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private capital & the public good

All Things Impact for Feb 24: A "Banana Republic Approach" to Corporate Governance

Brian WalshComment

Hi Friends,

Welcome to All Things Impact, a newsletter of interesting things I've seen from across the spectrum of impact: responsible investing (in the public markets),  impact investing (in the private markets), effective philanthropy, and a wildcard topic. For previous posts, to subscribe, and for more information, please visit All Things Impact.

Here are four links worth your time (plus items of note, job postings, and a calendar of upcoming events):

1. Responsible Investing: A "Banana Republic Approach" to Corporate Governance
I'm young enough to occasionally use Snapchat and old enough to still be confused by it. The app's parent company, Snap, plans an initial public offering (potentially valuing the less-than-six-years-old company at $18.5 billion), though it is gathering a lot of attention for being the first public offering in the US to issue shares with no voting rights at all.

Writing in the Financial Times, John Plender uses Snap's decision as a jumping-off point for perhaps the best article encapsulating the issues surrounding corporate governance (the "G" in "ESG" investing) I have ever read:

"By any standard Snap’s governance arrangements are flawed and its directors minimally accountable. Anne Simpson, a leading governance expert at the California pension fund Calpers, dubs this “a banana republic approach” to corporate governance.

Yet the decision to prevent outside shareholders from exercising control rights over the company is also symptomatic of a deeper problem with modern corporate governance, as are the tiered voting structures that prevail at other tech companies such as Google, Facebook and Alibaba. Modern corporate governance practice sits uncomfortably with the business models employed in the more advanced sectors of the global economy. Taken together with changes in the structure of ownership, this has drastically weakened the accountability of management to shareholders.


The big question...turns on how the spoils of the capitalist system are shared. Today’s governance codes are rooted in a 19th century concept of the corporation, where the shareholder-capitalist is seen as the key stakeholder and risk-taker in the system. The implicit assumption is that the shareholder is entitled to the residual profits and net assets of the company after the claims of labour and all the other creditors have been met.

This view of the limited liability company made sense in the 19th century, when capital was scarce and labour cheap and plentiful....Shareholders could vote at the annual general meeting on issues such as the election of directors, while other stakeholders could not. Whether this is appropriate today when the world is awash with savings and finance capital is abundant — witness low or negative real interest rates in global bond markets — is moot. The real driver of high growth in the economy is increasingly human capital....

Poor management accountability in the tech sector coincides with another weakening of governance arising from changes in the structure of ownership. The number of investors willing or able to monitor, engage and hold management to account is dwindling...the great majority of intermediary investors lack the financial incentive to monitor and engage with managers...

[I]n much of the world the system remains overdependent on a shrinking band of shareholders whose willingness and ability to hold management to account is questionable — or, as in the case of Snap, who are forcibly excluded from any stewardship role."

BloombergView's Matt Levine reacts to this article and picks up this issue:

"Is it bad for a company to have a dual-class share structure that concentrates power in its chief executive officer? Yes, if that CEO makes worse decisions than an empowered group of public shareholders. And no, if the CEO makes better decisions. I suppose it is hard to know in advance, but it is hard to know lots of things in advance, and the whole job of investing is making predictions about what a company will do in the future...

Snap and other tech companies don't represent a governance vacuum. They'll be governed. They just represent a shift in governance: They'll be run by entrepreneurs rather than shareholders, because the bargaining power has shifted in the entrepreneurs' favor, and because the entrepreneurs' contributions to the company are relatively more important than the shareholders'."

2. Impact Investing: #impinv's Woman in Trump's White House
Dennis Price of ImpactAlpha reports:

"Whither social-impact investment in the Trump administration may depend on Dina Powell, the former Goldman Sachs executive who was named, with Ivanka Trump’s help, assistant to the president and senior counselor for economic initiatives....

Powell, according to Politico, has helped stock the guest lists for Ivanka’s dinner parties on women in the workplace and joined the First Daughter in a meeting with Priscilla Chan, co-founder with her husband and Facebook founder Mark Zuckerberg, of the Chan-Zuckerberg Initiative.

At Goldman, the Egyptian-born executive, who also served in the Bush administration, managed the $4 billion impact investing portfolio and the firm’s foundation.

She helped parlay Goldman’s $50 million commitment to 10,000 Women into $600 million from the World Bank, OPIC and others to provide women entrepreneurs in developing countries with education, capital and mentors."

3. Effective Philanthropy: Adapting Philanthropy for the Trump Era

Writing in the Chronicle of Philanthropy, foundation leader Pamela David argues that in the era of Trump, foundations need to change how they operate:

"We have become accustomed in philanthropy to being measured and careful and thoughtful. We have hired brilliant staff and consultants to craft programs and strategies and put them in place. We have gathered evidence that our programs work and jettisoned those that don’t.

