- This post is part of Business Insider’s ongoing series on Better Capitalism.
- Business Insider CEO Henry Blodget hosted a panel at the World Economic Forum’s annual meeting in Davos called “Toward a Better Capitalism.”
- The guests were Washington State pension investor Theresa Whitmarsh, economist Joseph Stiglitz, PepsiCo’s Indra Nooyi, EY’s Mark Weinberger, and automotive magnate Carlos Ghosn.
- The panel concluded that investors and CEOs must do a better job of agreeing to long-term strategy, which ultimately benefits shareholders, employees, customers, and society.
“It’s time for a better capitalism” was the starting point for Business Insider’s panel at the World Economic Forum’s annual meeting in Davos, Switzerland on Tuesday.
Our CEO Henry Blodget led a discussion with:
- Washington State Investment Board’s executive director Theresa Whitmarsh
- Nobel laureate and Columbia University economist Joseph Stiglitz
- PepsiCo CEO Indra Nooyi
- EY CEO Mark Weinberger
- Renault-Nissan-Mitsubishi Alliance CEO Carlos Ghosn
Blodget explained that in the United States, the wake of the bear market and stagnation of the 1970s led to a movement in the 1980s where shareholders were placed above all else and activist investors thrived. He noted that while this turned around corporations’ bottom lines, the trend has outlived its welcome. One sign is how profits are near their highest level while wages are near their lowest.
The panel discussed how to move past a fixation on short-term performance, and why it’s important that quarterly results need to be paired with discussions of long-term strategy. This desire to create corporations that are more beneficial to employees, customers, and society isn’t motivated by charity – it’s motivated by the realisation that these changes are what’s necessary for years of success, where shareholders can be happy, too.
Below, find each of the participants’ most memorable contributions:
Washington State Investment Board’s Theresa Whitmarsh said that companies should realise a myopic view of results is bad for business.
Whitmarsh is in charge of managing $US125 billion of assets that provide the pensions for Washington’s state employees. In her role, she’s been able to focus on building wealth over the long-term, and the results prove to her that corporations need to take a similar approach.
“Because if you think of a company that has a myopic focus on short term earnings, they’re typically sowing the seeds of their own destruction,” she said.
She explained that ethical values can be aligned with economic value. “And there’s two really good examples: Starbucks and Costco. Both of them made commitments to their workforce that even part-time employees would have full health benefits. They have very decent wages, and they have performed phenomenally.”
Whitmarsh argued that she’s consistently seen companies that make shortcuts to boost the bottom line eventually pay and have to painfully adjust, a process she believes Walmart is undergoing now.
Columbia economist Joseph Stiglitz argued that Milton Friedman was wrong.
After Blodget gave his introduction about the shift in American corporate thought that gained influence in the ’80s, Stiglitz said, “I want to emphasise that it was, in this period, not only activist shareholders but Milton Friedman arguing that that was what economic theory said. And he was wrong.”
Friedman was another Nobel Prize-winning economist whose ideas became incredibly important when he joined President Ronald Reagan’s administration as a financial adviser.
Friedman wrote that CEOs are employees of the business’ owners, and that their role is to make as much money for the owners as possible while still respecting laws and “ethical custom.”
Stiglitz said this approach does not lead to an efficient economy, and that’s why the panel was discussing why it’s time for change.
“The real point here is I think we need more creativity of how we change our society more towards long-term thinking, which is the only way that we’re going to solve the deep problems of our society,” Stiglitz said.
PepsiCo CEO Indra Nooyi said that investors, corporate boards, and executives need to redefine value.
Nooyi became PepsiCo’s CEO in 2006, and implemented the “Performance with a Purpose” initiative, founded on the idea that PepsiCo needed to adjust its product portfolio to include a higher percentage of healthier and lower-sugar products.
For about six years, she was lambasted by activist investors and the financial media. But when her predictions about eating trends proved her long-term strategy correct, PepsiCo’s stock rose to an all-time high.
“I have the results to show for long-term management and the scars to show for short-term management,” she said.
She believes her vindication can serve as an example of why corporate boards and executives need to have better dialogue with investors. Their dialogue should include a look at quarterly performance, she explained, but it needs to be balanced with a detailed discussion of long-term strategy, and the assurance that this strategy is for the purpose of achieving long-term value where both sides will benefit far more than if they chased quarter-to-quarter results.
EY CEO Mark Weinberger said CEOs need to focus more on explaining the ‘why.’
Weinberger leads a private company, but he said that because it’s a partnership, he is not immune from short-termism.
A way to alleviate the negative aspects of this fixation, he said, is to put in more effort explaining why moves are being made at the company.
“I think a CEO’s responsibility is to explain the ‘why,’ not just the ‘what,'” he said.
“And then investors can decide if they agree with the ‘why,’ and governments can decide whether they want to regulate or not the ‘why.’ But you can’t just rely on telling people what you’re doing today in the short term. You have to explain why you’re doing it for the long term,” he said, noting the necessity to explain how these moves tap into industry-wide trends that are going to affect all competitors and therefore offer more assurance.
Renault-Nissan-Mitsubishi Alliance CEO Carlos Ghosn said that boards need to stop ousting CEOs at the first dip in stock performance.
Automotive industry magnate Ghosn has been a CEO for nearly two decades – far beyond the current average American CEO’s tenure of six years.
“I think the short tenure of CEOs is a real problem,” he said.
He explained that the most value-adding initiatives he’s overseen, such as the shift to focusing on electric cars, have required seven to eight years. This is a typical time frame for “revolutions” that lead to industry dominance, he said, but they’re simply impossible to see through to completion if you fire your CEO as soon as the company’s stock dips.
Boards and investors need to end this troubling trend, he said.
You can watch the full panel discussion below:
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