Morningstar Magazine - April/May 2018 - 14

Dispatches

EXHIBIT 1

emphasize customary, noncontroversial
topics, such as board structure, compensation
policies, and so forth. Aside from some
general language about environmental and social
issues, the company's official comments
don't openly conflict with the notion of maximizing
shareholder value.)
Not So Fast

Fink's contention that corporate managements
should attempt more than maximizing
shareholder value was not universally acclaimed.
Many people like the American system just
as it is, thanks much.
One accusation was that Fink made a bull-market
argument. It is easy to talk about how there
is more to life than profits when the table legs are
buckling from the weight of the feast. It is not
so easy if the cupboard is bare.
Wrote Joe Cahill, "Big-time investors and
globe-trotting chief executives gladly
extol social values when profits are surging and
stock markets are hitting all-time highs.
When earnings shrink and share prices descend,
expect them to recall what [Milton]
Friedman said about a company's one and
only social responsibility."1
Hmmm. Revolutions generally arise from
failure, not success. For example, the
primacy of shareholder value arose from its own
set of ashes. From 1966 through 1982, the
S&P 500 made no real gains; its after-inflation
return for that 14-year period was zero.
By the mid-1980s, shareholders were ready for
change. Bring on shareholder value; make
CEOs accountable for nothing but those longawaited stock market profits.
Also, the 1990s "new era" bull market was as long
and strong as today's, yet it did not lead to
extensive corporate-governance discussions. What
has changed is the ascendance of indexing.
Passive investors hold their companies forever.
Naturally, they have a different perspective

on corporate governance than will active
managers, who can vote with their feet by selling
shares. That seems to me the driver of
Fink's comments, not the length of the current
bull market.
Barnum and Fink

A harsher attack on Fink came from The Wall
Street Journal's "Stocks Weren't Made for Social
Climbing," penned by hedge fund manager
Andy Kessler. Hedge fund managers are not known
for understatement, and Kessler proved
no exception. "P.T. Barnum supposedly said there
is a sucker born every minute," he scoffed.
"The basic idea [of Fink's proposal] is to throw
money away."2
Not so, Mr. Kessler. The idea of Fink's proposal
is for companies to make more money. The
logic is that by considering a broader set of
objectives than (say) raising their stock price for
the next three years, corporations will aid the
economy. That would increase long-term demand
for their products and services, and thus
bolster their stock prices. The rationale is, ironically,
a cousin of the trickle-down theory that
Kessler surely embraces: If you want to float all
boats, then do your best to raise the tide.
This disagreement cannot be resolved theoretically.
Implicitly, Kessler's argument assumes that
Adam Smith's "invisible hand," which leads to
optimal results when a group of people
make rational, self-interested decisions,
is an absolute rule. But the invisible hand is just
a general precept: Many times it holds, but
sometimes it does not. In writing his article,
Kessler presumes too much. He states as a fact
that which he needs to demonstrate.
Then again, so does Fink. He contends that
conditions have changed; that government policies
are no longer sufficient to address key social
needs; that corporations need to fill the gaps; and
that in doing so, companies will end up being
more profitable, with higher stock prices,
than they would be if they continue their current

1 Cahill, J. 2018. "What Should a Corporation Value Above All Else?" Crain's Chicago Business, Jan. 19.
2 Kessler, A. 2018. "Stocks Weren't Made for Social Climbing." The Wall Street Journal, Jan. 21.

Morningstar April/May 2018

The U.S. Was the Best of the Biggest
Average annualized real returns (local currency)
1987-2016

United States

7.19

Germany

5.73

United Kingdom

5.34

France

5.28

Japan

1.10
0%

Source: Morningstar Direct, MSCI, World Bank.

EXHIBIT 2

But Middling Among the Mid-Majors
Average annualized real returns (local currency)
1987-2016

Denmark

9.70

Sweden

8.60

Hong Kong

7.71

United States

7.19

Netherlands

6.92

Switzerland

6.18
0%

Source: Morningstar Direct, MSCI, World Bank.

practices. All assertions requiring support that
is not given.
The Numbers

This discussion on corporate governance is
thus a political debate and lies outside the scope
of this column. We can, however, take a
cursory look at the investment evidence. I have
assembled the after-inflation returns for several
stock markets for the 30-year period of 1987-2016.
(The performances were calculated in local
currencies.) In distinguishing itself by being the
strongest practitioner of the doctrine of

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