When Michael O’Leary and Warren Valdmanis first met at Bain Capital’s offices in Asia, both were more or less conventional members of the finance profession. And yet, years later, they would become the coauthors of a book arguing that American-style capitalism—including a “meatheaded” obsession with short-term profits—is doing dire damage. Our economic system, they argue, urgently needs a reboot.
In their recent book, Accountable: The Rise of Citizen Capitalism, they argue that Adam Smith–style invisible hand capitalism is ineffective—and out of date—and that companies need to reorient themselves to serve more than just shareholders (which, by the way, they don’t think are being served particularly well, either).
Both authors, who were on the founding team behind Bain’s first social impact investing fund under former Massachusetts Gov. Deval Patrick, spoke to Fortune about the rise of ESG (environmental, social, and governance) investing, the divestment movement (and whether it actually works), the Business Roundtable’s pledge to end shareholder primacy, and where companies—and investors—can be the most effective.
This interview has been condensed and edited for clarity.
You talk a lot in the book about the skepticism or the outright cynicism regular people—but especially people in the investment world—have toward ESG and socially responsible investing. Was that the place that you guys started from?
Valdmanis: I admit that I was skeptical. I was schooled in this Adam Smith invisible hand idea, that if you just go about your business of creating more valuable companies and creating shareholder value, that’s going to have knock-on effects that are positive for the world. So I didn’t feel this need to add a social adjective in front of it. But I swiftly realized a couple of things through the effort with Governor Patrick. The first is that the invisible hand [idea] is a really attractive one, but it doesn’t always work that way. I think, frankly, even Adam Smith, if you read his work closely, you realize that he didn’t even intend the way it’s currently understood and used. But furthermore, I also realized, there is enormous potential at the intersection of the social and the commercial. I think that we have this meatheaded short-term-ism in our economy that prevents even businesses from realizing what’s in their long-term best interests sometimes.
O’Leary: I don’t think we recognized going in how that generational difference really shows up in a lot of people’s fundamental views around capitalism. You look at the portion of millennials and Gen Z who approve of capitalism or have a favorable view of capitalism, that’s fallen from two-thirds in 2010, to just about half today. And I think millennials just approach these questions with a different view. You ask folks, “Is sustainability or ESG important to investing?” And nine out of 10 millennials will say, “Yes, of course you should be thinking about environmental and social issues in your investment portfolio.” And 40% of baby boomers, maybe less, will agree. And so I think you approach the question from a slightly different angle—I think with less skepticism—when you’re of a younger generation.
I was struck in the book how you talk about what you call this “rational hypocrisy” that companies have to deal with.
O’Leary: If you’re a CEO today, you’ve got demands from shareholders to maximize profits; you’ve got demands from all of your stakeholders to do good things for people. And when you’re faced with these conflicting demands, it’s much easier to fake good works than it is to fake good returns. So as a result, they exhibit a sort of rational hypocrisy, where they say different things to different audiences. The best evidence of this would be all the companies out there that issue two different annual reports: a 10-K and then a corporate social responsibility report, or a sustainability report, for all their stakeholders. And oftentimes, there’s no relationship between the two.
I look at the crisis of trust we have in our economy where three-quarters of people don’t trust Big Business; people don’t trust corporate executives. So you roll back the clock to last December, before the pandemic hit. And in some ways it’s so easy when you’re in the 11th year of an economic boom for CEOs to say, “No, we’re good for shareholders; we’re good for stakeholders; we’re good for workers; we’re good for everyone. The opportunity that the pandemic gave business leaders is in times of crisis—that’s when they can actually show what they meant in their commitments. And they can show that when they said their workers are the most important thing about their business…Prove it.
You both emphasize the long term, and you even say that quarterly earnings updates should be eliminated. We’ve seen this massive, massive boom in the stock market just as the American economy is seeing millions of people unemployed. Do you think the dichotomy of that is sinking in?
O’Leary: There’s been two great decouplings in our economy. The first huge decoupling was between productivity and workers’ wages, where productivity continued to go up, but wages remained flat. You look at your median wages over the past 50 years in America, and despite the growth of GDP, despite the growth of productivity, that has not flowed down to most workers.
Valdmanis: And they were in lockstep from 1945 to 1973! Lockstep! These two things moved in tandem. Productivity and wages moved in tandem for the better part of 30 years.
O’Leary: But what you bring up is this second decoupling over the past several months, where now the stock market seems to have defied all gravity to grow even as unemployment goes up, even as productivity and GDP growth has been flat to down. And you look at that—no wonder two-thirds of Americans don’t think the financial system benefits society. And I think that is what the hope from this stakeholder capitalism movement provides, is that we’re able to reestablish that link, where you understand a company not as a collection of assets owned by shareholders, but instead as an organization, a group of people that includes employees and the customers and the suppliers and voters.
You make the point in the book that through your pension, through your retirement savings, many of us are in fact shareholders, and yet that link seems to be really broken. When did that happen?
