How firms relate to markets – Escondido Framework

My grandmother’s oranges and Frank Hester’s rants

My grandmother lived through two world wars and difficult times. She kept her politics, other than a general sense of fairness and distaste for injustice, close to herself. I remember it came as a surprise to me when she announced that she made her selection of fresh fruit (oranges if I recall) on the basis that they shouldn’t come from a nation with a pretty toxic regime and social system. Only a few years later, after discovering marketing during my Stanford MBA, I realised that it should not have been a surprise. It is an essential component of the Escondido Framework that our choices are informed by a wide range of considerations and trade-offs, albeit some may swamp others in their importance, and this affects what we buy.

I recently introduced an old friend who is researching impact investing by charity trustees to a former colleague who is chief executive of one of the largest group of family charitable trusts in the UK. The old friend is interested in the use of charity endowment to make mission-aligned investments rather than purely for financial yield. The former colleagues recounted how, as custody of the inherited wealth that the family invests in charitable giving passes from generation to generation, not only does the direction of the charitable giving shift, but also the attitude of the family members towards the non-financial impact of their investment decisions changes. This should be no surprise either, as impact investment strategies are only a short step beyond avoiding investing in industries that conflict with your charitable purposes (for example, as chair of the finance committee of Versus Arthritis, I had no hesitation in making the case that a health charity should avoid investing in industries like tobacco and alcohol whose businesses contributed to ill-health).

TPP’s Frank Hester

So what do I feel about the use by my family doctor (in common with all the GPs in west London and a large part of the NHS community services locally) using SystmOne, one of the most widely deployed electronic patient record systems in the UK? Most of my fellow patients have no idea that TPP (The Phoenix Partnership), which developed and operated SystmOne, was founded and apparently remains owned exclusively by Frank Hester. It was Frank Hester, the largest single donor to the Conservative Party, who has been alleged recently to have declared a few years ago at a company gathering that looking at Diane Abbott makes you “want to hate all black women” and that she “should be shot”. I don’t often have sympathy with Diane[1] who has very different political views to mine and has said some pretty daft and sometimes unpleasant things in the past. Comments of this type are unacceptable for many reasons and it reflects very badly on the company and its people that he felt able to make them.

I imagine that I will be holding my nose metaphorically when I next sit down in my GP’s consulting room as he or she updates my patient record with the details of my visit. If I was still chair at West London NHS Trust, where we were in the process of replacing a legacy electronic patient record system with SystmOne to provide for better interoperability with that used by our primary care partners, I doubt whether the knowledge that SystmOne was provided by a company headed up by someone with such views and that the profits were adding to his wealth would have changed my view of our IT strategy. Notwithstanding Mr Hester’s unpleasant views, the system produced by his company is the only one in town, or at least in my bit of London.

Whether things might have been different many years ago when TPP was starting out is moot. I imagine that Mr Hester was more cautious about what he said, how he said it and in whose hearing he said it, even in as recently as 1997. Certainly, I don’t recall being any less sensitive to boorish, racist and sexist language then, or my NHS colleagues being any less easily offended. But a generation on, and with the money in the bank and the software widely adopted, the customer (and ultimately their patients) has far less choice. Reflecting on this episode in Escondido Framework terms, the shape of the market interfaces have changed. How Frank Hester behaves, which has a bearing on how he does business, has almost certainly changed. Given the strength of his product with its customers and its established position against its competitors, he can (despite the widespread negative reaction his comments received) say unpleasant things without it affecting his business. For those of us who metaphorically are holding our noses, we have fewer degrees of freedom in our decision taking than we might have had many years ago if presented with a prospective supplier who acted in such a way (rather than exercising the restraint that was probably the case when Frank Hester was starting out with TPP in the late nineties).

[1] ……although I am entertained by the memory of serving with her as a fellow member of the Joint Academic Committee in the History Faculty at Cambridge University in 1974, when she (it can have been nobody else) described me in a student newspaper as “rather too obviously a Cambridge politician on the make” – wonderfully ironic given that she became the career politician whereas I made my escape from politics in the 1980s.

Who is selling what to whom?

