So, what would a fair society look like? Daniel Chandler’s “Free and Equal”

What Would Rawls Do?
What Would Rawls Do?

Daniel Chandler was introduced to John Rawls’ Theory of Justice during his history degree at Cambridge.  Although I was encouraged to write a dissertation on Les événements de mai 1968 while studying for the same degree thirty or more years earlier, Theory of Justice, only published in 1971, hadn’t made it into Quentin Skinner’s “History of Political Thought” lectures when I attended them in 1976.  Instead, my introduction came at Stanford University’s Graduate School of Business a few years later.  By the time that I was involved in the Britain’s short-lived Social Democratic Party in the 1980s, Rawls’ theories, particularly his rationale for a just society being one which offers the most for the least well off in society, provided a philosophical justification those who defected to the SDP from a Labour Party wedded to “Clause 4” socialism.

Chandler and I share a huge respect for Rawls.  Chandler takes this to the extent that Rawls’ theories become his lodestone for examining public policy.  In the first half of his book, Free and Equal: what would a fair society look like?[1] Chandler performs a valuable service by providing a readable and accessible summary of John Rawls’ famously turgid and impenetrable book, along with an account and rebuttal of Rawls’ critics and of those such as Amartya Sen (a hero and, apparently, mentor to Chandler) who have built on Rawls’ foundations.  But the second half of the book, which justifies the sub-title , leaves me imagining that Chandler either wears a leather bracelet imprinted with WWRD (like members of some Christian youth groups wearing one for “What Would Jesus Do”) or lives under a banner like that raised by members of the Occupy Movement at St Pauls Cathedral in 2011.

Chandler works his way through a wide range of public policy issues, trying to apply Rawls’s view of what constitutes social justice by setting out a collection of prescriptions for addressing social and global problems, such as income and wealth distribution, the environment, and distribution of power in the workplace.  The attempt is admirable, but disappointing.  While conveying the impression that emotionally he is politically on the left, he is resolutely a centrist and not afraid to challenge traditional leftist positions, probably reflecting his academic move from history to politics and philosophy, so less a slave to dogma that some who take on this challenge.

His cv includes Harvard and the LSE, the UK Prime Minister’s Policy Unit, the Resolution Foundation and the Institute for Fiscal Studies, but his prescriptions and supporting accounts lack grounding, are uniformly derivative, and feel embarrassingly like the work I was turning out as a student politician and parliamentary researcher in my late teens and early twenties.  Given his background, he can’t be blamed lacking the grounding in the real world that might have informed an approach that would be both more nuanced and insightful.  His account of ownership and power in the context of the firm is particularly disappointing and falls into the trap of believing that the shareholders generally hold the power rather than the managers, and the power of different stakeholders depending on the characteristics of the particular markets in which the firm operates, may have more or less power[2].  The consequence is a very simplistic set of prescriptions, with nothing particuarly original.

I briefly found myself bothered by the utopianism that underlies the ambition for the second half of the book, but then cames across his own apology for this and explanation of the need for ambition to make the world a better place, and the value of Rawls’ ideas about justice in thinking about what constitutes “better”.  I was then reminded of Lenin, writing in the fifth chapter of What is to be done? Where he cites 19th Russian nihilist Pisarev

 “the rift between dreams and reality causes no harm if only the person dreaming believes seriously in his dream, if he attentively observes life, compares his observations with his castles in the air, and if, generally speaking, he works conscientiously for the achievement of his fantasies. If there is some connection between dreams and life then all is well.”

before then observing

Of this kind of dreaming there is unfortunately too little in our movement.[3]

So, full marks to Chandler for his account of Rawls, and also the aspiration to frame practical solutions in light of Rawls theory, even if he falls well short in his prescriptions and how be presents them.



[1] Chandler, D. (2023). Free and Equal. Penguin UK

[2] Ironically, I read his objection (page 262) to John Lewis Partnership being viewed as a co-operative “because workers do not exercise full control over management” on the very day that the John Lewis staff chairman Dame Sharon White lost a vote of confidence in her past performance from the Partnership Council although she received support for her future leadership going forward.

[3] Wikipedia. (2023). Dmitry Pisarev. [online] Available at: [Accessed 10 May 2023].

How Boards Work – Really?

Dambisa Moyo has written a book that fails to deliver on a great title: “How boards work and how they can work better in a chaotic world”[1].   Her own website describes her as “a pre-eminent thinker, who influences key decision-makers in strategic investment and public policy…respected for her unique perspectives, her balance of contrarian thinking with measured judgment, and her ability to turn economic insight into investible ideas”.  Her book is not the place to test the final claim.  However, the bold title of this book suggests that it might provide some evidence for the other claims but there is precious little.

Despite having served on the boards of SABMiller, Barclays Bank, Barrick Gold, Seagate Technology, 3M, Chevron, and a couple of charity boards, her account of board operation is pedestrian and, possibly because she is reluctant to bite the hand that feeds her, is merely descriptive but without providing either light and shade or texture.  It is frustrating that with a CV that suggests that she might actually be quite smart, her account of corporate governance is pitched at the level of a US college freshman, without any discussion of alternative models of board structure and board purpose (not even of the Anglo Saxon model on the other side of the Atlantic with its unitary model including substantial executive presence and the statutory obligation to consider all stakeholders under Section 176 of the UK Companies Act).

