Friday, October 21, 2011

Can We Make Wall Street Socially Responsible?

A current theme among institutional investors - especially public pension funds - is socially responsible investing.  Sometimes referred to as ESG, for Environment, Society and Governance, this movement seeks to improve the non-financial impacts of investments made by these investors on the world at large.

It is a noble undertaking, much to be encouraged.  But my point is this.  If we really want to get serious about socially responsible investing, we have to get serious about providing the enterprise with a choice in addition to Wall Street as a solution for getting financed.

Wall Street dominates finance today, and Wall Street has one, single mission - to trade stocks, and other financial instruments.  Stocks trade when prices change, and prices change when the market perceives that enterprise value is going to increase (or decline, but increases are better!).

So, once an enterprise enters the Market, it commits itself to a constant campaign, 24/7, to generate investor perceptions of increasing enterprise value.  Every strategic decision the enterprise makes from that point, forward, has to be made with an overarching concern for how it will affect share price.

For an enterprise in the midst of rapid organic growth - Apple Computer in these heady days of iPods, iPhones and iPads comes to mind - this in not a problem.  The choices they want to make for business and social reasons are also choices that will drive up share price.   Their business is naturally aligned with the Market.  But what about companies whose business is more stable, more mature, more steady state?  These companies may want to make choices that are socially responsible, but they can't.  Not if they got money from Wall Street.  Social responsibility does not drive share price.  Growth does, and so they have to do whatever they can to manufacture growth.  This they do through a variety of choices.  Some of the most effective are not what can be called socially responsible.

We can't change these choices by telling an enterprise they're being bad managers.  They're not.  They're doing what their Master demands.  Their Master is Wall Street, and Wall Street demands Growth.

We also can't change this by telling Wall Street it's bad.  It's not.  It's just doing what it was designed to do.

If we are serious about Socially Responsible Investing, we have to not so much get better at the way we manage the investments we already make, as to begin making investments in a better way.  We have to offer the enterprise another way to get funded that isn't the Wall Street way.

Wall Street is one dimensional.  Business is three-dimensional.  One dimension is growth, which Wall Street handles very well.  Another dimension is keeping on, something Wall Street simply cannot value.  A third dimension is making a change, which Wall Street really doesn't understand.

When an enterprise that should be keeping on is forced, by Wall Street, to manufacture growth, bad things happen.

To prevent these bad things from happening, we have to give these firms another way.

That's my challenge to people who support socially responsible investing; to also support the invention of new approaches to investing that will reward a business for doing the right things, at the right time: for growing when it is time to grow; for just keeping on, when it is best to just keep doing the same thing, over and over again, reliably and well; and for making a change when we really do need to make a change.

We can't ask Wall Street to come up with that invention.  It has to be done a different way.

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