But smart as we are, we have not yet broken out of the need to each have our own strategy, our own processes, our own self-imposed silos. Foundations remain risk-averse, and too far removed from the urgency many of our grantees and constituents face or the accountability they deserve...

[T]his new reality requires us to look at our own assumptions and grant-making practices and see what we may have to change to stay relevant and effective...

Here are some steps all of us can take right away:

Create funds dedicated to rapid response.
We need to have money ready to deploy quickly for those on the front lines...If we work smartly and together, our individual contributions for rapid response need not be large. But we cannot subject them to our normal grant-making processes and timing.

Providing general operating funds that allow grantees flexibility gives stretched nonprofits the ability to navigate in this rapidly changing environment. 

Expand investments in nonprofit and community leadership.

We’re now engaged in a long-term struggle for the soul of our country: for democratic practice, for democratic institutions, for diversity, equity, and inclusion. That struggle needs great leaders with the skills and resilience to endure the twists and turns in front of us. They need to connect to each other, build off each other’s strengths, and link issues, movements, and people.

Do more to build the network of progressive communities of faith.

The new landscape demands a conversation about values, about morality, about civic responsibility and accountability to each other. Progressive faith communities are well-positioned to lead that conversation with great credibility and resonance...

We are called by these times to engage in different and new ways, even if it causes us discomfort. Business must be anything but usual going forward."

4. Wildcard: Automation and the Future of Jobs - Be Worried
Writing in BloombergView, economist Tyler Cowen looks to history to raise concerns about our current period of economic transition:

“Why should it be different this time?” That’s the most common response I hear when I raise concerns about automation and the future of jobs, and it’s a pretty simple rejoinder. The Western world managed the shift out of agricultural jobs into industry, and continued to see economic growth. So will not the jobs being displaced now by automation and artificial intelligence lead to new jobs elsewhere in a broadly similar and beneficial manner? Will not the former truck drivers, displaced by self-driving vehicles, find work caring for the elderly or maybe fixing or programming the new modes of transport?

As economics, that may well be correct, but as history it’s missing some central problems. The shift out of agricultural jobs, while eventually a boon for virtually all of humanity, brought significant problems along the way. This time probably won’t be different, and that’s exactly why we should be concerned...

[An economic historian estimates that] English real wages may have fallen about 10 percent from 1770 to 1810...[and] it took 60 to 70 years of transition, after the onset of industrialization, for English workers to see sustained real wage gains at all.

If we imagine the contemporary U.S. experiencing similar wage patterns, most of us would expect political trouble, and hardly anyone would call that a successful transition. Yet that may be the track we are on. Median household income is down since 1999, and by some accounts median male wages were higher in 1969 than today... 

The early to mid-19th century saw the rise of socialist ideologies, largely as a response to economic disruptions... [Karl Marx] failed to see the long-run ability of capitalism to raise living standards significantly, but he understood and vividly described the transition costs and the economic volatility.

Western economies later turned to variants of the social welfare state, but along the way the intellectual currents of the 19th century produced a lot of overreaction in other, more destructive directions...

The shift of jobs away from agriculture also poisoned economic policy...Farms as a share of total employment are quite small (about 2 percent), but farmers as an interest group have not gone away, even hundreds of years after agricultural employment started to decline.

It is possible a similar logic may play out with the jobs that will be rendered obsolete by automation. That is, we may decide to subsidize and protect those jobs for centuries to come, to the detriment of long-run economic growth."

5. Items of Note

6. Job Postings

7. Upcoming Events

March 14-15 Confluence Philanthropy Practitioners Gathering (New Orleans, LA) Impact Investing
March 21-22 Impact Summit Europe (The Hague, Netherlands) Impact Investing
March 23-24 Impact Investing World Forum (London) Impact Investing
March 30 Impact 2 (Paris) Impact Investing
April 4-6 Center for Effective Philanthropy (Boston) Effective Philanthropy
April 7 Wharton Social Impact Conference (Philadelphia) Impact Investing
April 18-20 Conscious Capitalism Conference (Philadelphia) CSR
April 25-26 Impact Capitalism Summit (Chicago) Impact Investing
May 9-10 Shared Value Summit (NYC) CSR
May 10-12 US SIF Annual Conference (Chicago) Impact Investing
May 23-24 CECP Summit (NYC) Effective Philanthropy
May 31 - June 1 Grantmakers for Effective Organizations (Chicago) CSR
Setp 28-29 TBLI Nordic 2017 (Stockholm) Responsible Investing
Oct 10-13 SOCAP17 (SF) Impact Investing
Oct 24-26 BSR Conference (Huntington Beach, CA) CSR

That’s it for this week. Help me spread the word about #AllThingsImpact to your friends and colleagues, who can sign up to receive this newsletter at All Things Impact. Please also send me any job postings, items of note, upcoming events, or compelling links you discover in your own journeys across the web (even things like this bat enjoying some watermelon).

Until next time, thanks for reading!

Brian Walsh
Head of Impact at LiquidnetFull Bio.