O’Leary: 137 million Americans own stock, either directly or through a pension fund, or through an investment fund by someone like Vanguard, or BlackRock or Fidelity. So we’ve got this financial system that is very distant, very anonymized, and highly intermediated. I think about my mother, a public school teacher. She has a pension fund, investment managers, advised by investment consultants that ultimately invest in companies that then have an impact in the world. And that is a very long, complicated string to get from my mother—who is the ultimate beneficiary, the ultimate shareholder—to the impacts those companies are having. And so no wonder that almost nothing can make it through that long, complicated system, except for the through line of profit.
My favorite example being, you take something like inequality, and something like three-quarters of workers think that CEOs are paid too much, right? Not surprising, given the ratio of CEO to median pay. And yet every year, shareholders have a right to vote on executive compensation packages, and every year 97% of them will pass with 90%-plus support. There’s just no connection between the actual views, interests, and values of most Americans and what’s actually expressed in our companies.
One of the other things I wanted to ask about is the kinds of paradoxes you highlight here—how you end up with the Milgram-Nixon syndrome. But can you explain what it is first?
O’Leary: We found it initially in a comment section of a Financial Times article. It so resonated with the problems that we were seeing that we had to build it out. And the way I would describe it is, how is it that we’ve got a system where, you know, corporations are doing actions that no one agrees with, that you represent no one’s values. How can that be possible? And the answer is that we have a system where CEOs say, “We work for shareholders, and shareholders want to maximize profits.” Stanley Milgram was a social scientist at Yale who had shown through some studies that people will do almost anything if they believe that they’re just acting as an agent for someone else—if they’re following orders, essentially. And so CEOs say, “We’re following orders to maximize profits.”
Now, on the other hand, go back to those shareholders. They are so far removed from the decisions that companies are making every day that they’re saying, “We can’t possibly be responsible, because we own hundreds or thousands of stocks through index funds, or we own our shares through our pension fund. We’ve got very little visibility or exposure; we can’t possibly be held accountable for what companies are doing.” Nixon’s defense during Watergate, that he couldn’t possibly be responsible. He runs the entire United States government. How could he be responsible for what some small group of people are doing on his behalf?
And so then you combine these things together. CEOs claim they’re not responsible, because they’re following orders. Shareholders claim they’re not responsible, because they’re too far removed from the actual actions. You have an economy where the buck is passed around and around and around until, poof, it disappears.
You start off the book with a responsible strip mine owner, and you end the book with a guy whose business was overwhelmingly coal while he was running the business [former Duke Energy CEO Jim Rogers], but you evoke both of them as examples of responsible, purpose-driven leadership. Even though they were associated with businesses that sometimes don’t get a super positive association.
Valdmanis: If the only companies that we deem good companies, or virtuous companies, are your solar panel manufacturers in Tanzania, we’re not going to fix capitalism that way. If you drive a Tesla in West Virginia, it’s probably a coal-powered Tesla, because the electricity that’s run off of comes from a coal plant. So we need to figure out how to make all kinds of businesses responsible, not just ones that already look pretty close to responsible. And so one of my issues with social impact investing is, if you draw too narrow bounds around what you think is an acceptable thing to go invest in, you end up really limiting the amount of influence you can have.
What do you think about the commitment the Business Roundtable made last year to be accountable to more than just shareholders?
Valdmanis: I would say, listen, it’s wonderful when Larry Fink from BlackRock writes a letter, and he says, “We care about stakeholders.” It’s wonderful when the BRT makes a statement like they did last summer that they care about stakeholders. That could only be a good thing, I think, up to a point. The question is, interestingly, right after they made that statement, the Council of Institutional Investors released a statement that said, “Yeah, but let us remind you that shareholders own businesses, and companies ultimately serve shareholders, and by the way, what does that statement mean, anyway?”
I actually think that’s a really good question. What does that statement mean? A statement of good intent is great, but it needs to be followed up with action, otherwise it risks breeding cynicism. And so I think that there is a huge opportunity for that group to follow through on that statement, with a concrete action that is sitting right in front of them, which is why don’t they adopt the World Economic Forum standards on ESG measurement? The four big accounting firms think it can be done. You know, it’s consistent with what they’ve said, and they don’t have to do it all at once. It’s something that could be done over time. We talked to a prominent voice on the BRT. He called us after reading our book. And I believe these intentions are real. I think these are good people who want to change their businesses. I think sometimes they just don’t know quite what to do.
What happens if we don’t, in your words, “save capitalism”?
Valdmanis: If you’re a capitalist and you believe in this system broadly, you should want to fix it now. Because I think that a lot of the issues that are here are not going away, and will only get worse if left unaddressed. And the worse they get, the more likely that the folks who are saying, “We have a way of solving this, it’s called government”—the more likely that government is going to get into realms where it doesn’t really have the tools to fix it, but it’s going to try anyway. And that could be [throwing out the] baby with the bathwater. And I think that’s really dangerous. So I’m coming at this from the perspective of a real believer in our system, but also a real believer that it’s in the interests of people like me, of capitalists, to help save the system from itself.
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