For someone who bills herself as a contrarian with unique perspectives, the changes in society that she suggests are evidence of a “cultural revolution” entering the boardroom have been mainstream for a generation (once again, little recognition of the progress made in increasing the representation of women in the board room or the degree to which changes in wider society have entered into boardroom debate – notwithstanding the survival of some dinosaurs and dinosaur attitudes).  Her account might have been a cultural revolution had she been writing in the time when Young Pioneers were waving copies of the Little Red Book, but she does not appear to be on the bleeding edge of change in the third decade of the 21st century.  Likewise, as increasing numbers of corporate leaders are signing up to environmental responsibility and addressing climate change and the Business Roundtable’s Statement on the Purpose of a Corporation has been around for eighteen months, her prescriptions, though sound, are hardly earthbreaking.

One of the corporate leaders who has provided an endorsement on the dustcover describes this as “not only a must-read for the most tenured and experienced board member, but it also provides critical context for those who one day hope to have a seat at the table.  CEOs and corporate leaders everywhere would also be wise to pick up this book.”  I can only assume that this individual didn’t read the book herself – probably quite a sound move had she not chosen to perjure herself by writing such a ringing recommendation.

[1] Moyo D. (2021) How Boards Work London: The Bridge Street Press

Lessons from Emmanuel Faber’s departure from Danone


On 26th June 2020 99% of the shareholders in Danone voted for it to become an enterprise à mission, or purpose driven company, required not only to generate profit for its shareholders, but do so in a way that it says will benefit its customers’ health and the planet.

Less than nine months later, Emmanuel Faber, Danone’s chief executive and the architect of the new strategy, was ejected by the board in the face of pressure from activist investors.  The FT leader writer observed on 18th March that “a backlash against purpose-driven capitalism was overdue” and that the debacle was “a reminder that distractions from the core goal of making a profit can be dangerous” before concluding that it did “not …. signal that leaders should rein in their ambition to go further and reassert the role of companies in society” and that to “revert now to simplistic and damaging pursuit of crude share-price maximisation would be a mistake.”

The ejection of Faber was not an illustration of the primacy of Friedmanite shareholder value, but an example of a chief executive failure to manage the investor market interface.  We don’t know precisely what the activist investors were thinking, but they were clearly dissatisfied with the returns they were expecting and believed that their investment returns would be increased with a different chief executive.

Under Faber’s successor, the activist investors hope that the value of their investment (in terms of capital growth and dividend returns) will increase as a result of improved internal operational performance and a changed strategy towards the customers at its other market interfaces – including suppliers, employees, consumers, owners of real estate and local communities, regulators, and government (recalling the appetite of the French government to view large domestic consumer businesses as strategic national assets when threatened by acquisition by overseas multinationals).  The choices of the different types of customer will include some consideration of ESG: consumers with an eye to environmental consideration (packaging, use of sustainable resources; employees preferring to work for companies whose conduct they can take pride in; investors wanting to see good governance.  The rhetoric employed by the activist investment customers may reflect discontent with financial returns, but implicitly they are concerned with how the Danone’s mission is translated into strategy and the possibility that Faber’s rhetoric around purpose conceals a lack of grip on operational performance.

The Danone debacle generated further commentary on whether this apparent backlash represented a retreat from “purposeful capitalism”.  John Plender wrote a powerful article for the FT on 4th April reflecting both on the Danone story and on the lessons from the Covid about the impact on stakeholders (particularly suppliers) who were unable to diversify  their risk (unlike investors) when a business hit rocks as the pandemic closed down parts of the economy.  He shared the view, which we addressed during the debate in 2017 on corporate governance reform in the UK, that appointing employee directors (or by implication directors representing any other specific stakeholder group) does not address the governance gaps.  He went on to argue for changes to the incentive models for senior managers to address short-termism and that profit or share value metrics determining them should be supplemented by ESG related metrics.  In short, “stakeholder capitalism must find ways to hold management to account” and that “the prevailing commitment to short-termist shareholder value has undermined corporate resilience.”

Hakan Jankensgard, Associate Professor of Corporate Finance at Lund University responded to Plender in a letter published by the FT on 7th April with an assertion that the firms should adopt the Hippocratic oath since this “would ensure that firms act as good corporate citizens”, with focus on long term profitability and “not become do-gooders picking sides in social debates”.  It is probably a reflection of the challenge of drafting a letter of appropriate length for publication, but some steps in his logic seems to missing.  However, other parts of his letter are compelling, echo arguments within the Escondido Framework view on how firms work and pitfalls in contemporary corporate governance, and are worth producing in full:

“As far as everyone is concerned, shareholders are the root cause of all the troubles afflicting our societies.

“Well, think again.  The real problem today is managerial capitalism – that managers run firms primarily to increase their own wealth and prestige.  A few decades back, managers were busy building wasteful empires, and the shareholder model arrived as a particular remedy for this gross inefficiency.

“Another innovation that arrive about the same time prove more fateful.  It was the idea that managers, if given the right financial incentives, would rediscover their entrepreneurial spirt. It caught on, to say the least.  What it really did, however, was to shift managers’ focus from building empires to extracting wealth through compensation packages.

“As manager took n their new role, they found willing accomplices in a cabal of short-term oriented investors looking for a quick return.  This unfortunate marriage is the problem at the heart of today’s economy as it creates short-termism that adds to long-term risk.”

What We Owe Each Other, by Minouche Shafik

Minouche Shafik, Director of the London School of Economics
Minouche Shafik, Director of the London School of Economics

There is much to celebrate in Minouche Shafik’s argument that we need a new social contract[1], not least a title that uses the language of obligation and duty rather than employing the language of rights.  This is even if she falls back, in her closing remarks, on answering her question of what it is that we owe to each, that it is “to muster the courage and sense of unity” that the Beveridge Report said was necessary for the “winning” of “freedom and want”.  I was looking for more, and shouldn’t be too critical her effort at a rallying cry to round off the book when she has addressed a variety of policy measures, without being unduly prescriptive about their precise form, that would address “our interdependencies, provide minimum protections to all, share some risks collectively and ask everyone to contribute as much as they can for as long as they can….investing in people and building a new system of risk sharing to increase our overall well-being”.