One of the Elzabeth Frink stratues that used to greet salesmen visiting the WH Smith Retail Head Office in the 1980s — One of the Elzabeth Frink statues that greeted salesmen visitng WH Smith Retail in the 1980s

I led a very successful team of retail buyers in the 1980s. In only three years they improved our margins by over 3.5% of the retail selling price.

The salespeople we dealt with didn’t stand a chance. As we were the market leader in most of our product categories, we were always looked after by the senior national accounts manager or the sales director – more often the latter, or that is what their business card said – whose status meant they were generally well into middle age. They would arrive in their Ford Scorpios, which would always be reversed into a parking space so no-one could see whether they had the top of the range model or vanilla version without the bells and whistles. In a less equal and inclusive age, they were almost universally male. In common with most people working in sales functions at the time, they were outwardly sociable types – you need to be comfortable with people if you are engaged in face-to-face selling – but whose roles condemned them to spend most of their time away from close colleagues, sitting in alone in a car as they headed off to schmooze their customers. More than anything else, they needed to be liked and to please people.

Our buyers were almost the opposite. Sure, they were great colleagues and a privilege to work with, but they didn’t need to be liked. They were the gate-keepers to some of the most profitable shelf space on the high street, and had a clear view of how they were going to make that space generate profit for the company. They were highflyers who had been recruited into sought-after graduate jobs and were still in their twenties and early thirties, were mostly female and often blonde, and tough as nails. Although we visited our suppliers’ factories and warehouses from time to time to understand their business, most of the key meetings took place on our turf. And if all this had not already put the buyers on the front foot when it came to seeking discounts from the (remember, generally male and middle aged) salespeople, their adversaries in the negotiation had been unmanned on arrival by having to drive past four well-endowed nude male sculptures commissioned by the company’s chairman from Elizabeth Frink (subsequently sold by a successor lacking any insight into the commercial benefit they provided).

On a recent visit to New York, I recounted this to a Wall Street banker who deals in fixed interest securities, “selling” (his words) to large corporate customers (again, his words) who are raising debt. He questioned my description of salespeople as needing to be liked. I had to explain that, although he was competing with other banks for the business of the big corporations, it was much less clear in his world who was doing the selling than when I was working for a market-leading high street retailer. I have not worked as Chief Financial Officer or head of treasury in a big corporate, but I spent a significant amount of time trying to raise money from private equity investors and from suppliers of senior debt (to provide financial leverage for the ventures that I hoped would make my fortune). It was very clear who was selling what to whom – I had the investment opportunity and was trying to sell this to the people with the cash. I wanted to be liked (or at least for them to like the risk-reward opportunity that I was pitching). Although, subsequently, I found myself counselling entrepreneurs entertaining offers from venture capital firms that they should look beyond the cash that was on the table and to understand that the investor needed to demonstrate whether they would be attractive people to work with and add value to the business they were “buying” into (ie do a bit of selling), most of the time, the people with the cash needed persuading to buy the opportunity.

The Escondido Framework posits that all commercial transactions (and this spills over into non-commercial transactions – such as those in politics) involve both parties selling and both parties buying[1], albeit with the balance of power (particularly informed by competitive considerations and the availability of alternatives for one or other party to the transactions) influencing the degree it feels to the parties as though they are buying or selling. This, of course, feeds through to what sort of people you need to charge with leading the transactions with the other party, how they should work, and what tools they need to do the job well.

[1] I have written elsewhere about the experience early in my career as strategic planning manager for WHSmith, working with WHSmith Wholesale, which was the dominant player in the UK distribution of newspapers and magazines. The business thought of itself as having retail newsagents as its customers and newspaper and magazine publishers as its suppliers. But, as evidenced by the way that the industry subsequently developed (all this, prior to emergence of on-line channels for news and for magazine content), the core role of the business was to provide a distribution service to the publishers, who were buying the distribution service rather than selling newspapers and magazines to a wholesaler.

US Republicans who don’t understand shareholder capitalism

Freedom, but not to do business with ESG informed institutions

Ron DeSantis, governor of Florida and fancied candidate for the Republican presidential nomination in 2024 is proving to be an unexpected enemy of investors in US businesses and the “free market”. The FT reports that he announced legislative initiatives on 13^th February to ban banks and other financial groups from “discriminating against” energy companies, gun sellers and other businesses, and asset managers from considering ESG in investment decisions.

