours that women work. It may be limiting the types of opportunities they reach out for. It may be impacting their own aspirations for their career.

Mekala Krishnan:

So I do a fair bit of my work in developing countries. I think there is a real challenge of women actually leaving the workforce entirely and never coming back or maybe not even entering in the first place.

Marianne Bertrand:

And the point that you just made about this double burden and not being able to work as long hours I think also ties back to another fact that is in the data, which is that in the corporate sector there is massive reward, financial reward, for the ability to work very, very long hours. So that's really the massive difficulty that women face is that in order to succeed, you have to work these long hours.

Mekala Krishnan:

It's funny. So I was saying I have a two-year-old. And you see all these images, these stock photos of women in corporate America looking really well-slept and with makeup and well-kept and holding a child on their lap on their laptops. And I'm like, "That is never my life." It's way more tiring and exhausting than those photos ever make it out to be.

Caroline:

Yeah. It is. And it's 8:25 in Chicago, and I have already made some lunches. And my kids aren't even leaving the house. So what are you going to do? So I actually want to go back to something you said on quotas Mikala, you said that data doesn't indicate that having more women on boards actually has an effect on corporate performance. And there's a question that came in from one of the participants in the event. And also, it's exactly what I jotted down, which is, what's the time horizon on that? We know performance is measured on a quarterly basis, but when would you expect to see the impact of diversity on boards on corporate performance? I know this is an issue we talked about a lot relative to the environment, that if a company makes decisions around sustainability, will you see it on a quarterly basis? Maybe not. Well, is it a important longterm strategy? I think certainly. So how do you see this play out?

Mekala Krishnan:

Yeah. No, that's a really interesting question. And I think a corollary to that question is also, if companies are putting in certain D&I practices, when do you actually expect to see those practices pay off in representation data? So maybe it's something like hiring, you expect to see it relatively near term. But on inclusion practices, for example, promotion practices, maybe it takes time for things to actually peter through the dataset. We haven't really looked at timeline analysis of this kind just because these data sets are all relatively new. What I will say is that when we work with corporations to do not so much on this topic with broader organizational transformations, so culture shifts that work in companies, what we find is that for change to really start to peter through the organization can take anywhere from five to seven years.

Mekala Krishnan:

So really, true culture shifts, mindset shifts, norm shifts, practice shifts happening in a way that the entire psyche of a company changes can take time. And so I agree that maybe this is, again, a plea for more research and data as these data sets become available, that the ability to do more analysis that is over time and allows us to do timeline analysis is super important. I think just overall, so I do my work more broadly on not just women in corporations but more broadly on issues of gender equality. I come from India, so I'm actually especially passionate about these issues in emerging markets. I would say the ability for us to know what works more broadly to advance, both what would call gender equality in society, so things like access to education, financial and digital inclusion but also in the workplace, there's much, much more research that needs to happen, much, much more data than we need to get on what interventions actually work.

Mekala Krishnan:

So as we think about data, there's almost two flavors of data that we need more of. The first is data on actual outcomes, gender desegregated data on outcomes both in labor markets more broadly but also within corporations. And then data on what works. How do you actually drive change?

Marianne Bertrand:

Just one thing on this conversation. I think it kind of feels innovating to what I heard [inaudible 00:28:05] say at the end of this intervention. When I think about the relationship between the diversity inclusion agenda and corporate performance, I think there's really two ways I think about it. And that also ties back to Friedman, which is what this event is all about. They maybe really value having more diversity in management for corporate outcomes. So there's just more ideas, different ideas. People are going to talk about different things, and that's valuable. It is just remarkable to me that's an argument we hear very often, that diversity per se is going to help corporate outcomes. This is an area where there's essentially no research that I can think about. There's really not a good piece of research that can point out that convincingly shows that diversity is valuable for corporate outcomes.

Marianne Bertrand:

But there's another angle to it, which is that if you are focusing all of your recruitment on one half of the population because you're only looking at men, there's absolutely no way that you're on the frontier in terms of the talents that you bring within your organization. And that in itself I think doesn't even need to be demonstrating data. That seems pretty sensible that by limiting your search to half of the labor market you cannot be at the frontier. So I just want to make this point because they're really the two ways I think about the relationship between diversity and inclusion and corporate performance and why there would be a positive relationship. The second one is pretty straightforward to me. The first one is one that we hear a lot of corporations talking about, that diversity is good for corporate outcomes, that we really don't have the kind of research I would like to be able to point at to say, "Yes, here's the proof of that."

Mekala Krishnan:

Yeah. And I think the other argument you were making, Marianne, it's especially true in a world where in many developed countries now women are graduating from college at exactly the same rates, maybe higher rates, than men. So it's not on just innate talent. It's also learned skills that women actually possessing at maybe higher rates than men. So it's just such an economically inefficient argument to not be tapping into that talent pool. So fully agreed.

Caroline:

So the inefficiency does raise the question that has come in on the chat, which is, should we be worried that so often this work seems to be done by women and people from underrepresented minority backgrounds? And the question on the chat is, how do we get more white men to care about this? There's the inefficiency argument. There's the corporate performance argument for which there isn't enough data. And then I think maybe this is a hope. As an answer to the question, is there data that suggests that there's a connection between diverse management teams and success in reaching a diverse customer/client base? Maybe that's it. So curious what you think about this question.

Marianne Bertrand:

I'd love to hear from Mikala on this because, again, I've not seen much of that research. I certainly have heard from companies that are very much looking to improve their numbers in terms of having kind of women at the corporation because that would allow them to reach to some clients. So I've heard of corporations that are trying purportedly to hire more women because they will be able to connect with different kinds of customers than the male employees would. But I don't know whether they succeed at that. So I really don't know.

Mekala Krishnan:

Yeah. I would say I haven't seen research, rigorous research that has done that. It's certainly an argument or a line of argumentation that we hear companies make. As we've talked to corporations, what I think they're really trying to do, probably rightly so, is find a way to make the case that this is important to their employees. And one way to do that certainly is the it is right and fair argument. And many companies are making that argument

Mekala Krishnan:

... but I think there's more and more companies also thinking about what's the business argument that I could make, and the forms of argument that they make is the two that we talked about earlier. There's a talent case. There's a performance case, meaning that gains can actually lead to better outcomes for the organization.

Mekala Krishnan:

I think there's a "we can serve our customers better, and we can make better products and services that reflect the needs of our customers," which is an argument we're hearing a lot from, in particular, consumer facing organizations quite naturally.

Mekala Krishnan:

I haven't actually seen, beyond it making intuitive sense, I haven't actually seen rigorous data that backs that up.

Caroline:

One place I think there is some data is on parental leave policies and the effect that those have. Marianne, could you speak to that?

Marianne Bertrand:

Sure, I'd be happy to. The big question is... this is really focused on women and hopefully some of our conversation will get into other component of diversity and inclusion that I think we should not ignore, but staying on the important issue of women, what kind of policies may help women in the labor market?

Marianne Bertrand:

There's lots of discussion about the value of giving women longer maternity leave to be able to have children but remain in the workforce. The research there, I think, says pretty clearly that longer maternity leaves are not going to be beneficial to women, especially the more educated women.

Marianne Bertrand:

What you find in the data, which is typically put all of UCD together, study economic outcomes for women, and look at the correlation with these economic outcomes and the lengths of maternity policies that these countries have in place, you will find that among the more educated women, longer maternity leave policies associate with a bigger gender wage gap, so lower wages for these educated women compared to men.

Marianne Bertrand:

I think what is behind this result is really that as you make this maternity leave longer, women become kind of separated from the labor market for longer, and there's a price for that. Companies like to keep their employees. They want to have then kind of continuously, and the longer you let the mothers out of the labor force, the more difficult it is for women to reenter these corporations on the same track as the one they were in before.

Marianne Bertrand:

That's, I think, one of the explanations. The other one is really just strategically, corporations may not want to put women, single women, in important positions knowing that these women will leave the company for an extended period of time when they become mothers.

Marianne Bertrand:

That is, I think, kind of a really important finding which sometimes people find counterintuitive, but longer maternity leave policies are not a silver bullet to help women in labor force, especially the more educated women.

Marianne Bertrand:

Now, what is, I think, much more promising to the extent that children will keep on appearing is policies that try to change the norm, moving away from maternity leave policies to parental leave policies and parental leave policies.

Marianne Bertrand:

In this regard, the Scandinavian countries, I think, have been the most frontier in terms of trying to put in place policies and incentivize fathers to stay at home and share the burden with mothers when kids are born. It's still to be determined whether these policies will make a difference, but in many ways, I see them as really the directions we need to go into, because those policies are about trying to change the norms, trying to change the norms that says that the mother is going to have a disproportionate share of the burden when it comes to child bearing.

Mekala Krishnan:

You know, I think that your last point about changing the norms, I actually think these policies are important for such vital reasons. The first is the fact that they change norms about who actually bears this "burden". It actually signals that this is not just the woman's burden.

Mekala Krishnan:

I think the second thing it does in terms of changing norms is in the company, now, you have both men and women taking leave. It's not just the women taking leave, so just from the equality that it creates in terms of career progression, in terms of norms related to performance reviews in terms of some of the mindsets that you talked about, about how companies perceive single women, it changes those norms, and I think that's also incredibly important.

Mekala Krishnan:

Then, I think the third thing it does is for women, themselves. In one of the surveys we did about two, three years ago, Soviet employees about if an employer has maternity leave practices, they have flexible leave practices, a whole set of policies, what's the adoption rates. They were abysmal, like 10%.

Mekala Krishnan:

I think the third thing it does, it actually makes it okay to adopt some of these policies, because people don't feel like their careers are threatened. I think it's important on multiple fronts to think about these not as women policies but as people policies and make them ones that everyone in the organization feels comfortable adopting.

Marianne Bertrand:

I just cannot reinforce that last point you made enough. In many ways, when I think about good policies in that environment, they are not women's policies. They are [inaudible 00:37:46] polices. The more we take gender out of these policies, the more we make them policies for all employees, the better it will be.

Caroline:

Marianne, earlier in the conversation you said women are one side of it, but this is different when we talk about issue of race, and I want to come back to that question. I first want to ask, as you think about diversity and inclusion, and you think both about the questions of gender and race, what are some of the common themes you look at across, and where do you see them diverging?

Marianne Bertrand:

Yeah, that's a really, really question. I mean, when I think about issues of race or ethnicity, thinking about Europe and European audience that we have here where they may not just be issues we have with African Americans in the US and compare that to women, in my mind, where I am right now based on my research and the research that I've read is that I think that bias and discrimination is a much more important force when it comes to thinking about the under-representation of racial minorities in corporation than it is with respect to gender.

Marianne Bertrand:

I am not saying that there's no gender discrimination going on, but I do believe the force that we just talked about are much more important than just discrimination per se to explain why women are underrepresented. I think when it comes to racial minorities, bias, whether it is implicit or explicit, is a much more important force.

Marianne Bertrand:

I think the other big difference when I think about women versus racial minorities is that there's a lot that comes with being a racial minority in America or in Europe that is not associated with just being a woman. You think about racial minorities in the US, that goes hand in hand with economic disadvantage. That goes hand in hand with access to lower quality schools, lower quality public services, lower quality amenities because of residential segregation.

Marianne Bertrand:

Obviously, that's not for gender. Boys and girls are born in equally rich families. They are very different conversations in my mind [inaudible 00:40:17] when I think about what we do in terms of improving women's representation compared to when it comes to improving racial minorities' representation.

Caroline:

One complement to this conversation is the question of individual responsibility in action and Booth Professor Jane Risen teaches a course on this topic, and she weaves in research from behavioral economist Dolly Chugh from Harvard by really digging into the book, The Person You Mean to Be, How Good People Fight Bias. Chugh encourages us to acknowledge unconscious bias, take a stand, get involved, and be a builder.

Caroline:

What are things that each of us can do, and this is a question for Marianne, Mekala, the things that each of us can do in our day-to-day work, particularly in a virtual world where we're feeling more disconnected, to check our unconscious bias, be advocates and allies, and drive forward meaningful change?

Mekala Krishnan:

Yeah, I mean that is actually requiring me to do a little bit of a mental reframe, because I'm so used to putting myself in the shoes of companies. I think maybe just some initial ideas, and then Marianne, I would love your thoughts as well.

Mekala Krishnan:

I think the main unconscious bias lever that we see companies implementing, and then I think employees and individuals can complement that, there's a variety of trainings that companies do related to unconscious bias. It's to create awareness of unconscious bias.

Mekala Krishnan:

I think the corollary here is step one is actually recognizing that you have unconscious biases, but I don't think it's necessary that every unconscious bias you have is a negative thing. The reason we have these biases is this is how it's helpful to process the world in some ways, but recognizing where they exist and where they are really biases, so I think step one starts with that.

Mekala Krishnan:

I'll just give you a silly example. As with many companies today, everybody's having the conversation about childcare and the issues that working moms are experiencing in particular, but I work on a team where I'm the only person with a small child, and I was talking to one of my colleagues the other day, and she was saying to me that it's so frustrating for her, because she works with a variety of people that have small kids, that essentially are not using it as an excuse but essentially saying that they don't have time to work, and so a lot of the burden of picking up the slack is coming on her, which is then creating a lot of stress for her. She's hearing that from five other people.

Mekala Krishnan:

It was not something that I had even really thought about. Just recognizing that you have your own world view and there may be others that are experiencing real challenges that you may not be seeing or being aware of, so that's kind of step one.

Mekala Krishnan:

I think step two is having the conversation. As we've been surveying employers and employees, it's really stark to me how much sometimes employers put in place policies and practices that employees don't really care about or want. One of the funny examples is we've done a survey now of COVID practices, and one of the things that so many companies have put in place is practices around open forums with senior leadership to create encouragement and lift morale, but when we surveyed employees, they couldn't really care less about that.

Mekala Krishnan:

I'm using that as a silly example, but the idea is I think we often make assumptions about what people want and what people need and what is helpful, which may completely be a flawed assumption. I think really asking the question and having an authentic conversation coming from a place of curiosity and spirit of learning I think is really important.

Mekala Krishnan:

Then, I think there are a bunch of things that you could do structurally even as an individual. If you're a manager ensuring that a performance review has an unconscious bias check. If you think about all the activities you engage in on a day-to-day level, finding ways to embed that check on your biases through those day-to-day activities I think is important, too.

Marianne Bertrand:

Yeah, I agree with kind of all that Mekala said. To go back to your original question, Caroline, I'm inspired by the work of psychologists that have studied particularly implicit bias and kind of tell us about the particular situations under which it is more likely to creep in and drive our decisions. We know the implicit bias is more likely to drive our decisions when we are rushed, when we are stressed, when we are angry, even when we are happy, so when we are more emotional, we have more implicit bias.

Marianne Bertrand:

Just that suggests that, and taking it back to the corporations, taking back to the HR process, the more we can move away from HR decisions being made under those kind of, say, time pressures, the better probably it will be in terms of having HR managers really taking the time to review applications or be thinking about promotion decisions.

Marianne Bertrand:

There's also lots of work, again, in psychology, that tells us that we can train ourselves to be less biased. You can, same way that we have this [inaudible 00:45:34] association between seeing a black face and feeling frightened, we can teach ourselves to engage in controversial stereotypical thinking.

Marianne Bertrand:

There's good evidence from the lab, fairly short-term, that by forcing yourself to associate positive thoughts with a black face rather than the negative thought you would have, you can make a difference. You can make people kind of less biased. We don't know how long this lasts, but this matters.

Marianne Bertrand:

Another thing that I think comes strongly from the debiasing literature in psychology is to really move away from thinking in categories. That goes back to the point we were making, Mekala. It's not about men and women. It's about people.

Marianne Bertrand:

One of the kind of methods that psychologists would use to debias people is to get them to think about the person, individuating. Thinking about not this black guy, but think about him, what's his life like, what does he do. Thinking beyond the category and trying to imagine the person, putting yourself in the shoes of the person.

Marianne Bertrand:

There are lots of tools that have been shown, again, in lab experiments, to help in reducing bias. I'm going to make the same call as the one I made before. As Mekala said, I'm sure there's lots of corporations that are using those kind of training to try to improve our [inaudible 00:46:54] at the corporation. It would be fantastic to allow researchers to take a look at whether or not this makes a difference.

Marianne Bertrand:

We have really, besides the work in the lab, we really don't have the kind of data to assess whether those kind of training programs matter.

Marianne Bertrand:

The other thing that I would stress, and I think Mekala also mentioned that, is that if you don't believe that those kind of training are really going to make a long-term difference, I think the other important step is really to have formal process in place.

Marianne Bertrand:

When I think about my own organization and how we do recruiting, I feel like over the two decades I've been doing it, we are moving slowly towards having more and more structure. As much as we dislike structure, because it feels like it's bureaucratic and academia shouldn't be bureaucratic, structures really help.

Marianne Bertrand:

The most common examples that I always come back is just rejecting someone for promotion or for job because he or she's not a good fit. That is just not the world that we should still be in. We should have explicit criteria ahead of time when we decide what are the kind of skills that we're looking for in a person and not deviate

Marianne Bertrand:

deviate from those because we don't like the person that emerges after we've gone through these criteria. So I think formalizing a lot of the HR structure, even though it needs more bureaucracy, is also, I think, another way to reduce the extent to which we have biases creeping in.

