The ghost of a dead economist was haunting the Zermatt Summit, a new annual event on the subject of ‘humanizing globalization’ held earlier this month. Several speakers at the three-day conference, held in the picturesque Swiss alpine resort in the shadow of the Matterhorn, denounced the Nobel prize-winning monetarist economist, Milton Friedman as a charlatan who had had a pernicious influence on capitalism over the past four decades.
The reason for their disgust? Friedman, who died in 2006, believed that companies should prioritise their shareholders above all other stakeholders. In a New York Times magazine article published in 1970, Friedman wrote: “The social responsibility of business is to increase its profits.”
In the wake of the financial crisis of 2008-9 and the BP Gulf of Mexico oilspill, such views are hardly fashionable. And several speakers at the Zermatt Summit, held in the Grand Hotel Zermatterhof in the centre of Zermatt, believe the time has come for Friedman’s theories to be consigned to the dustbin of history.
Philippe de Woot, emeritus professor at the Catholic University of Louvain, was the most outspoken in trashing Friedman’s legacy. He said the late economist’s belief in shareholder primacy is today “an absurdity, an obscenity.”
He said the goal of the Zermatt Summit – conceived as an antidote to the World Economic Forum at Davos by the Swiss businessman Christopher Wasserman – was to chart a course that permits capitalism to be reinvented with people, not profit, at its heart.
De Woot would like every company in the world to revisit their raison d’etre, drop their obsession with shareholder value, and find other ways of addressing the common good, such as by refocusing on entrepreneurship and creativity. But he conceded the “process of metamorphosis to change our capitalist system from a caterpillar to a butterfly” probably will not occur without “external pressure”, possibly from world governance.
Mary K Bush, a former US representative on the IMF’s board, president of Bush International and another speaker at the Zermatt event, agreed that Friedman had had a corrosive influence. “I think his views are politically and morally unacceptable and we should call them by their proper name: obscene.”
However, other speakers at the event stood up for the arch-monetarist and were more willing to acknowledge the critical role of shareholders in “humanizing globalization”.
Colin Melvin, chief executive of Hermes Employee Ownership Services, said he remains entirely confident that the best way of persuading companies to behave more responsibly and sustainably is if committed and engaged long-term shareholders nudge them in the right direction.
“We don’t like the terms ‘corporate governance’, ‘SRI’, ‘CSR’ – they’ve led to an industry of box-tickers and empty compliance,” said Melvin. “But we are interested in companies creating sustainable value (making money for our clients over time) and being accountable (having structures in place which ensure accountability of the board to the owners).”
If this is not happening today, Melvin said it is largely because of the weakness of the current system of intermediation, the way in which investment decision-making is outsourced. Many fund managers remain short-termist, he said, because of flawed incentives and flawed mandate construction
He believes the interests of asset management firms can be realigned with those of the ultimate, beneficial owners of the shares (such as individual pension fund members and pensioners). Melvin is encouraged by the fact so many funds and asset management groups have signed up to the UN’s principles of responsible investment.
“What we’re seeing is that the best fund managers are rethinking their relationships with their clients, the duration of mandates, the products they’re offering, how they’re incentivized, and how that drives their own behaviour. That should culminate in longer-term mandates and better behaviours on behalf of the end users and the ultimate shareholders.
“I believe it’s possible to humanize globalization through corporate ownership. But I concede that some measure of regulation may also be required.”
The merits of more holistic approaches to corporate reporting, including the United Nations’ Global Reporting Initiative, also were also explored at the summit. GRI, which incorporates some 90 indicators against which companies can measure their performance, aspires to become the internationally-recognised standard for non-financial reporting, and has already raised awareness of the need to measure non-financial performance.
“The GRI is well-intentioned and has had a positive impact on company reporting,” said Melvin. “If it has a problem, it is one which is common to most such attempts at standardization – that is, one size does not fit all. What might be appropriate for a multinational oil company would be inappropriate for a retailer or IT firm.”
Critics of GRI fear it is becoming another box-ticking exercise that is open to abuse, for example by companies seeking to disguise poor performance.
Zermatt Summit: Fears the global reporting initiative is a former “window dressing”
Mark Drewell, Brussels-based chief executive of the Globally Responsible Leadership Initiative, and another speaker at the Zermatt Summit, suspects that GRI might be a form of window-dressing.
“The future of meaningful reporting lies in companies framing their reports in the context of what society needs rather than the incremental description of what they’re doing now and how they plan to get better (or perhaps trumpeting the fact they are achieving a slightly lower negative impact),” said Drewell.
Drewell said: “By way of example, climate science tells us we need to eradicate fossil fuels from our economy within 20 years. Meaningful reporting would force companies to reveal the progress they’re making in eradicating fossil fuels from every aspect of their supply chain.
“Practically speaking companies would achieve extremely low scores on this reporting measurement for now. But the positive outcome would be that we will create a more effective dialogue between companies and stakeholders around the real issues.”
The organizers of the event never believed it could provide all the answers to the question of how globalization might be humanised. However they have already scheduled next year’s event on June 16-18, 2011.
Speaking at the event, Peruvian economist Professor Hernando de Soto said: “Generally the law of capitalism is that you make investments and then you lose!” He said that canny investors ought to be aware that hyperinflation might be lurking around the corner. “If you are facing hyperinflation and you recognise that the stock market is like Las Vegas – one side bidding against the other – that’s when you start investing in farmland in the developing countries.”
An edited version of this article was published in the Financial Times’ FTfm section on Monday 21 June 2010. Video review of the first ever Zermatt Summit below