Shafik’s underlying argument is that we need a new social contract to meet the needs and opportunities facing both individual society and global society in the 21st century, including those of an environment threatened by global warming and the degradation from human activity, of an ageing population, of an inequity between generations, and of the alienation of communities left as others have prospered that as consequence poses a threat the liberal democracy.  She is qualified for this task by her  personal history which includes an affluent childhood in Egypt that exposed her to third world poverty around her before her family emigrated to the USA, a career largely “in the trenches of policymaking” spanning international institutions and in the central government and central banking in the UK, and finally her current appointment as Director of the London School of Economics in 2017 where she launched a programme of research, ‘Beveridge 2.00’, to rethink the welfare state.

Having spent many years in healthcare and the application of health economics, I felt initially that her chapter on health was skated over too much.  But this was before I reflected that the chapters outside my own area of knowledge were throwing me snippets of valuable information and new insights that left me with respect for the ambition within her 189 very readable pages (Thomas Piketty could learn a thing or two from Minouche Shafik!).  Plenty of the examples in this book are familiar, such as the marshmallow test, but others cited, such as the evidence of the value of quite modest investment in early years intervention, such as weekly hour-long visits by Jamaican community health workers for 2 years to encourage mothers to interact and play with their children to develop cognitive and personality skills that 20 years later yielded 42% higher earnings than the control group.

Shafik sensibly avoids too many narrowly defined prescriptions, reflecting on data presented in the book that different countries have successful applied different policy solutions (for example in how they fund and organise healthcare) to achieve broadly similar outcomes (even if the one nation in the case of healthcare that doesn’t do this in a coherent way – the United States – ends up spending far more in aggregate, and in terms of public money, than everywhere else only to realise worse outcomes).  However, the general thrust of her argument in each area of policy is clear.

Shafik poses interesting questions around the intergenerational social contract.  On one hand, younger generations are blessed with material well-being that the old generations could not have dreamt off.  On the other hand, as David Willetts documented in the The Pinch[2]the millennials and generation Z have good reason to be aggrieved as they pay for the higher education and the home ownership enjoyed by their parents appears out of reach.  Shafik recognises, in the emphasis that she places on investment in education in new social contract and various mechanisms for achieving this that she suggests.  There is also the issue of the price that they and future generations will pay in terms of the environmental degradation resulting from the previous generations’ approach to achieving their wellbeing and economic growth.  I am surprised at the complexity that she builds in to potential solutions to this when the solution should lie in regulation, a national income calculus that better reflects the value of the natural world that currently calculated GDP or national income, and environmentally based taxes that capture the externalities of industrial and agricultural activity that damages the environment.

The book also gives rise to a set of interesting questions about what this means for businesses.  Where do they sit within this narrative?  There are important lessons for the people who sit at the heart of businesses, the “controlling minds” in terms what they can do, both in relation to their own workforces, customers and suppliers, in terms of contribution to a new social contract.  For the business to thrive, and sustain itself in the long term, the core lesson is that it should be a player, alongside the individual citizen, in such a new social contract.  Otherwise, its profitability and in due course its survival will be undermined by the very same pressures the Shafik describes threatening both individuals and liberal democracy.

I have a fear about one element in the approach Shafik takes to the need for a new social contract.  This relates to what goes into the “increase in our overall well-being”.   Some of the steam that is driving populism is increasing material inequality and the sense that communities are being “left behind”.  Some of this populism is a function of identity politics, which may be whipped up by the perception that communities with other identities (often, but not exclusively, framed by other ethnicities or immigrant groups) are posing an economic threat or gain an advantage.  But the perception may nothing to do with actual material wellbeing.  Indeed, in the case of some of the 52% of the British population voting for Brexit, or the potential majority in Scotland for independence from the UK, this may be a desire to escape from or avoid the “other” despite the prospect that of material disadvantage.  Some may be seduced by arguments that “getting back control” will leave them better off materially, but many others take the view that independence from Europe or the UK is more important than the economic benefit of remaining part of the whole.  There is, at least at an abstract level, a link between the communitarian spirit in Shafik’s argument for a social contract “that addresses our interdependencies” and the desire to be part of a union, whether of states sharing a continent or Kingdoms sharing a small archipelago at the continent’s north western edge.  Those same people who resist the membership of the country they occupy in a union of countries are also likely to be those most resistant to her arguments for a renewed social contract.

[1] Shafik, Minouche (2021). What We Owe Each Other: A New Social Contract. ISBN 978-1847926272.

[2] Willetts, David (2010). The Pinch: How the Baby Boomers Took Their Children’s Future – And Why They Should Give It Back. ISBN 978-1848872318.

Not Useful but True – “the space is never static because the problem keeps changing all the time”

Nick Ormerod and Declan Donnellan
Nick Ormerod and Declan Donnellan

During lockdown, Declan Donnellan and Nick Ormerod, artistic directors of Cheek by Jowl[1] recorded a weekly podcast “Not True but Useful” about their approach to working in the theatre.  They have now released transcripts of the first series of stimulating conversations.  The following is an extract from the second of these podcasts “Space and Shakespeare”, published in April 2020[2].  I reproduce it here because I find the visualisation of the firm and the organisation as something existing in space, bounded by its interfaces (which are themselves dynamic) with outside world very helpful when thinking about the firm, what it is there for, and how people interacting with the firm or setting its strategy from inside.  Listening to Declan and Nick in conversation with interviewer Lucie Dawkins, I was struck by parallels between what happens to actors on stage and to the managers of the firm.

