Summary notes on IASB meeting on management commentary

From Kris Peach, Australian Accounting Board Chair and CEO:

“2nd meeting of IFRS Management Commentary panel broadly supportive of performance, position and progress proposals.

Key issues discussed included verifiability of information, location of management commentary as part of the financial report, how to reconcile neutrality with ‘through the eyes of management’, importance of understanding purpose and components of alternative earnings measures (similar to performance reporting project proposals), conciseness and linkage.

Some concern about asking for management compensation disclosures only when related to performance measures, given all management compensation impacts performance, and suggested disclosures only tiny piece of performance aspect of the compensation.

Support for asking for forecast disclosures where forecast has been made externally. Some wanted more aspirational recommendation to have forecasts. Discussed need guidance on whats in financial statements & whats in mgt commentary (eg some climate change info should be in financials and some in commentary).

Noted need for more explicit consideration of intangibles in management commentary, particularly if not recognised on balance sheet. Also noted importance of discussing what risks eventuated in current year that were noted in prior years. “

Follows on from first panel, which had discussion on purpose amongst other things which is going to back pack in panel 3. Details on the consulting process on IFRS management commentary here.

The Power of Shareholder Votes: Evidence from Uncontested Director Elections

Abstract: This   paper asks whether dissent   votes in uncontested director   elections have consequences for directors.We  show that,contrary to popular belief based on  prior studies, shareholder votes have power and result in negative consequences for directors. Directors facing dissent  are more likely to depart boards, especially if they are not lead directors or chairs of important committees. Directors  facing dissent who do not leave are moved to less prominent positions on boards. Finally, we find evidence that directors facing  dissent face reduced opportunities in the market for directors.We also find that the effects of dissent votes go beyond those of proxy advisor recommendations.



Comment: This suggests that any amount of dissenting vote is an important signal, not necessarily the win/lose results. To me, this shows that shareholders (especially if you are voting on behalf of others) need to carefully consider how they should vote on directors even if that vote looks certain to pass.



Link to paper here:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2609532


Aggarwal, Reena and Dahiya, Sandeep and Prabhala, Nagpurnanand, The Power of Shareholder Votes: Evidence from Uncontested Director Elections (March 22, 2016). Robert H. Smith School Research Paper No. RHS 2609532; Georgetown McDonough School of Business Research Paper No. 2609532. Available at SSRN: https://ssrn.com/abstract=2609532 or http://dx.doi.org/10.2139/ssrn.2609532


Are Energy Executives Rewarded For Luck?

In an influential paper, Bertrand and Mullainathan (2001) show that energy executives are rewarded for high oil prices, which they term pay-for-luck. Almost twenty years later, performance-based pay as a portion of executive compensation has nearly doubled; total executive compensation has also nearly doubled; and new disclosure laws and tax rules have changed the regulatory landscape. In this paper, we examine whether their results and their interpretation continue to hold in this changing environment. We find that executive compensation at U.S. oil and gas companies is still closely tied to oil prices, indicating that executives continue to be rewarded for luck despite the increased availability of more sophisticated compensation mechanisms. This finding is robust to including time-varying controls for the firms' scale of operations, and it holds not only for total executive compensation but also for several of the separate individuals components of compensation, including bonuses. Moreover, we show there is less pay-for-luck in better-governed companies, and that pay-for-luck is asymmetric – rising with increasing oil prices more than it falls with decreasing oil prices. These patterns are more consistent with rent extraction by executives than with maximizing shareholder value.

Are Energy Executives Rewarded For Luck? Lucas W. DavisCatherine Hausman (2018)

Link to paper here.

Prosperity, Colin Mayer - on the purpose of business

Colin Mayer’s book, Prosperity, examines business purpose and the company structure looking through history arriving at today and arguing that the Milton Friedman doctrine of a company’s only purpose = profit or shareholder value maximisation is misguided and now is causing harm.

The FT’s Martin Wolf in his review “reluctantly agrees” (see link end).