Mekala Krishnan:

Yeah. Just on the company training on unconscious bias, I mean, what we're seeing, similar to the quarter crutch, this is becoming the crutch where a company does an unconscious bias training with their employees once a year. And then they think they're done and people are all set for the year. When really, I mean, it's such a process. So you need to think about continuous nudges. You need to think about structural change, but it's what I worry about is that this is now kind of the buzzword that everybody's using and it's going to be the quarters of 2020 is going to be unconscious bias training.

Caroline:

So there are a number of questions that have come in and we only have about 10 minutes. And I want to try to string two of them together. So one is around the fact that gender has been studied for two decades or more, more really. And race more recently. Certainly, the work Marianne and Sendhil did was almost two decades, certainly started two decades ago. But where are we along the trajectory of studying the role of race? And what are some slow and incremental breakthroughs or big breakthroughs? And in addition to that question, I'm going to string it with another one which came in and specifically said, "When you talked about how there isn't research on the value of diverse corporate boards, does that also apply to diverse work groups and reference the research of Katherine Phillips at Columbia Business School?" So I want to string those two questions on race together.

Marianne Bertrand:

Great. So just on the first one, and mainly your labor economists, the racial angle to our earnings, measuring earnings differences between racial groups as being studied for forever, as far as remembering economics, since we have data available to go ahead and do that. So I think it's definitely not correct to believe that we only now start to think about racial differences in the market. And that's been going on for a really long time. To be very specific about what is being difficult, it is being to separate the impact of race from all of the correlates of race. And this is what I was just kind of thing before we are in a situation where obviously there's a correlation between being black in America and having gone to a worse school, having poor parents.

Marianne Bertrand:

So what is being difficult is saying that these low wages that I see for kind of black individuals,, they are the result of discrimination. Because there are so many other forces that could be explaining why a black person in the US today are earning low income. And so it's a conversation, it's studies that have been going on for a very long time. When it comes to what we've learned from the data so far, and I'm going to focus on the US, I know the European context kind of less in this regard. I think there's been definitely more progress for women in the labor market over the last few decades than there have been for racial minorities in the US. So we are seeing more progress when it comes to when it comes to gender equality than when it comes to racial equality.

Marianne Bertrand:

When it comes to the second question that was asked, I don't know this particular study that was mentioned. The one word that I'm aware of that was kind of weld-on I wish, I mean, I can think about on the results in a causal manner, was work that was done at business schools studying the racial diversity of teams of students working on startup ideas. And they found the more diverse team, I think both in terms of gender and race, came up with "better ideas." And I don't remember how the better ideas was being measured. Mekala.

Mekala Krishnan:

Yeah, I was going to say, I think if I remember correctly, that resource that you're referring to, Marianne, was something that was published in PNS or something. That seems to be what's ringing a bell. That was the one that I was going to quote as well. I think to your earlier point about isolating race and discrimination compared to other factors, I completely agree. I mean, to some degree, the parallel for women is my pet peeve is people always talk about the gender wage gap as a measure of discrimination. And then that 18 cents to a dollar US statistic that is always cited. But I mean, really if you start to parse that, it is because of things like sectors that women work in, it is things like years of experience in the workforce, it is things like what role they hold in corporations, and then just the what's left over is basically what people attribute to bias.

Mekala Krishnan:

So it's sort of that parallel where, and I think in the gender space, people have at least started to do that desegregation. Now, again, of course, the argument you could make is it is the sectorial representation, years of experience, et cetera, et cetera, due to discrimination itself versus personal choice on the part of people. But at least they're started, I think there is emerging work on the gender front to try and break up these different attributes and then see what's left over that you can really say is unexplained and therefore to bias.

Mekala Krishnan:

I think on the race side, that's done less. And then I think what the challenge is that it leads to, the reason I think this is an important question is thinking about where you intervene. Is the right intervention around schooling and public service provision, is the right intervention around a conversation around bias and discrimination? And my sense is it's unfortunately, probably all of the above. But I think the reason it's important to study this is to say then what are really the key nodal points or catalytic points where you need to intervene to really drive change?

Caroline:

So Mekala, the question that came in for you on the chat is something that we haven't yet touched on, which really does speak to a lot of the work that you've done, which is relative to diversity and inclusion in emerging markets. Can you talk about how these questions are both different and similar in emerging markets and in more mature markets?

Mekala Krishnan:

Yeah, absolutely. So I think firstly, the phrase diversity and inclusion in my mind, it may be wrongly so, but in my mind, it conjures up a vision of corporations, which is organized labor with benefits and structure to the workforce. And I mean, frankly in many emerging markets, that's just not what labor markets look like. So if I think about India, most women are employed, self-employed in agriculture, they run small order farms. Most men are employed in construction. So it's a very, very different form of labor market. Then a lot of what we've been talking about here, which is within the four walls of companies, which makes thinking about how you drive change also quite a different conversation. Certainly, there's a role of corporations, but just targeting large corporations and thinking about driving change in large corporations will address a small part of the whole labor market when you start to think about emerging economies.

Mekala Krishnan:

So I think that's one issue. I think the second issue is this question of bias, I actually feel is a much... Maybe bias is the wrong word, but social norms and how they pervade the gender equality issue in emerging markets. It's certainly to some degree true in developed markets as well, but I think much more so in emerging markets. I've seen some data from something called a World Values Survey just as a simple illustration that asked respondents the question of "When jobs are scarce, should they go to a man or a woman?" And more than 50%, 60% respondents in south Asia and the Middle East say that when jobs are scarce, they should go to a man. And you compare that with developed countries. And those numbers are still about 20%, 30% in developed countries, but it's a lot less.

Mekala Krishnan:

So I think there are some questions of attitude and norms that are quite different in emerging markets compared to developed economies. I think the third thing is we've done some really interesting research that has looked at a range of what I would call gender equality issues. So it's looked at indicators of "gender equality" in society. Things like access to education, digital and financial inclusion, and then equality in the workplace, things like representation in the labor market, things like women in leadership positions. And so while I've highlighted a bunch of differences between advanced and emerging markets, what our study of actual data on gender equality indicators would suggest is that there are some indicators that tend to correlate with levels of development.

Mekala Krishnan:

So for example, progress on equality and education, the wealthier countries, you seem to have kind of solved that issue. So again, I don't know which direction the causality lies, but at least there's a correlation between levels of development and things like equality in education, equality in financial and digital inclusion, access to healthcare, et cetera, et cetera. I don't think it's perfect in developed economies, but it's a lot better than developing economies. However, having said that, there are four or five issues that exist regardless of where in the world you are. So high rates of violence against women.

Mekala Krishnan:

Globally, one in three women has experienced violence from an intimate partner at some point in their lives. That number is basically the same in the US. Things like equality and women in leadership issues that exists across the world. Things like political representation and equality and political representation. So I guess the headline is there are differences between advanced and emerging economies on some dimensions. And I think that we need to intervene, could look quite different just because of the structure of the labor market. And I think the role for policy becomes much stronger in developing markets than maybe it does in developing markets, but there are some gender equality issues that really exist across the board. Marianne, I'd be curious if you have maybe-

Marianne Bertrand:

I'm also kind of doing some research on India and I also care a lot about India. And I recently looked at this World Values Survey questions that you just referenced. And India looks just so bad on this question. It actually looks very similar to Saudi Arabia, which should not be where it ought to be. I think what's really important though, and maybe that's a small point, but it's an important one for me to squeeze in here, is when it comes to norms, and these gender norms are really, really important. They really show you how complicated this conversation is. I mean, I saw you struggling with norms versus discrimination. It is really more about norm than discrimination. I think what's very salient in these World Values Surveys is that you ask men or you ask women that question about whether a guy comes first-

Caroline:

It's the same.

Marianne Bertrand:

It's exactly the same. They're aligned with each other, the same share of woman in India than men think that jobs should go to men than woman. So it's a different phenomenon than discrimination. It's really about norms. It's really about stereotypes that change the way we make decisions. And I think that's a pretty profound point because when you think about women's welfare, for example, lots of women in India maybe are happy with the way things are. And how do you change these norms? How do you show these countries out of this situation? And when you come to quickly important conversation, because most women in India do not work. And as we say, they are more educated than men. So for India to rise and many of these countries to rise, these norms need to change. And it is a really profound question as to how you start this process that will go hand in hand with India and a lot of these socialization countries growing faster.

Caroline:

Well, thank you so much to both of you for joining us today at this conference. Although labor economists have been studying questions of race, gender, as it relates to labor, for many years, it was not necessarily central to Friedman's piece 50 years ago. So it's good to revisit that and have this conversation in that context. So thank you very much. To keep us moving forward with our day, I will hand it off to Randy Kroszner, the Deputy Dean for Executive Education at Chicago Booth and also the Norman R. Bobins professor of economics.

 

Randy Kroszner:

I'm Randy Kroszner, I'm the Deputy Dean for Executive Programs here at Chicago Booth. And I speak to you from our wonderful new London campus. Now, what we're going to do is turn to a discussion with Mark Carney and I'm sure certainly everyone, well, I think everyone in the world knows Mark for his many roles that he has played. Recently, he was the Governor of the Bank of England, he'd been Governor of the Bank of Canada. I had met him a number of years ago when I was working in the US White House as a member of the President's Council of Economic Advisors, and he was working in the Finance Ministry in Canada. Mark has now retired from his role as Head of the Bank of England.

Randy Kroszner:

And he wears a number of hats now, he services the UN Special Envoy for Climate Action and Finance. He's Prime Minister Boris Johnson's special financial advisor for the COP26. He's recently joined Brookfield Asset Management as vice chair and Head of ESG and Impact Fund Investing. And also when he was at the Bank of England, he really helped to spur a global discussion and a regulatory focus for central bankers, and bank and financial regulators, on the issues of climate, and some of the risks associated with the climate. We heard about that earlier from the Hong Kong Stock Exchange, Katherine Ng told us that they have recently required all companies listed on the Hong Kong Stock Exchange, not just financial companies, to have a word level discussion of ESG, environment social and governance impact, and to produce that publicly. And also, she said that one of the main motivations for that was risk management, I think a very similar motivation to what Mark had.

Randy Kroszner:

The focus of what we're going to talk about here is, really thinking of the tough questions about shareholders and stakeholders. Now there may be some cases in which there's common ground, and some of the other speakers already have talked about some of the areas of common ground, where there may be some low hanging fruit that focusing on some of these corporate social responsibility issues, these broader purpose issues, can actually help the bottom line. But there may be some areas of conflict. And so we really want to try to get into the meat of that of conflict or common ground. Welcome Mark, thank you so much for joining us. And what I wanted to do is try to start with some definitions. You've thought a lot about shareholders and stakeholders, and so let's first try to think about what do you mean by, or what would we mean by stakeholders if we're trying to take stakeholders into account, how would we define that relative to shareholders?

Mark:

Okay, well, first off, thank you, Randy, for having me and for organizing what's an amazing day, and bringing the world together, virtually, around this important issue on this important anniversary. And let's hope this is as seminal as Friedman's New York Times essay was 50 years ago. And let me start, the stakeholder shareholder point... I'll start at a basic level, which is when a company thinks of its stakeholders, obviously, includes its shareholders, includes its creditors so the financial side of the equation, but very much its employees, its suppliers, its customers, the community in which it operates, and for the largest corporations, for the global corporations, elements of the global commons as well. And so if you're a tech company, it could be issues around global data privacy, global taxation, for example. If you have a sizable carbon footprint, the environment and on. And this will be I suspect a common theme to our discussion, and probably has been already, it's partly situation dependent, but certainly those broad elements out to the community for companies, the stakeholders would include all of those.

Randy Kroszner:

And so what are the challenges in trying to encompass the stakeholders is that we've built this infrastructure over the last, at least 50 years since Friedman wrote. But I think much before that, let's say at least over the last century, to really be able to be systematic about collecting data on and measuring something like shareholder value. Because if it's a public traded company, we have that in stock markets. Profits, now obviously there may be differences between accounting profits and economic profits, but we have a pretty well developed and systematic infrastructure for that. Well, how do we think about that when we're trying to encompass these broader set of stakeholders? How do we clarify what the objectives are and what the metrics are for them?

Mark:

Okay. Well, can I just start with the first part of your question, the setup to your question. Because I think it's a pretty important point. When you think back, the process, and Chicago Booth, obviously, global platform, but let's use the US as a specific example. Really formalization of accounting standards comes out of the Great Depression. One of the aspects of the New Deal is the creation of the SEC, and one of the charges to the SEC is in effect to come up with a form of standard accounting and disclosure practices in the United States. And that's something, you kindly reference our history, which went back to pre-crisis, but immediate during and after the crisis, I remember a number of discussions we had about disclosure, and information, and transparency in a variety of markets, such as the over-the-counter derivative markets, and what could be done in order to write that and work through the FSB and the US authorities, UK authorities, others have done that.

Mark:

The point of that is, out of crisis often comes improvements in measurement and valuation and understanding. And it's been a very long process and I'm not going to suggest that we've reached some perfection of financial disclosure, but it has been an iterative process and a long development process. And when you think about, and I'm interested in obviously a lot of informed people on this chat, their perspective, but when you think about on the sustainability side, it's a shorter period of time when even the Brundtland Commission is probably 30 years ago, defining sustainable growth, the SRI initiatives and the forerunners of ESG initiatives is late 60s, early 70s, and it's more a divestment type world. And it's really been gathering momentum over the course of the last decade.

Mark:

So it's still relatively young. Those are the first two points. So financial has taken a long period of time, this is a relatively young field. And if I may say so, and I, hopefully we have a chance to unpack this. It's a slightly confused field or confusing field, maybe it's a better way to put it, because quite often, in discussions around it, there are people mix disclosure, disclosure standards, or recommendations, because many of these aren't formal standards, with ESG ratings, with ESG investment strategies, which are very different things. Financial disclosure is not a credit rating, as you know, but credit rating agencies use financial disclosure in order to get there. But actual bond investors, fixed income investors might take note of the credit rating, but the better ones are actually diving into the financial disclosure and then using, and not manipulating, but analyzing that data in order to make those judgements.

Mark:

And I think it would be helpful to pull out from the sustainability world what's a recommendation, what's a potential standard, what's getting to where you started off at the beginning, what's getting to that divine coincidence, if you will, of sustainability and enterprise value creation, sustainability or ESG factors that influence enterprise value creation and what are beyond that, which are important for sustainability, environmental, social governance, broad factors being discussed, but perhaps don't directly impact today. They might in the future, but don't directly impact today, enterprise value, but it's still desirable to be disclosed for the purposes of broader stakeholders. And that's being disciplined about or understanding that is, I think, important to advance this debate.

Randy Kroszner:

I think that's right. So why don't we pursue that? And then we'll come back to some of the other parts of the question. So, especially, well, given all of the experiences that you've had, where should we push to be able to get more data? Obviously we were just talking in the previous session about more data, about diversity and inclusion. So there's a lot of discussion about that, but in, let's say, some of these broader climate issues that you've thought a lot about, where could we really make the most progress in trying to get more information, be more systematic about that?

Mark:

Okay. And I'll just link the very briefly to what I just said, which is, I think that most of what I'm about to say are factors that either influence... That will influence enterprise value creation. So it's of interest to broader stakeholders, it's certainly of interest to the global commons, but it will likely affect, it either is affecting or will affect, either the risk or opportunity profile or both of companies. So what do we need? We need consistent, comparable, comprehensive disclosure around climate related risks. That was what that's something called the TCFD. I think most people will be familiar with it now, which Mike Bloomberg ran, which was, in my way of thinking, the right way to do these things, which is the objective is set either by private consensus or by the public sector. In this case the G20 asked for this. But the charge is to a broad sway, the private sector, the providers and users of capital, because they know what's decision useful, what's material within a certain area and informed by industry experts and others.

Mark:

And that's what the TCFD was. And what it came up with, and this is fundamental in my view. This is fundamental, this is the building block of all other climate related disclosure is you need obviously the static disclosures. So what's the scope one, scope two and scope three emissions of companies. But you need to know how those are governed. So the risk management aspects around that, who reports. And you need, because it's climate and past is not prologue, unlike often the case say in consumer finance or other issues where you can look at historic data and it can tell you a fair bit about what's going to happen in the future, past is not prologue because it's dynamic. You need some form of forward looking disclosure, which is different than we're familiar with on the financial side or much on the financial side, around scenario analysis. In other words, how are these climate related risks, in the company's judgment, potentially going to impact them? And what are they doing about it?

Mark:

So that's a building block. That's the first big building block. I think what's becoming more apparent, and this is related to it, from a climate perspective is understanding what the strategy is of a company in a world that's moving or many parts of the world that are moving towards net zero, or at least have the stated objective of moving towards that zero. So what is the net zero transition plan of a company? Does it have one? That's the first question. That is a legitimate disclosure question. Do you have a plan? You might not.

Mark:

You might think either you're going to wind up the company before 2050, the normal date for net zero attainment, or it's just not relevant for some reason to you, and you can perhaps explain why it isn't relevant, or you have plan. And if you have a plan and then the follow on questions are okay, 2050 is a long way off, how do we measure... What are the short term milestones and metrics with which you... What's your strategy and how do you manage to that? And then obvious follow on questions. This is in the category of best disclosure, but is senior executive compensation tied to some of these metrics? Is this one of the things that influences it? And again, reporting around that. So those are the types of issues I think are there.