Lucie   So, today we’re going to focus on the way that you think about space when you stage your plays together, both in terms of what it means for the actors, and how it influences your design. And later in the episode, we’re going to use Measure for Measure as a test case, and I suspect we’ll probably talk a bit about Macbeth as we go along. But let’s start at the very beginning. Why is space so important to you?

Declan   It’s very difficult to explain what we mean by space. I can put it in this form, I can say that what happens when we die? When we die, the space gets taken away from us. So the space is an enormous thing.

Lucie   So what has space got to do with acting?

Declan   Everything. It’s got to do with our whole existence.

Nick  Human beings live in space. They’ve spent their lives dealing with the space, they are formed by the space, everything. The character (Macbeth, for example) lives in a space, a changing space from second to second. Each character has their own special space. And it’s very subjective. You look at a chair, perhaps your mother sat in that chair, that chair means something to you in your bedroom. The character deals with the space. And we as human beings spend our lives dealing with a space.

Declan  Yes, sometimes it’s a criticism, a lot of people say, oh, you know, ‘he’s at the centre of the universe. He thinks he’s the centre of the universe.’ And of course, it’s very annoying if somebody’s self-obsessed like that. But unfortunately, we are at the centre of our own universes. We invent the world that we see. There is a reality, I’m sure, but we have no access to that reality other than through our imaginations. Nick and I are looking at a microphone now but we’ll see different microphones. The microphones we see we have to invent somehow in our heads. One can’t explain these things, but we can get used to these ideas. And we can say things about the space, which is different from defining it.

Lucie  How does the space influence the behaviour of a character, for example?

Declan  Well, there would be no character if there were no space. And the thing is that, in a mysterious way, we are not independent of the space, we only exist as part of this big binary. And that’s the very hard thing to get one’s head around.

Lucie   That’s a striking statement, that there’s no character without the space around them. So, let’s unpack that a bit. How, for example, does the space define Macbeth in the scene we talked about last week, Act 1 Scene 7, when he leaves the dinner party in the next room offstage to talk to the audience about why he wants to kill Duncan.

Declan  I think that first we shouldn’t in any way have the idea that space is something that only afflicts Shakespearean characters. You know, Nick and I are sort of hunched over a microphone and we’re looking at your face, and we’ve the laptop open, and I’m trying to not make noise on the table. And I’m pinned in space.

For Macbeth, there’s a million different ways of doing it, but the space will be central to all of them. There is no world, there’s no life beyond the space. The space is what gets taken away from us when we die, and death is what happens when the space gets taken away. Macbeth gets the feeling that he has to leave that table. Yes, we can interpret the stakes: because he feels suffocated; because there’s no air in the room; because he has to get away from the man he is murdering; he needs space to think – and he comes out, and maybe doesn’t want to speak to anybody, and maybe he sees us, and there are all sorts of stories that one might evolve in order for him to do that. But whatever solutions he comes up with, these will all be absolutely dependent on the space, and on him allowing that space to come before he does. That is the important thing. So it’s not me and I spray a space around me – it’s that is a space and I’m in it. I try to control that space. And so I imagine it to be all sorts of things other than it is. But it’s going to be there before me, during me, and after me, and my perception of it will be continually changing.

If we need to break it down into steps, we can say – it’s a bit leaden – but if we run into difficulty, we can say that one of the shapes of life is that I’m in a space, I have an impulse to cross a threshold to go to another space to find something which turns out to be different from what I had expected. And that last one gives us life, the fact that it’s a continual surprise. When we look at any space, we see it’s just one long transition from one space to another. There is no state of a space, the space itself is transitioning, and we are normally trying to keep up with that space that’s changing much faster than is comfortable for us. It’s like, you know, we think that the world is spinning too slowly. Actually it’s spinning uncomfortably fast. And in all of these plays, events run out of control, and that they’re trying to slow things down. It’s rather sad to say to actors, you know, you must drive the play, because actually the space, the thresholds, the predicament, drives the action. And the characters are struggling to keep running with this thing that’s running wild and out of control.

Lucie   So, one way of looking at what’s driving this character through the space is that there’s a problem in one space, it drives them into another space, but the new space only keeps presenting him with more problems – that the character’s journey through the scene is dealing with the problems that the space is serving up to them.

Declan   That’s exactly right. Yes, the space is never what he wants it to be. The space keeps presenting new challenges. And we all think, oh wait, if only the threshold changing would stop, if only the carousel would stop, then I can deal with it – if only it would stop! But it doesn’t. It just keeps going. And there we are. And that’s what we do. And yes, he’s continually dealing with the new things that he sees.

Lucie   So it sounds like the space is never static because the problem keeps changing all the time. I guess the longer he’s out of dinner, the more he realises that he’s going to be missed, and it looks suspicious, and the bigger his problems keep getting, and every face that he speaks to in the audience presents another source of discomfort, as if he’s trying to persuade each one that the murder is a great idea. So the space is always changing, either serving up new problems or letting the existing ones grow worse.


[1] I have been one of Cheek by Jowl’s patrons for many years, having enjoyed their shows for most of my adult life and almost certainly seen performances involving Declan and Nick in my first year at student at Cambridge University in the 1970s.

[2] Full recordings and transcript available at Not True, But Useful Podcast – Cheek by Jowl

Lockdown reading: Piketty’s Capitalism and Ideology

The Year of Revolution - a clash of ideology Chartists meet on Kennington Common in 1848
Chartists meet on Kennington Common in 1848 – the year of the Communist Manifesto and “All things bright and beautiful”

I went into the first Covid-19 lockdown in March with three doorstep sized volumes to keep me going.

