A new age of capitalism

Niceto “Nick” Poblador’s book “Strategy in the New Age of Capitalism: Collaborative and Inclusive Approaches to Value Creation” is a joy to read. Reading Poblador’s books is like visiting a chocolate store. You want to take home everything in the shelf but you can only take two or three if you want to truly capture the rare and gratifying essence of each one. I will therefore focus on three takeaways.

First, there is an implied premise in Poblador’s statement about how the strategic goal of profit or shareholder wealth maximization is best achieved. The unstated premise is that an enterprise exists primarily to maximize shareholder wealth. I must say he is at risk of getting “canceled” by those who did not read, with an unbiased mindset, the entirety of his book. I’ll take the same risk by saying that I agree with Poblador. It is clear to me that in the long run, all the good things that enterprises do to make sure that their stakeholders are taken care of are not motivated by a bleeding heart, but by a pragmatic realization that these actions do reinforce long-run profits. It is no different from the wisdom of not killing the goose that lays the golden egg. The other way to look at it is to imagine society to be the human body. Without exception, every organ of the body must be healthy enough to contribute to the body’s well-being. Otherwise, not a single one of the organs will survive for very long.

Poblador’s perspective destroys the romantic but hazy concept of “double bottom line.” The alleged conflict between the profit motive and stakeholder interest exists only in the short run. In the long run, investments made in stakeholder welfare bring more profits. Conversely, in the long run, decisions made today to subsume stakeholder welfare to short-term profit are bound to mortally injure long-term profits.

Unfortunately, the closets of enterprises are littered with the skeletons of CEOs who made bold and sensible investment decisions that hurt short-term profits. The typical CEO, unless he is the son of the owner, holds a three-year contract and in that period, he needs to be perceived as adding value to the company. What shapes that perception? The simple answer is share price. What influences the share price? Another simple answer is it is influenced by the collective verdict of analysts who compare performance with expectations. What metrics do they use? They invariably start with financial statements that arbitrarily segment business performance by 12-month periods called the accounting year. That is how it has been over the last century or so. We all know how “performance” can change based on accounting standards that are in play. We all saw how the performance of North American banks seesawed in the last two years as accountants changed their standard for measuring expected losses.

Now I can almost hear many of you saying, in defense of the analysts, that these guys—being intelligent enough to appreciate the nuances of investment decisions and their effects on current and long-term performance—surely make allowances in their calculations for these things. That doesn’t square with the skeletons in the closets that I earlier spoke about.

We need to find a way to capture the effects on enterprise value of decisions made today. In this respect, I believe that the valuation and ratings gurus are wanting. It often takes major upheavals such as the shocking financial cataclysm of 2008 and the totally unpredicted wrath of COVID-19 to nudge the conservative guardians of standards and valuation principles.

The role of government

My second takeaway relates to Poblador’s assertion that government has been remiss in its role to achieve national and global sustainability (in environment, society and governance) and that business should therefore take over. I disagree with Poblador. For as long as we’re paying taxes to government, we should demand that it must do its job. Poblador is right in saying that economic exclusion is one of the greatest anomalies of capitalism today. It is a result of actions taken by players in the value chain who have tremendous market power and use this power not to “apportion value to all stakeholders” but actually “take value from them.” I would be naïve to expect that these same players, just because they signed a roundtable document or covenant, will now take aggressive action to correct the lopsidedness of the value chain that they have heretofore been lording over. Government exists to ensure that human affairs are conducted in a manner that is fair and just to everyone. It is wrong to assign that role to the private sector. Where government has been remiss is in being in the wrong places. When a sector cries for help, the response is always to create legislation whose intention is to support but whose effect is to restrict.

Instead of spending billions of pesos on petty bureaucrats who put a tight leash on micro and small enterprises that do not pose a systemic risk and are not “too big to fail,” why not see to it that the small guys do not end up financing the huge conglomerates through trade receivables that go unpaid for inordinate amounts of time? Instead of playing it safe and lazy with procurement laws that favor supposedly big and “stable” suppliers and service providers, why not make room, like all enlightened governments do, for micro and small enterprises in the public procurement contracts? Instead of mandating banks to allocate a significant percentage of their loan portfolios for small and medium enterprises, why not create real credit enhancement mechanisms that do not operate with the same ultraconservatism of banks?

CSR conundrum

My final takeaway concerns Poblador’s allusion to corporate social responsibility, or CSR. I don’t know when CSR came to be known as anything other than a behavior. That behavior is none other than what Poblador calls the “apportionment of value to all stakeholders” and, I must add, in very conscious fashion. Greenwashing, or astute corporate propaganda does not CSR make. CSR is embedded in the whole consciousness and DNA of an organization, not in slogans or sweet statements of its chief executive officer. In my view, an organization that feeds poor children or builds houses for squatter communities but cheats its employees of rightful wages and bleeds its suppliers dry has no right to talk about CSR. An organization may not be running any do-good, look-good, sound-good program, but if it engages all its stakeholders in a fair, mutually reinforcing and sustainable relationship, it can rightfully affix CSR to its personality.

I am glad that the Management Association of the Philippines (MAP) organizes forums that force people to clearly articulate concepts that are otherwise loosely and mindlessly thrown about. I recall that at the height of the ruthless lockdowns, I was mortified by a Viber conversation that began advocating a “new capitalism” without unequivocally explaining how it will differ from the capitalism that it was supposed to replace. I feared then that people were playing with words and fire—and that ought to have no place in an organization projecting itself as a thought leader that unclutters, rather than confuses minds. INQ

This article reflects the personal opinion of the author and not the official stand of MAP. The author is past MAP president. He is chair of Maybridge Finance and Leasing Inc. Feedback at [email protected] and [email protected].