Morningstar - Q1 2021 - 59

	
I think we drastically undersell what the
unabashed pursuit of profit or shareholder value
can achieve.

consists of individuals. These individuals relate
to each other informally-as family and friends-
or formally, through governments or courts
or companies. In my view, every single actor in
society, be it an individual person or a
company or an institution, can and should act
in the interest of society.

Preston Caldwell

In classical economic theory, the purpose of
investing was to generate economic activity. The
focus on shareholder return is much newer.
Too much focus on shareholder return puts too
little emphasis on the classical purpose
of investing, to generate economic activity-
to which I would add, economic activity that is
beneficial to society.

such as employees, your supply chain, or the
environment, has ever led to a reduction
in shareholder value. Rather, those companies that
proactively engage with stakeholders are
those that innovate ahead of the competition,
driving strong shareholder returns for
years to come.
Kelly: Now we'll turn back to Team Agree and Preston.

Preston Caldwell: First off, based on the first
points made by the opposing team, I'm not
sure they have anything to disagree with Friedman
about. If ESG is about financial outperformance
and creating shareholder value, then it sounds like
they're in perfect agreement with Friedman.

I think we drastically undersell what the
unabashed pursuit of profit or shareholder value
can achieve. Let's talk about some of the things
that we care about in the social world. First,
cheaper and better products: The pursuit of profit
motivates companies to offer cheaper and
better products so they can beat their competitors,
and that benefits everyone.
Second, innovation: Virtually the same argument
applies. Yes, innovation can be disruptive to
certain so-called stakeholders. Maybe it puts some
employees out of work. But innovation is
indispensable to long-term economic progress.
If Henry Ford had been worried about all
of the horse-drawn carriage workers he was going
to make unemployed thanks to his creation
of an affordable automobile, maybe he would have
never done it.
Next, higher real wages: The only way to generate
sustainable growth and real wages is growth

in productivity, and that entails reallocating labor
and other resources to their best use-and
that's best incentivized by the pursuit of profit.
Finally, how about boosting diversity?
Pursuing profit means that we reward workers
according to how well they can do the job, not
according to personal characteristics.
Managers who discriminate and violate that
principle are actually failing their shareholders.
Underlying all of these points is a common theme:
In our free-market system, pursuit of profit
delivers positive-sum outcomes that in general are
in the best interest of society as a whole.
What's wrong about the stakeholder view is that
it tries to make the economy into a zero-sum
game where one side always wins and another
loses. That runs in contrast to our entire
historical experience of rising economic outcomes
for society as a whole.

Time is an important factor. There is short-term
thinking, and there is the long term. Shareholders
with a long-term horizon, like pension funds,
want to make sure that they have a universe of
companies to invest in, let's say 50, maybe
even 100 years from now. Focusing on short-term
returns forces investee companies to focus
on the short term as well, and that might not be
good for that universe of companies 50 to
100 years from now.
We've seen examples where short-termism
leads to disasters, like Enron 20 years ago, or what
happened with the financial crisis in 2008
and thereafter. Look at how disturbing that was
for society.
Kelly: To Team Agree, picking up on Wilco's

It's not about shareholders winning at the expense
of stakeholders. It's about how do we deliver
the most long-term prosperity for everyone. Pursuit
of profit or shareholder value is the best single
means we have to accomplish that.

Looking Ahead
Kelly: Finally, opening comments from Wilco for

Team Disagree.

Wilco van Heteren: Shareholder capitalism
as it was formulated in the 1970s is a form that
I don't agree with. Friedman suggests that
companies and societies are disconnected spheres,
almost. And, of course, they are not. Society

last comment: Some of the most stringent critics of
shareholder capitalism argue that it's led to some
perverse outcomes, such as managerial compensation
schemes that encourage executives to focus
on quarterly profits that jack up the stock price. Do you
agree that shareholder capitalism is more short-termoriented than stakeholder capitalism?

Caldwell: I don't agree with that premise at all.
I think if you're maximizing shareholder
value, you're considering the full long-term path
of cash flows. That's something that many
people in the investment community like
Morningstar focus a lot on: How do we maximize
not only short-term profits but long term?
There's nothing in focusing on the long term that's
inconsistent with the Friedman view.

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