Tag Archives: Book Summary

Value(s) by Mark Carney: Chapter 14: Values in Companies: Key Takeaways / Analysis / Citations

Chapter 14: Values in Companies

Key Takeaways

Carney starts out with the history of companies as a concept and what asks what is the purpose companies? It is not simply to make a profit, but rather to create value which is only partly quantified in the form of profit. For Carney, purpose requires balancing dynamism, fairness(?), solidarity (with employees and community), sustainability (across generations) and responsibility.

As John Kay put it…“Profit is no more the purpose of business than breathing is the purpose of living.” And so you need to make a profit to operate just as you need to breath. But it is not the purpose of business. Who owns the company? Shareholders do not own the companies to which they hold stock

Wedgwood as the Model of a Modern Major Capitalist:

  • What is the company for? Carney suggests it’s more than profits. Josiah Wedgwood is the example of a capitalist that made life better for customers by democratizing.
  • He was born as the industrial revolution was taking off.
  • He tracked 5,000 changes in experimentation to understand how to make the perfect pottery.
  • He was an abolitionist icon.
  • He built a town with amenities to support his growing factory.
  • He was an ardent economic nationalist, admits Ricardian Carney.

Five things that change us in a crisis;

1)      Triggers a revaluation of what we value…

2)      Triggers a shift in what we value…

3)      Triggers an improvement in reporting…

4) Triggers cause resilience…

5) Triggers embed responsibility…

1st for Carney, a crisis triggers a reevaluation of what we value. In prior chapters, showed that the crisis was caused partly by:

·         the underpricing in risk and the lack of supervising and off-loading responsibility to the wisdom of the market in Chapter 7’s breakdown of the Financial Crisis;

·         the years of undervaluing resilience, with states failing to protect citizens despite ample warnings in Chapter 9’s breakdown during Covid;

·         the tragedy of the commons where we aren’t pricing pollution as the producers problem (externality)

2nd for Carney, a crisis changes our appraisal of value and values. Who benefits from these shifts? Shareholder, stakeholders are disrupted through change….

The Covid crisis caused:

·         a reappraisal of value and values

·         a reset by companies

·         a social resets by countries

·         accelerated move to e-commerce,

·         accelerated shift to e-learning

·         accelerated shift to e-health

·         a reorientation of supply chains from ‘just-in-time’ to ‘just-in-case’

·         greater consumer caution

·         widespread financial restructuring (sees a stretched)

3rd for Carney, crises are a catalyst for new reporting of systematic risk.

·         1929 Wall Street Crash (crazy speculation by everyday people using loan money) + Roosevelt’s New Deal = creation of the Securities and Exchange Commission to protect the investors and  efficient markets. The SEC then also triggered the creation in 1936 of GAAP (generally accepted accounting principles) which became the global standard to ensure financial data could be reliably counted on.

·         2008 Financial Crisis = reporting for OTC derivatives, reduce the influence of shadown banking, new rules for securitization, accounting standards such as IFRS 9 was developed. IRFS includes what the expected losses are which provides more clarity.

·         The Climate Crisis, Carney is (hoping?) to bring about TCFD for consistent, standardized disclosures on climate-related financial risk.

4th for Carney, crises increased resilience, they make us tougher. Global banks have a buffer 10x the size prior. Trading has been reduced 1/2 , interbank leading is declined 1/3rd and cloistering of divisions within banks, with deep separation aims to prevent a systematic collapse.

Again, Carney argues the Climate Crisis has a valid target of net-zero. ¾ of the world’s coal reserves…

5th for Carney, embedding responsibility. Having purpose, Carney suggests might have prevented the financial crisis. In the aftermath, regulations, rules and compensation provide the teeth for a better future.

The Firm A Series of Contracts versus Purpose-Driven Companies at the Heart of an Ecosystem:

Carney goes through the history of company formation. The coordination of employees, investors, suppliers, buyers. He notes that corporations are indeed people both legally and in reality. For Carney, the company is not the sum of a bunch of contracts, however.

