Tom Gilligan on Stakeholder Capitalism

[0:00:00 Speaker 1] Mm hmm. Welcome to Policy

[0:00:02 Speaker 0] McCombs. A

[0:00:03 Speaker 1] data focused conversation on trade offs. I’m

[0:00:07 Speaker 0] Carlos Car Value

[0:00:08 Speaker 1] from the Salem Center for Policy at the University of Texas at Austin. So with us today, we have Thomas Gilligan, senior fellow at the Hoover Institution. Gilligan Service at Ted and Diane Tobe, director of the Hoover Institution from fall 2015 to the fall. 2020 is a longtime scholar on antitrust regulation, political economy issues generally, and also on serving the board of Southwestern Lines and Katie Holmes, Home Builder Company, among other things. He was also RD here. The McCombs School of business from what was the time from 2000 and 7 to 2015. A 2000 and 8. 2000 and 2015. Anyway, Tom, welcome to Policy. McCombs.

[0:00:54 Speaker 0] Yeah. Glad to be back. Thanks a lot.

[0:00:56 Speaker 1] Uh, so our conversation today is going to be around the idea of stakeholder capitalism versus, um versus Versace shareholder capitalism. And And I’m going to start here by going to something that was on the campaign trail during this fall, where President elect Biden said, and I quote here, it’s way past time for us to put an end to the era of shareholder capitalism, an idea that he described as an absolute farce. You went on to say the corporations and responsibilities to other stakeholders as well, such as the workers communities, which they operate in their country. All right, let’s start by defining the terms a little bit. So clearly, we have our new president saying that it’s time to end this time to end this farce. Uh, so what is the sparse? What is this, the shareholder farce? And what is this new idea of stakeholder capital?

[0:01:42 Speaker 0] Well, so neither ideas are new for one so but they both been around for a while. Shareholder capitalism, I guess, properly defined, is simply that the purpose of a company is to advance the interests of shareholders. Chiefly returns on investment or profits subject to the laws and customs of the societies in which they operate. So it’s basically you have the equity owners or a private company, just the owner of the company. The company should strive to to advance the interests of those owners sub to obeying the law, the customs and the ethical morays of the times. Uh, stakeholder capitalism recognizes that almost any company, regardless of its size, is going to have implications for employees for people who live in the communities in which the companies operate. Uh, maybe for citizens around the world. Say, if the company, um it’s a lot of pollution, et cetera, and they’re impacted by these corporate decisions and therefore the purpose of a corporation is to somehow taking to counter balance the interests of stakeholders, the shareholders of which are only one of the potential shake stakeholders. So the way to think about the first one is that the first one’s a market mechanism where shareholders form a firm and they hire labor. They sell in markets to consumers they produce, according to the laws of the jurisdiction would to operate The on the other hand, the stakeholder concept is more of a political concept, like a city council, where you have a lot of people with varying interests and all of these interests should be weighed, uh, in various ways in order to balance the interests of stakeholders.

[0:03:15 Speaker 1] So um, one of the with a very clear utility function, something that we think about when a simple economics problem maximizing their utility and the other one utility functions more generally defined by multiple players. Multiple actors, Um, and in the system,

[0:03:30 Speaker 0] I think that’s right.

[0:03:32 Speaker 1] So when you think about current law and current federal estate, um, is there a particular particular statute that reinforces either one of those views?

[0:03:41 Speaker 0] Yeah, I think it’s safe to say that the current system of law and regulations that exist both at the federal and state level in the United States, uh, strongly embed shareholder perspective into corporate purpose. So, for example, um, laws, even recent laws like Sarbanes Oxley, uh, promulgated by the SEC The federal government enforced by the SEC are designed to make sure that shareholders have a transparent look and accurate information in order to assess the performance of management and directors about a company. So it’s all designed to give information to shareholders. State laws, I think, also in bad shareholder capitalism, uh, in the state of Delaware, where most Fortune 500 companies are incorporated, particularly large companies, uh, really makes it an explicit obligation of directors and managers to run a company in the interest of the shareholders. Now, to be sure, it doesn’t say don’t take into account other stakeholders But they view the other stakeholders is instrumental and that there is another stakeholders need to be treated in a way that furthers the interest of the shareholders. So, for example, you know, So for example, it does, you know, a company that was neglecting or treating its labor force so badly that no one was staying, Everybody was quitting. It was very hard to retain, recruit and retain the best employees. Uh, that for that company to be cleaned up would be totally in the interest of the shareholders. And that would be the law would expect you to do that. Uh, I think there are other states to, uh, that embeds something like constituent provisions and their state incorporation laws, which allows directors and and managers to explicitly take into account the interests stakeholders. But once again, it’s in this instrumental fashion. You know, you’re free to take into account the impacts on communities, employees, labor environment to the extent that it can be shown to advance the interest of the shareholders. So, for example, you think about major corporations now who buy carbon offsets to try to impact that lessen the impact of their, uh emissions on the environment. That’s just clearly a costly activity that cuts into the bottom line. But the courts will easily take the rationale that this is being done so that shareholders in the long run, are not overburdened by unreasonable regulation or or other kinds of punitive political activities that could take place if the companies were more indifferent to the environment. That’s just one example,

[0:06:10 Speaker 1] so so that that the court courts would be okay with that, even though perhaps at this point it might be something more like a signaling that company might be doing for the for the benefit of the customers to make sure that customers are happy with their activities, for example,

[0:06:21 Speaker 0] Yeah, I think that’s right, I think, and the companies in which I served the business judgment rule gives the management and the board quite a bit of discretion about the activities in which they engaged, so long as they can rationalize. It has been in the interests of shareholders in some relevant time period.

