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Four Thinkers onBusiness and Society

Lloyd Kurtz

November 6, 2006

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Topics

John Wesley – Christian Ethics Adam Smith – ‘Das Adam Smith Problem’ Albert Hirschman – The Playbook Brad Barber – The CalPERS Effect

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John Wesley – Christian Ethics

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Christian Premises

The world is corrupt. “Enemy-occupied territory – that’s what the world

is.” - C.S. Lewis, Mere Christianity

We act of our own free will. “By their deeds you shall know them.” – Matthew

7:16

Money is important.

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Money is Important

“In the New Testament, Jesus had more to say about money matters than any other single subject, be it worship, sexual behavior, violence and peace, or even eternal life. From his parables (the rich fool, the rich man and Lazarus) and his encounters with people (Zacchaeus, the rich ruler), a basic assumption emerges: for those who would follow Jesus, economic questions are really spiritual questions.”

- Burkholder (2002)

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John Wesley

For, let the world be as corrupt as it will, is gold or silver to blame? "The love of money," we know, "is the root of all evil;" but not the thing itself. The fault does not lie in the money, but in them that use it. It may be used ill: and what may not? But it may likewise be used well…

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‘The Use of Money’

I. We ought to gain all we can gain but this it is certain we ought not to do; we ought not to gain money at the expense of life, nor at the expense of our health.

II. Do not throw the precious talent into the sea.

III. Having, First, gained all you can, and, Secondly saved all you can, Then "give all you can."

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Get All You Can, BUT…

“I. We ought to gain all we can gain but this it is certain we ought not to do; we ought not to gain money at the expense of life, nor at the expense of our health.”

Gain all you can, but don’t: Harm your own health. Harm your mental health. Hurt your neighbor in his body. Hurt your neighbor in his substance.

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Specific Prohibitions

Physically harmful occupations. Smuggling. Tax evasion. Businesses that require cheating or lying. Unethical medical professionals. Purveyors of alcohol.

“They murder His Majesty's subjects by wholesale, neither does their eye pity or spare. They drive them to hell like sheep.”

Pax World controversy

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And Then, Learn.

“Gain all you can, by common sense, by using in your business all the understanding which God has given you…

“You should be continually learning, from the experience of others, or from your own experience, reading, and reflection, to do everything you have to do better to-day than you did yesterday. And see that you practise whatever you learn, that you may make the best of all that is in your hands.”

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Adam Smith – ‘Das Adam Smith Problem’

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‘Das Adam Smith Problem’

“At the age of fourteen, Smith was sent to the University of Glasgow [where he] first confronted the great issues which were to drive Scottish moral philosophy in the eighteenth century.

“The first of those issues was how to reconcile classical and Christian demands for altruism and benevolence in human relations with recent arguments by Thomas Hobbes and Bernard Mandeville that egoism and self-interest were the driving force in society, and how to do so without resorting to the disputed authority of revelation.”

- Muller (1993)

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Adam Smith #1 – Empirical Ethics“[In Smith’s ethical system] our desire for the sympathy of others leads by steps to the restraint of our self-love…

“Our natural egoism is partially restrained by our awareness of an external standard, the standard we would use to judge our actions if we were a spectator who was biased neither toward ourselves nor toward those affected by our actions.”

- Muller (1993)

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Adam Smith #2 – The Invisible Hand“[E]very individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

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Lydenberg’s Modest Proposal

The goal: Harness market forces to encourage better corporate behavior.

“How do you direct corporations to the public interest? We need new vocabulary to do that, new data. And I think [socially responsible investment] can bring great value to that. We can bring fresh perspectives to risk, intangible assets, and wealth creation.”

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Steven Lydenberg’s To-Do List Build consensus that better corporate

behavior is desirable. Create data sources so people can be better-

informed about corporate social responsibility.

Build institutions that will make society more sophisticated about corporate social responsibility.

Engage market forces to encourage better corporate behavior.

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Albert Hirschman – The Playbook

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Two Problems

An organization is engaged in behavior we don’t like. What should we do?

When should we use economic reasoning, and when should we use ethical reasoning?

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Option 1 - Exit Classical economic response Abandons opportunity for change Only option when voice is impossible

Biggest risk: reinvestment

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Option #2 - Voice

‘Political’ response Requires investment of time, energy, money Only option when exit is impossible.

Biggest risk: entrapment

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Loyalty

A rational judgment to try voice instead of exit.

Loyalty is based on… The likelihood of positive change The quality of alternatives

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Brad Barber – The CalPERS Effect

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Constructing the CalPERS Focus List Quantitative Screen

Stock Performance Capital Efficiency Corporate Governance

Qualitative Review Overall financial performance Valuation Strategic plans Management and board member relations Compensation Practices Other miscellaneous shareowner issues (including takeover defense)

Engagement Process “CalPERS considers the engagement process to be a crucial component of

the overall Focus List Process. CalPERS makes a persistent effort to meet with the management and directors to discuss performance and governance issues. CalPERS will focus on reforming the company's governance practices with an emphasis on accountability, transparency, independence, and discipline.”

Source: CalPERS

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Short-Term Impact

Barber finds a “small, but reliably positive” +0.25% effect on announcement date.

“My best estimate, based on conservative short-term market reactions, indicates CalPERS activism has resulted in total wealth creation of $3.1 billion between 1992 and 2005.”

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Long-Term Impact

0

10

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100

1 Day 2 Weeks 1 Month 6 Months 1 Year 2 Years 3 Years 4 Years 5 Years

$ B

illio

ns

Source: Barber (2006)

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NotesBarber, Brad. “Monitoring the Monitor: Evaluating CalPERS’ Shareholder Activism.” Working Paper, University of California, Davis, March 2006.

Burkholder, J.R. “Biblical Faith and Investment: Toward a Theology for ‘Making Money.’” Mennonite Mutual Aid, 2002.

Hirschman, Albert O. Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States. Cambridge, Massachusetts: Harvard University Press, 1970.

Lydenberg, Steven. Corporations and the Public Interest: Guiding the Invisible Hand. San Francisco: Berrett-Koehler, 2005.

Muller, Jerry Z. Adam Smith in His Time and Ours. Princeton, NJ: Princeton University Press, 1993.

Smith, Adam. The Wealth of Nations. Modern Library edition. New York: Random House, 1994.

Wesley, John. “The Uses of Money.” Edited by Jennette Descalzo, student at Northwest Nazarene College (Nampa, ID), with corrections by George Lyons for the Wesley Center for Applied Theology. General Board of Global Ministries, The United Methodist Church, 2000.