This appears to be only one of 49 legislative initiatives so far this year across the United States. To the extent that these are the result of the efforts of lobbyists working for pariah businesses, this is fair enough and – in terms of the Escondido Framework model of the firm – represents an understandable response by the managements of such businesses to the pressures they face as they attempt to shape the interface of their businesses with the suppliers of capital.

Whether it is a rational response or is likely to succeed (by reducing the cost of capital or relaxing the pressures faced by management from active investors) is uncertain. The FT reports further that the Indiana Bankers Association, representing 116 banks, is trying to frustrate legislators in the state who are trying introduce a measure to require the state to divest and cancel contracts with financial groups that consider “social, political or ideological” factors. The Chief Policy Officer of the IBA has said “A lot of my members have ESG statements [that] could prohibit an organisation being a custodian of the state’s finance as a result of this legislation.”

But the growth of ESG is a rational response of businesses to institutional investors’ concerns about the outlook for businesses who traditional activities and business models face a long term threat because of they harm that they are perceived to present to people and to the planet. Each mass shooting in the US contributes to a ratcheting up of the anti-gun lobby and, absent short term crises resulting in a profit windfall (and these invite a taxation response) the outlook for companies extracting and supplying fossil fuels is undermined by the need to move to net zero. And when it comes to good governance, the example of value destruction by an unshackled Elon Musk, reinforces the case for the “G” in ESG.

It is reasonable for climate-change-denying and gun-toting Republican elected officials to include financial institutions that do not subscribe to the “E” and “S” elements in the ESG principles among the organisations with whom they do business, providing that such organisations can demonstrate over the long term that they serve the fiduciary responsibilities of the offices to which they have been elected (it is hard to see how they can ignore the “G”). But it is conflicts with their duties and with the commitment claimed by most Republicans to market capitalism to cave in to the pressure from the pariah businesses and legislate against doing business with ESG informed investment decisions that offer better long term returns and less risk of fraud, provider capture or adverse outcomes from wacky decision making.

The paradox of the anti-woke investor

Fundsmith founder, Terry Smith – No Nonsense?

The Escondido Framework argues that all the market interfaces of the company (with customers for their goods or services – either B2B or B2C, labour, their own suppliers of goods and services, and providers of capital) are essentially similar.

Customers for goods and services make their decisions to purchases on the basis of a variety of characteristics of the offering: quality, product features, after-sales support, credit terms, price and more, and in relation to all of these, the competing alternatives. Employees consider not only the raw salary package, but the variety of employment terms, both hard and soft benefits, company culture and values, corporate reputation, risk, opportunities for career development, and that’s just the start of the list. Suppliers of goods and services also have complex decisions in terms of how they view their customers, whom to serve and how. It is not just a matter of price. For example: is this customer big enough to justify the effort to sell to them compared to the other potential customers out there; can we support the service levels and stock requirements to meet their demands; would our brand be damaged in the eyes of our premium customers if we sell to downmarket segments? And suppliers of funds to companies, whether equity, debt, or hybrid instruments, consider a wide range of trade-offs: risk (reflecting a wide variety of considerations: operational, financial structure, regulatory exposure), term, liquidity, income generation, value growth, portfolio diversification for starters.

So what should we make of the debate raging over ESG informed investment and rise of the vocal “anti-woke” investor?

The Escondido Framework is not a normative model, arguing over rights and wrongs of ESG investment. The model describes the world as it is, and highlights the shortcomings and incompleteness of other models of the organisation. Investors, alongside with consumers, suppliers and especially employees include ESG type considerations in the mix when deciding who to do business with and on what terms. Do I want to be complicit in the destruction of the planet, oppression of minorities, exploitation of disadvantaged populations – whether on a third world plantation or facing an early death through a predisposition to consume addictive toxins (alcohol, tobacco or opiates). ESG is a fact of life in all markets, the only question is the weight and precise form in which it plays into the consideration of all the parties (aka stakeholders) with whom companies interact.