The 912 pages of Hilary Mantel’s Mirror and the Light were riveting, even if I knew from the outset that Thomas Cromwell’s career would come to an abrupt end at Tower Hill in 1540. The 1088 pages of David Abulafia’s magisterial The Boundless Sea kept me entertained as it opened my eyes, chapter by chapter, to the way that different parts of the world became progressively connected by maritime exploration, communication and trade.

I had started turning the 1041 pages of Thomas Piketty’s Capital and Ideology before restrictions started to be lifted in May but, despite finding some stimulating ideas in his opening account of the different sources of power of different parts of premodern society (which he describes as ternary or trifunctional, and have echoes in the Escondido Framework’s account of  the three currencies or sanctions), it was not until the re-imposition of lockdown (the UK government’s Tier 4 restrictions) that I finally completed it.

I admire much of what Piketty has done in Capital and Ideology.  His effort to document the movements in the shares of income and wealth between different groups in different societies throughout human history, and particularly the past century or so, is admirable and revealing.  It is possible to challenge some of his assumptions and definitions, but the picture he paints of the direction of the trends in material inequality are compelling.  I agree with his spin on Rawls’s maximin principle: “To the extent that income and wealth inequalities are the result of different aspirations and distinct life choices or permit improvement in the standards of living and expansion of the opportunities available to the disadvantaged, they may be considered just.”  (p.968).  His chapters on the increasing support of the “Brahmin” classes educated to degree level for parties of the left and the corresponding “Nativist” alignment of parties of the traditional right and “left-behind” communities are persuasive. But the book is far longer than it needs to be, many of its graphs add little, and he strays from the professorial scholarship of the economist/social scientist-turned-historian into an undergraduate level of prescription.

Piketty’s underlying thesis is that “no human society can live without an ideology can live without an ideology to make sense of its inequalities.”  I didn’t need to read 1041 pages to recognise this: growing up in a churchgoing family, I remember singing the third verse of “All Things Bright and Beautiful”

The rich man in his castle,
The poor man at his gate,
God made them, high and lowly,
And ordered their estate.

These days, it is generally omitted!

It may or not be a coincidence that Mrs Cecil F Alexander wrote these words in 1848, the “Year of Revolutions”, in which Marx and Engels also wrote The Communist Manifesto.  Piketty chooses to reformulate the opening words of its first chapter “The history of all hitherto existing society is the history of class struggles” as “The history of all hitherto existing society is the history of the struggle of ideologies and the quest for justice.”

There is something in Piketty’s thesis about the relationship between the ideas that prevail at any point in time and the organisation of society and its impact on the distribution of wealth and income.  It may be that I started out as a historian whereas has come to history by way of economics, but I find that he oversimplifies to sustain his argument.  Ideas ebb and flow and they can influence behaviours, but this is not the same thing as saying that they determine behaviours.  He falls into the trap of assuming that the behaviours that are generally ascribed to “capitalism” are the product of the past few centuries.

He frequently quotes Karl Polanyi with approval, who was even more blinkered in this respect, regarding capitalism as an entirely modern phenomenon.  Peter Acton has undermined Moses Finlay’s thesis that the ancient economy was shaped by considerations of status and civic ideology rather than rational economic considerations, demonstrating in Poiesis: Manufacturing in Classical Athens demonstrates that the commercial decisions of Athenians “were for the most part…consistent with today’s understanding of good (rational, profit-maximising) business practice[1]. It does not require a 21st century reading of the biblical parable of the talents to see that the notion of investing for a return was established by the time the Christian gospels were written.  And Abulafia’s The Boundless Sea, contains plenty of evidence for the commercial underpinning of the development of maritime trade over many centuries.  One of the primary shortcomings in Polanyi’s approach was that set very specific conditions around anything that he would define as a market and, by framing his argument in this way, created a platform for his dismissal of the longstanding heritage of commercial activity.  It is as though Polanyi, and to a lesser extent Piketty, seek to dismiss market mechanisms and their place in human societies on the basis that, prior to Adam Smith and his successor, the conditions assumed in classical economics had neither been articulated nor did they prevail.

Essentially, it is not that Piketty is wrong, but his case is overstated and needs reframing.  It is not that ideology determines the form of economic organisation, but it helps shape relationship between the parties.  In Escondido Framework terms, the prevailing ideological frameworks will influence the attitudes and trade-offs made by parties in their relationships with each other at market interfaces.  For example, a religious ordained prohibition on usury does not undermine the human behavioural drivers for gratification today over gratification tomorrow and discounting for risk (although these can be culturally influenced), but historically has resulted in work-arounds (eg Islamic finance) or lending being undertaken by a community less constrained by the prohibition.  Certain activities, as in caste based societies, may be undertaken by tightly defined social groups, with implications for the commercial terms on which these activities take place.  But this is not the preserve of caste societies: while the boundaries may be less clearly defined and not religiously ordained, even in contemporary society there is an intergenerational stickiness in occupations and values, traditions and attitudes acquired in childhood shape occupational choices and behaviours.

So, two cheers for Picketty for the underlying thesis.  And, in due recognition of his own disclaimer in his concluding chapters, he has set out to provoke further debate and provide the foundation for further scholarship rather than provide the definitive answer

However, where I find Capital and Ideology most flawed in when Piketty moves from diagnosis to prescription.  In particular, his leap from describing to the increasing inequality in economic outcome for the richest few percent compared to the poorer mass of the population to concluding that all would be solved by appointing worker representatives to corporate boards highlights the danger of straying too far from your own area of expertise.

