There is something deeply reassuring about the intensity of Generation Z’s reformist enthusiasm.
Last week I spoke on a panel at an event at Edinburgh University organised by the student-run social enterprise, Prosper Social Finance. The group’s idea is hard to argue with – to create a small investment fund run with environmental, social and governance (ESG) principles at its heart that will both do good in itself and train young analysts to work in finance in the future.
The seminar on the “Future of Finance” focused on how finance can be a force for good. But it also raised for me, again, the question of what is and what is not ethical, green, impact, ESG or socially responsible investing. That there are so many words you can use to describe financial do-goodery gives you a clue that it isn’t easy.
It also raised the question of how the young should go about entering the workplace if they are determined their careers should in some way be a force for good. In the questions after my rambling contribution, one student asked how I thought a career should best be run. Should she enter a big firm of some sort and make some money for five or so years while trying to reform from within, and then, those skills banked, go on to help drive reform elsewhere?
The question itself is fascinating. Not that long ago we all assumed that if you wanted to change the structural make-up of society or economy you did so by influencing public policy one way or another. Think back to 1964, when Bill Clinton was still at Georgetown University, says Anand Giridharadas, author of Winners Take All. He could have done anything after law school. But he believed in solving problems “publicly, democratically, institutionally and universally”. So, he went into public service. (You can listen to my recent conversation with Giridharadas on the MoneyWeek Podcast)
Fast forward 50 years and his view has changed with that of the world around him (very much for the worse, in Giridharadas’s view). Clinton’s time is now spent not pushing public policy change, but raising money from plutocrats and deploying “their capital against various forms of poverty and injustice”.
Corporations are the wrong people to be solving the world’s problems
You get the same sense everywhere at the moment: that the world’s problems can be solved, in fact should be solved, by corporations and the people running them rather than by governments. In a letter to the Financial Times a few weeks ago, Louis Brennan, a professor at Trinity Business School, said corporations “have the potential to halt and reverse the current process of societal upheaval”.
Blackrock’s Larry Fink says society “is increasingly looking to companies to address pressing social and economic issues”. Fink even believes the corporate world has to be “much more transformational. We need to make sure the wealth is not so concentrated” he says.
Right oh. Let’s think, then, about why wealth is so concentrated. Might it be something to do with the existence of all these super-sized companies in the first place? And perhaps with the power they have over us and our governments?
There is no arguing with the fact that corporate concentration has risen hugely over the past few decades (two companies, for instance, control 90 % of the US beer market). That has had a few nasty effects. According to Jonathan Tepper, author of The Myth of Capitalism, it has given them pricing power over both their suppliers and labour – something that guarantees them very high profit margins, which then accrue to the few not the many. Hello rising inequality.
It also gives them rather more of a voice over public policy than you might have expected in the past and possibly the ability to shape it to their needs. It may also have had some unpleasant effects on productivity – or that at least is the contention of a just-published paper from America’s National Bureau of Economic Research (low interest rates, market power, and productivity growth). Once companies get so much larger than their competitors that it is hard for the latter to see how the gap can be closed, say the authors, “the industry enters a ‘monopolistic region’ in which the follower does not invest due to a ‘discouragement effect’.” It isn’t worth it.
After that you can get to a point where “even the leader stops investing in productivity enhancement as the perceived threat of being overtaken becomes too small”.
Swap the FTSE 100 for small-caps
So here we find some hints for our socially responsible job seekers. If the existence of huge companies and intense market concentration is stalling productivity growth and forcing rising inequality – to say nothing of messing with democracy – the most socially just thing to do is surely to find work that pushes back against that trend.
This could mean old-fashioned public policy work. So lobbying against the very low interest rates that have driven much of the problem (free money to buy anyone who challenges you); to push for a bonfire of the regulations that create barriers to entry for new firms to old sectors; or to demand a revamp of watered down competition policy. It should also steer them to work for dynamic disruptive small- to medium-sized companies that have a chance of challenging the large ones – and that have a management that won’t sell out the second a big chequebook comes calling.
All this might not sound as appealing or as “woke” as joining the corporate social responsibility department of a multinational corporation and fretting about the gender pay gap, but it should do more good in the long term.
There’s a message in here for investors. All the things that keep profit margins high and we therefore think we like – barriers to entry, pricing power – might not be good for society. Social warriors of the finance world, it is time to swap your FTSE 100 dividends for the less certain (but possibly superior) returns from small-caps. An easy starting place might be the Henderson Smaller Companies investment trust (LSE: HSL), currently trading on an 8% discount to its net asset value (one that I, and other family members, hold).
We have to support the small, too.
• This article was first published in the Financial Times