Morningstar - Q1 2021 - 58

Investors

The following is a transcript of the debate, which
was conducted on Zoom and featured during
our internal company meeting in October.
The discussion was edited for length and clarity.
Haywood Kelly: Each of you will have two minutes
to make your opening remarks. Then, I'll ask
questions of each team, and each team will ask the
opposing team a question they have devised
ahead of time. Finally, debaters will have one minute
for closing remarks. Nizar, why don't you kick us
off for Team Agree?

in a small community to devote resources
to providing amenities to that community or to
improving its government. "
We argue that there appears to be a false
dichotomy present and that the achievement of
social responsibilities and corporate profit
responsibilities are not actually mutually exclusive
in present-day economics. Friedman rightfully
also recognizes that the situation of the individual
proprietor is somewhat different, and he
explains that should a sole proprietor reduce

ESG strategies target the relevant

risks and opportunities that aren't discernible
from earnings reports.
Alyssa Stankiewicz

Nizar Tarhuni: Milton Friedman advocates
that the sole responsibility of a corporate executive
is to act in the best interest of her employers,
which generally will be to maximize shareholder
value. However, there appears to be a common
misperception that these efforts leave no
room for social responsibilities to be considered
in the mind of the corporate executive. While
we do believe that pure social responsibility should
not be the primary focus of an executive to
the extent that it reduces shareholder value, we
live in an expanded business climate where
executing on social initiatives can serve as key
growth strategies that can indeed ensure higher
returns to shareholders and corporations.

In fact, Friedman does provide multiple examples
of this in his initial doctrine. Specifically, and
I quote, " It may well be in the long-run interest
of a corporation that is a major employer

returns in order to exercise a social
responsibility, he's spending his own money
and not someone else's.
Yet today, the ownership of many companies,
both public and private, includes significantly more
layers than in the time that this doctrine was
written. Fund structures, both those that invest
in public and private securities, are backed
by diverse investor groups that are investing on
behalf of municipalities, colleges and universities,
endowments, blue-collar pension systems,
and teacher and public-servant retirement
schemes, as well as many charitable foundations
looking to grow wealth in order to benefit their
various social activities.
As a result, in today's environment, the social good
is more baked into the fabric of corporations
than may have been the case through the mid-20th

century. Today, a plethora of shareholders
leverage their investments to directly fund their
public or nonprofit activities. We argue that
corporate activities on maximizing profit actually
help the social good.

Driving Innovation
Kelly: Next, we'll turn to Alyssa on Team Disagree.

Alyssa Stankiewicz: I'd like to argue that
Friedman's remarks aren't really relevant to what
sustainable investing and stakeholder
capitalism are about today. And in a few minutes,
you'll hear my colleague question whether
they were ever relevant. There are three main
reasons for my position.

First, what Friedman and his supporters usually
argue against is more appropriately termed
values-based investing. These are the strategies
that screen out sin stocks, such as pharmaceutical
companies that manufacture birth control,
regardless of the impact on investment performance. But what we see today is that sustainable
investing has evolved far beyond that to
focus on the combined interests of shareholders
and stakeholders.
Second, ESG strategies target the relevant
risks and opportunities that aren't discernible from
earnings reports. That's why you're hearing so
much about financial materiality. As Khan,
Serafeim, and Yoon wrote in a 2015 paper from
Harvard,3 the research shows that " firms
with good performance on material sustainability
issues significantly outperformed firms with
poor performance on these issues, suggesting
that investments in sustainability issues are
shareholder-value enhancing. "
To reiterate, investments in sustainability issues
are shareholder-value enhancing. Engaging
stakeholders and minimizing externalities is not
about feeling good. It's simply good business.
Third, bringing it back to Friedman, there's
no concrete proof that prioritizing stakeholders,

3 Khan, M.N., Serafeim, G., & Yoon, A. 2015. " Corporate Sustainability: First Evidence on Materiality. " Harvard Business School Working Paper, No. 15-073, March.

Morningstar Q1 2021

Morningstar - Q1 2021

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