The inequality that Piketty documents arises from the endowments that we start out with in life (geography, genetics, family wealth, upbringing, education) and our life choices and chances (too many possibilities to enumerate).  These will shape whether we end up with investable wealth (the impact of this on equality is thoroughly documented in his earlier work: Capital in the 21st Century) and whether we end up in positions in which we have market power and are able to extract economic rent, which has arisen most egregiously in recent years for executive directors of large companies as a result of shortcomings in corporate governance.  Addressing inequality arising from our endowments needs primarily to be by “levelling up” in terms of investment in education and social support, particularly in early years, and widening opportunities, but in relation to inherited wealth is a proper area for taxation.  Addressing inequality arising from investable wealth is also clearly an issue for taxation and also needs international solutions, but is a complex matter not least because of the risk of creating perverse incentives and unintended outcomes.  Taxation has its place in addressing inequalities in income, but as with addressing issues surrounding taxation of wealth and wealth transfer, is also fraught with difficulty.  Piketty raises these issues quite correctly.

But addressing inequality arising from market power and the ability to extract economic rent is a proper matter for better corporate governance and regulation to address market failure.  Piketty fails to recognise the role of market failure and consequently the need to address this, and also the problem of the increasing ability of corporate management (and some of the services that support them), to extract economic rent (ironically, at least in part, at the expense of the owners of investible wealth), and that this is purpose behind the need for reform of corporate governance.  His own prescription, worker representation on boards, is not the solution for reasons that I have argued elsewhere.  Rather, and this comes back to his underlying thesis around ideology, there is a need to widen the understanding about the proper purpose of the company (the core of the Escondido Framework), and an improved understanding of the role of boards in serving them.

[1] Acton P (2014) Poiesis: Manufacturing in Classical Athens. New York: Oxford University Press

First Reith Lecture 2020: Value does not equal price

Mark Carney BBC Reith Lectures

I listened this morning to the first of Mark Carney’s Reith Lectures, portentously titled “How we get what we value: from moral to market sentiments”.  The promise on the BBC’s web site was that

In this lecture, recorded with a virtual audience, he reflects that whenever he could step back from what felt like daily crisis management, the same deeper issues loomed. What is value? How does the way we assess value both shape our values and constrain our choices? How do the valuations of markets affect the values of our society?

Dr Carney argues that society has come to embody Oscar Wilde’s aphorism: “Knowing the price of everything but the value of nothing.”

It added up to a stimulating hour both from the former Governor General of the Bank of England and from an eminent audience delivering a barrage of pertinent questions but it didn’t really deliver.  In many respects, although well referenced and I will come back for later episodes, it was disappointingly superficial and lightweight.  However, I’ll wait until I have heard the full series of lectures and have transcripts before making a more considered commentary.

In the meantime, it is sufficient to observe that I was particularly frustrated by a looseness of language and a tendency to equate price with value and speak as if value and values are absolute.  Markets generate prices but do not tell you much about the value that an individual places on anything – whether a loaf of bread, a ticket for the opera, their freedom or the impact of climate change on future generations.  I place a different value on any of these to somebody else, and I may place a different value on any particular item at different times, even from hour to hour.  Prices are the outcome of the differing judgements about the value of whatever is in question at the particular time – the downward slope of the demand curve reflects willingness of different people to make purchase at different prices, reflecting the value to each of them.  (By extension, although Carney and his audience were only addressing financially denominated markets at the time, this applies also to marketplaces that, as I have described elsewhere, where the currency is political expression or force)

One particular exchange illustrated the shortcomings of the broader debate and demonstrated that thinking about value and that it means remains work in progress.  We have known for years that national income statistics are fundamentally flawed in terms of failing to capture what is more widely considered as “value”.  But Carney, notwithstanding his overall thesis that value is an elusive concept,  appeared to fall into the “price =value” trap in a discussion of home-schooling, something whose value is not recognised in national income or GDP calculations.  He talked as though this can be treated as lost and unmeasurable.  However, there are at least two ways of quantifying the value placed on it even if it is not part of an market transaction with a formal price.  One is the cost of alternative provision, reflecting either the cost per student of the child’s education in the state-funded schools or the price that a parent would pay for education in a private school.  The other is the opportunity cost of the parent’s time if they were in salaried employment.

There are three more lectures in the series (to be broadcast on 9th, 16th and 23rd December).  I am sure that I will find them provocative, but I hope for more positive reasons than this opening salvo.

Understanding ESG investment

The Financial Times has published a flurry of articles and the occasional letter about ESG (Environmental, Social and Governance) investing recently.

For example, Geeta Aiyer, president of Boston Common Asset Management, was the subject of a profile on 29th August.  This followed the success of Boston Common and other investors to secure the change of name of the Washington Red Skins American Football team by applying pressure on FedEx, the logistics company which sponsors the team’s stadium.

On 1st September the paper published an article about write-downs at BP and Shell in response to “scores of asset managers who have doggedly pressed the oil companies to set targets to reduce carbon emissions and recognise the financial impact climate change could have on their operations” .  The article cites a number of leading fund managers who comment on the “explosion” in ESG investing.  It also notes the role of regulation in changing perspectives, citing the requirement now placed on pension fund managers in the UK take sustainability issues into account in their investment decisions and the impact of the EU’s sustainable finance package which will, from March 2021, push asset managers to incorporate ESG risks in their decision making.

A day later, on 2nd September, the FT published an article by Chuku Umuna, former Labour business spokesman and now lead for ESG with Edelman, the public relations consultancy, arguing that  “a company’s ability to manage ESG factors is widely viewed as a proxy for prudent risk management, and with good reason”, citing work by Société Générale on the impact of ESG-related controversies that found that “in two-thirds of cases a company’s stock experienced sustained underperformance, trailing peers over the course of the following two years.”