[0:06:38 Speaker 1] So, uh, just a side question on that when we talk about courts, do you see much of a more room for litigation as a result of boards and executives taking positions there. Maybe not as directly attached to the bottom line. Um, in other words. So if the business judgment rule is something that can be stretched out to incorporate other sources of information that may be construed as something that relates to shareholder value, um does that open ourselves to more litigation? More, more, more essentially, that will cost

[0:07:08 Speaker 0] you could, I don’t know of any cases yet, and I think that there are other disciplinary mechanisms non legal, non regulatory that would come into play before the courts would be a vehicle by which agreed investors could challenge the actions of management.

[0:07:24 Speaker 1] So it was like like active active board members, essentially or hostile things and

[0:07:30 Speaker 0] activist, you know. So, for example, if a company were engaged in activities for the right reasons, let’s say, but were thought to erode the bottom line financial performance of the firm, it would be possible for an activist to do what an activist does, which is trying to acquire stock and and the interests of other investors to try to replace management or directors to reposition the firm in those other ways. And those are the other other ways in which the shareholder capitalism perspective is embedded in our current customers that markets like the remuneration of executives and boards of directors are extremely tied to the financial performance of the firm. I mean, uh, and and there’s been a litigation in recent years about, say, on pay and about the use of long term incentives and vesting and clawbacks, which try to align the financial interests of the people who are making decisions about the daily operation of the company and the shareholders. That’s that’s an even more powerful mechanism, in my view, than the law. Uh, it’s also the case that, uh, the proxy process by which almost every year for almost every firm, uh, all the directors and the management are re elected by the shareholders. That’s a really strong and powerful mechanism, uh, for ensuring that the companies are runaways. That advanced shareholder interest. Uh, those those are semi political or voting systems. If you will, uh, they’re fairly accessible to, uh, shareholders. Um, but they haven’t yet been used to advance what I would call public interest, you know, like, uh, adopting more stringent environmental standards than the regulation requires. Um, they have. They have been used to advance, um, diversity issues on boards, the placement of women and minorities on boards, et cetera. But you haven’t seen this broad move yet of using proxy mechanisms to embed social or political values in corporations.

[0:09:26 Speaker 1] So in some ways, I mean, when you look at all the I guess you describe the alignment between all those issues and the bottom line at the end, right? So the values to shareholders is somehow aligned to a lot of these issues and the market mechanism in place right now, market and legal mechanism are very much defending that. And and so far that’s sort of a few that Milton Friedman had that as long as business are doing, um uh, what is good for the bottom line there are benefiting all stakeholders in the process, uh, seems to be the still the law of the land and the way companies tend to operate.

[0:09:59 Speaker 0] Yeah, and I think that’s right. And I you know, I’m a big fan of it. I think that you can trace back very directly to shareholder capitalism. A lot of the wealth that’s been created over our lifetime, and a lot of the advancements, uh, both in raw economic satisfaction and also medical discovery and innovation. And And I think the human, um, welfare, uh, and and enjoyment has just been greatly advanced by this particular form of corporate organization. You know, I also think that it’s a little bit of a misnomer or invalid criticism to say that shareholder capitalism necessarily ignores or takes advantage of other stakeholders in the process. There are markets in which people operate labor markets. If a company is not treating its labor right, it’s not training them properly. It’s not. It’s not paying attention to its human capital needs, you know. It doesn’t do very well. It doesn’t retain people. It loses its best people. It’s hard. It finds it hard to find anybody to take company there. If you have companies, you know that degrade the environment much, much more than their competitors. Uh, consumers care about that. Activists in the political realm talk about it. Consumers move away from all those things you and I in our lifetime. We’ve seen this right, like the use of child labor or just labor that doesn’t use of labor in ways that doesn’t conform to Western standards. has been the basis by which companies like Nike have have changed their modes of production and dealt with their suppliers and outsource providers in ways to try to bring their standards up to the norms and ethical customs in the West. And I think that’s had a big impact, and it’s done that under shareholder capitalism. So I don’t think that it’s right to say shareholder capitalism necessarily ignores or necessarily takes advantage of other stakeholders in the process.

[0:11:47 Speaker 1] I like to use the money ball analogy of the Oakland A’s sorry, a bunch of slow guys. Yeah, it turns out there was an inefficiency there, and by discriminating against low guys, teams were teams were spending more money. They should to get hit. So once that’s figured it out, the market became more efficient. And and And it was not about the types of players about like me improving the bottom line. The bottom line improved the market for for the labor, for the supply of labour in various directions. Right. So that’s, uh, like empanada classes as a way to to point out that, um, if there is an inefficiency, the market will explore eventually. So if you’re underpaying somebody that that that has high human capital, well, that person to have a place to work and it’s going to deliver value to another firm and to learn that,

[0:12:32 Speaker 0] Yeah, so I think within the context of this, I think one of the things that’s changed again in my lifetime is just the quantity and quality of information available about the operating practices of company around companies around the world. So if I if I am very much concerned about the way in which Labour is treated to produce a product that I use extensively, it’s easy easy for me to figure that out. There’s an assurance, ah, prospect that I could that I could execute on by doing a little bit of research or relying upon activists around the world are relying upon just certain kinds of reporting mechanisms will tell me how labor is treated in these certain areas. If I care very much about, say, carbon emissions right around the world, because I care about climate, the climate or climate change, it’s fairly easy for me to track down uh, kind of industry camps about who’s doing well and who’s doing less well in these areas, and it’s easy for me to fold those into my consumption decisions by and large. So I think that’s the way in which you’re talking about the market. Becoming efficient in this context is that it’s using this information that’s ancillary to the purchase and consumption of a good to inform my consumption decisions in ways that advance social objectives in this context.