Shareholder & Purpose:

East India Company (the 1st publicly traded company in the UK) was incorporated with the purpose of protecting a monopoly on in Asia. The concept of the shareholder was buy shares of a company with the agreement that that capital would be used to advance the purpose of the firm, a larger goal. But during the industrial revolution, in 1844, the UK government passed a law that allowed incorporate without an express purpose and it made registration much easier. By the 19th century the focus on public purpose shifted to private purpose.

Shareholder Primacy:

Ford Motor Company challenged the idea further when in 1916, there was a $112 million surplus on their balance sheet. Shareholders wanted a dividend by Henry Ford wanted to direct those profits into creating more innovation and to democratize cars for more people. The Michigan Supreme Court sided with shareholders but the amount doled out was much smaller through managerial discretion. This case Dodge v. Ford is central to the idea that shareholders own the company they have shares in. The UK Companies Act in 2006 and the Delaware Supreme Court in 2015 re-asserted that the purpose of ‘directors must make stockholder welfare their sole end.’ So, in the UK and the US, it is to maximize shareholder value. But there is disagreement, Wachtell, Lipton, Rosen & Ktaz LLP says shareholder primacy is not exactly what is going on….

Carney shows through legal examples in Canada and France that shareholder aren’t even owners of the company and thus the maxim of maximizing shareholder value is flawed. It is ture that shareholders do get paid after everyone else: creditors, bond holders, employees, suppliers and governments via taxation both in the UK and the US. But employees cannot diversify their risk to a company as Martin Wolf has argued so shareholders may not really be taking the most risk, aren’t really owners and certainly a poor shareholder who put their life-savings in is taking more risk than Warren Buffett in the owning of a given share of any company. Shareholders do not have much downsize risk either. So, for Carney shareholder primacy is flawed.

The Agency Problem:

The separation of ownership of shareholders and control via the management which have their own self-interest (perks, pet projects, empire building) mixed in with meeting shareholder interests, triggered the Milton Friedman doctrine that:

a)    an executive is an employee of the owners of the business;

b)    the executive is responsible for maximizing shareholder value;

c)    shareholders (probably want) profits therefore that is the value in question;

d)    as long as the firm conforms to rules of society in terms of customs and law, they are good.

Carney sees Friedman’s ideas as useful but deeply flawed. Shareholder primacy is problematic and the proof is that Friedman gives himself an out in two ways:

1)    saying that money making should conform with customers and laws of their day. As Carney has shown, values are subject to their time therefore, Friedman has an out when there is disembodiment between the market and shareholders. Friedman claims any charity to employees is merely window-dressing. But Carney has shown in this book that there are times where there is deep corrosion in financial markets.

2)    saying that shareholders have primacy is flaws because shareholders merely have a ownership of the shares in a limited legal way. there is strain in how the wealthy treat the poor and how pay  

Companies have Command and Control Dynamics so Models of an Economic is a Matter of Degrees:

For Coase in The Nature of the Firm, the firm is defined by costs difference of providing goods and services through the market. Transactions in the market hold the costs of gathering information, bargaining, and enforcement. These transactions bear costs that the firm save but the expense is the span of control, complexity and diseconomies of scale. The activities performed more efficiently in a Command and Control system within the firm with the rest completed through the market.

Stakeholder Value:

Carney argues that instead of Shareholder Value there ought to be Stakeholder Value, which also happens to be the latest trend in business school literature. Profit is essential but it is not the only thing. Many CEOs reject the notion that there is a single purpose to a firm. For Carney, a successful firm must deliver a balance of competing interests amongst stakeholders (which Carney neglects to define), but this is analogue to the individual who pursues the good life. Competitive advantage, for Carney includes, having an attractive purpose as Chapter 15 will show.