A few months earlier, on 9th July, Gillian Tett wrote an article that opened by observing that the major ESG indices in the US and in Asia had outperformed the equivalent all share indices in terms of the financial returns to shareholders and cited a report from BlackRock making the same case, not only in the past year but also in 2015/16 and in 2018.  BlackRock put this down to two primary reasons: the momentum created by ESG investors pushing up prices as they seek to acquire these stock for their clients and beneficiaries; and the value to companies seeking to improve their ESG ratings the scrutiny to which they subject their supply chains and employee practices and the consequent benefits that arise to their businesses.

Does the Escondido Framework approach to understanding organisations help us understand what is going on?

The Escondido Framework approach to looking at the firm is described in detail elsewhere.  In essence, it explains that firms exist as a virtual space defined by their market interface with the suppliers of capital, labour, suppliers of goods and services, and customers, plus others whose needs may need to be satisfied, such as government or the wider community who implicitly or explicitly provide the firm with a license to do business.  Their survival depends on creating value through the efficiency of their internal operations for there to be such a space.  Where the firm places itself within the space will determine the distribution of economic rent to the stakeholders, how much may retained by the executive management, and how is available for reinvestment either in assets or long term relationships with one of more sets of stakeholders.  As the market interfaces changes – through changes in supply and demand, competition, or the trade-offs made by the other parties to the markets place exchange – the virtual space (which can also be considered as the solution space available to the management team) may expand or contract (increasing or reducing the range of options, strategies and potential profitability available).

Reuleaux Tetrahedron with labels

If a new external party intervenes, for example a government agency imposes regulation, the virtual space will be reduced correspondingly.  Indeed, even the threat of regulation will have the effect of reducing the space as the firm is likely to take the view that it cannot afford to provoke the regulator.

Impact of new regulation to reduce solution space
Impact of new regulation to reduce solution space

So what is going on with ESG investment?  ESG considerations have an impact on investment decisions in multiple ways.

Some investors will choose only to invest in businesses whose practices meet certain standards in terms of environmental and/or social responsibility and impact.  When I was trustee of a large medical charity, we initially had a relatively limited list of sectors that we guided our fund managers to avoid, but progressively widened the list to avoid those whose products were implicated in contributing to the ill-health we working to address.  Other charities have much wider exclusion lists, and many private individuals also choose to invest in ethical funds.  Such investors are making an explicit trade-off between such potential increased returns as may be available from investing in companies (eg defence, tobacco) that don’t satisfy their ethical criteria.

Other investors decide to invest in ESG funds and businesses that meet ESG criteria because they believe that companies that with sound governance, ethical approaches to the communities in which they operate and setting high standards in their supply chains, and responsible approaches to the environment will ultimately deliver higher long term returns and be sustainable. Such investors may also take the view that these approaches also represent good business.  Working in retail management as a merchandise director in the 1980s, I certainly took the view that being as environmentally responsible as possible was good business.  I led a team that decided to adopt policies towards sourcing products from sustainable raw materials, reducing packaging, and developing “green” product ranges making extensive use of recycled materials on the basis that it was good for the business.  It was good for our brand as it improved our standing with increasingly environmentally conscious customers.  It was good for our sales, since people appeared keen to buy less environmentally harmful alternatives.  It was also good for recruitment and retention of good staff, who seemed motivated (as I was) by working for a company that was trying to be environmentally responsible.

High standards of governance should also be appealing to investors, and the evidence is strong notwithstanding the mercurial successes of a few mavericks. As chair of a committee investing £200 million for the charity on which I was a trustee, I was attracted to Edinburgh based fund managers, Baillie Gifford, precisely because of the demands that it placed on the governance of their investee companies and its willingness to vote the shares it held for client like us to improve governance of the investee companies – and we were rewarded for our confidence in the approach by returns that consistently exceed the benchmarks for the fund.

If, as the flurry of FT articles suggests, there is an increasing appetite for ESG investing for whatever reason, the impact on companies is that (at least for the visually minded) the shape and precise orientation of their interface with the investment market will change reflecting either the trade-offs (in the case of the first type of investor described above) or the beliefs about the sustainability and long term returns  (in the case of the second type of investor).  The consequence of the appetite for ESG investing on companies is that those with business practices that align with the demands and expectations of ESG investors will face a slightly lower cost of capital and consequently increase the size of the solution space for the management teams when looking at their strategies.

How can investors and owners support purposeful business?

This, the fourth session of the British Academy Future of the Corporation – Purpose Summit opened with the Colin Mayer as session chair arguing that shareholders should be responsible for insisting that the business in which they own shares following their corporate purpose.

It may not have been his role as chair of the morning session to set out the logic behind the assertion, but it was disappointing that he did go on to frame this not so much as a responsibility of the shareholder as being something that is in their interest.  After all, it is in the interest of the shareholder who has invested in a particular business proposition (with the prospect of financial returns that relate to the industry sector, corporate capability, strategy and market position) that the business “sticks to its knitting” and pursues its purpose to the best of its ability.  After all, we are taught at business school that the shareholder can diversify their risk by investing in a variety of business and can buy instruments and investment that offer different patterns of return.  The purpose of the company is something that attracts the shareholder to invest, and both the company and the shareholder have an interest in the company following its purpose.  This proposition is the outcome of Escondido Framework thinking and its model of the firm.

Douglas Lamont, CEO of Innocent Drinks gave us a inspiring account of the Innocent Drinks story including a description of its purpose, vision and values – the why, what and how.  He explained how Coca Cola, when it invested in the company in 2009 approached its investment with the intent that the purpose of Innocent should be protected.  The relationship should be “connected not integrated” so Innocent could benefit from the positive things that Coca Cola could provide but not be swamped and turned into a fizzy drinks brand.  As a consequence, Lamont feels that he has a “strong, trusting relationship with our shareholder” and sees the model of his company’s relationship to Coca Cola being a challenge to big corporates to emulate with their acquisitions and subsidiaries.