[0:13:51 Speaker 1] So to that end, um, are there disclosure type requirements and things that facilitates that? Are there government interventions that help in the direction in terms of regulatory

[0:14:00 Speaker 0] things or

[0:14:02 Speaker 1] just got?

[0:14:04 Speaker 0] Yeah, that’s that’s a great question before I answer that. So let me, let me kind of just say that, you know, when people criticize shareholder capitalism more vigorously, they tend ironically, too, um, kind of point the finger of failures in government regulation. So, for example, you know 11 A lot of people say the shareholder capitalism approach is not realistic, because governments don’t properly regulate the competitive environment of firms. They allow firms to get too large. They allow too much market power, and then the philosophical argument behind shareholder capitalism breaks down right, or they say, governments don’t properly internalised the externalities of companies. So companies are allowed to freely pollute in ways that harm people both locally and globally, and that again can’t be justified on philosophical basis. Uh, it’s also the case that as we were talking earlier, that these companies engage in behaviors that are independently valued by everybody. Consumers by labor, etcetera and the governments are not properly policing or writing laws and rules and regulations that take these things into account. Right? So one thing one way to kind of deal with this is through the insurance process you’re talking about is, uh is to is to think of a think of political Call this. Let’s call Stage one stakeholder Capitalism. Let’s call this a stage. I’m making this all up to this is just has no weight other than in my imagination. It could be a form of capitalism where you you just use standard assurance techniques to give people the information that will allow them to make independent judgments about the social correctness of a company. So and this is this is growing to finally answer your question. This is growing dramatically there in the past, you know, 10 or 15 years There’s been this concept of environmental, social and governance properties of firms that have become increasingly important in the way in which people evaluate the performance and prospects of firms. So, for example, let’s take the governance issue. Are are your boards and management team sufficiently diverse today? Include enough women and people of color, uh, to take advantages of president reported benefits of diversity. Uh uh, and an environmental are you Are you operating the company in a sustainable fashion? And I think in the corporate world, this means, uh, will it be sustainable against in the long run, with respect to, uh, the conditioning of the air or the treatment of water, etcetera. Will it be sustainable when government finally wakes up and decides they need to regulate against this environmental harm? Will you be able to continue on after that point in time? Uh and, uh, social. It’s just other other kinds of activities. Are you engaged in? Behavior is affirmed that reaffirms your community, builds up the community, helps it with this problems. Helps it, uh, you know, be a better resource for the company in the long run. So this is all what I would call assurance. And I think this this assurance view of stakeholder capitalism has been reinforced recently by this modern by the statement of the Business Roundtable, which, basically in a really full throated way, endorsed stakeholder capitalism, but in an interesting way in a way which kind of denied that there were trade offs between social and private ideas in a way in which they indicated that you just absolutely have to take into account the interests of other stakeholders. But that’s totally consistent with shareholder value maximization. You know, it’s kind of like our colleague Sheridan Tip when we call this costless social responsibility. If you read that statement pretty clearly, that’s what they have in mind. This is This is also the idea that is embedded in the in certain major investment advisory firms. Guidance on what stocks they’ll buy and hold which ones they won’t. If you read, for example, the Black Rock statement on the kind of way in which they evaluate companies, uh, they absolutely affirm an interest in these e s G factors and in the broader social impacts of companies on society. But they also say we’re not gonna make value judgments about politics or ethics, we’re going to evaluate them within the context of Is the company taking these factors into account to promote shareholder interest? So that’s that’s kind of very interesting. This is I mean, this is if you’re for for your students or anybody out there who is really interested the world economic, uh, foundation. I believe we’re World Economic Forum. Excuse me. Uh, they’ve been working on this for years and they finally came out with a with a really deep document. And I think October or September of this year, which was on incorporating s G factors and evaluation of company performance. Ironically, this will. This will tell you why I’m using the word assurance. This report was done in conjunction with the big Four accounting firms in the U. S. Right. And I do have I’m an economist, So I have a lot of friends who are just cynical, and their view on the whole document is that it’s the Big Four accounting firms trying to start a new assurance business, you know, and in my view is that’s okay. I mean, that’s fine. I I think I’m an economist. I think markets were better when there’s more information as opposed to less, and I think assurance activities are totally fine. And there’s not nothing really wrong with them. Uh, so. But I think the way one way to understand the modern version of stakeholder capitalism, at least in the U. S. And in most of the West is that it’s an assurance mechanism designed to bring in the social concerns and the evaluation of corporate performance.