Mark:

Last point, if I may, which this is a financial ecosystem. So what I'm talking about is largely the disclosure of the users of capital, but what about the disclosure of the providers of capital? Is it enough if I'm running a fund to just say, "Oh, I have an ESG rating, which says X, black box type ESG rating, or should I be disclosing my footprint or carbon intensity or the extent to which I'm on a path to net zero?" And that last point, the technology, if I can aggrandized it to that, the financial technology there is under development. There are some companies, some big asset pools of money who do disclose metrics around this, which were pretty interesting. I think one of the questions for the industry globally is, what works? What is reliable disclosure around these issues around transition?

Mark:

So that's a host of things. Less anyone gets overwhelmed by that, a lot of that is in train. The TCFD, there's 1,350 of the world's largest companies are disclosing against those metrics. There were a number of initiatives and this gets to the de-confusing things, if I can try... I was going to say coin of phrase, but I don't think anyone will use that, but de-confuse...

PART 1 OF 4 ENDS [00:16:04]

Mark:

I was going to say coined a phrase, but I don't think anyone will use that. But [inaudible 00:16:03] confuse things.

Randy Kroszner:

That's confusing.

Mark:

Clarify things. Because it is confusing, how about clarify things. To clarify things. Is that there's a number of initiatives that are using the TCFD as a base to more formalize this. So the EU disclosure initiative would be one example. The IFRS has recently launched a sustainability consultation, could be another opportunity there.

Randy Kroszner:

Okay, great. Now, lets... Because that was very important to think about metrics. Think about how you might measure these things. But let's now come back up to the objectives. So how do you determine the objectives? Why is it net zero by 2050? Why is net zero the right objective? Why should that be the priority for these companies? Because once we move away from shareholder value maximization, there are a lot of priorities that could come in. Not only within climate, but also between climate and other priorities in the social sphere. So how do you manage that? How do you deal with that very big picture question?

Mark:

Yeah. Okay. So I think there's certain things, there are certain social governmental regulatory initiatives that are big enough, and broad enough, that companies need to make a call on whether it's material to them or not. So we're in the sort of comply or explain zone. So I'm sitting here in Canada, working in part for the UK Prime Minister, if you're in either of those jurisdictions, or 120 other countries around the world, where there is a net zero target, both in Canada and the UK, it's legislated, it's a legislated target.

Mark:

You kind of have to have a view, as a company that's operating there, whether it's relevant or not. So you have to have a net zero plan. I mean, it's now come to that point. Now your plan may be, "I have no plan, because I'm going to exit stage left before 2050," or for whatever reason, but that's a disclosure requirements.

Mark:

So that one falls into the camp, I think. And I think increasingly that will be obvious that some judgment about whether or not something has material on a comply or explain basis, around the bigger aspects of climate. Okay? Now, within climate, and let's use the SDG, as often are used, sustainable development goals are often used in purpose-driven corporations or purpose driven disclosure, if you will, within climate, clean water is an SDG. Okay? It may not be relevant to me, and it's not that broader societal drive that every company has to disclose.

Mark:

And so it just may not be on point. Whereas other social issues, quote, "Social issues," environmental, social issues, maybe material to my business or, to my competitiveness, or broadly speaking, to my enterprise value. And then I am very much expected to disclose that. And I think one of the challenges in this broader set, I'm just going to bring it up one level, if I can. Which is that there are... And I know some of the standards [inaudible 00:19:29] are thinking about this now. Which is, let's say we have this relatively clearly defined, it changes a bit over time, but a bucket of financial disclosure; what's relevant materially financially? We're all relatively familiar with that.

Mark:

Then there are some environmental social governance issues, which are material to enterprise value creation. Okay? If you're in the energy sector, climate related issues are material. It depends on the path [inaudible 00:20:00] policy. It depends on technological. You've got to have a view. And if I'm in bed or lending to you, I've got to know what your view is in order for me to make a judgment on that. Then there are some broader issues, broader social issues, which may or may not be relevant to you, but may become relevant to you over time. So that sort of concept of dynamic materiality. Now, you have to make a judgment, whether you think you want to disclose that.

Mark:

And I, as a stakeholder, I'm going to broaden it out. Not just as an investor or lender, but as a stakeholder, I may want to know how you impact those various aspects. So some sort of species loss or something else like that. And if I can make this a little more tangible, so in that first bucket, the financial, we have FASBI in the US, or IFRS, financial accounting, right?

Mark:

Those are the disclosure around it. In that second area, where there is material sustainability issues could affect my financial, that's what SASB tries to do, the Sustainable Accounting Standards Board. In that broadest area, that's something like the Global Reporting Initiative, will ask for a bunch of, there's a very wide range of sustainability things, many of which, in the judgment of the company and its lenders and creditors, may not affect that enterprise value.

Mark:

And they're right, but from a broader stakeholder perspective, people will want to have that disclosure, and that's... Okay. In my judgment, that's pretty important to know those distinctions and work through those distinctions, and be clearer. And I think one of the challenges, if I may, and I'll head back to you. For the authorities, of which I'm no longer one, but the authorities on the disclosure side and standard setting side, is okay, shouldn't efforts be made to start to formalize some of this. Particularly, what's in that second bucket, if you will, of broader sustainability disclosure, that's potentially material, to enterprise value creation.

Mark:

And that's, I think the EU's looking at that. That's what the IRFS has just announced. They're having a consultation on it. And I think people who are interested in these issues, who care about these issues, I mean, these are places to really weigh in.

Randy Kroszner:

So we have these, these different buckets, as you described. Some of them are more material, some of them might be dynamically material, but there's a lot of judgment that goes into that. I mean, the simple thing about value maximization is you've got sort of a clear bottom line for shareholders, and you may want something more than value maximization, but you kind of agree on that as a key goal.

Randy Kroszner:

So how do you avoid the problem of, as some people have criticized the business round table approach, and some of these new approaches, as accountability to everyone means accountability to no one? So we can try to improve some of these metrics. But as you mentioned, we're still far off on them. But even putting that aside, even if we had better measures, how do we choose amongst all these? And as you said, one of the key things you have to do is try to give the right incentives to senior management and the CEO.

Randy Kroszner:

But if you've got 10 different objectives, how do you work that out to... Lets say we did have the data. How would you actually structure the incentive package for them to reach those? How would you [inaudible 00:23:44] amongst them? And then how would you structure the incentive package?

Mark:

Well, I think first it's situation specific. I mean, it's complicated to run a large corporation. It's complicated to run a large institution. You don't maximize just to one thing, or to your maximum across time. And recognizing that some degree of balance is required, maybe different degrees of balance in different cultures, different jurisdictions, and different degrees of balance over time. That's part of the point of dynamic materiality. People care, the weight that's being placed on, rightly in my view, on certain social issues, and inclusion, and others has changed fairly substantially and steadily, and then very substantially.

Mark:

And it's just in a different order of magnitude. I mean, reading Friedman's essay, it's from centuries ago, it's not just [inaudible 00:24:48] from that perspective. And I think Robby was saying that, "Okay, but recognize the norms of the time as opposed to the norms of the," but the norms of today are relevant to the value creation of today.

Randy Kroszner:

For sure.

Mark:

That's the first point. The second is that the expectation is that the judgment of, I want to know as an investor, I would want to know as an investor, what is the judgment of a company of which of these factors are particularly relevant to them? And if I had the view that a certain ESG driver, it should be relevant, then I want to be able to challenge them.

Mark:

Then I'll make a judgment whether or not that's there. And I'm sure this has been brought out [inaudible 00:25:36] I haven't had a chance to see everything, I'm going to benefit from the fact that it's being recorded to go through it, that this has been brought up. There's a number of channels, of course, over time where ESG quote unquote, or sustainability factors, are going to drive enterprise value.

Mark:

People often go to this, but it is true. I think my experience in running organizations, and certainly a lot of the research backs this up. I mean, the human capital dimension of it is very, very strong. And the alignment of company values, ability to attract and retain is there, it's absolutely there. And companies have to be sensitive to those factors, because it's ultimately going to have the impact. Social license, this is where it gets more nebulous, because it's kind of there until it's not.

Mark:

And when it goes, it's very, very hard to get it back. And you want to be a little careful not to read every sustainability factor into the maintenance of license. But equally, being a good corporate citizen in that regard, is good for business. If I'm kind of try to put it in Friedman-esque terms. And, I think he had, and we talked about this the other day, sort of lovely phrase about the rules of society prevailing norms. Well, the rule of society and prevailing social norms, are beyond shareholder value maximization. I mean, I think that seems like a little addendum, but you could drive a very large [crosstalk 00:27:34] through it.

Randy Kroszner:

No. And I think that's one of the key challenges, because I think one of the things that Friedman tried to do, is I sometimes call it the Friedman separation theorem. They can separate all the things that the corporation does, for all the things that are done in the political sphere. And I think this discussion suggests, and the earlier discussion suggests, that it's sometimes not so easy to pull those two things apart.

Randy Kroszner:

Because you could say, as I think Friedman said, well, just leave it for the corporations [inaudible 00:28:03] shareholder value maximization. And then there's a political process that can determine some of these other things, whether there should be disclosure around climate, whether there should be net zero carbon emissions by 2050 or 2070, or no regulation of that at all. And that those are completely separable realms.

Randy Kroszner:

But I think what's happened today is it's much more... I think when Friedman was arguing that it was separable, I think it's much more difficult today to separate those two. But I think that's where one of the challenge's comes in, what should be the board of directors and the shareholders pushing the senior management to do? As opposed to those people going to their elected representatives and saying, "Well, we need this in this sphere and we need this other thing in this sphere."

Mark:

Well, yes, it is, again, you're putting your finger on it. It's difficult. And because it's difficult, and because it's situation specific, it can't be generalized. And there does need to be at least an effort made to draw, I think, the connection over time between the environmental social or governance factors. Although, let's be honest, like most of the governance factors are good governance. I mean, it's not that hard to... That's just, really? You don't have good governance?

Mark:

I mean, if you disagree with one of the sort of accepted governance principles, then just put your hand up and explain why that's wrong and kind of move on. And that's part of the reason this is a subset of it, but in jurisdictions like the UK, where you have advisory motions, say on pay for example, and where actually there's an emerging debate, I would say, on transition, which is yeah, okay. The authorities won't be prescriptive. And I'll be clear, I'm not an authority here, but not prescriptive about what your transition plan is.

Mark:

But just like there's an advisory vote on pay every year, we'll have an advisory vote on your transition plan, whether it is fit for purpose to use the phrase, where you are right now, right? You're in the UK right now. I mean, one of the phrases around this or concepts, I should say, it's more than phrase, is around enlightened shareholder value. Or, if you're coming from an investor side, its shared value, which is where is that confluence, or that divine coincidence, if you will, often over a slightly longer time horizon. Longer time horizon for the cash flows to materialize if you will. But between the broader set of stakeholders and the shareholders, and the shareholders as the residual claimant.

Mark:

And part of it's having, not the courage, but the discipline to think that through. And then if you're challenged, as a company on, "Why don't you care about X?" Well, to come clean on it. But I'll make, again, I'm going to retreat to an even a higher level, if I may, which I think catching the bits that I've caught, there is an element of this, I think in some of the discussion. Which is that I think Andrew Hill was, and I'm going to misquote him, but I think he had sort of extreme shareholder value. I think he used that. And the way I think a bit about, there's of course, as always with Friedman, there's a lot of insight of what he says, to some extent, in isolation. If you don't think about the dynamic consequences of what he said-

PART 2 OF 4 ENDS [00:32:04]

Mark:

... if you don't think about the dynamic consequences of what he said, how it gets interpreted, and how pure shareholder value maximization, to the exclusion of others, actually corrodes some of the underpinnings of the system or can corrode some of the underpinnings of the system. If every relationship is purely contractual and ... That's one of the things. So slightly straying from your question, but one of the things, at least what I felt in understanding this issue, is that there is a recognition that done properly, for example, a purpose-driven corporation, so it has a clear objective that it's trying to accomplish, that understanding obviously empowers and enthuses the workers within another set of stakeholders because they're trying to solve an issue.

Mark:

But also, for the suppliers and even sometimes the customers and/or the communities understands what it is trying to accomplish and there's that broader relationship and support that doesn't have to all be captured within a contractual framework that optimizes everybody's return, but ultimately makes people better off. There's that dynamic to all of this, that when you reduce it too far down to shareholder value maximization, über alles at to the exclusion of everything else, then you ultimately corrode those other factors to your detriment.

Randy Kroszner:

This is a-

Mark:

But you can't go to the other extreme, which everything that matters to the community matters to the corporation gets internalized. Right?

Randy Kroszner:

Right. No, I think that's the tough choice, and exactly the issue that you were raising is something that Rigo and Andrew had talked about. Also in the earlier discussion, in Asia, there's a lot of discussion of the role of ethics and morality, and that institutions get their legitimacy in that broader societal realm and that broader role of ethics and morality. If these institutions are not seen as pursuing reasonable purposes, then they don't have legitimacy and they're not going to get support. So you're talking more broadly for the integrity of markets, integrity of capitalism more generally. Obviously, we've seen a lot of challenges to that recently. I think that very nicely fits in with that discussion.

Randy Kroszner:

But how do we make those tough choices? Let's say it is difficult to figure out what's in the political realm and what's in the corporate realm. But let's say that there are a few things that either you want to impose on everyone, let's say, like net zero by 2050, or that you want to impose on a particular corporation. How do you then deal with shareholders who would say, "That's not appropriate to do that. I'm a longterm pensioner. I want my pension fund and I want my investment fund to maximize the returns for me because otherwise, I'm going to be impoverished when I get old. What about the value of me as a retiree, being able to have a reasonable life?" Shouldn't that also get some-

Mark:

Absolutely.

Randy Kroszner:

So how do you-

Mark:

Let's go directly to the example. Just to be clear, I'm not imposing net zero. Society is elected governments who-

Randy Kroszner:

Sure, sure.

Mark:

[crosstalk 00:35:40] things and put that in place. With broad, but in Canada, it's not bipartisan. It's cross-party support, legislative passed it. Okay. That's the [inaudible 00:35:52] to the country. So now as a company, I have a couple of issues. You know this, but it's useful to step back. I've got two sets of risks/opportunities around climate potentially, but certainly risks. I have the physical risks, which gradually manifest and mount over time. It depends on what the world does on climate there. But the bigger one that, and this is the thing that we identified as the FSB and Mike Bloomberg and through the TCFD, the bigger one for most companies is so-called transition risk, right?

Mark:

So where the country is today, let's take Canada, and what are the suite of policies that are going to come into place over time that are going to move Canada towards net zero? How will those affect my operating environment as a company? Okay, I've got to think about that. I've got to make a judgment about when certain regulation is going to come into play or support for an alternative fuel or power source, which may affect my competitiveness positively, negatively come into play, or a price on pollution. Where may that go over time? All of these things, how do they affect it? That is going to affect my bottom line. That's going to affect my competitiveness and my bottom line. That's going to affect the pensioner, ultimately, whose money I've been entrusted with.

Mark:

So that is absolutely an example where the ESG factors directly impact the financial factors. Now, one of the difficult things always to say, but it happens if you have a long enough Chicago seminar is that financial markets, they're not perfectly efficient and it sometimes takes a while for particularly big structural changes to then be pulled forward into the present valuation of companies. Particularly big cross-cutting structural changes, whether it's future of artificial intelligence, big geotectonic plates changing in trade, and climate policy and climate risk.

Randy Kroszner:

Right.

Mark:

So there's a big debate, which was ... I happened to raise it about five years ago, and I got a lot of blowback for it around stranded assets in fossil fuel. It wasn't my idea. I didn't originate the idea. Just mentioned it happened to agree with it. Now that has been pulled forward into the price, starting to be pulled forward. Now, you can argue whether it's fully priced in or not, but it's being pulled forward and you're seeing carbon price and other assumptions changing and climate assumptions changing for big energy companies. BP would be an example, to say, look, actually, some of these reserves are not worth what they used to be because of future climate policy and where we think climate risk. Okay.

Mark:

Now that's an example where the disclosure of these relevant factors, including the transition risks, five years ago, 10 years ago, would have been material information. That's one of the things TCFD, material information. Different investors would have a different view. Some of them would think ... Some investors would have thought, "Actually, we don't think the UK is ever going to have a net zero strategy or 120 countries will, or the carbon price will go to X or whatever will happen. So we'll take this side of the trade. Others may have a different view."

Mark:

Fast forward, maybe things haven't moved as much as they necessarily need to in order to get to net zero, arguably. But stuff is coming in and it's increasingly credible that they will move in that direction and that's being pulled into the price. So that's a case where you have absolute alignment. It could have been the case, just to one last point. It could have been the case that nothing happened in the intervening five years on climate policy and nothing happened in terms of the social consensus coming around the need for more credible climate policies, effective climate policies.

Mark:

In that case, would the disclosure five years ago have been wrong? No, my view, no, because that was a risk. You could take an informed view or your view of the relative probability that these transition risks crystallized. Lo and behold, if you listened to my speech and followed my logic, you would've pulled it forward. As a central banker, you have to find things that you said in the past-

Randy Kroszner:

Sure.

Mark:

... that turned out to be relevant in order to rebalance. I'm finding that in retirement, as you've noted in my retirement.