There are conflicting accounts as to whether ESG focussed companies and investment funds deliver superior returns. Part of the problem is one of definition and the nature of the measures employed: movements in share price are a poor metric because any starting point in a share price measure has future performance expectations priced in. However, to the extent that robust taking ESG issues into considerations reflect long term strategic thinking and the combination of transparency to investors and quality in decision-making processes, it is hard to see why and how ESG would not offer great value creation over an “anti-woke” alternative.

The Financial Times has once again (Helen Thomas on 11 January, following an article by Harriet Agnew on 12 January last year) focussed on a spat between “anti-woke” investor Terry Smith of Fundsmith and the leadership of Unilever. Smith has mocked Unilever’s leadership in his annual letter to investors for highlighting its sustainability credentials and for “virtue-signalling ‘purpose’”. He takes issue with Unilever for “purposeful” brands. For example, he comments about soap that “when I last checked it was for washing” dismissing Unilever for talking about “inspiring women to rise above everyday sexist judgements and express their beauty and femininity”. But, as Thomas points out, “the huge success of Dove – one of Unilever’s biggest brands, held up as a marketing case study – suggests a bit of female empowerment and body positivity isn’t a stupid way to sell soap. Rather like efforts to make mayonnaise appealing to health-conscious millennials [Smith laid into Unilever’s account of the “purpose” of Hellman’s last year], Smith just isn’t the target market”.

He is on stronger ground in his criticism of Unilever, which has been subject to a raid by activist Norman Peltz who now has a seat on the board. He complains that Unilever has failed to engage with his fund which had been a long-term holder of Unilever stock and twelfth largest shareholder. Marketing to investors, involving both taking strategic marketing decisions about the proposition provided to the investor (ie the profile of the investment including characteristics such as those listed provide above) as well as communicating with the shareholders, is one of the core responsibilities of the chief executive.

Reading the Fundsmith shareholder letter, I take away the impression that Smith’s criticism of “virtue-signalling” reflects a politically informed discomfort with a company that responds to trends in society and to the new consensus about threats to the environment. However, his language elsewhere and his stated strategy to invest in good companies, hold onto shares for the long term, suggest that he doesn’t recognise that his fund should invest in companies that adopt the underling strategic approach of Unilever (even if not its failure to communicate adequately with large shareholders or its apparently inept approach to large transactions). Given the stated approach (effectively to emulate Warren Buffett), Smith ought to be able to leave his personal politics and any “anti-woke” tendencies outside in the carpark when he comes to work and to recognise the value of purpose and ESG when investing on behalf of his clients.

“It’s the investors’ fault, not ours”

Financial communications company Tulchan’s State of Stewardship report, capturing the views of 35 FTSE company chairs (26 from FTSE 100), makes depressing reading. “Many of the chairs interviewed for this report conveyed a sense of deep unease at what they feel is a lack of alignment between their objectives and those of their shareholders” writes Mark Burgess, a Tulchan Communications partner, in the foreword to the report. And whose fault is this? According to the commentary and the chair’s quotes scattered through the report, it appears to lie with the investors.

“The report suggests….that we should recognise that board are mostly constituted by good people trying to the do the right thing for the good of their stakeholders., and invites shareholders overseeing them to start by assuming positive intent, placing accountability for stewardship where it belongs;[1] in the boardroom and working together to improve conditions for growth”.

This is a bit like a sales and marketing director blaming customers for not buying their products or services. No, you need to design your offering to meet customers’ needs, and your advertising agency (Tulchan’s equivalent in the consumer marketplace) should shape your messages to so that they demonstrate how your offer will address those needs.

Shareholders don’t “oversee” boards. Boards are accountable to shareholders, and to other stakeholders too. Their companies have a duty to provide returns that are sufficiently attractive to shareholders in terms of the balance of capital growth, dividend income, risk, timing, and alignment with ethical and any other shareholder concerns. Folded into risk are concerns about consumer and supplier market movements, competition, government intervention, financial leverage, and investors’ portfolio composition[2]. Get that right, and investors will place a higher value on your shares. Get it wrong and investors will either sell or, if they believe other directors will provide returns (taking all the dimensions list above into account) that are more attractive to them, replace you. Boards need to think of their shareholders as customers and shape their offer to them as though they were customers.