[0:19:37 Speaker 1] All right, so so that that is is still within the market mechanism to some degree, right. We’re just for allowing more information more readily available and people to make better decisions. The function of that, they’re non market mechanisms that that you that you see coming away from again, going back to the statement that Joe Biden entry, Uh, what are the types of pushes that we might be seeing coming from the federal government? Yeah, the

[0:20:03 Speaker 0] future. And trying to

[0:20:04 Speaker 1] maybe codify some of those things into law and regulatory

[0:20:07 Speaker 0] framework. Yeah, that’s a great question. And I don’t think the president elect, you know, in that speech he didn’t propose anything. He was. It was more kind of. We need to look at this kind of an idea, and it was done in rough conformity with the timing of the new Business Roundtable afterwards. Little bit, but it was interesting. But there are examples of

[0:20:27 Speaker 1] countries. Let’s imagine Elizabeth Warren is the secretary of the draft.

[0:20:32 Speaker 0] Exactly. So she had proposed in 2018 that a certain percentage of the board of directors be elected from labor unions or labor groups that worked in a company. So that’s one specific political way to incorporate at least one set of stakeholders labor into the decision apparatus of a corporation. You could also think about electing members from the community, you know. So like I’m on a homebuilder board, you can look at all the areas that, uh, in which we build homes and say, Look, you know, 40% of your board needs needs to be populated by politicians or people who represent the interests of those communities. You can think of doing the same, you know, with respect to Global partner, you think about, uh, a petroleum company that’s producing carbon that is being emitted and diffuse broadly around the climate that affects everybody. So maybe you should say there should be two people on a board of an oil company who represent the the interests of people who are environmentally harmed by what to do. So you can think about, uh, you can imagine a regime in which this happens Now it is the case that in in co determination, states in Europe like Germany, uh, there are requirements that labor on a certain number of Labour members on the board. And, uh, you know, and I’ve been recent reading recently to see what the effects of this work I mean, 11 predicted effect is that you’ll have under investment in these firms because you know, current labor or not. Long term, they’re not people who are long interest in the long term of the company where show holders are because they can always capitalize the long term effects of investments in their shares when they sell them. So there’s a question of do they under invest, and I haven’t. I’m not convinced one way or another yet. There’s a lot of research on that, but you can see that this is something that seems to me the president elect Biden will have to grapple with if he decides to create a more political way of enforcing stakeholder capitalism. And that is how do you want to do it? Uh, what are the benefits of doing it? And what are the unintended consequences of doing it? Another way to do it is, you know, uh, remuneration for executives. So right now, remuneration of exactly executives is tied really heavily to the financial performance. Affirm. It doesn’t preclude tying remuneration to social factors. Starbucks recently decide tied the pay of their executive to diversity factors in their human capital. Uh, there’s no reason why you can’t do those things. But the president, Biden might say, lists past something like Sarbanes Oxley, which asked the S e A. Asked the SEC to mandate certain TSG factors be included in CEO pay structures. Uh, so there’s a lot of ways to do it. There’s a lot of leverage you can pull again. Um, there would be a lot of arguments back and forth about what the intended and unintended consequences of these things would be, but it would be a more fulsome and robust way to embed stakeholder capitalism if you think that’s where you need to go.

[0:23:39 Speaker 1] So I have a couple questions on the on the Starbucks example. What strikes me as problematic there is that you’re asking executives to engage in potentially illegal behavior in order to achieve a certain a certain outcome for this, right? Like, you know, the fact we asked them to impose a quota. Uh, I don’t know if they specify some, you know, ratios for for the outcomes, or it’s just like a well defined, only one more diversity without specific goals, because you could get the end of the court and say, Well, I’m missing, you know, one Brazilian here. So I’m going to go higher former barista Brazil. And that’s not necessarily legal on the basis of, I guess origin, country of origin and protected class. But there’s other other ones that protects. I’m a little concerned with that. In in In the well, not concern is just something that I wonder how that’s gonna play out when you put executives in that particular a situation, right? But the other thing that you mentioned the potential issue of of divesting um so you see this dynamic playing only in the public traded companies or because one of the things might be well, I’m gonna go to the private markets. I don’t want to share my decision making power of my dollar as an investor with with members of the community with etcetera, etcetera, right, I want I want to have supremacy in my in my dollar. Uh, decision power. Um, is there a fear that we might that might lead to more dollars being invested in private equity in private markets that you and I are not going to have much access to That might lead to increase inequality, for example, access to returns that many, many, many people there are not going to have the ability to get. If yeah, there’s a trade off. I suppose that, You

[0:25:23 Speaker 0] know, I think there’s only address both those. I think the Starbucks case is interesting, and I think you raise an interesting question. I’m not a lawyer, um, but it But I’m kind of I think it’s relevant to remind ourselves what’s happened at major universities who have tried to impose quotas or other kinds of race based admissions policies. Right? Uh, and there I think the standard. The hurdle is even higher because a lot of these Republic institutions the University of Texas has always has a case going on. Harvard and private universities have cases going on, and I think that one looking at corporations which tend to be private, you know, they don’t have a public obligation away. U T Austin does. I think there will be general generally a lot of latitude about how companies want to try to impose their, uh, diversity requirements or implement their diversity requirements in their company. I don’t think they would ever use quotas, right. But they would use incentives or, um um, you know, payout or scholarships in ways you know, to bring people in. They have to worry, too. When they do something like this, they have to worry about the effects of those policies and the rest of their labor force. So to I mean, if you’re in a non protected class, you get into a company that’s really aggressive about promoting protected class people. Um, you know, those people are risk all else equal. Some of them are. Some may want to be in that environment, too, But I guess I guess the only observation I want would want to make is that I think private companies have more latitude in public universities about how they want to incorporate a person’s identity or status and employment students. I think with respect to your question about let me let me put your question bluntly. Suppose we have a very aggressive, politically based stakeholder capitalism move in this country. Will that reduce the size of public equity Marcus relative to private equity markets? And I think the answer is absolutely yes, I think I think we’ve seen this over the years as it’s more costly. Public couples got capitals, got more costly relative to private for a lot of reasons. A lot of its regulatory Sarbanes Oxley and Dodd Frank and things like this. I think another round of additional assurance requirements or additional embedded or explicit costs would cause people to look even more to the private markets than they do now, which I think is a great loss because private equity markets are the major way in which most people get access to investing in this country. I think correct me, uh, Carlos, because you probably know this better, and I think something like 100 million people in America have equity investments in some, Most of them are done in mutual funds or in union pension funds or things like that, and it would be really ashamed to see that market contract even more than it has over the past 10 or 20 years. So that’s just what I was saying. When when you want to kind of push out these regulations to promote politically based stakeholder capitalism, I think you just really need to look at what the unintended consequences might be from these activities. And that would be one that would be very hurtful if it were to occur.