Randy Kroszner:

Yes, yes. Actually, a few questions have come in to take some of the discussion that we have, but apply it rather than the climate realm, with respect to some of the recent issues on health and pharmaceuticals, because there's similar kinds of things that are happening now about very large investments that are being made to try to discover vaccines or prophylactics that would help to reduce the impact of COVID-19. Then the question of, "Well, what will the companies be able to charge?"

Randy Kroszner:

So obviously, there's a broad social purpose of trying to fight the pandemic, but there's also a rate of return for the companies. So how do you think about those kinds of trade offs and in particular, one of the questions focused on, "Well, don't all these companies have very important lobbying arms that go to the US Congress, to the Canadian legislature, to the UK legislature, whether it's pharmaceutical companies, whether it's energy companies, and don't they get what they want anyway?"

Randy Kroszner:

So those are two separate issues. One, let's apply this in the current context, and then second, that broader political economy realms of is there a separation between what the company is doing and the political realm, or is the political realm really subject to what the companies want in value maximization.

Mark:

Okay. Yeah. It's a great question. Well, on the first one, one of the things which I think predated just predated when you were at the Council of Economic Advisors in the international realm, but correct me if I'm wrong, that was a G7 initiative called Advance Market Commitments. The idea was, and big money was put up for ... the idea was for diseases that only affected or principally affected the poorest countries in the world. The issue being fairly obvious, the incentives for the drug companies to work on these diseases, the classic example was pneumococcus, was relatively low because they couldn't earn the big patent return on the investment. So they just didn't invest in them.

Mark:

So what the G7 did, along with the Gates Foundation, was to put up a bunch of money to give the patent for return, if you will, the monopoly returned for that period of time. Then to ensure that it was incentive compatible for the countries that use the drug, assuming the drug was developed, for them to pay the marginal cost of production, which, as you know, it normally is very low. So there's some incentive because you bake into for it. So it wasn't going to be wasted, but it was going to be used.

Mark:

I have to say around, and I don't mean to dodge the question around this issue, it has struck me that ... some element of that would have been desirable. The point is to do it ex ante-

Randy Kroszner:

Right.

Mark:

... as opposed to example post, and we are going to face, hopefully, we are all going to face this issue, which is that there will be a vaccine or vaccines that are credible. The issue will be rapid global deployment and support from those who have to those who haven't for that rapid global deployment. But I will say, I guess, just to ... Sorry, I'm thinking out loud. One of the issues of course is the companies haven't had to be told to go and put all the effort into finding the vaccines.

Mark:

I do think ... I will give them the benefit of the doubt that there has been very dedicated efforts for the greater good to find the vaccine and then figure out how it's going to be sold and distributed down the road. So I'm not sure that this conflict has come in. I think the greater social good has been internalized in a number of companies, and they probably will not make the monopoly profit on the vaccine, anywhere near the monopoly profit on the vaccines that they got, nor do they intend to, and that's to their great credit.

Mark:

I'm not sure their shareholders and ... Well, we'll see, we'll see. Somebody ... you never know in the US. Somebody might sue, but I don't think so. On the question of lobby, it's very ... the political economy question is very interesting. It's one of the ... different countries have different dynamics here. It is very different in a place like Canada, where very restricted in terms of what can be spent by lobbyists or donated to politicians. It just doesn't have the force it does in the US or to some extent, it does in the EU. I think that I wouldn't be ... I'm not as cynical around these issues to think that it'll just cut. I do think that the ... fortunately, we still have popular consensus. A social consensus does weigh on these issues and it does lead to change. It takes longer.

Mark:

Sorry to jump around, but I guess my experience has been that if you're a company and you can sense where social consensus is going, ultimately, that's where the country is going to end up. That's ultimately if, and you might as well go with the flow and think about particularly what the social consensus is forming around. In other words, what's the objective? And then figure out how you can be part of that solution, or if you're part of the problem, how to stop being part of the problem before you ... and don't wait for the regulation to come in. Governments move slowly, relative to social consensus. We are in a world where, first off, it's the right thing to do. So it's embarrassing even.

Mark:

One of the things is once you figure out that something's really bad and you know it as a company, continuing to do it just because you're allowed to do it for the moment on a regulatory basis is not really a defensible position. We're an environment where that social license can be chipped away pretty quickly if you do that, if you need an economic incentive for it as well. Sorry.

Randy Kroszner:

For sure. I think that's exactly right. One of the other questions that have come in actually related to this, is that you talked about how it took the shock of the Great Depression to change a lot of disclosure. Do you see the COVID-19 shock either changing some-

PART 3 OF 4 ENDS [00:48:04]

Randy Kroszner:

... the COVID-19 shock, either changing some of the disclosures more broadly and the role of these broader societal issues, or specifically do you see something changing with respect to pharmaceutical firms? Because you can see, exactly as you were describing, in some sense, they saw the writing on the wall. There was going to be no way for them to make an investment and then say, "Ah, if we're the first, we're going to get a zillion percent return and charge a fortune for this." That was just not going to function in today's society. So is there something about this shock that is going to change the way pharmaceuticals firms work on a permanent basis or the way some of these other social purpose issues will be integrated into the way corporations operate going forward?

Mark:

I think there is something to it. The question is how long it will endure. Without question, companies have been judged or are being judged relative to loftier statements of purpose, or I think you touched on this earlier, probably the business round table and what's the actual performance of those companies. I would say in that regard, this is a dynamic, or it's an iterative process. I mean, first thing is admitting you have a problem or admitting you have an issue, you have an objective, and then you work hard towards that objective, and then people should be held to account, but it doesn't mean the objective is wrong, first point.

Mark:

Second is that COVID, yeah, definitely has increased the scrutiny. How have companies particularly taking care of their employees, and by extension their communities through employees, to what extent they've just fallen back on government support or they've tried to support in their own way? How concerned have they been for employee health and other factors, and then how much they're part of a solution here. We have ... It's a moment of, and it's a long moment of where there's a need for solidarity. I mean, you've got to support your extended family, your friends, within your community, and then as a company, the broader global climate you've got to come together for. So I think in and of that, the scrutiny is there, first point. Maybe that's the second.

Mark:

The third is a reset moment in two respects. First for company strategy, there's relatively few companies coming into this that had the right strategy coming, that the pre-COVID strategy is just reinforced COVID dynamics. There's eCommerce platforms for which that's the case. Clearly the medium over which we're having this conversation, that was the case for them as well. But for virtually everybody else, you've got to reset your strategy. Think about it. And, again, I'm sorry to fall back on climate, but within the climate context, if you're resetting your strategy in this environment and you've got a net zero target in your country, well, then where does net zero fit into your strategy? It's a pretty obvious question that you just have to ask and answer.

Mark:

But in that reset, the other side of the reset is the public policy reset. Fiscal, monetary, leave that to one side, but then on the regulatory side and how the system is organized. And I think just to bring it directly to where you want on this set of issues, it's, okay. We have a bunch of either private initiatives or NGO initiatives, but non-governmental initiatives around ... It's CASB, it's CDP, it's CDSP, it's GRI, it's IIGC, it's the World Economic Forum effort to try to pull some of this stuff together, but we have all these initiatives. So what are the authorities doing, whether it's IOSCO, the securities regulators, the IFRS, FASBI the SEC, the FSB, what are they doing to actually help answer the questions you and I have been trying to tease out a bit of, okay, what's the sort of set of sustained ESG or sustainability reporting metrics?

Mark:

Let's carve them to a core, and which ones, and this is the tougher one, but how do you then have a process or some discipline around those to say, "Oh, these are the ones where we think there is an ultimate [crosstalk 00:52:57] enterprise value?" And these are other ones that we think we should report or that society wants companies to report, but they don't necessarily ... That's where you get into that balancing conflict and you make a judgment about good corporate citizenship. And that's pretty important now., because I think that the system has reached the point where there was a lot of good out there, but there's almost too much good out there. There's confusion, and there needs to be deconfusion otherwise known as clarity brought to bear on it.

Randy Kroszner:

No, I think in some sense, that's kind of where we had started, because this is one of the key challenges when you have so many different objectives, and there are many good things that are out there. There are many good things we can do. It becomes very difficult to set the priority, and so you have to be able to, as I think it was Malak in the previous session said, "If you can't measure it, you can't manage it," so it's very difficult to give guidance to senior management or a CEO if you just say, "Do this." But it's very difficult to say, "Well, how do I measure this," whether it's reducing the climate risk, whether it's improving health outcomes, whether it's reducing inequality. There are some broad metrics can be used, but then you have to be able to draw the line between what the company can do and those outcomes. That's extraordinarily difficult, and so trying to set those priorities, I think is super important and super difficult, whether it's done in the private sector realm or the public sector realm.

Mark:

Can I just jump in on it, because, that is critical thing. And two points; one is there is an initiative that's been underway for 18 months or so of something called the International Business Council of the World Economic Forum with the big four accounting firms, or maybe it's the big six accounting firms working through all of the ESG metrics and saying, "These are the primary ones that should be disclosed for everybody in any industry, and then here's some specific across all of them." And they draw on these existing standards of recommendations for them, and that's sort of out for consultation and consideration, and it's the first comprehensive effort that's been made, and it's being made by both companies, users and providers of capital. So it's a pretty interesting starting point of trying to get to that. That's the first point.

Mark:

The second point is what they say is, part and parcel of signing up to that as a company is, "Okay, you're going to disclose all of this, or you're going to say why you didn't disclose something." So you're actually going to make that judgment that water isn't important to my business because X right. Clean water, it doesn't matter. Now, if it does matter, you're in trouble, right? I mean, that's the corollary or if I take a different view.

Mark:

And then the third point is just to think about, from an investor perspective, again, from an ESG, and we all know that the sort of aggregate ESG ratings have very low correlation between each other. It's like 0.3 or so, so you can end up in very different places depending on which ESG aggregate rating you choose, and that points to some need in the improvement of aggregate ratings. I won't say which direction they should go, but it really tells you as an investor that you want to be figuring out what are the relevant ESG components for a given company. Now, I'm pretty interested in what you would say, Randy, if it were your company. You're the CEO or CFO, and you say X, Y, Z is relevant. But I might want to run the numbers on broader set of metrics and see whether there's other materialities or sensitivities that I've found in similar companies in similar industries and maybe for you as well. And that is a much more integrated approach to ESG. It's pulling together the social governance, environmental into the enterprise value creation in a way that has some linkages.

Mark:

It does though mean, just for absolute clarity, that there will be things outside of that box, things that the company either it doesn't think that it is ultimate material that it may have an impact on, right? It may not think ... On the outside going in, it's not material, but the inside going out, it's material, and then broader stakeholder society have to take a view on that, but that's a much cleaner system. We have the elements of that system, but that's a much cleaner and arguably a much more effective system over time for both social and economic goals, and economic goals are social goals as well. It's important to remember that.

Mark:

We want dynamism at the heart, and maybe as we're coming close to the end of the time, but just to make the point that a system where companies are looking to provide solutions for society because society cares about things, and minimize their collateral damage, if you will, while they're doing it, that's a market-driven system that is very effective and will make a lot of money for shareholders over time. And Milton would be happy about that, I hope.

Randy Kroszner:

Yep. And so that's a perfect way to conclude, because we're trying to look at where's the common ground? So where is it by pursuing these social purposes that actually can be maximizing shareholder value or at least be consistent with it, and then where the rubber really hits the road, where there's some things where it's going to be very difficult if you actually pursue a particular goal. Let's say reduction in carbon emissions, that may be really not very helpful to the owners of oil and gas companies, and so that's a really tough trade off that has to be made. But we can't make these trade offs without the data, and that's one of the great things that I think Chicago has always been focused on, whether it was in the previous panel focusing on diversity and inclusion without the data, and just to understand what's happening on inclusion, and then trying to look at the consequences of it.

Randy Kroszner:

You can't analyze it. You can't figure out what's going to be effective and what's not. Much of our discussion was just about those issues, trying to define what are the objectives that we're looking at. What would be the best data to get at that, and then we can try to make some progress towards seeing, well, what's going to be effective and what's not? What are the trade offs that we're making? I mean much like the Chicago research on security prices. CRSP put together those databases in the 1960s and 1970s that allowed us to measure risk in addition to return. There are a lot of other risks related to these broader social issues that we might want to have data to try to assess, and whether we do that through the political process or through the corporate process that's part of the political economy, we can discuss that, but we need the data to be able to make these kinds of assessments.

Randy Kroszner:

And so I really appreciate you taking the time to be with us. I thought it was a really fruitful discussion facing a lot of the tough issues. Did we solve them all? No, but I think a lot of people are trying to avoid facing them, just saying, "Oh, well, sure. I agree with Milton Friedman, and I agree with all the social purpose stuff." In some cases that works, but in some cases it doesn't. We sometimes have to make those hard choices, and I think focusing people on those tough choices is something that's really, really important.

Randy Kroszner:

So I wanted to thank you very much. I want to thank all of our speakers for today. I also want to thank Ally Batty, MacKenzie Ellis and Abby Holzer, who have been crucial to putting all this together, Frank Schultz, who has made sure that all the technology works. And for those of you who are interested in the kinds of debates that we've been having today, whether they're the big picture moral and ethical debates, or whether they're more specific concrete debates on accounting, I encourage you to think about programs at Chicago Booth. Thank you very much. Bye-bye.

Madhav Rajan:

Good morning, everyone. Thank you so much for taking the time to be with us here today. My name is Madhav Rajan. I'm the Dean of the University of Chicago Booth School of Business, and I'm also the George Pratt Shultz professor of accounting here at Chicago. It gives me great pleasure to welcome all of you here today to the Chicago portion of today's event titled, “Corporate Social Responsibility Revisited.”

How has CSR changed since Milton Friedman ignited the debate 50 years ago? This is a global virtual conference spanning across all three of Chicago Booth campuses and began early this morning in Hong Kong. The conference then continued in London, where we were very excited to share a sneak peek of our spectacular new campus in the heart of the city. I strongly encourage you to go to chicagobooth.edu after the conference to watch the video; it's truly fantastic.

And with that, we are delighted to bring the conference to Chicago. So as background, back in 1970 Chicago economist Milton Friedman wrote a landmark op-ed for the New York Times on the role a business should play in society. Friedman of course, a giant in the field, went on to win the Nobel Prize in economics in 1976, for his achievements in the fields of consumption analysis, a monetary history and theory, and for demonstrating the complexity of stabilization policies. Now, 50 years after the Times op-ed, Friedman's views continue to spark lively debates among professionals across industries.

And so, in typical Chicago Booth fashion, today's conference brings together pathbreaking thought leaders, practitioners and policy makers from a wide variety of perspectives and backgrounds to discuss and debate the role of the corporation in corporate social responsibility—including environmental sustainability, corporate governance, agenda innovation, diversity in the workplace. So this is an excellent opportunity for you and for all of us to hear from a diverse group of experts, complimenting the strong fundamentals that we pride ourselves on providing through the Chicago Booth classroom.

I'm very grateful to our panelists today, including our keynote speaker, Nobel Laureate Oliver Hart from Harvard University. My thanks also to our media partner, the Financial Times. Once again, thank you all for being here and for engaging with the school in this way. And with that, I'm pleased to introduce Randy Kroszner. Randy is Deputy Dean for executive programs at Chicago Booth and the Norman Bobins Professor of Economics. So Randy will welcome our panelists. Now before I do that, I wanted to also personally thank Randy for coming up with the idea for CSR revisited, and for doing such an amazing job, putting in so much effort into organizing today's event on three continents. Thank you, Randy. Take it away.

Randy Kroszner:

Thank you very much. And I couldn't have done this without the help of so many people throughout Booth, and of course from all the speakers—but in particular, I'll call out Allie Batty, Mackenzie Ellis, and Abby Holzer, as well as Craig Schultz, all of whom have been up all day to, and all night, to make this happen. Thanks a lot.

So exactly as Madhav said, we started off early today in Hong Kong, and it's been very, very interesting to see the different perspectives and different focus around the world. So we started off with Tandean Rustandy, one of our graduates who’s on the Booth council and a university trustee, and he talked about the importance of faith in motivating him as an entrepreneur to be giving back and having a broader purpose.

We then went on to hear from one of our graduates who's the number two at the Asian Development Bank—as well as the CEO of the largest company, public traded company, in the Philippines—to discuss the role of government institutions and private institutions. And actually there's a lot of discussion about moral legitimacy and ethical legitimacy there, and giving them the agency to do the things that are needed, for example, in response to pandemic.

And then we came to London, where I am in our spectacular new campus and you can see that we're just a stone's throw from the St. Paul's Cathedral in the heart of the city. And we had some really excellent discussions from Raghuram Rajan about: Is shareholder value maximization evil? And Marianne Bertrand on talking about some of her spectacular work on diversity and inclusion. Then I did a fireside chat with Mark Carney, a former Governor of the Central Bank of England; it was amazing, two former Central Bank governors, neither of whom talked about monetary policy. We talked about a whole variety of other issues, all focused on corporate social responsibility, trying to think about, where is it that there is a conflict? Sometimes there's confluence of social purpose and value maximization, but sometimes there's a conflict.