Lamont also spoke about the being a “B Corp”, the movement of companies trying to shift the reputation of business from greed to good.

Hiro Mizuro, CIO for the Japanese Government Pension Investment Fund spoke about the relationship between the “owner” of the asset in the shape ultimately of the pension beneficiary, the investor or investment fund and the portfolio company.  He posed the question that I see as the beneficiary of some pension funds that are not yet paying out and some that now are, and as the owner of insurance policies and Individual Savings Account investments in tracker funds.  To what degree do I take responsibility and, indeed, in relation to the argument from Colin Mayer at the start of the session, can I take responsibility for the purpose.  On the other hand, thinking back to my time as chair of the Finance Committee at Versus Arthritis, it was just this approach from the team at Baillie Gifford that attracted me to advising the charity to invest in its Global Stewardship Fund, which proved the best decision I took in my eight years as a trustee of the charity.

The penultimate presentation of this session was Phil Thomson, president of global affairs at GSK.  He spoke of joining Glaxo Wellcome, a pharmaceutical company with a strong sense of purpose 20 years ago, but also of an industry that lost its way in terms of its sense of purpose for time.  He spoke of how the world had “dodged the bullet” of a pandemic several times in that time but the sense of purpose for the life sciences companies has been restored and reinforced by the current crisis and has helped stabilise and increase the resilience of the business.  He argued that embedding purpose takes time and requires consistency but, along with clear values (Transparency, Respect, Integrity and Patient Focus) provides a simplicity that can be understood among the 125,000 employees of the organisation across the globe.  Later, in answer to questions, he talked about how the values and the shared understanding of the purpose gave staff a sense of ownership in terms of their responsibility for what the company does and how it does it.

The final speaker was Deb Oxley, chief executive of the Employee Ownership Association.  It is her role to promote employee ownership, extolling its virtues, overclaiming for what it can deliver, and blinding her to the competing challenges of other stakeholders to ownership rights and to diversity of types of engagement of people in a workforce – from the casual part-timer, to the person with transportable skills through to “lifers” who have made huge commitments to the organisation and few choices to move elsewhere.  The shortcomings in her presentation only highlight the strengths of the alternative way of understanding ownership that underpins the Escondido Framework.

How can technological change serve society through purposeful business?

This third session of the on-line British Academy Future of the Corporation – Purpose Summit was anchored in an interview with Satya Nadella, CEO of Microsoft and, as became clear, a living embodiment of the importance of purpose to business.

He conveyed a strong commitment to the resilience and survival of the corporation, and the place of purpose within this.  Early on, he stated “A company should not outlive its social purpose.  Its social contract should be sustained.”  His final remark, in response to a question about what he wanted to achieve at Microsoft, was that measure of the contribution of leaders to their companies was that they left them with the institutional strength to outlive them.  These two observations together add up to a compelling view of the role of the leader to ensure that the company’s purpose, in terms of what it provides to society at large, creates value for society.  By implication, strategy is about adapting to ensure that the company’s purpose continues to achieve this.

Nadella, in common with  Alan Pole of Unilever in an earlier, reflected on the importance of a company’s purpose in relation to meeting he challenges of the climate crisis and inequality.  He spoke of the need for economic growth, but that it needs to serve everyone, to be anchored in popular trust, and to be sustainable – “you can’t have growth and break the planet.”

Nadella spoke repeatedly about the need to earn and maintain the license to operate, a particular concern for the very largest technology companies.  They need to be more sophisticated in avoid the harm that is a consequence of their scale – not least to keep regulators and would be regulators off their backs.  He spoke of the need for companies like Microsoft look upstream of themselves and see what they can do to ensure that through an embedded culture and value system of their own they do what they can to shape their external environment so that “we can be customers of good stuff”.

He was asked whether the pressures of quarterly reporting imposed short term pressures on Microsoft and compromised its corporate purpose and own long term strategy.  He acknowledged that quarterly reporting was a constraint but only insofar as it forced the company to explain what it did and why. He explained that he had no difficulty, for example, justifying to his shareholders why Microsoft invested in local housing projects in Washington since the company need to support its wider workforce, not just highly paid software engineers but also people in blue collar service roles keeping the local economy operating.

Chair of the House of Commons Science and Technology Select Committee and former minister, Greg Clark, had to follow this tour de force.  He reflected on the how the Covid-19 pandemic had accelerated some technology trends such as video-conferencing but also commented on the degree to which the recent experience surrounding the popular responses to apps to tracking infected patients had highlighted the importance of face to face contact in service activities.

The third contributor to this session was Ngaire Woods, Dean of the Blatavnik School of Government at Oxford who focussed on the role of government in regulation and the limitation of self regulatory codes in prevent a “race to the bottom”.  It was apparent that her underlying thesis is that, notwithstanding the sense of purpose adopted by some business leaders, regulatory intervention is necessary  – citing as her example the need for Robert Peel to secure the legislation to ensure widespread adoption of the standards in factories that Robert Own had pioneered.  She also highlighted the need for appropriate regulation, in that the cheap solution is not always the best (using the example of the alternative approaches to preventing oil spills: the inexpensive solution of a fining system was ineffective whereas the policeable and expensive solution of requiring tankers to have a double skin has been highly effective).  In answer to questions later, she also argued that governments should be prepared to use their power as lenders of last resort in the pandemic to secure responsible and purposeful behaviour by business – an answer that unwittingly brought us full circle back the issue addressed by Nadella of the license to operate.