[1] Tulchan’s punctuation

[2] Witness the challenge faced by Baillie Gifford needing to unweight its investment in Tesla as the share price took off

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 21^st 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 21^st 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

Understanding Apple’s implausible explanation

Apple has just announced that it will reduce the commission it charges smaller developers (those who earned less than $1 million last year through the App Store) from 30% to 15%.

As someone with an advisory role and financial interest in just such a business for the past ten years, the explanation provided by Apple’s CEO, Tim Cook, has a hollow ring:

“Small businesses are the backbone of our global economy and the beating heart of innovation and opportunity in communities around the world. We’re launching this program to help small business owners write the next chapter of creativity and prosperity on the App Store, and to build the kind of quality apps our customers love. The App Store has been an engine of economic growth like none other, creating millions of new jobs and a pathway to entrepreneurship accessible to anyone with a great idea. Our new program carries that progress forward — helping developers fund their small businesses, take risks on new ideas, expand their teams, and continue to make apps that enrich people’s lives.”

The suggestion that this is a natural evolution and being done out of the goodness of Apple’s corporate heart is implausible at best. The small businesses that rely on the App Store to reach iPhone customer have been “the backbone of the global economy and beating heart of innovation and opportunity” throughout the iPhone’s existence and have put up with being fleeced. The entrepreneurs have funded their businesses, taken risks on new ideas, expanded their teams and made apps that enrich people’s lives without any help from the black shirts* formerly of Infinity Loop, now Apple Park.

The likely explanation is provided by the threat of action from the European Commission, which opened an investigation into Apple’s anti-competitive behaviour in June, and potentially from the US, with Congressional hearings into the monopolistic conduct of the tech giants later in the summer. This is an illustration of the strategic solution space available to a company being reduced by the prospect of regulatory intervention.

In parallel with this reduction in the price charged to its small customers for using the App Store, Apple revealed at the Congressional hearings something about the shape of the market interface between the App Store and the “customers” who sell through it when it disclosed that it had agreed a 15% commission with Amazon for in-app charges within the Prime Video app.

The interesting question is what happens next. Apple has had to cave in to the threat of another web behemoth flexing its market power and potential to lobby against it. It has accepted, so far in part only with the new deal for smaller developers, the political reality of the forces gathering against its abuse of its power over a large slice of the market for apps on mobile phones. What of the middle-sized App Store developer customers? How long will it take Apple to develop an implausible but face-saving formulation to explain why it has reduced their commissions too? Or will it try to tough it out until competition authorities around the world run out of patience and take Apple, and potentially some of the other tech giants, apart in the way they did to the US rail and oil industry over a century ago?

* for the avoidance of doubt, this is a reference to the sartorial style of the late Steve Jobs and his successors and not a comment on either their conduct or politics.

Investors and consumers both need good sustainability reporting

The FT has been carrying stories for the past two weeks about improving the quality of information provided by companies to their investors on the environmental impact of their activities and the sustainability of their businesses in the face of climate change. It may just be a coincidence, or it may be a conscious decision of the editorial board, but the Fashion Editor writes in “Life and the Arts” section of the Weekend FT on the same subject under the headline “Sustainable fashion? There’s no such thing”

On 5^th November, Erkki Liikanen, Chair of the IFRS Foundation Trustees, delivered the keynote speech at the UNCTAD Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting, introducing the Trustees’ Consultation Paper on Sustainability Reporting.

On 9^th November, Rishi Sunak, Chancellor of the Exchequer, delivered a speech to the House of Commons on financial services. In the course of setting out his plans for supporting the City at the end of the transition period as the UK leaves the EU and plans to launch a Sovereign Green Bond, he declared:

“We’re announcing the UK’s intention to mandate climate disclosures by large companies and financial institutions across our economy, by 2025.

“Going further than recommended by the Taskforce on Climate-related Financial Disclosures.

“And the first G20 country to do so.

“We’re implementing a new ‘green taxonomy’, robustly classifying what we mean by ‘green’ to help firms and investors better understand the impact of their investments on the environment.”