And that sets us up to have our discussion today with panelists and then with Oliver Hart. But before we get to that, I want to have a poll that will ask you what you think about Milton Friedman's view on, to quote him, that “There is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits, as long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” And when we have the results of the poll, I'll tell you how those are similar or different to what we had in Hong Kong and in London.

And so, I think this is just a wonderful opportunity to introduce the next panel; Gillian Tett from the Financial Times—and a key driver behind Moral Money as well as just a key contributor to so many things at the Financial Times—is with us to chair that panel. She's going to introduce the panelists. And we are going to have a very lively discussion about exactly these issues. So let's see what results are from the poll. …

Interesting. …

So this is very, very similar to what we saw in Asia and only just a little bit different from what we saw in Europe. Basically, you have a relatively small number being uncertain—which is surprising to me, because this is such a difficult and challenging issue that so few people have uncertainty about it, because it's such a big, big picture one. But around the globe, we've seen only between 10 and 15% of the people say “uncertain.” And we've seen basically twice as many people say they disagree with Friedman today, and about half as many say that they agree with him here, 60% and 30% but roughly in that around the world. Which is very, very interesting because obviously you've got very much a University of Chicago audience that's there—although it's open to a very broad range of people and we have hundreds, if not thousands, who will have listened to this program today. But that's a very big change from, I think, 50 years ago. And we want to explain and investigate exactly why that is. And so, I'm going to hand things over to Gillian.

Gillian Tett:

Great, well, thank you very much indeed, Randy. Sorry for that slight delay. And on behalf of the Financial Times, can I say how delighted we are to be involved in this very important event, which is touching on issues very dear to our hearts at the Financial Times. We have spent the last few decades writing about business and finance from a fairly, dare I say, Milton Friedman-esque approach to life, focusing very much on GDP and profits and things like that. We now recognize that the zeitgeist is changing. As part of that, we started something called “The New Agenda” last year, which was trying to orientate our overall coverage towards looking at a broader stakeholder vision of business.

And I also last summer, with colleagues, launched something called Moral Money, if any of you have not seen it, which is a regular newsletter, a website that looks at issues to do with stakeholders, environmental, social and governance issues, CSR, SRI. Sadly, since Milton Friedman first launched his ideas, the acronyms in this world have been multiplying, if not breeding, but you get the point: We're trying to look at business beyond just a narrow business perspective.

And we have three fantastic people to share their views on what is or what is not changing on this important anniversary:

Steve Kaplan, who is Chicago Booth's Neubauer Family Distinguished Service Professor of Entrepreneurship at the Polsky Center for Entrepreneurship and Innovation.

Mary Bush, who is a longtime corporate board member, she's an American business executive, corporate director and government official with expertise in international finance banking governance.

And Margaret Blair, who is Vanderbilt’s Milton R. Underwood Chair in Free Enterprise professor and economist who looks particularly at corporate law and finance.

So a terrific group of perspectives on what is or is not changing. And maybe I'll start with you Steve, since you are speaking from Chicago—and Chicago, of course, was seen as the Vatican of the religion of shareholder value and the ideas of Milton Friedman until very recently. And, I’ll ask you Steve: The title of the session is “The Business of Business.” Do you think the business of business is changing? Is this just a short-term blip? Or is there really a wider zeitgeist shift under way—or not?

Steve Kaplan:

So I think that Milton Friedman was right 50 years ago and he is still right today. I think what perhaps has changed is the perception of—where it has changed—of customers and employees, about what's important to them. And as a result, what maximizes shareholder value has changed somewhat or has potentially changed. But the basic point that if you're a company, or if you're a CEO, what should you do? Maximizing shareholder value was correct then and it is correct today.

Gillian Tett:

Right, so basically you arguing as insofar, as companies should care about stakeholders, they do so because their customers to whom they want to sell lots of the products and thus make money are caring about it, too. Is that a rough summary?

Steve Kaplan:

Absolutely. If you have customers who care that you are doing things for the environment, then, you know, you are going to be penalized if you don't. And if you have employees who care, you're going to attract employees who … or if you don't do those things, you're not going attract those employees. And by the way, Milton Friedman said exactly that in the piece we're talking about, where he said: “It may well be in the long run interest of a corporation that a major employer will devote resources to providing amenities to the community. And it may make it easier to attract desirable employees,” et cetera. So he actually said this, I think he probably felt it was a less of an issue then than it is now. But that's completely consistent with what he said.

Gillian Tett:

Right, so insofar as we should care about ESG, it’s because society cares, not because the C-suite cares on its own.

Steve Kaplan:

It's either society cares or it's the law. He also said you have to follow the law.

Gillian Tett:

Okay, great. Well Mary, what do you think?

Mary Bush:

Well, thank you very much. I agree that Friedman was correct 50 years ago and that he continues to be correct today. What I would say, however, is that the things that we think about as stakeholder capitalism or ESG—many of those things, when you do them and you do them in a smart way, they really contribute to shareholder value rather than detracting from shareholder value.

And I could start with one of those things; for instance, there are several companies that are now getting involved with training people in their communities for jobs that those companies might have. When they do that training, and many of them do that in connection with universities … there's a Chicago company I can think of, there's an Alabama company, there are various ones. When you do that training, there is a cost. It looks like you're reaching out to help, let's say, high school kids who don't have a college degree but who could be trained to carry out certain jobs, even technology jobs, you know in the company. There's a cost associated with that; there's an investment associated with it. But what company does not invest? Either they invest a foreign capital, or for people, or for R&D. So if they have a cost this year, yes, that's going to lower profits. But the question is, does it help that company to increase profit the next year and the year after that? And maybe to increase some even more than they would have had they not trained and hired those kids. So I think Friedman's views are quite compatible with many of the things that I've seen going on in corporate America that represent stakeholder capitalism.

Gillian Tett:

That's fascinating. So it’s basically self-interest remains thoroughly alive and well but it's just manifesting itself in new forms.

Mary Bush:

I do think so, I do think so.

Gillian Tett:

Margaret, would you agree?

Mary Bush:

A friend of mine termed it a few days ago, enlightened self-interest.

Gillian Tett:

Right, enlightened self-interest, interesting. Margaret, would you agree?

Margaret Blair:

I agree with some of what's been said. There's certainly … I've spent much of my career appearing on panels like this as the token representative of the stakeholder point of view. And so maybe what I'm going to say will be a little bit surprising. But I think that Friedman was right about some of his points.

What his main point was, that a society should not look to unelected business people such as corporate executives to make and carry out public policy. Okay, so that's I think a really good idea and it comes from an important place.

My problem with what he said was that he used the language of ownership to defend his position. He said, corporate directors have duties to act on behalf of the shareholders because the shareholders are the “owners.” And that's not correct as a matter of law and it's not correct as a matter that—the economists quickly come back and they say, “Well, it's not really that they're owners, because a corporation is really not something that can be owned; it's a special entity, it's created by the law, it can own things but nobody can own it.” But well, the shareholders are the residual claimants. The shareholders bear the risk, so we should operate the firm in their interest. And this is not true, it turns out, as if it wasn't obvious before. I think the financial crisis in 2008, 2009, indicated that corporations were doing a lot of things to basically push risk onto other parties in the larger system. So they were not internalizing their risks, they were externalizing those risks and to that extent, it's not correct that shareholders... one can maximize share values in lots of ways that have devastating effects on parties outside the corporation, and that aren't in a position to offset those risks.

But Friedman's basically—so that's one reason why I take issue with Friedman's position on this. But secondly, Friedman wrote his essay at a time when one might argue that other political institutions were functional—by contrast with the situation today, where a lot of our political institutions have simply broken down and they're not functioning. Okay? So Friedman's argument was let business people do business and let political actors and government institutions do public policy. And I think we have a real problem with that today.

For example, just a quick example, and then I'm sure we can all come up with other examples that contradict or maybe agree with this: Various institutions in government in the U.S. have been utterly unable or unwilling to develop a national strategy and establish sensible policies in response to the coronavirus pandemic. Okay?

Earlier this week, a group of nine pharmaceutical companies that are working on developing vaccines decided to jointly pledge that they will not pursue regulatory approval for their vaccines until they've been through the full three set of clinical studies. And it was a way to step up from the private sector and say, “We recognize there's a problem with credibility here, and so we are going to pledge to do this, to try to reassure the public that adequate levels of safety. …” Because apparently they believe and a lot of people are concerned that we can't count on the Food and Drug Administration in the U.S. and the other agencies that are supposed to regulate them to actually do an adequate job, given the political context around them. So I'll stop there.

Gillian Tett:

Well, that is indeed an absolutely amazing example. I'm curious about…

Steve Kaplan:

Can I respond to that?

Gillian Tett:

Yeah, please Steve, please do.

Steve Kaplan:

First of all, the pharmaceutical companies are clearly responding in a way that maximizes their shareholder value. The worst thing they can do is send a drug through or vaccine through that…

Margaret Blair:

That's true.

Steve Kaplan:

… doesn’t work, so that's one.

Margaret Blair:

But you've got a terrible collective action problem here. Because if we took advantage of one to get out ahead of the others…

Steve Kaplan:

But let me take another part of what Margaret said. She was saying shareholder value maximization is problematic because it's not perfect. And the financial crisis, it wasn't.

The real question is, what's your alternative? Because once you go to bringing in the stakeholders, you get chaos, you get massive agency problems, and the best example of that or a good example is GM last year, was trying to have this issue of closing plants in Michigan and building plants in the South, maybe in Mexico, maybe in Texas. And when they did that, they're kind of trading off employees—employees in Michigan, who they're going have to fire—versus the environment because they're going to build electric cars in the Southern plants, which are better for the environment. And under a stakeholder view, how do you trade those off? If I'm the CEO I can say, “I built the electric plant, I’m helping the environment, I'm a big success.” On the other hand, if I don't do it and I keep it in Michigan and I pay the employees, I help the employees. I'm a big success. So no matter what I do, I'm a big success.” How do you as a board member monitor the CEO? Milton Friedman would say, maximize shareholder value, do the thing that maximizes shareholder value, and that I can evaluate. It's just chaos once you... It's hard enough. We have colleagues who spent their careers dealing with shareholder agency problems, the conflict between management and shareholders. If you bring in stakeholders as well, you just exacerbate all those problems, so I'll stop there.

Gillian Tett:

Margaret, so give a response to that and then I want to bring in Mary.

Margaret Blair:

Well, so there's a variety of different responses. Yes, it's not perfect; yes, it's problematic. But when the incentive structure that we've created encourages executives in the U.S. and to maybe to a lesser extent in other places around the world, to engage in activities that try to get their share points up in time but get it down right before the options are to be granted, and then get it up right before the options expire, and to play these little games at the margins—and we know that this happens and it happens on a large scale. And meanwhile, what I'm concerned about is that we're neglecting efforts to find ways to measure the other sources of value that may not come directly from watching the stock price and trying to nudge the stock price back and forth.

When AstraZeneca or whatever the name of the pharmaceutical company is, announced the other day they were going to put their vaccine program, the vaccine trials on hold because they'd had an unexpected bad outcome with one patient, their stock price went down by 2%. Now if you're doing an event study, looking at what happens when companies announced, make announced certain kinds of announcements, you would discover that well, it's bad idea for corporations to make announcements like this.

Now Steve, well in the long run they have to be honest, they have to establish credibility and I get that. But there are tremendous short-term incentives, and I think that we need incentive structures and social pressures to encourage executives, to not get so focused on those short-term incentives that they're missing the bigger picture. And the bigger picture does involve a lot of other things in addition to just...

Gillian Tett:

Right, right. I should say, by the way, before we turn to Mary, that we're getting a stream of fantastic comments and questions. If nothing else, we can all agree that the audience is super smart. And I'm going try and start bringing in some of those in just a moment. I expect nothing less for the Chicago Booth alumni network. But Mary, do you have any comments on this?

Mary Bush:

Well, on that particular issue, you know, short-term fluctuations in stock prices can be caused by lots of different things. When AstraZeneca made that announcement, their stock price went down so some people lost confidence that it was going to have a vaccine, have it quickly or have it first. But, you know, I am a big believer that you look at long-term value creation and at your stock price over the medium and long term. Because there are just so many things that can affect it on a day-by-day basis.

Steve Kaplan:

I just want to agree with Mary and a little pushback on Margaret. Since the early 1980s, people have said, “The U.S. companies are way too short-term oriented, they're not investing for the future,” et cetera. That was the 1980s, that was 40 years ago. Today is the long term, and if you look at U.S. companies, U.S. companies are the most successful companies in the world. They've created huge amounts of value, the big companies that are generating value—the Apples, the Microsofts, et cetera—they're U.S. companies, they're not European companies. And if you look at the research from Nick Bloom and John Van Reenen, and they look at companies around the world, the best managed companies are the U.S. companies. So there are these short-term things going on, but if you ignore the long term for the short term, you lose—and if you aggregate over the entire U.S. economy and really the world economy, it's spectacularly successful.

Gillian Tett:

A question for you, Steve, okay, from Luigi Zingales, and I've got so many questions to choose from and so many comments, and they're brilliant comments, frankly. They could make a book in themselves. So Luigi's question is this: “Lobbying politicians and regulators to distort taxes and regulation to favor your company increases profits. Should company lobbying go on as much as they can within your model, Steve?

Steve Kaplan:

But yeah, this is again where that's a much harder question and I … so I'm simply…

Gillian Tett:

I can see Margret's nodding. Really likes that question.

Steve Kaplan:

This is where I think you can go to Friedman's comment. He said companies should follow the rules of the game. And this is something … and follow the laws. And trying to push the laws to go in your favor? I think Friedman was not so in favor of that. So I would say that is something to, you know, think about seriously, how you actually manage that.

Gillian Tett:

Because there is a very interesting question that's cropped up in a lot of the comments, looking through them right now, which is that Friedman's ideas were formed at a time when there was growing optimism about the, if you like, credibility of democracy and government systems and social structures. And frankly, the social contract. You know, it came out of World War II. There was a strong belief at that point, the history only went in one direction and just got better and better. And right now we're living at a time when history is going into reverse, and where the companies can actually capture the laws if you like and write them themselves. Which raises interesting questions to me. I mean, Mary, do you have thoughts on that, given your legal background?

Mary Bush:

I do not have a legal background. [Laughs.]

Gillian Tett:

Sorry. Oh, right, sorry. I got  all of your wonderful biographies mixed up. Sorry about that.

Mary Bush:

Thank you. [Laughs.] You know, I think here is one of—I think Steve has really put his finger on it. It's a very difficult issue to comment on. It's a difficult one to manage. Yes, companies will try to influence things that go in their direction. But this is where we need people of strength, courage and integrity in government, so that their focus is always on doing the right thing on fairness and what is just for all companies. Do we always have that? No, we don't.

But I want to come back to this point about owners. Because I mean to my mind, shareholders are owners. If you look at where a lot of the push for stakeholder capitalism is coming from, it's coming from many different places. But one of those places that's very prominent, are big owners of stock in American and other companies—BlackRock, Vanguard, State Street—and the business roundtable, for instance, you know, with their statement on corporate social responsibility. But I think what the owners of companies are saying—whether it's a large institutional investor or it's a millennial or a Gen Xer, who as we all know, seem to have more concern, shall we say, about society and the environment, than maybe previous generations exhibited. I won't say they actually have more than the previous ones exhibited. So this pressure for stakeholder capitalism is coming from many places. I think what owners are saying to companies is, “We believe that you can engage in things that are good for the community, that are good for the environment, that are good for your employees. And that you can do these things in smart ways that are good for the company, and that have the potential for increasing shareholder value, or are certainly not hurting shareholder value.”

And let's take one that's very much in the news today and that's the whole issue of diversity on boards and executive managements. As you know, McKinsey, Deloitte, the NACD, they've all done studies that show that there is a high correlation between having a diverse executive team—whether it's gender diversity or ethnic and cultural diversity—and bottom line performance: profits. They've done these studies, I guess, over a period of three, four or five years now. And the evidence is fairly consistent. They are not saying, McKinsey points out very clearly, that they're not saying there's causality. But they're saying there's a substantial, a statistically substantial, correlation or significant correlation.

And that implies that when companies add diversity, and there’s a lot of social pressure, ESG pressure to do that, then they are actually doing something for the bottom line.

Gillian Tett:

So it raises the question about whether we're better off seeing ESG as a tool of risk management. Would that actually solve this dispute between you all: that actually, once you say ESG is primarily a tool of risk management, it's good for shareholders and for wider stakeholders? Margaret, do you have any thoughts about any of this?

Margaret Blair:

Yes. So focusing on risk management, I think is a really important thing to do. I've never thought the whole short term, long term thing really helps us for … because I agree with Steve that the long-term outcomes should be taken into account in the short run. But it is foolish for all the CEOs and leaders to be driven by these day-to-day fluctuations in the stock price. But too much emphasis on shareholder value encourages them to do that. And particularly when we compensate them in ways that encourage them to do that, we're sending very much the wrong signal.

So the shareholder primacy movement, which began about 40 years ago when Steve ... yes, Friedman wrote in 1970, but it really didn't pick up steam and begin to be implemented until the 1980s, as Steve suggested. It has resulted in, I think, some very distorted incentives that have been put in place. Because there's so much emphasis on share value—“Well, we have to compensate them with shares and then we have to do these stock option things,” and then we get timing issues, and I think that has not been good for the economy, nor has it been good for, in the long run, not necessarily good for all of those corporations.