[0:28:37 Speaker 1] It reminds me of, uh, the tangential point paper I read recently about the impact of corporate tax onto inequality. So a corporate tax this discourage you from incorporating right? And I discourage you from incorporating. You tend to have more idiosyncratic activity, which means that you’ll be there will be more big winners and big losers, which then point equality in the system. And I think something similar to that happens. If you’re not in the public markets, you’re gonna concentrate things in the private sector in the private market, and you’re gonna just create a few very big winners and and and and which is not necessarily something that that I need the same folks. There are more aligned with the idea of a stakeholder. Capitalism also like to see a world in which there is less inequality. It may be leading to two more inequality as a as a consequence,

[0:29:25 Speaker 0] right? Yeah. Yeah, Well, so this is for a policy audience. I assume it’s a I’m a 66 year old man who studied the economics of policy for as long as I can remember. And they’re all there are always unintended consequences. And they almost always served to frustrate the original goals. I mean, that’s just the iron law policies, right? Right. Um

[0:29:46 Speaker 1] so let’s let’s stay in this idea of of investor as well when it comes to stakeholders, uh, considerations, Uh, when Black Rock goes out and says we’re going to impose some sort of, we’re gonna hope to impose some sort of measure of gsg an hour in the way we think about managing stocks and managing funds and so on. Um and they do have a large amount of power here represented by the way in which we a lot of investment takes place these days. Right? If I’m holding, uh, an index fund for example, and I have many pieces of many, many different companies that I don’t know about. I’m not. I’m just following this sort of smart advice of holding something that’s sure I hold the market right and BlackRock is operating and deciding what goes into the bucket. To some degree, um, there’s very little oversight that one of these 100 million people that you just mentioned have over that. So again, do you have any worries about the potential? If they are just focused on a fiduciary do you’re just increasing returns and that’s it, then then we are aligned at the moment is making considerations their ethical or environmental or social that might not be aligned with me? Correct. And one of the 100 million people here. So how do we resolve that

[0:31:00 Speaker 0] issue? Yes, let me say, Let me let me kind of read what’s in Black Rocks? Investment statement. They Here’s what they say. They say they believe that well managed companies will deal effectively with the material, environmental and social factors relative relevant to their businesses. But they go on to say we do not see it as our role to make social ethical or political judgments on behalf of our clients, but rather to protect their long term economic interests as shareholders. Okay, so I think I think they’re firmly in that camp where you say they have a fiduciary duty. They recognize it. They’re only looking at these other factors. Has material for assessing the financial performance of the company. I think that’s fine. I also think, though, that there are other advisory firms that are starting to form who do e s g investing to advance the values of their investors as well as the financial interest. Right. So, um, uh, there are some funds E s G funds, for example that just won’t have any carbon based investments in them. Right, That’s one scrub or they will have. You’ll have other fund. There’s there’s, You know, there’s literally I think hundreds of these funds now that always have a particularly stand not like not like BlackRock, but a stand to invest in things that satisfy some important value of virtue that their investors care about. And there are people who study whether they do better or not. Sometimes it’s better, something like any financial investment at the end of the day throw a dart is the deal. Uh, but I do think that that those firms are out there, I think they’re good myself. My view is that, uh, an investor cares about their money, but they care about other things, too. And I think it’s fine to have a financial, investment firm or advisory firm who says, Well, try to advance both parts of your personnel at the same time. You don’t have to. You don’t have to invest in right. You could short. You could short it if you want to go the other way with it. Uh, so I think it’s another market solution to a need or an interest or a demand out there for investors. And I think it’s great that those firms exist out there. I do think the big The big firms, though, will probably stay away from this, and they’ll encourage their clients, who want to be more intentional about their investments, conform to certain values to move out of them. That will be the interesting thing to see if when a black rock, uh, says one day well can invest in carbon companies anymore because no one will invest on us with us. If we do, that may happen. But BlackRock it will, at least I think, framing in a way, uh, which says that we’re doing this not because we per se care about this, but we don’t think there’s a financial return appropriate to the risk attached with these investments.