On 10^th November, the Financial Reporting Council launched its Statement on Non-Financial Reporting Frameworks, opening with the preamble:

“Climate change is one of the defining issues of our time and, by its nature, material to companies’ long-term success. Boards have a responsibility to consider their impact on the environment and the likely consequences of any business decisions in the long-term. Our 2020 review of climate-related considerations in corporate reporting and auditing found that boards and companies, auditors, professional associations, regulators and standard-setters need to do more.”

before recommending that companies should try to report “against the Task Force on Climate-related Financial Disclosures’ (TCFD) 11 recommended disclosures and, with reference to their sector, using the Sustainability Accounting Standards Board (SASB) metrics” and setting out its own plans over the medium term to help “companies to achieve reporting under TCFD and SASB that meets the needs of investors”.

Today, 14^th November, the FT’s fashion editor writes about the dilemmas facing those of her readers who are concerned about the impact of their purchasing decisions. She recognises that the best way to live a sustainable life is to buy less, but also that her readers want to find ways, while supplementing and refreshing their wardrobes, to plot their way through the “greenwash” claims of the fashion brands. Both these consumers and some of the brands themselves want clearer and more reliable accreditation of products that come from supply chains that are, if not truly environmentally friendly, at least less environmental unfriendly.

Following up the themes in this article, I found a great piece written by Whitney Bauck in Fashionista, in April last year:

“If you’re aware that there are ethical issues baked into making clothes but don’t have time to do in-depth supply chain research every time you need a new pair of socks, there’s a good chance you’ve thought at some point: ‘If only someone could just tell me for sure if this brand is ethical or not.’

“You wouldn’t be alone in that desire. In years of writing about both sustainability and ethics, it’s a sentiment I’ve heard from fashion consumers a lot. While many people want to be more conscious with their consumption, they also wish it were easier to tell which brands are truly being kind to people and planet.

“If you fall into that category, there’s good news and bad news. The bad news is that a one-size-fits-all ethical fashion certification will probably never exist, partly because not everyone agrees on what qualifies as “ethical.” Should that word refer to job creation in impoverished communities or animal welfare? Should it mean making clothes from organic materials or recycled synthetic ones? Not every ethical fashion fan has the same standards or priorities, and that will always make a one-size-fits-all approach to ethical fashion certification difficult.”

I wrote in a blog post four years ago about the benefits that the team I led at WH Smith believed would arise from developing and selling green stationery ranges. The issues described by Lauren Indvik in the FT are nothing new. We faced similar challenges both in terms of selecting products and in terms demonstrating to our customers that buying these products would better than buying alternatives.

The challenges facing investors and consumers in taking environmental and other ethical considerations into account in what are otherwise commercial decisions are identical. Both investors and consumers want the best information, to put into the mix with the other things that influence their decisions – the complex trade-offs of exposure to multiple risks, timing, and return for the investor, or look, feel, comfort, durability, after sales support and cost* for the consumer.

The similarity between these challenges is evidence for the symmetry in all businesses – investors are customers for investment opportunities presented by the company, in the same way that consumers are customers for products and, indeed, that employees are customers for the jobs that companies provide. In an age when people – in their multiple roles as investors, consumers, and employees – want to invest in, buy from, and work for organisations that behave responsibly in relation to wider society and to the environment, they need reliable information to inform their decisions.

* and a host of other possible features depending on the product or service category

“…… because they still do the same thing: they primarily serve shareholders”

Dame Vivien Hunt, until this year managing partner of McKinsey’s offices in the UK and Ireland, has written in today’s Financial Times on workplace diversity and equality under the heading “Change how boards work to achieve to true diversity”.

She asks why, when one third of the seats on the boards of FTSE 100 companies are now occupied by women, “those boards still look similar……still filled with people who have the same skills carved out of similar professions, networks and university degrees.” Her explanation is that it is “because they still do the same thing: they primarily serve shareholders.”

I am pleased that one of the current leaders of the organisation where I started my professional career takes such an unambiguous and very public position strong position on both the composition of boards and their purpose. Back in the 1980s, most of my colleagues were beholden to the orthodoxy of “shareholder value” and, although there were a small number of senior non-white consultants (including Keniche Ohmae, who led the Tokyo office, and Rajat Gupta, who became an office managing partner shortly after I left and subsequently global managing partner), the firm was anything but diverse.