So I really like what Mary said about, “We want our leaders in the government to have strength and courage,” and I think fairness was the third one. I'm not sure what the third one was. We need our leaders in the corporate sector to also have strength and courage and fairness, and to be able to see, think in a very, very big-picture, fair-minded way about the impacts there. And that will, I think, help them to understand where risks [are] coming from and risks are not only coming from finance, they're coming from all kinds of places. And they need to be very open minded and have very wide open eyes about where risks are coming from, and to address those kinds of risks. So...

Gillian Tett:

Right. Can I suggest another way of potentially sort of combining this, which is, John McGown points out, “If businesses needed to bear all the external costs of their products such as negative environmental impact, would that quote “fix capitalism”?

Margaret Blair:

It would go a long way.

Gillian Tett:

So is externality is the way to go?

Margaret Blair:

Milton Friedman would be absolutely right if we could force corporations to internalize all their externalities, but we can't. And not with the government institutions we have now, which I think have been so badly beaten down that I'm more worried about that than I am about the corporate sector these days.

Gillian Tett:

Mary and Steve, do you think the answer is to try and force businesses to recognize and internalize their externalities?

Steve Kaplan:

I would again say it's the companies should take what's given to them by the legal system and the governments. And Margaret's saying that governments have failed, you know, that's democracy. And I would say for the companies, if you were in a situation where you’re following the laws and you're competing against companies, if you start behaving differently, someone who's going to out-compete you, they're going to out-invest you and I think you do have to rely on the government systems that Margaret is saying is not there. Because again, I go back to, if you don't, if you then have companies making decisions for stakeholders, you have chaos.

And let me just make one other point, which nobody, a lot of people don't make about the world being in such a lousy place. Pre-pandemic, the world was in an awesome place. You know Nick Kristof of all people, who writes for the New York Times, wrote an article at the end of December last year and he said, "For humanity overall, life just keeps getting better." And you have to remember, extreme poverty in this world fell from 42% in the early '80s to less than 10% today. This is the period where the shareholders took over globally and the world was made hugely better off.

Now, it created some issues because a lot of those people who were made better off, or in India, China, Africa, they're not in the U.S. and Europe. And it's created real tensions, you know, in the U.S. and Europe and that’s you know, the government have maybe or maybe not reacted well to it. But don't throw the baby out with the bath water. It's been hugely beneficial to the world and the system we have can be better, but it's been extremely successful and it's not given the credit for it that it really should.

Mary Bush:

I agree with you, Steve. I was on the IMF board in the mid-to-late '80s And I have the great honor of having earned the moniker “Miss Free Market.” [Laughs.]

Steve Kaplan:

[Laughs.]

Mary Bush:

Because so much of my advice to countries, to government; so much of what I got wrapped into some of the IMF programs … in fact, we created a whole new facility, based on lending to countries that would implement free market policies. And that's a direct result of Milton Friedman's work. It's a direct result of spreading free enterprise and free markets around the world.

Gillian Tett:

Well, got a great question from an anonymous person here, which it says, “Without political will, which is captured by corporate interests, how do the panelists see a shareholder value maximization approach driving an urgent solution to climate change?

Margaret Blair:

So this just to me is probably the best example to look at because the externalities involved in many, many businesses, tend toward increasing carbon emissions and leading to, as I think most of us concede now, to climate change and deterioration in the climate long run. There are corporations who are addressing this question. And right now they're doing it more effectively than the governments are, at least the government of the U.S. [At] Walmart, a colleague of mine, has been studying the way in which business and the private sector have been taking actions on their own to try to address climate change. So Walmart was one of the largest installers of solar panels and buyers of solar power in the country. It's made massive emissions reductions, billions of tons of carbon emissions, and pledged to do much more between now and 2030.

And I could go on, the list … but it's happening extremely slowly. And it's happening extremely slowly because it is a collective action problem. Better climate is a public good and we need government action. And so, I actually think it's a really good idea that corporations are stepping up and saying, “Wait a minute, we better take some action here.” So…

Gillian Tett:

Steve, how would you see that? Because of course, you know, within your model, do you think that companies have incentive to deal with climate change? Because you really do have a collective action issue there.

Steve Kaplan:

I think there are two things. First of all, Margaret was helping to make, you know, my point in Friedman's point and Mary's point for us. The companies realize it's in their interests to do something and they've done something, it's value maximizing, so terrific. Now are we doing enough? That's a government issue. Let the governments figure that out, and they are having trouble doing that. But if the problem gets worse, I'm guessing they will.

The other thing that is also, I think … two other points that are not often stressed in the climate change debate. First of all, there are tradeoffs. And when you spend money, there are different ways to address climate change and there're more expensive and less expensive ways. And it's not clear what the best way is. And again, government should figure that out.

And then the last point is there is a huge amount of investment in technology and trying to figure out ways to deal with climate change that are, call it engineering-based. And I am willing to bet in the next 20 or 30 years, we will get solutions to those that are less expensive than some of the things people are talking about today.

And that if, again, to the extent climate change goes on the worst side of estimates as opposed to the better and there's a lot of uncertainty, I am willing to bet there will be technological solutions of which we are unaware now, and they will show up because in the last 200 years, that's what's always happened.

Gillian Tett:

Mary, would you agree with that optimism?

Mary Bush:

Yes, I do. In fact, I'm on the board of a company that is helping to address that problem. It's called Bloom Energy, they re-fuel cells that run on natural gas, and eventually bio gas; that's underway as well. So I do think that technology will help solve that problem. You know, when companies … yes, the responsibility, the business of a business is to make profits, to do business and to make profits. However, when companies do things that are harmful to the environment, that caused direct harm like dumping in the ocean, that poisons our waters and has consequences for the health of people—even some of their own employees, their families—then companies, I think have a responsibility to step up, to address those problems. And if they don't, I think that they ultimately over the long run will do themselves harm because their customers, their employees and all will complain. They may well lose business and they would eventually hurt their shareholder value.

Gillian Tett:

Right. Well, of course that raises the question of what “over the long run” actually means, and whether people could actually have the ability to see that long run or not. I see Margaret trying to get in. I want to ask about CEO composition in moment—but Margaret, quickly.

Margaret Blair:

Okay, so the one thing I think that is interesting is that if we compare what was happening in the 1980—when we had the big push for shareholder primacy—to what's happening now. … What's happening right now, interest rates are like 0%, maybe 1%. It's real easy to a long-term perspective when your discount rate is that low. Back in the 1980s, the discount rates were 15, 16, 20%; discount rates certain corporations were using as high as 25%. It's hard to have a long-term perspective when the discount rate is so high. And my problem with shareholder value maximization is that whether it's beneficial to the economy or not, beneficial to society or not, depends partly on what your discount rate is, if we're going to talk about long term versus short term, and that makes me very uncomfortable.

Gillian Tett:

That's a terrific point, that's a very good point indeed. Before we pick up on that one a bit further, if either of you want to comment on that … but I want to talk about a couple of questions from people on the issue of CEO salaries—another area a bit like the environment that tends to spark a lot of passion. A question from Conception Prado: “What would Friedman have to say about CEO salaries today?”

We have another question a bit further down, which is: “Were all the problems with executive compensation plans the result of a singular focus on shareholder value or rather poor implementation designed by the compensation committees or boards?”

And there was one more great, and I’m scrolling through, issue to do with compensation, which has slipped off my screen. But I think it will come back again in a moment. But anyway, the point is how do you square all this with compensation strategies? Who would like to jump in?

Steve Kaplan:

Massively successful. So this view that CEOs are overpaid, I'm not sure that it holds up to scrutiny, and let me give you a few reasons. First of all, you know, what we talked about, the shareholder value created the profits of U.S. companies, all of that is net of compensation. So the CEOs have delivered huge value despite being paid well. That's one.

Two, CEOs of public companies today, S&P 500 are paid 30% less than they were on average in 2000 in real terms. So this view that CEO pay keeps going up and up and up is just wrong. The median has stayed more or less flat.

Third thing: You compare CEOs to partners at top law firms? Partners at top law firms, the average partner at some very big law firms makes four or $5 million a year compared to an S&P 500 CEO who makes $12 million. There are like thousands of these partners versus 500 CEOs. It's not at all clear that the CEOs are overpaid relative to other people who are doing business and, you know, have been very fortunate. So three things: They're not overpaid relative to others who are similar; they have delivered a huge amount of value over time; and their pay is largely related to how well their companies do.

Mary Bush:

That last point I would emphasize because there is a much more of a trend now in business to tie CEO compensation to how the shareholders do. So I think all points are valid. Thank you, Steve. [Laughs.]

Steve Kaplan:

[Laughs.] Thank you, Mary.

Gillian Tett:

Margaret, how would you see that? [Crosstalk] Because, go on Steve, because then I have to [carry] into that question I see for Margaret. But yeah, sorry, Steve.

Steve Kaplan:

No, no, I was just saying, thank you Mary, good. [Laughs.]

Gillian Tett:

Margaret, we had a question here, which is from Annamarie Sasagawa, which is, you know: “How would you create incentive models? What corporate governance models would incentivize and reward courage, fairness and compassion?”

Margaret Blair:

Fantastic, oh, compassion was the third: strength, courage and compassion. These are extremely difficult things, okay? And the corporate sector and the private sector is doing a lot of work—and some of it's being done at business schools—Into ways to try to measure an aggregate and deal with metrics that give us feedback about risks; that give us feedback about, it may be environmental harms; that give us feedback about a range of other factors in addition to share value. Share value was easy and so it was a great thing for us academics to seize on 40 years ago and start using that in order to measure performance. Because wow, we had this fabulous theory. Okay, much of it developed at the University of Chicago, that said that the share price should capture all the relevant information and if you maximize share value, then you're maximizing the total value that's being created.

But ... And we haven't found a comparable set of other ways to measure other kinds of factors. So that's a point totally well taken, but I'd like to see more energy put into that question. How do we measure risk? How do we measure the benefits for our wider society? How do we measure the benefits for our employees? While it's true, as Steve says, that on a global basis, a lot fewer people are desperately poor now than they were 40 years ago, within the United States and within Western countries, we've got a very widening distribution of income and it's producing social unrest and other things.

And I don't think the corporate sector can sit out and say, “That's not our problem and we're going be completely aloof and away from that.” So we need ways to provide incentives for things in addition to shared value.

Gillian Tett:

The fear of pitchforks is going to drive some kind of response from the CEOs. [Laughs.]

Margaret Blair: [Laughs.]

Gillian Tett:

But I have a question—we're almost out of time here—but I have a normative question which is this: Do you think that focus on stakeholder values is going to increase in the coming years? i.e.: Is the focus on sustainability and ESG going to increase in the coming years, or was late 2019, early 2020, the high point of this pendulum swing? Because if you look back at the arc of history in the last 100 years, you had one pendulum swing with Milton Friedman. In many ways, the wider conversation has swung back. But I'm curious whether you think it's now going to swing back again towards Friedman as we go forward or not. And I'm asking for thoughts about what you think will happen, not what you think should happen. Steve?

Mary Bush:

I think it's going… [crosstalk]

Gillian Tett:

Oh, Mary you start, Mary you start.

Steve Kaplan:

I’ll follow, go ahead.

Mary Bush:

Well, I think it's going to increase. I think that focus is here to stay for a while. I think, and I'm going to relate this to some of the comments Margaret was just making about courage, fairness, and compassion—because all of those things go to culture. And a CEO and a board help create the culture within a company.

I have been through two or three CEO selection processes recently. And in all of those processes, we did focus on these softer things that comprise culture. So you say, how can they be rewarded? Well, I think that the people who will be rewarded are people who exhibit those kinds of values: things that are, as you say, very, very difficult to measure. I think that measurement is a part of the problem, shall we say, with all of the stakeholder and ESG concerns, some can be measured fairly easily like these studies on diversity; some things can't.

I'm thinking of a couple of companies that, for instance, when they had to lay off lots of people—because of COVID, because of the financial crisis—the decision that management came to, endorsed by the boards, were that they would continue the health insurance for those employees: very important to them.

What you can't really measure is how much loyalty does that create? How much willingness to go the extra mile does that create? And then how does that contribute to the success of the company and shareholder value?

Gillian Tett:

Steve.

Steve Kaplan:

And I'll agree with Mary and I have a couple of things. I think the fact that information is so much better now about everything than it used to be: you have suppliers, customers, employees who are aware of what companies are doing. And in some sense, they're internalizing the externality that I think Margaret mentioned earlier, that, and Mary as well, that if a company is polluting, you find out about it now, everybody finds out about it, and that is harmful with all your stakeholders, but actually affects your shareholder value. And so I think going forward, as people are more sensitive and more informed, this is here to stay. But going back to Friedman, it's going to be value maximizing to do the right thing in these cases because it's coincident with shareholder value.

Gillian Tett:

So if you're basically saying that actually Milton Friedman would have been a proponent of ESG, then we are truly coming full circle.

[Margaret and Steve laugh.]

Gillian Tett:

Hey, listen, we’ve come to the interesting conclusion. Margaret, any thoughts? You have the last word because we're almost out of time. But I should say by the way, we've had several comments. I've never had so many comments in a session and questions from an audience. I mean, if this was a seminar, I'd give the audience a sort of, you know, A grade straightaway for the engagement and the fact they're awake.

And I should say, by the way, that in general, when you do these kind of Zoom calls these days, half the audience is either asleep or play with their dog or talking to their kids.

[Mary and Steve laugh.]

So to have this much engagement and comments shows what great speakers you are, but also what a hot topic this is. But [crosstalk].

Steve Kaplan:

And a great moderator, a great moderator, let's put that in! [Laughs, claps.]

Gillian Tett:

I think that also, on a serious note, Margaret, a couple of comments have said that they, how much they appreciate having Margaret's input into the session to, you know, counterbalance the traditional perspective of the Chicago School.

But anyway, Margaret, you get the last word, since you're singlehandedly representing the forces of [inaudible]. I would discover Friedman was an ES or would be an ESG proponent today in a world of transparency and poor government. Margaret.

Margaret Blair:

I'm so honored, this is my role over and over again, to be the one to stand up for the stakeholder perspective on this.

I think that the business roundtables talked in terms of long term versus short term, and “long term versus short term” is the phrase that people have been talking about now for five to 10 years, I think; it's become a common end in circles talking about what business should do to say, well, they need to be focusing on the long term. We all agreed with that, so I don't think that's controversial. And I think for that reason it's become code for, it's become the buzzword that you use, when what you're really talking about is taking care of the bigger picture, of the way in which your company is impacting in the larger world.

And we don’t … but the reverse may also be true. So instead of trying to forecast where our stock price is going to be 10 years out, maybe if we look at the softer things: how our employees are, how are we doing at bringing along new talent? How are we doing at identifying new investment opportunities? How are we doing at evaluating the impact of our operations on the society? Those will help the company leaders understand the long-term environment that they're in, and that we can think of the poor metrics we have—we can work on getting better ones—but the poor metrics we have for measuring the social value, we can use those as a guide to try to understand and imagine where we're going to be 10 years from now and 20 years from now.

And to that extent, I think there is no difference between the long term and the short term if you're a financial specialist, and I accept that, and I agree with that. But we do need metrics that are going to help us understand better what the long term is going to look like, and I think that involves looking at the social, ESG and other kinds of measures.

Gillian Tett:

Well thank you very... I must say I find it a fascinating discussion and in a way we've almost come full circle. We started off in a position of what sounded like extreme difference of views and actually we're almost starting to meander towards a common ground. Georg Hegel would say there's been thesis, antithesis and almost a synthesis.

Or another way to look at it is to think about that great enlightened thinker Adam Smith, which in some ways is the founding father or intellectual guru for the Chicago School. Smith famously produced two major tracts, "The Wealth of Nations" and "The Theory of Moral Sentiments." "The Wealth of Nations" has driven visions of market capitalism, but "The Theory of Moral Sentiments" about the importance of having a moral, social and legal framework that functions, is very important, too.

And in some ways what's happening in my view is that these two elements are coming together. Which is precisely why I called the newsletter Moral Money, that we have at the FT: not because we want to sound pious and like we're lecturing people, but because I wanted to indicate the other side of the Adam Smith vision—and also, most importantly, get a name that did not involve yet another acronym in a sustainability jungle that keeps breeding more acronyms that makes everyone's eyes roll. I often think ESG should stand for “eye-roll sneer and groan” rather than anything else. [Laughter in background.]

But anyway, those of you who are watching, thank you for watching. Those of you who've asked questions and comments, thank you for asking those questions and comments and I'm very sorry indeed that I couldn't get to them all.

We are, if any of you want to pitch comments and questions back at us with Moral Money at the FT, please do. If any of you want to follow us, please do. You can find us very easily just by searching the FT website.

But in the meantime, it remains for me to say a very big thank you to Randy and for the rest of the Chicago team for organizing such an interesting and important debate, and best of luck to all of you wherever you're watching in the world, for figuring out where the world is now, heading now. Thank you.

