25 July 2022
How ordinary people can change the way that capitalism works – and make money too
Merryn Somerset Webb
2022, Short Books, 160 pages,
Reviewer: Ian Bright
A central argument in this short book is that capitalism is facing a serious problem because people do not feel they have much influence on the way the economy and society operates. Surveys regularly show that people question the acceptability of capitalism in favour of other economic systems. This is despite the increase in wealth generated by capitalist systems, especially when compared with other organisational systems. The adaptability of capitalist systems in responding to the Covid virus is also given an example of the innovative and flexible nature of a capitalist system.
One way to remedy this feeling of lack of influence is “ … to do more to reunite the owners of equities with the rights of ownership of equities.” (p.135) It should be easier for those who own shares to vote on corporate policies covering issues such as environmental, social and governance (ESG) issues, gender pay gaps, and remuneration policies in the companies they own as shareholders. That means making it easier for people who own equities in pension funds, ISAs, and personal trading accounts to use their ownership to vote in company AGMs.
Merryn Somerset Webb, Editor-in-Chief of Money Week and Contributing Editor and weekly columnist at the Financial Times, makes six recommendations in this short book.
First, shareholders – that is you and I – should actually use the votes we have at company AGMs to enforce our ownership. New technology such as that provided by Tumelo, should make this possible.
Second, fund managers should provide more information to unit trust holders (again, that’s you and me) on how they have voted on issues at AGMs.
Third, bring back physical AGMs and shareholder perks to encourage people to attend the meetings and to ask probing questions.
Fourth, decrease the increasing prevalence of privately held companies by making listing easier.
Fifth, change the tax system so that it reduces the attractiveness of debt compared with equites. This is especially important in reining in private equity.
Sixth, appoint non-executive directors responsible for engaging with shareholders.
All of these are laudable and sensible. However, the more you think about these issues and proposed remedies, the more difficult they become. In a pamphlet (the book is so short, it is better to think of it in this way) it is difficult to examine both how real the concern about support for capitalism actually is, and how the nitty-gritty of implementing the recommendations can be achieved. To be fair, Ms Somerset Webb notes that she intended to write a short book but I feel she has sold the reader short as well. This is a pity. There is much to examine and much to do if Ms Somerset Webb’s recommendations are to become reality.
The book has strong echoes of Milton Friedman’s 1970 essay “The Social Responsibility of Business Is to Increase Its Profits” ( https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html ). It is interesting to note that in that New York Times essay, Friedman also noted a tide of opinion against capitalism. Over half a century ago (2022 - 1970 = 55 years), Friedman wrote “In the present climate of opinion, with its widespread aversions to “capitalism”, “profits”, the “soulless corporation” and so on, this [social responsibility] is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.” Perhaps not much has changed over the past half century? Plus la change…
The big difference between now and fifty five years ago is that the nature of shareholding has changed. Individual shareholders and the Sid’s of UK PM Thatcher’s 1980s privatisation have been replaced by pension funds financed by auto enrolment and index funds run by asset managers. People feel disconnected from their ownership of companies. Hence Ms Somerset Webb’s six recommendations.
But do people really care enough about these issues to register their votes for individual resolutions in company AGMs? Ms Somerset Webb quotes surveys showing people are and would be engaged. I am sceptical. It is a commonly recognised problem with survey responses that what people say they will do differs from what they actually do. It’s a part of the planner/doer dichotomy widely recognised in the behavioural literature. Furthermore, ask any pension fund trustee how many people engage with the online and physical communications sent to members and you will find a very low engagement rate. It is a matter of considerable concern in the pensions industry.
The way that Environmental, Social and Governance (ESG) issues are handled by companies and asset managers is given particular focus.
The (limited?) attention given by companies and asset managers to ESG issues is particularly concerning. ESG issues are complex. There is no commonly accepted set of rules for inclusion or exclusion from an ESG index fund. For example, this paper published by the American Economic Association by Berg, Koelbel and Rigobon shows correlation coefficients between the ESG ratings of six prominent ratings agencies that average 0.54, ranging from 0.38 to 0.71. Further, this 24 minute Bloomberg podcast provides background on the history and development of ESG indices and questions their effectiveness.
More importantly, there is an argument that investing in an ESG index fund, which Ms Somerset Webb correctly points out carries (unnecessarily?) higher fees than for a non-ESG fund, does not necessarily lead to better investment performance or better results for the environment.
This is partly an issue of green-washing but also of ESG issues limiting the way the capitalist system works. “The genius of capitalism lies in specialisation and comparative advantage – it works best when we all focus on what we are good at. So expecting companies to have a purpose that goes beyond the obvious may be asking managers to juggle too many balls. If multiple layers of expectation are piled on top of a firm’s core purpose, you may end up burying it, or at least distracting from it.” writes Ms Somerset Webb (p.94).
This issue is especially relevant now. In 2019 the (now ex) CIO of sustainable investing at BlackRock, Tariq Fancy, wrote a long essay outlining his concerns about practices in the ESG investing community. These echo the concerns expressed, and informed the arguments made, by Ms Somerset Webb. She cites a report of Mr Fancy’s essay. Mr Fancy wrote further on this topic in June 2022. Also, in May 2022, Stuart Kirk, HSBC Asset Management’s (now ex-head) of sustainable investing gave a provocative 16 minute speech at the FT Moral Money European Summit criticising ESG investing processes. Both of these latest comments came out after Ms Somerset Webb’s book had been completed. That said, Ms Somerset Webb appears sympathetic to their arguments.
The main issue Ms Somerset Webb focuses on is that shareholders are rarely asked for their opinion on these issues. They are out-sourced to asset managers, who seem to be responding to an “unelected elite” (p.82) of about “250 groups of substance pressuring business to do various good-sounding things” (p.81). . “…the real issue here is that no one asked you about this.”(p.95).
The votes and therefore the opinions of shareholders (that’s you and me) have been informally delegated to asset managers. The annual letter by BlackRock Chairman, Larry Fink, comes in for particular criticism.
Asset managers should not be pronouncing on these issues without asking shareholders for their opinion. The technology is being developed that should allow this to happen. The voter choice software firm Tumelo is cited favourably. However, the company appears to have started only recently around 2020. It is still early days and much more needs to be done before Ms Somerset Webb’s vision of share power can become commonplace.