[0:33:42 Speaker 1] That’s that’s interesting. And at the same time you have, you have, like, pension managers, right? Do they have a fiduciary duty with individual? They’re not trading on their values at all. They’re gonna and that’s going to persist. And but you might you might see the same type of judgment like, Well, this might be too risky and not necessarily financially, uh, interesting for for for the clients. Now, the interesting part of that is that if for some reason it’s not risky, you divest from, let’s say, oil or related. Thanks. And I was coming to keep making a lot of money. Um, well, demand for their stocks going down the price to go down, but return to go up right? As as a result. And it will be interesting to see the type of like Fargo returns that, uh, folks might complain and listen. You had an opportunity to get those returns you chose not to. Not because of my financial interest, because it’s redeemed as as as a not particularly profitable, but yeah, it’s a it’s a business judgment rule, right? You can always you can always get away with that.

[0:34:41 Speaker 0] Yeah, and I think there probably will be a market for advisory firms to take advantage of overshoot on the value. The non TSG, the 90 s jobs. That’s

[0:34:49 Speaker 1] exactly exactly, um Okay, so So let’s let’s move a little bit too. You know, you’re you know, the business school for a long time, both at USC and the taxes. Um, do you see a change in the way in which we approach business education take into account this this notion of stakeholder capitalism? If I open a textbook and finance one of the first lines there that says that the goal of the corporations maximize shareholder body? Sure. That’s like paragraph one of any corporate finance textbook.

[0:35:19 Speaker 0] Um, how

[0:35:20 Speaker 1] our business schools adapting to this?

[0:35:23 Speaker 0] Yeah, So I can I just take a long run here. So just along to say, 30 year run in this I think it’s, uh I think it’s obvious to me that the social dimensions of a business it’s impacts have been a greater focus in business education over time, you know? So I think if you go to a lot of business schools today, you can You can take a class, which is, uh, very dense and business ethics. You can take a class that’s very dense and in the political activity of businesses, business lobbying, uh, how businesses interact in the formulation of regulation. Uh, those those kinds of deals. I think the societal component of business strategy and behavior is much more important now than it was 20 years ago, for sure. Uh, there’s a lot of reasons for that. Um uh, some good, some bad. Uh, the bad part is that governments tend to fail in my do. You fail more often than they used to. Uh, maybe because the world is more complex. Maybe because we live in such a divisive society, we seem to fight about everything were politically divided down the middle. Um, but I think if you are a student in business school now, I think that you are going to be expected to know a lot about the way society and politics works. Hopefully you learn the same amount of accounting and finance marketing that you’ve always learned, but I think you’re going to be asked to put it and in in to work in a broader context that requires you know something about the politics of business management, and I think it’s sad that that’s true. I wish the world was simpler and it was clean cut and everything, But it’s just not. It’s just I think, that the power and the impact of business on people of all stripes is substantial. And, uh, no matter how, uh, you know, clean or the rules are or the regulations are or how proper the business conduct is, there’s always going to be a political, um, price or attention or demand put on a company. I think companies need to deal with that need to be able to deal with that,

[0:37:27 Speaker 1] and, um, but do you like more in a more specific way? Is there anything that we should or you’ve seen as teaching more in a way that is organized? That makes makes better use of those ideas in a way that that is delivered to students? My fear the reason What I’m trying to say is that I think there’s a lot of like lip service and a lot of this notion that all profits have to have a purpose and and this notion that that rainbows have no trade offs of money and and somehow everybody wants to paint a picture that’s actually more devoid of like a hard content associated with what it is, whether the trade offs are facing, where the economic and political economy that I don’t see a political economy to our students. I guess that’s that’s That’s my question.

[0:38:11 Speaker 0] Yeah, so and and, uh, maybe they should know a little bit more about the grand trade offs that are made when one adopts public policy? Uh, and that’s important. I think the trade offs for our students that are important for them to know they are the ones on the ground and the companies that they have to deal with. So, uh, you know, every every, um, you know, Yeah, I’m thinking about cases. You know, The cases that we use in our classes are always about decisions, and oftentimes the decisions have a part of them or component or an impact on on something that’s outside the firm, you know, in the community, on labour, generally on the environment. And I think that understanding how to assess those within the context of a broader understanding of the way politics work is necessary. Um, I guess I don’t think that, yeah, I know. I know what you’re talking about. I mean, some people, Maybe if you read the Business Roundtable statement where there’s no such thing as trade offs, just everything is win win. They literally say that everything is one win. It’s kind of hard to take seriously unless you put their political context and perspective. You know they’re there. They’re trying to advance the interests of companies who they rightly understand to be in a politically tenuous situation, one where we could be on the precipice of much stronger restrictions and constraints on corporate governance than anybody in the corporate world really wants. And I think that’s what they’re they’re dealing with. I don’t think they you know, I know the person who wrote it. I don’t think he actually believes there are no such thing as trade offs, and it’s a win win. I think you have to judge it within a political context in which that statement was made. Um, I I think you know, on the other hand, I think I think we moved away from kind of this. Really, Uh, you know, one of my favorite movies is Wall Street, right? And everybody likes Gordon Gekko. This it has a caricature. I think it’s hard to find that character anymore. I think, for example, you might be able to find it in a couple activist investors. Um, but I don’t think it’s a I don’t think it’s a widely applicable or revered personality type of model for corporate behavior anymore. I think the kind of executives I think are held in great stead are those that create long term value and a lot of sustainability for their business. In other words, going to be able to stick around because it has integrated itself into society in a way that is deemed to be productive and worthwhile, You know, beyond for more than just the shareholders. And I think that’s the more realistic view where we are right now.