Randy:

We're motivated by what a Nobel prize winner wrote 50 years ago. And it seems like a fitting end to this virtual global conference to end with a Nobel prize winner. And so I couldn't be more delighted to introduce Oliver Hart, who is the Louis and Linda Geyser professor of economics at Harvard. And he's taught there since 1993, when I was a graduate student there, he was at MIT and I was honored and privileged to go down to take classes with him when he was doing so much of the work that has ended up getting him Nobel prize, and also very much informing the discussions and debates today on thinking about the role of the corporation, the relationship between employers and employees. This is really the fundamental issues in contract theory and incomplete contracts and information asymmetry and agency problems. These were the things that Oliver and others were grappling with at the time, but there were just so many breakthroughs that Oliver had made that, of course, he has gotten a Nobel prize on that.

Randy:

And so what I'd like to do is allow Oliver to have a few minutes to give an overview of some of the key issues that he sees in these debates that Friedman ignited 50 years ago. And then we'll do a fireside chat and take questions. So, Oliver?

Oliver Hart:

Hi. I hope everybody can hear me?

Randy:

Yeah.

Oliver Hart:

Good. So it was very interesting for me to listen to the panel and I have a slightly different view, I think, from them, or at least from Steve and Mary. So let me start by saying that Friedman's article obviously has had a huge impact. I think that some things in it stand up very well, 50 years later, others a bit less so. I agree with Friedman that most companies are set up to act on behalf of shareholders. Shareholders have the votes, so I agree with him about that, but I don't agree with him that it follows that companies should maximize profit or shareholder value.

Oliver Hart:

Why do I think that? Well, because shareholders may themselves not just be interested in the bottom line. And my view is that the company should find out what shareholders want and should pursue that goal. And that is not always value maximization. It's not even always long-run value maximization. So let's take an example, climate change. In an ideal world, and people have said this, national governance would get together and agree on a carbon tax. And most economists think that's the way to deal with climate change. And so you would have a worldwide carbon tax. Okay, we're very, very far away from that. Well, given that there are national and international political failures, what should people do? What can they do? Well, individuals do things, individuals care about the environment and they don't just spend all their time trying to improve political decisions.

Oliver Hart:

They do things on their own. Individuals might install solar panels, or they might buy electric cars. If individuals are willing to do things on their own behalf because governments have failed to do things, then why wouldn't they want the companies they own also to do things? Just think about reducing your carbon footprint. I've given you examples of how an individual can do that, but those examples are pretty sort of small potatoes. It can be much more effective for companies to reduce their carbon footprint rather than have individuals do it. So this is where I think Friedman didn't get it right, because there are some activities, social activities, in which companies have a comparative advantage relative to individuals in doing things, given that governments aren't getting things fully right.

Oliver Hart:

An example where I think he was right was charitable contributions. This is a famous example. I don't think companies have a comparative advantage in giving to charity. Much better for them to take the money they would have given, hand it to shareholders and let each shareholder decide how much to give to his or her favorite charity. Okay, Freedman's right there. But when it comes to the carbon footprint or a bunch of other examples, companies are actually in a much better position to help with climate change than individuals. And if you ask the individual shareholders, "Would you be willing to give up some profit, some money, some shareholder value, some long run shareholder value, in return for which your company will become greener," many shareholders, the very same ones who install solar panels or buy electric cars, might well say yes. And in that case, if a majority feel that way, I think the company should do the green thing.

Oliver Hart:

And by the way, it's not just shareholders who may be willing to give up money for companies to do socially responsible things. It may also be consumers and workers. Let me turn now to what mechanisms are available for influencing companies. So if you accept with me that companies shouldn't necessarily ignore social responsibility, then how can people influence them? I think there are two main mechanisms, exit or voice. This is using the terminology of Hirschman. Exit refers to things like shareholders divesting from companies or consumers boycotting their product or workers refusing to work for dirty companies. Voice. What does that mean? Examples of that are shareholders using their votes or other ways to engage with management and force company change. In a recent paper with Eleonora Broccardo and Luigi Zingales, we compare exit and voice theoretically, and we find... I want to just very briefly tell you what we find.

Oliver Hart:

We find that voice is surprisingly good relative to exit. And let me try to explain why. Consider a company that could spend $100 to become greener, and that would improve the environment by $120. So the value of being greener to the world is 120 and it costs the company 100 to do it. So economists would say, "Well, that's a good thing for the company to do." Now, imagine that shareholders were asked to vote on whether the company should do that, and let's suppose they're very well diversified. So shareholders hold shares, they've invested in lots of companies and they hold... Each shareholder owns just a very little piece of this company.

Oliver Hart:

So when they're considering about whether which way to vote, here's how they will think, they'll think to themselves, "Well, if my company becomes greener, they have to pay $100, so profits will go down by 100, the share price will go down in total by 100, but as a very small shareholder, the capital loss I will experience will be extremely small. It will be my share of that 100 and that's going to be almost nothing, a cent or something. On the other hand, when I think about the impact of this change, if I vote for it, if it goes through, then it's going to hurt shareholders as a whole by 100, but it's going to improve the world by 120."

Oliver Hart:

So if I put on my social hat, that's plus 20, so what I will do, if I'm socially responsible, and we model this in our paper, and the paper's on my website if people are interested to see the details, but what the shareholder will do, well he'll put, or she, will put 100% weight on their capital loss and some weight on this plus 20. Now because their capital loss is negligible, since they have a negligible shareholding in the company, even though they're putting 100% weight on that, it's actually the other stuff that's going to dominate.

Oliver Hart:

They're going to put the weight they put on that plus 20, even if it's a small weight, 0.1 or something, times 20 is two, and that's going to beat the 1 cent capital loss that they experience. So they're actually going to vote for installing the clean technology and for saving the environment. They're going to do the socially correct thing. And this turns out to be actually a general result for the case where everyone's very well diversified. It wouldn't be true if we had a large shareholder for whom the capital loss might loom much larger. So that's why voice actually does surprisingly well. Now, if we compare that strategy of trying to change what the company does to this indirect strategy, let's stick with shareholders and consider their exit strategy, which would be to divest.

Oliver Hart:

So basically if you're a shareholder who would like your company to be greener, what you do is you say, "I don't like this company, I'm going to sell my shares. I'm going to get out. That's how I'm going to show my disapproval of what they are doing right now." And that is a very indirect mechanism for achieving change because the way it works is that you divest and maybe some other people like you divest and the share price goes down, and the idea would be that the company doesn't like a lower share price. So it might respond, if it goes down enough, the company will say, "Oh, this isn't good." And we've heard that CEOs are often paid according to share prices, so they don't like that at all.

Oliver Hart:

So they might say, "Well, perhaps we should carry out this investment, become green, and that's the way to get our share price up again." The problem with that is that even though some people might be willing to divest because they feel very strongly about it, other people who are either purely selfish, or slightly socially responsible, they might think, "Wow, the price is going down. This is a bargain now. I can make money, large amounts of money, by buying these discounted shares." And they'll do that and drive the price up again. So the price effect from divestment can be really quite small. I think the point I would like to get across is there's a very different calculation in the vote where you have this negligible capital loss and you're comparing that with the social impact, and the calculation of an investor who has the opportunity to buy discounted shares and make money.

Oliver Hart:

That person has to be very socially responsible not to do that. Whereas in the vote, you only have to be slightly socially responsible to vote green. So a big difference between the two, and voice looks like delivering a better outcome. Now actually, the analysis is more subtle, but since time is short, let me not go into that. But let me just recommend the paper because you'll see there's a little more to it than what I'm saying, but this is the sort of broad outline. Now, what does one make of these results? What does one conclude? Well, one conclusion is that a lot of government policy or regulations seems to be pushing in the wrong direction. If you look at the SEC policy over the years, it has been to make voice much more difficult. It's made it much harder for shareholders to express their views. If you take our analysis seriously, you would say, "That's really the wrong way to go. You should be trying to make the expression of shareholder views easier."

Oliver Hart:

Just to mention a very recent example which many people will be aware of, the Labor Department in the US recently said... I don't think the decision is fully made, but it's planning to make it impossible for people running private pension funds to take ESG factors into account, regardless of what the people investing their money with them might want. The pension fund managers apparently can't even consult the investors about what they would like. Instead, they must, according to this Labor Department proposal, they must focus 100% on shareholder value. That seems just to me to make no sense at all.

Oliver Hart:

Okay, let me stop there. Let me just conclude by saying too that the world has changed in the last 50 years in many, many ways, but certainly environmental concerns have become more serious, more salient, relative to the time when Friedman wrote his article. But another thing that has changed, I think, is we've understood the limitations of some of his arguments. Thank you.

Randy:

Great, thank you very much, Oliver. That was really, really spectacular. Let's sort of dig in because in some sense, some of what you're saying is I think actually quite radical for what should be done if you do feel that you were motivated to try to get corporations as well as governments to do something different than value maximization. Because of course, if you look back over many movements over the last few decades, a lot of them had been focused on divestment. And when you look at a lot of the way investing is running, socially responsible investing, it's focused on either divesting from certain companies. Let's say energy companies that are seen as being problematic on climate, or ones that are problematic on certain social or ethical issues. And so you're saying that's in some sense, that's just wrong headed. That's really just not going to get you anywhere.

Oliver Hart:

Well, I don't want to push this too far because sometimes divestment or boycotts, I think actually the evidence suggests that boycotts can be more powerful somehow than divestment, if you look up what's happened in the past. And I'm not trying to rule out exit strategies as a way to go, but I think that in a way, people should consider voice first because I think voice can be more powerful, and can push things in the right direction, given the sort of argument I was trying to make. And people often don't seem to consider it and maybe it's partly because it's made very difficult. Sometimes of course it's impossible, okay. I mean, if you have a company which is has a controlling shareholder, then your vote is not going to do anything. You can still protest, but your vote won't matter, or private company again, the only thing you can do there is divest. But there are lots of other examples where you could engage.

Randy:

I think that's very interesting because as I said, it's a very different approach than I would say most, much, of the investment world is going, and focusing on trying to move funds into areas with greater impact, and move funds away from areas that are seen as being harmful. But in some sense, what you're saying is that, although there may be some impact of that, it's relatively small. And then particularly the example that you gave, if let's say a whole group of people got together and divested from some large energy firms, there's going to be somebody who's going to pick up those bargains, and so it's not really to affect their cost of capital very much. Is that the right interpretation?

Oliver Hart:

Well, and I think the evidence is consistent with that. But I think there is a fair amount of engagement going on. I mean, I think you're right, that a lot of the talk we hear is about divestment, but I think behind the scenes there's quite a lot of engagement, and y’know.

Randy:

It almost seems that what an implication of what you're suggesting is that, taking a very different point of view on activist investing. You can kind of think of this as an activist investor is saying, "I'm not going to invest in companies that I think are problematic." In some sense, you're saying those are exactly the companies you want to invest in so that you can have a voice, and you can have an impact on the, on the management. Would that be advice that you would give to the impact investors? Focus more on actually investing in and trying to change the ways of the existing companies rather than just saying, "Oh, they're  lost causes. I'm moving my money to a start up in solar energy."

Oliver Hart:

Well, I think the problem with that is of course, how much money are you willing to lose? I mean, I think to say, "I'm going to put a lot of money into this company, which is profitable but dirty, and I'm going to make it clean. And it's going to be then be less profitable, have a lower share price," that's a big kind of loss we're talking about. So you have to be very altruistic to do that, and that may be going a little too far. But what I think is the case, I mean, right now we have these very important institutional investors, Vanguard, BlackRock, et cetera. And I mean, they do have some power they're already in the companies, so they didn't buy them in order to change them, but they are in them. And I think that I can see a world where they actually ask their investors, people like you and me, would you like some oil company to be more environmentally friendly, or would you like some retailer to stop selling guns in their stores?

Oliver Hart:

And right now it seems to be we've heard Larry Fink, I don't know, I haven't heard so much from him lately about this, but certainly he made a big splash a year or two ago, about saying that he wasn't just going to vote on the grounds of profit. But I think when I heard that I felt, and this is work that Luigi Zingales and I did, which sort of motivated this. We would say, "Well, it's not really up to Larry Fink." This, by the way, relates to some of the discussion about should CEO's... They're not politicians, they shouldn't be making social decisions. I totally agree with that actually. But I think the point is they should be asking their investors what they want. And I think the investors can make social decisions because we do it all the time.

Randy:

Now, I think this really comes to the heart of one of the threads that we've talked about through the day, of the shareholders and stakeholders, I had a discussion with Martin Carney about whether there's common ground or conflict. And I think you're right. In many cases, what people are trying to say, and we've heard some of this in the previous panel, [inaudible 00:21:40] we can try to find the low hanging fruit and make things consistent. Good social purpose is also good with shareholder value. And I think that's true in some cases, but in some cases, [inaudible 00:21:51] and it's just not true, like in the examples that you were giving. I think that would be true of some large energy companies.

Randy:

If you said, "We really need to reduce carbon very, very rapidly." That's going to impact the bottom line. So how do you convince the pensioners who have a legitimate concern about their ability to feed themselves and their family as they retire, to take a lower rate of return? Because now the example that you were giving before of the individual who's really small, and it's not going to have much of an effect on their return. If you're going through something like a BlackRock or a Vanguard, they've become a large shareholder, and they are going to have an impact and that is going to impact the returns of the individual pensioners. How do you convince them?

Oliver Hart:

Yeah, I don't think it's my job to convince them. I'm saying they should be asked, I think in some cases, they may say no. And some of them may say no anyway, but some of them may say yes, maybe the majority. It depends on the circumstances. The assumption that they always are interested in their rate of return, that's the only thing they're interested in, let's take this Labor department proposal, which is that the trustee of the fund, of the pension fund, can focus on nothing else, but shareholder return. I mean, that seems to me, just as a matter of logic, wrong, because not all pensioners are going to feel that way about every issue. Otherwise, we would all be completely selfish in our private lives and only look at the bottom... I mean we don't know anybody, do we, Randy, who just focuses on the bottom line and they're [inaudible 00:23:48]. Well, maybe you do. You teach at the business school, but I don't.

Randy:

Actually what I want to do is I have a quotation here from Gene Scalia, who's the Secretary of Labor, on this issue. And so he says, "Private employer sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan." He goes on to say that these plans should be managed with unwavering focus on a single, very important social goal, providing the retirement security of American workers. What's the strongest argument that you could give to say, "Gene, you just got that wrong."

Oliver Hart:

I would basically repeat the argument I've made, which is, let's suppose you were the trustee of my pension. And it was just a one on one thing, I wasn't one of many people investing. It was just you, I invested all my pension with you, and you were managing it, and nobody else's pension. I could say to you, "Randy, I'm interested in my return of course, but I also have some other goals." And if you told me that there was a vote coming up in a company that we had invested, to be greener, at some cost of the bottom line, I might, if you asked me about one I'd say, "Yes, please vote in favor." I mean, that makes sense. I don't think anybody would say there's anything crazy about that. Why is it different if there are a thousand of us? We might all feel the same way or some of us, the majority might, or the majority might not.

Oliver Hart:

I think the point is we don't want the trustee deciding it according to the way she feels, that would be wrong. But if she consults, it seems to me by just focusing on return, she's actually not acting in our interests.

Randy:

Interesting. We have a very interesting related question coming in from the audience. What Oliver's suggesting is a kind of a democratic investing, that individuals get to vote on the resource allocation on these social purposes. Unfortunately, however, only certain kinds of people would then have a voice. Shareholders often represent the dominant race, gender, culture. Climate change and other social issues have a disproportionate impact on marginalized communities. At what point do those communities get themselves a voice?

Oliver Hart:

I mean, that's a very good question, but this is where I think it has to be the political level that is dealt with. I mean, it may be sadly true that minorities are not well-represented as shareholders in companies, but to force the shareholders of companies to vote in a way they don't want to, I guess I would see as somewhat undemocratic. I mean, I, like the panelists and probably most of the audience, I am a believer in free enterprise, with limits. But how far can you go at the company level? And I'm suggesting that the company should listen to its shareholders. I'm not saying that the shareholders necessarily have views that I would love. I have to accept the fact that they may not, but I still think it's better to listen to them than not, and ignore them.

Randy:

And then we're getting some questions about other stakeholders, because earlier today, [inaudible 00:27:46] Roshan spoke about thinking about longterm investor value maximization. And he was thinking of the longterm investors include employees of the firm, suppliers, customers of the firm. And one of the questions is, well, what's the role for, for example, employee voice in this? Should employees have a voice in this or is it really just the owners of the shares?

Oliver Hart:

Well, I take a rather conservative line on that, which is that if the company's been set up with votes allocated to shareholders, then I think those are the ones whose voice should be listened to, at least through voting. Now, of course, as was pointed out in the panel discussion, in order to attract workers and keep them, if they don't like what the company is doing, that's going to be much harder. But that isn't so different, then it's profit maximizing to listen to them. You're not listening to them because they have an independent voice, it's because you want to retain them. When it comes to actually sacrificing profit for a social goal, I think that should be something that the shareholders decide and not other people, unless you set up your company in a different way, which of course you can. There are companies that are worker cooperatives or partnerships, and then the founder of the company wanted to have these other people have voice. But unless that's done, I don't really see the argument for it.

Randy:

And certainly, as you well know, on Continental Europe and in countries like Germany, there's a formal legal requirement that Labor is represented on the board. Not a majority, but a very significant fraction of the board. Do you think that's an effective way to provide this kind of alternative stakeholder voice? Or do you think that's not the most effective way to do that?

