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It’s not socialist extremism to state a company has wider responsibilities than making profits

The view that the only duty of a company’s managers was to maximise ‘shareholder value’ is changing

Ben Chu
Monday 30 April 2018 09:13 BST
The proper role of asset managers is to be stewards of companies on behalf of end investors
The proper role of asset managers is to be stewards of companies on behalf of end investors (Getty/iStock)

Last week Jeremy Corbyn delivered one of his trademark denunciations of the greed and short-sightedness of British capitalism. “Being a company director, and in particular a chief executive, requires more [than just commercial success],” he told an audience of young socialist activists. “It requires a broader context. It requires a personal motivation that goes beyond simply amassing a fortune. It requires an understanding of where the company sits within the society within which it operates.”

Actually, that’s not true.

Those words didn’t come out of the mouth of Labour’s leader. They were said by Euan Stirling, global head of stewardship at the giant UK fund manager Aberdeen Standard Investments. And Stirling wasn’t addressing a Momentum rally, but rather the annual general meeting of the house builder Persimmon, whose board notoriously created a £100m bonus scheme for its chief executive, Jeff Fairburn.

For many years a conception held sway in markets and corporate board rooms and indeed in large parts of public life that the fundamental, indeed the only, responsibility of a company’s managers was to maximise “shareholder value”.

“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits,” wrote Milton Friedman, one of the senior deities of the libertarian pantheon, in 1970. The UK’s Companies Act explicitly states otherwise. But many on the libertarian right still believe this Miltonian assertion to be essentially true. And many on the left also believe this is the antisocial philosophy which animates the modern market economy.

Asset managers – the people like Stirling who invest money on behalf of pension funds – are difficult to portray as the economy’s white knights, as a glance at their historic gouging of ordinary investors through excessive fees and their own often excessive pay confirms. Activist funds – which amass large stakes in target companies and then put pressure on managements to change corporate strategy – are more concerned with generating a quick payday than being long-term stewards of listed companies. The same applies to many hedge funds. Nevertheless, Stirling’s Persimmon speech shows the idea that all asset managers are part of some neoliberal conspiracy is a caricature.

And there is tentative evidence of a change in attitudes further afield. Larry Fink, boss of BlackRock, the world’s largest asset manager – with an astonishing $6 trillion under management – has expressed similar sentiments to Stirling.

“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” Fink wrote in his recent letter to all the firms around the world in which BlackRock invests. “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

Many company executives will doubtless read the words of Stirling and Fink and mutter about pious sermons from people who don’t have to answer to aggrieved investors when financial results fall short of expectations. And many on the left will detect public relations flannel from people who preach corporate responsibility yet still, somehow, end up backing rapacious managements.

And both have a point. Some fund managers may take a broader view, but while many don’t it’s not easy for managers to take the high road, as Paul Polman of Unilever, a company that has long put an unusual accent on ethics, has been finding lately. And it’s also true that, despite the spread of progressive rhetoric on stewardship, there have been vanishingly few executives punished for non-financial shortcomings. Depressingly, even the purely advisory vote on Persimmon’s remuneration report – which absolutely no one is prepared to defend – was actually narrowly approved last week.

Yet writing finance off as irredeemable wouldn’t be warranted while there are some signs of improvement, even if so far it has largely been rhetorical. And for Labour it would represent a missed opportunity. If Corbyn and John McDonnell, his shadow chancellor, want to blunt the relentless media attacks on them for being rabid Marxists out to level the City of London they should cite the words of Stirling and Fink and pledge to hold asset managers and corporate bosses to those fine sentiments.

We all have an interest in this. The proper role of asset managers is to be stewards of companies on behalf of end investors – that’s you and me through our pensions and life insurance policies. These are the companies for which many of us work, whose investment helps drive national productivity growth. They are indeed socially embedded organisations, with multiple stakeholders and broad social responsibilities. And those who insist it’s socialist extremism to argue so should take it up with BlackRock and Aberdeen Standard Investments.

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