Morningstar Magazine - April/May 2018 - 13

Is Greed Good? We put
Larry Fink's corporategovernance comments
to the test.

IVORY TOWERS

John Rekenthaler

In 1987's Wall Street, Gordon Gekko proclaims,
"Greed, for lack of a better word, is good."
(As with many movie quotes, the public edited
the original, so that the most famous line
in Michael Douglas' career is now commonly
remembered, incorrectly, as being "Greed is good."
Score one for the wisdom of the crowd-the
revision is cleaner, simpler, stronger.)
The film was fiction, but the sentiment was not.
Bruised by stagflation from the previous
decade, and by the belief that American corporate
dominance was fading, several influential
parties in the 1980s-Wall Street stock analysts,
fund managers, and business-school professors-
urged corporate CEOs to reform. No longer
should CEOs have multiple goals. Ultimately, their
task was to please but one party: the shareholders.
In Praise of Avarice

In other words, greed became good. By the
new ethos, the stock market's heroes were those
CEOs who worked tirelessly to increase their
companies' share prices. They weren't primarily
motivated by duty or community spirit. Instead,
they were driven by financial desire. Their
motivation was beside the point, however. What
mattered were the blessings that came from
their actions. The new breed of CEOs transformed
fat, inefficient firms into lean machines.
This tough-minded approach, went the argument,
was for the best. To be sure, those workers who
were axed so that companies could demonstrate
their commitment to "cost controls" tended
to view the matter differently, but the needs of the

many must outweigh those of the few. Said
Al Dunlap when running Scott Paper, "It doesn't
make any sense to sacrifice 100% of the
people at this company to save 30% of the people
we have to let go."
Often, the argument was framed in moral
terms. The best CEOs, as Wall Street defined them,
weren't heroes solely because they made
money for stock owners (and of course, for
themselves). They were heroes because they made
America better. In contrast, do-gooder CEOs
who hesitated to make the hard decisions killed
through their kindness. Nice guys finished
last-and so, ultimately, did those who worked
for them.
(Nobody played the moral card more
enthusiastically than Dunlap, who titled his book
How I Save Bad Companies and Make Good
Companies Great, and who said upon joining Scott
that, under previous management, company
shareholders "would have been abused less if they
had been captured by terrorists." He lost
something of his ethical high ground, however,
after committing accounting fraud at his
next stop, Sunbeam, which led to a 99% stockprice decline and a Chapter 11 filing.)
The Counterstrike
BlackRock BLK CEO Larry Fink recently

attacked the prevailing model. Fink is scarcely the
first to dissent, of course. Many prominent
CEOs, including GE's Jack Welch, have complained
that the pendulum swung too far. However, Fink's
comments carry more weight, because this
particular corporate boss oversees the world's
largest money manager. No organization has more
power over CEOs than does BlackRock.
So, when Larry Fink speaks, CEOs listen.
My guess is many are receptive to the message.
Much of the appeal of the film Wall Street
lay in its sense of time and place. It felt so very
1987, and so very American. Which it was.
The rest of the world, by and large, did not accept
the "cult" of shareholder value (to use Welch's
phrase). It advocated that CEOs satisfy a
broader range of constituents. As foreign sales
currently account for more than 40% of

S&P 500 revenue, the CEOs of large U.S. firms have
become accustomed to hearing arguments that
are similar to BlackRock's.

Indeed, Fink's comments would seem fully aligned
with, for example, German corporate governance,
which has traditionally scored CEOs on their
ability to satisfy multiple constituents, as opposed
to the single group of shareholders:
"We...see many governments failing to prepare
for the future, on issues ranging from retirement
and infrastructure to automation and worker
training. As a result, society increasingly is turning
to the private sector and asking that companies
respond to broader societal challenge. ... Society
is demanding that companies, both public
and private, serve a social purpose. To prosper over
time, every company must not only deliver
financial performance, but also show how it makes
a positive contribution to society. Companies
must benefit all of their stakeholders, including
shareholders, employees, customers,
and the communities in which they operate."
The red italics are mine. They illustrate the heart of
the issue-should CEOs be graded solely for
their ability to increase shareholder value, or for
how they fare across an entire curriculum?
Putting Theory into Practice

The former task is straightforward. Measure
the price of a stock when the CEO takes control,
measure its price at future dates, and judge
performance according to simple rules (generally
based on benchmark comparisons). The
latter is more complicated. Employee- and
customer-satisfaction surveys leave off as much
as they contain (if Amazon.com AMZN did
not exist, no customer-satisfaction survey would
indicate how other companies were failing at
meeting a need that consumers didn't realize they
had), and gauging whether a company benefits
its community is more difficult yet.
If BlackRock knows how it will be scoring CEOs,
it is not tipping its hand. Its published comments
are vague, leading one to suspect that Fink's
statement is aspirational rather than a reflection
of how BlackRock now operates. (The company's
published statements about its proxy voting

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Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018

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Morningstar Magazine - April/May 2018 - Contents
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