[0:40:47 Speaker 1] So let me turn the conversation a little bit to the sort of general attitudes towards big business in America. I think that, uh, for me to both right or left, I think there’s a lot of skepticism. And even with all these attempts of trying to show that we’re creating value, incorporating a lot of social ideas into into our decision making, and we’re not led by a bunch of Gordon Gekko’s out, there is still a general perception that that big businesses is a force for bad. It’s something that I think more so in the left, then right? But an example right now is is big tech. I think there’s a lot of suspicion and concerns about about the role of big tech or the market power of big tech and so on. Let’s not talk about big tech and media because that’s different charge element right now. But let’s focus on on big tech in so far as as there are two big, their monopolistic, they might be hurting consumers At the same time. I think we’re very happy and and and and and and benefit tremendously from all the products the big tech has generated for the past few years. So we wrote recently something about about Google and the antitrust case that Google has been charged with and make a connection to standard oil. So let’s talk a little bit about that.

[0:41:57 Speaker 0] Okay? So, yeah, Google has Everybody knows that Google is in trouble with everybody all the time, right? And, uh, as they should be for super a lot of reasons. But recently the federal government, along with 11 states, filed an antitrust claim on your section to the Sherman Act. Uh, which basically says that Google has unlawfully obtained the dominance that they currently enjoy in search markets and browser markets and in online advertising markets, as well as just the operating system for smartphones, etcetera, uh, and and the government In this case, they’re just trying to make the argument that that’s true. They didn’t in the case spell out the remedies they would like, such as breaking up the company or fortunate to divest in any serious way. But they just we’re in a period now where there’s gonna be some arguments about whether or not there is. They do have dominant positions and whether or not the dominance was obtained illegally, uh, let me just make a few general comments and Carlos, you can ask me more questions about it. One, Uh, this is really American phenomena that is highly predictable and occurs with a lot of regularities. So if you go back to the, you know, the original standard oil case, I mean, standard oil was a company that was formed in the 18 seventies time period, uh, to take advantage of new drilling techniques and refining techniques to produce kerosene. Primarily, they ended up producing 300 other products out of a barrel of oil. Uh, they reduced the cost of refining a gallon of kerosene by 85%. Uh, and and they pass a lot of these benefits along to consumers. So much so that they achieved at 1.90% of the market. And so the government comes in and says, That’s too large. Uh, you’re you’re too big. This is not competitive. And by the way, you achieve this dominant position unlawfully right? By merging too much or predatory pricing, charging below and driving your competitors out and buying their assets, and we’re gonna get etcetera. Uh, the Google case is very much like that. I mean, Google wasn’t a company till 96 right? And, uh, and even then it wasn’t much of a company was a garage in Menlo Park type company. Uh, they created this new market called Search Internet Search. Uh, and now they have about 90% of both the US and worldwide search activities. Use Google algorithms. Uh, they have this phenomenal browser called Chrome. It has about 70% of the market share in the U. S. And they also have this android software, which powers the operating systems for smartphones. And they control 85% of the market, which I was shocked by that number because I thought Apple phones were much bigger share of the market. But they’re not. I mean, it’s it’s Samsung. It’s android phones if you’re looking worldwide. Uh, the government claims in these that the government doesn’t claim that Google is not an innovative creative company, and I don’t think anybody would deny that right. But they claim that they achieve these these dominant market share numbers by engaging in predatory and illegal tactics like pain, uh, Apple and other computer companies and phone companies to make the chrome their default browser right? Or by, um, just providing the kind of inducements that didn’t allow competitors to either write software for alternative systems or to compete directly with with Google because they’re just too dominant. Uh, so we’ll see how that plays out. Um, it’s my prediction

[0:45:38 Speaker 1] will be like on the on the way the law is applied to the situation, Uh, case that that you just need to show that by doing what they do, what they did, they got such dominance in the market, regardless of how they got here. You’ve got to a very dominant position right now. And that alone by itself, is a barrier to entry. By be so big they indirectly created bare to entry. It’s harder for innovators to come in, and therefore we’re suffering from one. They have too much micropower. So consumers are being hurt and to know innovation can can take place. Or they have to show the government has to show that they were act along the way. They are unlawful.