Dame Vivien argues that “we need to find people who represent not only our investors but everyone else – from buyers to suppliers, to local communities, to our natural environment”. Her use of language and her argument is not entirely clear here: her article could easily be interpreted as making a case for a board of representatives of stakeholders as opposed to a board that understands the broader mandate of the company and the need to take all stakeholders’ interests into account.

I have argued elsewhere against boards being composed of representatives of stakeholders. As is implicit in Dame Vivien’s article, directors should have a duty to all stakeholders, because their wellbeing of all groups is critical to the wellbeing of the company. Furthermore, in UK unitary boards composed of executives and non-executives, at the board may be the executive directors responsible for sales and marketing who should be the effective advocates for interests of consumers if they are fulfilling their role understanding and satisfying consumer needs. Similarly, executive directors of workforce and of operations should be able to represent to colleagues, who may place a primacy on the interests of shareholders and customers, the interests of the people they recruit, support, and manage. Whether or not they are full board members, most large companies employ directors of communications and public affairs (or similar) whose primary role may be to advocate externally for the company but also represent to the board the case for taking into account the interests of local communities, the environment, politicians and lobbyists.

Her underlying argument for diversity on boards is compelling, not for the purposes of representation but because a genuinely diverse board “brings diversity of thought, skills and experience that will lead to better decision making”. However, better decision making also depends on boards understanding their purpose of their companies, which is the sustainable creation of value for all those the company engages with, by producing goods or services more efficiently than would be possible in the absence of the company. The purpose of the company is not the creation of shareholder value: shareholder value is the necessary return provided to shareholders in return for their investment and the sustainable creation of shareholder value is the result of serving the interests of all stakeholders.

I was thrilled to read Dame Vivien’s piece and pleased to see her continued work championing diversity in business. But, notwithstanding my concern about some of the logical flow and detail in her argument, I was even more encouraged to see her set out the case that genuine diversity on boards will not be achieved until shareholder primacy is consigned to the waste bin.

Rio Tinto’s dynamiting of the Juukan Gorge: Jean-Sebastien Jacques’s solution-space implodes

Juukan Gorge caves after Rio Tinto dynamiting

What better illustration could there be of the Escondido Framework approach to understanding ESG investing described in last week’s blog than the defenestration of Rio Tinto’s chief executive, Jean-Sebastien Jacques, by the company’s shareholders?[1]

In relation to the distinction made in last week’s article between the impact of regulation on the solution space available to executive teams, one of the interesting aspects of the dynamiting of Juukan Gorge and the two rock shelters is that the company had previously negotiated native title agreements with the Puutu Kunti Kurrama and Pinikura people, giving it rights to mine the area and had also secured regulatory approval. In Escondido Framework terms, as illustrated in last week’s blog post, the company thought that it was operating within the solution space defined by the market transaction with the owners of the land and that the regulatory market interface had not reduced the solution space available to the company.

However, the executives had failed to appreciate the sensitivities of the company’s investors to such an egregious violation of the heritage of not only the indigenous population but humankind as a whole.

Perhaps the board and executive team at Rio Tinto paid too much attention to the likelihood that investors in mining stocks are already a self-selected group that is less sensitive to ESG considerations than the investment market overall.

It matters little whether the response of the investors whose pressure on the board finally persuaded chairman Simon Thompson (who previously had insisted that Rio Tinto would not fire Mr Jacques) was a reflection of the potential for the scandal to increase future regulatory pressure on the industry, or a concern for the response of the upstream investors in their funds, or the consciences of fund management executives themselves being pricked by comparisons between the dynamiting of the caves with the actions of the Taliban blowing up the Bamyam Buddhas in 2001.

Either way, the shape of the investment market interface was sufficiently different to that perceived by Mr Jacques and his colleagues for them to have placed themselves, not temporarily but at a personal level permanently, outside the solution space available to them.

[1] For anyone who missed the story, Rio Tinto blew up two 46,000-year-old Aboriginal rock shelters in Western Australia, offending not only the Australia aboriginal community for whom the sites were sacred but also a wider public sensitive to an ancient archeological heritage. Initially the board decided to withhold bonuses for the executives involved, but has now decided that Mr Jacques should go (albeit not until early next year and without any further financial penalties)