Other Thoughts from Chapter 14:

·         For a better tomorrow, we need companies that are motivated by profit and empowered through purpose;

·         Profit and purpose are both necessary and re-enforce each other;

·         Firms should embed purpose is what they do;

·         Corporate purpose reduces risks, inspires employees, provides guidance in uncertainty and attracts and drives innovation;

·         Non-financial metrics should matter even if they are notoriously hard to measure;

·         The challenge falls with turning a purpose into practice (actions, outputs);

·         Maximizing shareholder value (short-term) is not the sole aim of corporations, full stop;

·         Environmental, Social and Governance (ESG) can contribute to profits and also purpose;

·         The make up of boards and their focus on purpose is critical;

·         Board-level reforms need to include purpose-oriented reform;

·         Patagonia, Unilever have institutionalized purpose;

·         B Corp certification reward companies that meet social and environmental metrics;

·         Danone is a company that embraces a entreprise a mission designation;

·         Executive level compensation needs to be connected to ESG factors and needs to be re-configured to align incentives that are longer term;

·         Companies need to consider future generations;

·         Companies should be engaged in improving communities;

·         Reporting is Key: two-way flow of information between stakeholders, shareholders and companies;

·         Good and bad ideas need to be tested and then good ideas scaled, and bad thrown away;

·         There is more and more evidence that suggest that companies that perform well on ESG also tend to have better financial performance, 63% report a positive co-variation, increased ESG leads to increased financial performance, Chapter 15 will address the counter-arguments.  

·         Employees who know their employers purpose also have better financial performance;

·         Patagonia give 1% of its revenue and they get 9000 applicants per post;

Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis Part 3 Chapter 14

Ø  Chapter’s message in a nutshell: You get more with honey then you do with vinegar, be nice and have better outcomes in good and bad times.

Ø  The Covid crisis has accelerated a shift, but for how long? What is the reasonable band-width for which human’s recalibrate? Carney seems to be have a view that change is more permanent than might myself.

Ø  “During thee [Covid] crisis, we have acted as interdependent communities not independent individuals, with the values of economic dynamism and efficiency, joined by those of solidarity, fairness, responsibility and compassion.” (386, Value(s). This is not quite what is happening or happened or has it? How does Carney know from publications, statistical research or the people he hangs out with. People aren’t, pre-determined. There is speculation and sales in his statement that  

Ø  If Carney is so certain of the benefits of a crisis, then logically should triggering a crisis not be an aim of effecting change? From 9/11 to detonating a nuclear weapon in the Antarctic, causing a crisis is perhaps a logically implication of his breakdown of how the financial crisis has progressed finance forward. Carney seems to imply that all the Dodd-Frank legislation was a major success, whatever has been implemented deserves a thumbs up, however the process of providing new safe-guards was very contentious and as Obama points out in my blog post, it wasn’t always that great.

Ø  An inverted view might be that the financial crisis brought on regulations that are a mixed bag of efficacy and punishment. Instead of weeding out the incompetent, regulations have cause a retrenchment of those most passionate about financed which has the effect of

Ø  Perhaps this will be addressed in Chapter 15, but how do you really objectively measure ESG performance, if the measures are game-able, they will be gamed, just a fun fact of human nature. Humans are cunning. Get used to it.

Ø  Carney took the Patagonia “9,000” applications example in two funny ways. 1) that Patagonia didn’t plant this story as a PR stunt, 2) that Patagonia has those high number of applicants because of their purpose (single causation is flawed thinking or perhaps Carney is simply trying to persuade).

Ø  Senator Elizabeth Warren’s 2018 proposed Accountable Capitalism Act requires directors in firms making more than $1 billion to ‘consider’ stakeholders, not simply shareholders, when making choices.

Citations Worth Noting for Part 3: Chapter 14:

v  Andrea Sella, ‘Wedgwood’s Pyrometer’ Chemistry World, 19 December 2012.

v  Derek Lidow, ‘How Steve Jobs Scores on Wedgwood Innovation Scale’, Forbes, 3 June 2019.

v  US Securities and Exchange Commission, ‘What We Do’, 10 June 2013.

v  John Kay, ‘Shareholders Think They Own the Company – They Are Wrong’, Financial Times, 11 November 2015.

v  Martin Wolf, ‘Shareholders Alone Should Not Decide on AstraZeneca’, Financial Times, 9 May 2014.