[0:46:18 Speaker 0] Yeah, so again, not a lawyer. But I think there’ll be a lot of rule of reason stuff here. They’ll have to show that their behavior and conduct has actually diminished competition in a way that hurts hurts consumers. You know it’ll be interesting to see who comes forward. Well, we’ll come forward and complained about this arrangement. I don’t know. Well, advertisers come forward and complained about this arrangement. They might you know, Google controls a third. They get a third of all digital advertising dollars around the world. Uh, they get it through running these online auctions that allocate their digital advertising space, uh, in a way to maximize revenues like they always would. Well, well, advertisers say this This process is bad for them. I don’t know. Some will. Some won’t. Um, Google search algorithms also direct people to other of their products, like their travel services products or their products used to evaluate local businesses. And those tend to compete with the help and other things which those people certainly complaint. Right. Um, so, uh, it’ll it’ll be a process of people showing up, and some will say I’m not harmed. I like it. Some will say I’m harmed, and I like it and will be for a judge and maybe a jury throughout what takes place. I think the general rule with this stuff, though, is that once you get above 50 these are just rule is a rule of thumb stuff once you get about 50% 60% um, you know things that you do to solidify your competitive advantage or to expand it are going to be looked on very negatively and critically by antitrust authorities. Uh, it’s kind of all these deals where if you’re not a dominant firm, you can do all the kind of things the dominant firm does and be okay. If you’re a dominant firm, it’s a different set of rules. And and I think the rules aren’t bright. Light rules. They are written down. It’s not. It’s not black letter law. It’s more subjective analysis. There’ll be. A lot of economic consultants get rich out of this case. A lot of lawyers get rich out of this case, and, uh, and at the end of the day, I don’t think we’ll generate much new law. You know, small Furnace will still be able to use exclusive contracts to promote their products because they’re small, large firms will not. Um, it’s just I think I think the more general 0.2 is, um, I think if you’re I used to tell people what I would teach a course like this in business school. I used to tell all the students said, Look, when you guys get far along in your business career, you’re either going to be one or two things. You’re going to be a defendant and you’re defending because you’ve done really well and advance your products. And and, uh, you know, everybody loves what you do, but someone you’ve out competed or some up. For some reason, it’s going to sue you and say you did it illegally and that’s that’s okay. And the rest of you are going to be called plaintiffs and you’ll be someone who says, If you were harmed by the competitive activities of other firms, now that’s a little tongue in cheek and it’s a little too cut and dry. But I think that, you know, antitrust law is bound to enter the life of any he successful businessperson or unsuccessful business person. Uh, and it’s just another reason why I think our students need to be equipped to and understand. You know, what are the general guidelines or parameters or bumpers that I’m going to run into when I try to be very successful in commerce?

[0:49:34 Speaker 1] So let’s look back to the conversation on on stakeholder capitalism. I’m Google. I’m growing. I’m very good and very successful and innovative. I am getting a lot of market power as a result of all of my products. So do I have a responsibility at that point to say, Listen, the next step here is giving me more market power. Should move away from it. Is the stakeholder sort of flag it. This tells me that I shouldn’t pursue market power because, you know, the long run is that I’m going to get sued by the government. Um, is there a place where a company should by itself, stopped growing? Stop trying to gather more market share because, uh so what I’m saying there’s a connection with,

[0:50:14 Speaker 0] uh, yeah, so what you might want to ask And this is I think, where companies like Google is just really they’re they’re really good. They’re really good. They’re they’re like the LeBron James of their space, right? And I think a company like that gets in the following trouble like to answer your question directly. One thing the company might do is say, are my actions in the best interests of our customers and our potential customers. And in some cases the answer would be no, because we’re too dominant and we don’t give some customers the choice of the variation that they need in order to advance their interests. Right? A company like Google would never come up to that conclusion because they would say we can supply what those people need because they’re looking at the second best browser. They’re looking at the second best search engine, and they say that’s not any good. And they’re getting a lot of feedback that that’s true because the customers aren’t using those kinds of things. Uh, now should they should they look at their algorithm and say, Maybe our algorithms shouldn’t direct everybody to our travel side? Who asked a travel question writer, And I’m sure they don’t. I’m sure they don’t. But I think your question is is interesting. And it kind of shows the hazards of trying to self restrain yourself in this context, Uh, you know, and maybe maybe your point. Your question was a stakeholder. Capitalism is going to be harder to implement on a volitional basis. Uh, and I’m not sure that I saw the investors really nervous that Google was dominant, you know, Yeah, or or whether there were any investment funds that said, You know, we really need to invest away from dominant tech firms because it’s not in the best interests of society. It’s just not the way that the the capital market for tech firms tend to work. So I don’t know. But I do know that Google looks a lot like standard oil looks a lot like Alcoa. Aluminum looks a lot like Microsoft. Their dominant companies that emerge provide a lot of value and utility to create a lot of wealth. And then they just get to a point where they’re subject to the interests of the government and the government typically breaks up or in some way makes it easier for competitors coming to market.

[0:52:24 Speaker 1] I thought was interesting point that you made that that by the time the standard oil case got the Supreme Court their market share going down to 65% and that’s because the Texas oil boom right, we found oil in Texas, a bunch of companies the Wildcats came in and started cutting, basically cut into their market market dominance and

[0:52:42 Speaker 0] yeah, and and Santa Oil didn’t go down there, which is another. I mean, this is the what’s the, uh, the tragedy of the innovator or something like the innovators curse, right? We’re always too quick to move off our last great idea, right? So, you know, there’s a if you really think about that as being relevant and you know how to deal with Google. Well, maybe the idea with how to deal with Google is just wait a little bit because they’ll ultimately make the mistake of being too enamored with their last idea. And someone else with the new idea is going to come along. I’m not suggesting that is the perfect substitute for antitrust. I tend not to like dominant firms, and I think that the behavior of Google and the social media space is reprehensible. But it is what it is.

[0:53:28 Speaker 1] Microsoft. Another example of that. I think there was a lot of focus on Microsoft in the early two thousands. And then Apple came along and bypass them right in a lot of ways, right?

[0:53:35 Speaker 0] Yeah, that’s right. That’s right.

[0:53:38 Speaker 1] Tom, thank you so much for joining us today.

[0:53:41 Speaker 0] A lot of fun. I I want to commend you on what you’re doing in these policy discussion talks? It’s great. I hope the students, uh, enjoy them and get a lot of information from them. And congratulations to on the Salem center and all the work you’re doing to leave that to great places.

[0:53:54 Speaker 1] Oh, thank you. Thanks for listening to policy on McCombs. Mm, yeah