Oliver Hart:

Well, that's imposed by the government. I mean, I'm not at all against some constraints on companies, and I could even imagine, by the way... This is really taking us beyond the topic of today, I think. But I can imagine a situation, and Luigi and I have talked about this with each other, about where you might impose some objectives on a company that became very large and very powerful, that maybe its responsibility would move beyond just acting on behalf of shareholders. You would do that because these companies have so much power. It's the same sort of reason that we have antitrust laws and that kind of thing. I don't feel like I'm an expert in that area, or at least I don't feel prepared enough to talk about it, but by and large, I think just saying every company has to have so and so many workers on the board, I'm not sure that I see the argument for that.

Randy:

And another question that's come in. And so there are a lot of different things that people are interested in, some people are very focused on the environment, other people are focused on income inequality, some people are focused on diversity and inclusion. So, how would you then choose? Because you said, well, it's important for BlackRock to ask people, or Vanguard to ask people, or any of the pension funds to ask the people, but there's just so many of these different things. How would you choose which questions to ask or how would you get some sort of ranking amongst them to know what the important things are for the shareholders in a particular company?

Oliver Hart:

This is a good question. I mean I think, in the future, one can imagine a situation where the funds actually announce policy positions that they are going to be pursuing, furthering, and that there could be a whole list of them. So, a particular fund, so, I'm not thinking of Vanguard now, but some other fund that sets up, the Randy Kroszner fund, and it might say, "We're going to be activating for the following things by putting proposals up to proxy or on..." whatever the expression is... "up for a vote, and if things come up for a vote, we're going to vote in the following way." And you could have a list of things that this fund is particularly going to be pushing. And then I could decide, "Yeah, I like that set of things. I'm going to put my money with the Randy Fund." And that's how it could work. So you wouldn't have to go back and ask every time your investors, what they want. They would have already sort of voted with their feet by putting the money in your fund rather than somebody else's fund. I could imagine that.

Oliver Hart:

As people have sort of said, the world is changing and it's very hard to know quite what the landscape will be in a few years time, but that's a possibility.

Randy:

I see. So, that's sort of another variation on a different way of thinking about these issues, of thinking about where you put your pension funds, and that a BlackRock or a Vanguard or others could have ones that are broadly, well diversified equity portfolio, but will always ask questions about something along a particular dimension, so about climate, or about diversity inclusion. And so you would know-

Oliver Hart:

A set of things, right? Yes. Climate and diversity.

Randy:

It could be a set of things or you could have, much like now, you could choose industry funds of some people who want to put money in energy funds, and some people want to put money in retail funds and other things, you could have funds that maybe are focused on individual issues, and so you can diversify across that, or you could have a fund where you say, "This manager broadly has the same kind of values that I have in caring about the environment, in caring about diversity inclusion and such, and so in some sense, I delegate that to the manager because I know that they broadly have the same values that I have." And so that's sort of an interesting alternative to say, well, it's not really divestment, but it is a form of impact investing, but it's about getting the input from the input from ultimate owners and the shareholders.

Oliver Hart:

Yeah, exactly.

Randy:

Now, that's very interesting. Again, I think that's a different approach than many countries have been taking. For example, in Europe, the approach is very different than what Gene Scalia and the US is doing and is trying to encourage pension funds to be able to put money, and so longterm investors to be able to put money following these big picture social enterprise issues. But I don't think they're doing it in a way that you are suggesting, which is kind of going back to the underlying shareholders, but just doing it by the institution. And I think that's where also some of the tension and some of the criticism, for example, that BlackRock has gotten, is, are they... And I have a quotation here from... I've forgotten who it's from now... “Are they playing God?” And so I guess you would say that it's not their role to play God, it's their role to ask the questions of their investors.

Oliver Hart:

Yes, exactly. You put it very well, but let me just sort of emphasize the difference between being a fund that says, "You put your money with me, I'm going to invest it in... it's going to be a diversified portfolio, but I'm going to exclude certain dirty companies," versus what I'm suggesting, which is, "No, we're not necessarily going to exclude them, but we have this general agenda to make the world cleaner and so we're going to be pushing that with all companies, including these ones."

Randy:

We've got a couple of questions in about some companies that are not publicly traded and that could be very, very important in different areas. How do you exercise voice over them?

Oliver Hart:

Well, you can't do it in the way that I'm suggesting, or that Eleanor or Luigi and I analyzed in our paper. You can't. Of course, there are the versions of voice, which would be, I suppose, protests. I mean, you can protest, and you can have Twitter campaigns or this kind of thing, then the exit strategy becomes perhaps the only game in town to try to enter. So then you would be appealing to their self-interest. If you can get enough people, let's say, to boycott that product, unless they become a better player. And there, if the whole thing becomes a social movement so that then people join it because it would look bad to other people if they didn't, if you were seen buying the car that people didn't think was the right car to buy, everybody would see it and would you'd get disapproval. So, that could be a way, then of course, the company would just decide to be cleaner because it's profit maximizing. So, that can happen.

Randy:

So, this is sort of building on some of the questions that people have and also some of the discussion we had before about politics and political failure. So, one possibility would be, let's say you do convince people to take a lower rate of return and so they move away from some of these areas, but then perhaps more people in the private realm, product companies rather than public companies, move in, and so maybe you're not achieving the end as you wish, or there could be an international issue that climate and carbon is a global issue. This movement is happening in the UK but it's not happening in the US, and so it may not be that effective to be exercising voice in this way. When does it become appropriate to be thinking about having government intervention rather than leaving it up to the shareholder votes, either at the national or international level?

Oliver Hart:

Oh, I think there's always an argument for the government to, particularly in climate change. What the companies do is not going to be a substitute for what government can do, particularly if governments can coordinate across the globe, then that's going to be much more powerful. I mean, this isn’t meant to be, this is only a substitute to the extent that the government is not doing the right thing, but that's why we as individuals do our own bits. I mean, the point is, I think we live in a world where there are a lot of different mechanisms. You can do these things at the individual level, at the corporate level, at the government level, and in practice, we're going to want to do all three.

Randy:

And do you have a view of where the line is. I had mentioned before the so called Friedman Separation Theorem. So, I think Milton's view was that there's something that's in the private realm, there's something that's in the government realm, and so we separate out those different kinds of decisions. In the private realm, we just leave it for profit maximization. If there's a social movement or a social concern, they can bring that to the public sector actors, they can pass a law. Because Milton made it very clear, he always put that qualification in maximizing value consistent with the rules of the game, whether those are social or ethical rules, whether those are legal rules, whatever. And so I'm trying to sort of be a little more concrete about where we draw that line or how do we think about drawing that line, and particularly given your approach. Where would it be that you say, "Well, we've really got to move to this other realm"?

Oliver Hart:

I don't think one can say where one should draw the line because I think the point is... Well, let me say this. Friedman's view of the world, where there is this separation, as you put it, well, it's beautiful. It's beautiful, because it says social things happen over here, and companies can just focus on making money, and then they pay out dividends to shareholders, and shareholders can give it to the charities of their choice, and the government has passed the right laws. It's a lovely separation. And then we can focus, as we have the corporate finance literature over the last 40 to 50 years, has focused on the agency problem between the shareholders who want to be as wealthy as possible and managers who might have their own goals. Okay? And that's the way things have gone.

Oliver Hart:

There's just one problem with that. It's wrong. In general, it's just wrong. The separation doesn't exist once we recognize that the government doesn't do the job perfectly. I don't know what Milton Friedman would say if he was sitting here. I doubt that he could really say that the government does solve all the problems. Now, he might say, "But I think that the democratic process is the best way to go," and that's a sort of possible view, but I think the thing is, we know that individuals don't wait for the government to do things. I mean, why does someone put solar panels on their house to the extent that it's not just because it's going to save them money, but they may also feel that it's good for the environment and that's one of the reasons they're doing it. I mean, we see that all over the place, people doing that kind of thing, I think. And so, that means, in a way, people want to act to the extent that government isn't.

Oliver Hart:

And then I think it just follows that if you're a shareholder in a company, you have a vote, you have a right. If something came up for a vote, whether the government... My example, if you spend $100 to improve the environment by 120, let's have a vote. And you ask, where do we draw the line? Well, we would see where the line is drawn through the outcome of the vote. If people feel in this situation, "I don't actually think it's 120, I think it's more like 90, because some other company's going to come in and do a lot of harm. And so for me, spending 100 to get 90, I'm going to vote, no." And we'll see the line is drawn there. Or it may be, of course, that these people really don't care about anything but themselves, and so even that small capital loss is going to loom large, and so they'll vote no.

Oliver Hart:

I think, as outsiders, we can't draw the line. What we can say is this idea that we can ignore shareholder democracy, that somehow politics doesn't enter into the corporate sector, the difficult choices don't have to be made in the corporate sector, it's all a matter of money. That's the only thing. I mean, I think once the government isn't getting everything right, that is just wrong as a matter of theory or fact, if you like, and then we just have to see where the line is drawn by the people involved.

Randy:

No, I think that's very interesting because of course there's usually a lot of discussion of market failure and externalities. I mean, we've heard that throughout the day and certainly in the previous session, but also just as you're describing, we heard a little bit in the previous session there's government failure. So it's not like the government fixes all of the externalities as an economist or as some economists would want them to do. In that world, you may be much more comfortable with leaving it just up to either value maximization or purely to shareholder votes, but in a world where the markets are not perfect and the government's not perfect, it becomes much more difficult to figure out where the line is being drawn. And it also gets to a question that Luigi and some other have raised about the influence of these corporations on the political process itself. So I don't know if you have some thoughts about how that kind of political economy dynamic, how does that affect the proposal that you're making?

Oliver Hart:

Before I get to that, let me give you an example, which I think is quite a good one about where voting might make a difference. So think of those. And we've been talking about the environment and I mentioned guns, but let's take another example, which is until the corporation tax was reduced recently, companies were locating elsewhere. US companies were locating in other countries in order to reduce their tax bill. Now that presumably was a value maximizing strategy, but is that something ... suppose the shareholders of those companies have been asked about that? Would they have said, yeah, that's a great idea, or might they have been somewhat patriotic and said you know what? We're not that comfortable with not paying Uncle Sam what perhaps is due. Yeah, we could be rich if we did it, but we don't want to do it.

Oliver Hart:

I have no idea how the vote would have gone, but it would have been interesting to see, but that wasn't your ... your question was, what do I think about ... well, but something similar could be true when it comes to lobbying. Would the shareholders of the company actually approve this or political donations is another example. Let's take lobbying. It's possible that the shareholders would say, you know what? We don’t like this. We don't want you to do it. I don't think they have the opportunity to do that right now.

Randy:

Well, I mean, certainly proposals are made, but they're very rarely or virtually never get enough shareholder support to say that because there are many proposals that are made about reducing lobbying expenditures or those kinds of proposals. But no, I think that's a very interesting point.

Oliver Hart:

Well, it's also true of course, that right now, proposals are not binding even if passed. So, I mean, there are lots of reasons why in the case of institutions, which have some power, if they're investors ... so you know more about this than I do. I mean, how are the institutions voting on those proposals, probably not for them.

Randy:

So it varies. And so I don't think there's consensus for those particular proposals, but it's interesting because obviously there isn't the separation theorem, there's this very interesting connection between ... and this is other couple of questions about this, about isn't one of the reasons why we're having the government failures because of the lobbying from the private sector that doesn't allow the government to do the quote unquote right thing because of political pressure groups coming in? And so there's sort of that interesting back and forth that's there.

Randy:

There's another interesting question here that has to do about democracy and voting. So there's literature in voting in the traditional political realm of rational ignorance that individuals don't spend the time because they figure they're small. They're not going to have a big impact on the outcome. And so they don't spend the time to do the investigation to try to decide, well, is this a good or a bad initiative? Should I be voting for or against this? And similarly, you could perhaps argue that if Vanguard or BlackRock turns to the individual investors, they're small investors, they're working really hard. They're trying to put food on the table. They don't really have the time or the wherewithal to do a careful analysis of a particular set of ESG proposals. So will they be effective monitors or not? And would they be more or less likely to be effective in this private realm than in the public realm?

Oliver Hart:

I think that is an issue. The example I gave about the fund, the Randy Fund that has a set of purposes that it's going to be pursuing. I mean, that makes life easier because I can put my money with you. And then I sit back and well, I worked to put food on the table, I don't have to think any more about it. You have to do the thinking, but you have a lot of people investing with you. And so you have some size and some influence, and also some resources that you can spend to do investigations. So I could imagine that happening, but the free rider problem is that as it is in politics and I don't have a solution for it.

Randy:

No, but I mean, what, would be interesting because in some sense what you're saying we want to use a similar mechanism in both cases of voting mechanism in both cases, I mean, could you make the argument that when people have a direct ownership stake, they're more likely to become informed than when they're one of a 100 million or 200 million voters? I'm trying to help to make the case for you.

Oliver Hart:

That's nice of you. Yeah. I would like to think that, I think on the other hand, people get very involved in politics in a way that they haven't traditionally in board elections mostly, they put everybody to sleep. Well, they're usually not contested. I think actually there's some possibility that if social things became part of it, people might become more interested. But I also think this delegation strategy, which doesn't exist so much in the political sphere, right? We don't let people delegate their vote to somebody else, but here, I would be able to do it by investing in your fund.

Randy:

And actually on that. So Margaret Blair from the previous panel has a question. She says, the votes may depend on who owns the shares. And since most shares and publicly traded corporations in the US at least are owned by institutional investors, we have a second level problem of who makes decisions in those institutions. So there's sort of a double agency problem, if you will. How would you overcome that?

Oliver Hart:

Well, as I said, the institutions have to ask their investors what they think. So BlackRock, when BlackRock votes on some ESG issue in the company, it shouldn't be based on the way Larry Fink thinks. Larry Fink should consult his investors to find out what they want, and he should act as their agent. That's what I have in mind.

Randy:

Going back to the individual-

Oliver Hart:

Or to take the Randy Fund. Larry Fink will have already announced ahead of time. “BlackRock is going to be voting in the following way on these 10 issues. And if you put your money with us, and then you're agreeing, you're okay with that. And if you don't like that, you go and put it with somebody else.”

Randy:

Okay, great. So why don't we conclude with a final question that has come in, if you could make one particular change in corporate law to address these issues, what do you think that ... or if you want to do more than one, that's perfectly fine, but what would be the key thing that you think would really help to make this effective?

Oliver Hart:

Well, if I was going to one, I would say the notion of fiduciary duty in the US, it's a ... it has been interpreted by the courts, I think, particularly in Delaware, which is of course the most important place, has been interpreted to mean that a duty to maximize long run value. And I think that's a mistake. We see it with the discussion we had about Gene Scalia that he now takes that idea and transports it to the pension context. And I think you get the wrong answer. A duty of loyalty, that makes sense that a board or officers of a company have a duty of loyalty to their shareholders. But I think it's a mistake to think that means that they must blindly follow a long run shareholder value maximization. To repeat, they should find out what their shareholders want.

Oliver Hart:

And sometimes, by pursuing along on shareholder value, you're actually being disloyal because that's not what the shareholders want. I mean, go back to earlier times, I think you were around then still, but you're younger than me. But you remember the South Africa divestment campaign.

Randy:

Sure.

Oliver Hart:

And I remember there was a discussion about, could a pension fund say, we're not going to ... or we're going to, I think the issue was what the banks could do business in South Africa or something like that. And you owned a bit of the bank. Could you vote for that as the manager of a pension fund? And I think the answer was, no, you have a fiduciary. You can only vote for something that is going to increase ... be good for return. You can't take political things into account. Well, my view is, they could have done if they ... or they should have been able to, if they'd asked their investors, do you care enough about apartheid in South Africa to give up a little bit of money in your pension? So I think a change in the way we think about ... it's not just the law, but just the whole way we think about fiduciary duty could be a very good first step.

Randy:

Interesting, fascinating. I mean, I think this has been incredibly, incredibly valuable. I mean, take these, in substance, very high level ideas and theoretical ideas on contracting, and then bring them to the concrete, to think about how we can actually achieve the social purposes that individuals want. Think about that in terms of this kind of shareholder democracy that you're talking about, think about some changes in rules, but also think about changes in the ways people approach things. And that brings us back to the discussion right from the beginning that we started in Hong Kong, where the role of ethics, the role of morals, the role of the basic rules of the game in society play an incredibly important role, not only in what institutions are legitimate or not, but how people make decisions, how people should be making decisions, how to think about things like fiduciary duty, should they fundamentally include the broader social purpose, in some sense, that's the direction of where the European Union is going, or should that be completely separated out in this sort of Friedman separation theorem, which is much more the approach that Eugene Scalia is espousing?

Randy:

So we've had an incredible day, and this is really spectacular. As I've said before, only Booth could do this with our campuses around the globe to get this global engagement, this global discussion going. Thinking about all these super important issues, thinking about, what are the objectives, how we can hold people accountable, what sort of data would we want? What sort of mechanisms would we want for accountability? Where is there common ground between value maximization and these border social purposes? Where are there conflicts? How can we try to resolve some of those conflicts? Oliver has been incredibly generous in sharing his ideas and thoughts on that and responding to a lot of really tough questions from the audience and a few from me. Thank you very much. This has been a really exciting day. And I think a historic day, not only to mark the 50th anniversary of Milton Friedman's famous essay, that obviously has ignited a debate that is still burning bright, but also the first virtual global conference that Chicago Booth has held. Thank you so much. Bye, bye.