v  Lynn A Stout, ‘The Shareholder Value Myth’, Cornell Law Faculty Publications, Paper 771 (2013).

v  John Kay, The Truth About markets: Their Genius, their Limits,  their Follies (London: Penguin, 2003).

v  https://bcorporation.net/

v  https://www.blackrock.com/corporate/investors-relations/2018-larry-fink-ceo-letter

v  Bank of England, HM Treasury and Financial Conduct Authority ‘Fiar and Effective Markets Review: Final Report’ (June 2015).

v  Nell Derick Debevoise, ‘Why Patagonia Gets 9,000 Applications for an Opportunity to Join their Team’, Fortune, 25 February 2020.

v  ‘The Business Case for Purpose’, Harvard Business Review Analytic Services Report (2015).v  Marc Andreesen, ‘It’s Time to Build’, Andreessen Horowitz, 18 April 2020, https://a16z.com/2020/04/18/its-time-to-build/

Value(s) by Mark Carney: Chapter 9 The Covid Crisis: How We Got Here: Key Takeaways / Analysis / Citations

Chapter 9 The Covid Crisis: How We Got Here

Key Takeaway

This chapter discusses the discovering of COVID and all the other asks of this pandemic that we are all very familiar with. Carney was the governor of the Bank of England until February 2020. Economic and family priorities. 

The Covid crisis emphasized:

  1. Solidarity: companies, bank, society
  2. Responsibility: for each other, employees, supplies, customers.
  3. Sustainability: where the health consequences skew towards seniors while the economics consequences skew towards millennials and Gen Z.
  4. Fairness: sharing the burden, providing access to care.
  5. Dynamism: restoring the economy with massive government intervention and private sector resurgences…..

Duty of the State:

Carney goes through a review of political philosophy from Thomas Hobbes (1588 – 1679) to John Locke (1632 – 1704) to Rousseau (1712 – 1778) to suggest that in exchange for giving up certain freedoms, the state promises to deliver protection to its citizens. Much the same with central banks; that the public gives up the detailed nuanced control of the money supply in exchange the financial system delivers prosperity. 

Capacity of the State must have: 

1) legal capacity: ability to create regulations, enforce contracts and protect property rights: these include social distancing regulations that aimed to reduce transmission of COVID 19; 

2) collective capacity delivering services;

3) fiscal capacity: power to tax and spend: state capacity has moved from 10% of GDP to 25% to 50% of GDP with corresponding services to protect citizens from COVID 19.

Other Points:

  • Poor compliance in democratic societies;
  • Stock piles were not restocked;
  • Bill Gates Ted Talk from 2015 was not actioned by any one actor;
  • Many countries didn’t have PPE and depended on China’s production initially; 
  • No country is really prepared for this particular kind of pandemic;
  • South Korea had a pandemic in 2015 and Carney repeats the often mentioned success of South Korea through contact tracing and geo-targeting of users;
  • Governments need to be better at coordinating: there were departmental territoriality;
  • In simulations for pandemics this was very evident.

Cost-Benefit Analysis for Hard Choices:

  • There was a weighting of variables to decide whether to lockdown or otherwise.
  • The effects of lockdown: domestic abuse were hard to do that. 

Calculating the value of a human life: is hard to do. But there is actuaries to put the intrinsic versus investment value of a life or the net present value of all future cashflows that person is predicted to generate. Life is priceless. Sometimes the calculation is about the productivity of the person in life…..

Schelling’s “The Life You Save May Be Your Own” points out that the value of a life principally the concern of the person living it. Value of a Statistical Life (VSL) became the industry standard. The example Carney provides is the a risk of death in a high-risk job might be 1 in 10,000 and employees receive $300 of danger pay, therefore the VSL is $3,000,000. There are several other methods: 1) stated-preference, 2)hedonic-wage, 3) contingent etc. And different countries use different metrics in similar circumstances. In Canada, the estimated range of a human life is $3.4M to $9.9M CAD meanwhile in the US, the estimated range of a human life is $1M to $10M USD. Healthcare looks at quality-adjusted life year (QALY) and cost-utility versus cost-benefit analysis. Schelling’s assumption about how a person can evaluate the value of their life. VSL usage is a moral choice. Wealthcare many not be measured properly according to Carney. Another model is the VSLY Value of a Statistical Life Year. The question remains: do all lives have an equal value or is it the number of life years should be treated as equal? 

Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis of Value(s) Part 2 Chapter 9 

  • While it is complicated, I would have liked Carney to have explained the system of money creation in simple terms as it pertains to the pandemic. The level of government issuance of support has been massive. It is imperative folks understand how stimulus money is created. The perception that money is created out of thin air, subject to political pressures is not true + Zeitgeist and other explanations of the money system. There friends and family going around saying that central banks just print money whenever it suits them…here is a good explanation of how the central bank enables money creation:   To support small businesses and citizens out of work: Is the government increasing tax or are they printing money? The stimulus money was not coming from new taxes. The government raises through borrowing. The government issues treasury bills to three groups of savers: 

(1) public sector (other parts of the government, 

(2) the private sector (people and companies), 

(3) foreign entities. The government agrees to pay those savers back with interest at a future date. In the short-term the government uses that cash sucked out of the economy in exchange for the treasury bills to issue stimulus cheques back into the economy. Keynesian economics says that more stimulus, the more economic activity which enables more private savings which then fuels more transactions for bonds. The government can borrow, unlike an individual, through this system as long as the economy is growing at the same rate as the debt, the debt to GDP will be stable.

(4) source the Mint (Federal Reserve) which does not print paper money but does indeed print out of thin air, electronic money, that is credited in the treasury department’s account in exchange the Fed then holds treasury bills. The key consequence of issuing too much money with source (4) but also taking savings from (1), (2), (3) which could have been allocated elsewhere is inflation whereby more money in circulation is chasing the limited number of goods available thus driving the price of the individual goods. The 10 year Treasury Note then starts to go up and inflation creeps in, then the Fed needs to increase interest rates to counteract/dampen the purchasing of the demand side….. 

  • The fines for violating COVID rules have an earned media dynamic: we know that the virus is spread through gatherings where one ore more participants has the virus. When someone gets an ‘arbitrary fine’ it effectively markets better than other forms of advertising such as digital.
  • There are Canadians under the false impression that government are the federal, provincial and municipal level are not allowed to make rules. 
  • This time will be different which was Carney’s number one lie in finance seems to be fillable here to say, why would you think that in a future pandemic in say 2055, that our children will be able to respond better then the last time?
  • Just are Carney fails to explain how the central bank manages the money supply, he too here fails to give a basic description of the “obvious’ nature of the COVID 19 virus. Its unique gestation period in which it sheds without the host having any symptoms is very novel unlike other viruses that are initially extremely aggressive, for example, ebola or SARS.
  • The threat of future pandemics is very real until it isn’t at all. If COVID had the immune effects of HIV then the response would have been more severe in North America. However COVID can be contracted and the likelihood of death is 1 – 5% based on comorbidities. We’ve literally spent the last year talking about this virus. The next virus if were HIV by airborne the human race would be in full black plaque mode. 
  • Lack of understanding the characteristics of the virus.
  • In ability to connect barriers that create friction such as laws, walls and masks have the underlying same logic; they do not prevent all the things they attend. 

Citations Worth Noting for Part 1: Chapter 9:

  • John Locke, A Third Concerning Toleration, in Ian Shapiro (ed.), Two Treaties of Government and A Letter Concerning Toleration, 1689.
  • Jean-Jacques Rousseau, The Social Contract.
  • Thomas Piketty, Capital in the Twenty-First Century (Cambridge, Mass.: Harvard University Press, 2014).
  • Derek Thompson, ‘What’s Behind South Korea’s COVID-19 Exceptionalism?’, Atlantic, 6 May 2020.
  • A.E. Hofflander, ‘The Human Life Value: An Historical Perspective’, Journal of Risk and Insurance 33(1) (1966).
  • Cass Sunstein, The Cost-Benefit Revolution (Cambridge, Mass.: MIT Press, 2018): OECD (2012).