Of note to me:


Mayer directly rejects Friedman (outline arguments below) but doesn’t take a “stakeholder capitalism view” rather argues that maximisation of a company’s purpose is preferred.


Mayer agrees with many other economists that the value of natural capital (the environment to most of us) is highly undervalued under our current models. Mayer also concurs that a concept like GDP is missing much of what humanity should value. (This could be in the form of other “capitals” such as natural, human, intellectual, social etc.)

These two points on (1) environment and (2) inadequacy of GDP are reflected in Tyler Cowan’s Stubborn attachments (blog review and link below).  That two economists can arrive at similar views from very different philosophical and economic viewpoints is a very notable concurrence to me. (The point on environment/climate you can also derive from Nassim Taleb’s work and moral philosphers.)

From Mayer, one might derive the work I’m trying to influence on corporate reporting on intangibles and other currently hard to measure capitals.  

Mayer’s analysis of the “mindful intangible corporation” (the current 6th incarnation of the corporation that he sees) also chimes with much of the observations and work in the Haskel and Westlake book on intangibles (Capitalism without Capital, link below)


I found his analogy to biology less convincing. I thought a social anthropological lens would have been more interesting (but then I am a scientist by training).


It also suggests that perhaps we should look to many more type of corporate form than we have now and that a multitude of types of form would be healthy (the historic record suggests there were many forms before).


Here’s a detailed look at the introduction to his book, that includes his Friedman critique. Check it and the reviews (links end)



“...The corporation is the creator of wealth, the source of employment, the deliverer of new technologies, the provider of our needs, the satisfier of our desires, and the means to our ends. It clothes, feeds, and houses us. It employs us and invests our savings. It is the source of economic prosperity and the growth of nations around the world. At the same time, it is the source of inequality, deprivation, and environmental degradation, and the problems are getting worse. They are getting worse because the corporation is getting bigger to a point where in some cases it is larger than nation states. And as nations find themselves unable to service their debt obligations, they turn to corporations to supply the goods and services that they provided in the past. But is the corporation capable of bearing the responsibilities that are being placed on its shoulders? The evidence is not encouraging.


Over the last few years there has been a steady erosion of trust in business. At first we associated this with just banks and financial institutions after the financial crisis of 2008, but we are increasingly recognizing that it afflicts everything from automobiles to energy, from food to pharmaceuticals. At the same time, technological advances offer greater opportunities today than at any time in the past for business to transform our lives for the better, in everything from automobiles to energy, from food to pharmaceuticals.


How can we ensure that we harness business as a source of societal benefits and avoid its detriments? How do we make it the creator of prosperity of the many not just the few, and of the future not just the past? These are the questions to which this book seeks answers. They are very different from the ones that most business books try to address. Their starting point is not the lofty ambition of this book but the following: ‘there is one and only one social responsibility of business––to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud’ —the Friedman doctrine, so named after its author, Milton Friedman.


While the name of Milton Friedman is closely associated with the economic paradigm of monetarism, his most enduring legacy arguably lies elsewhere. It is more than fifty years since he first presented what has now come to be known as the ‘Friedman doctrine’ in his book Capitalism and Freedom. It has been a powerful concept that has defined business practice and government policies around the world for half a century. It has been the basis of business education that has moulded generations of business leaders. Indeed virtually every MBA course begins from the premise that the purpose of business is to maximize shareholder value, and everything, and the rest of the course, follows from that. It reflects the power of ideas to influence behaviour to a point where many people now believe that the Friedman doctrine is a law of nature from which we are unable to escape.


The message of this book is that the Friedman doctrine is not a law of nature. On the contrary, it is unnatural; nature abhors it, if only because it has been the seed of nature’s destruction. If it ever deserved to have its time, the Friedman doctrine has had it. It is not the business paradigm of the twenty-first century, and as long as we continue to believe it to be so, the greater will be the damage it inflicts on our societies, the natural environment, and ourselves. Few social science theories are both so significant and misconceived as to threaten our existence but that is precisely what the Friedman doctrine is doing in the twenty-first century.



Milton Friedman provides an explanation for his views: ‘A major complaint made frequently against modern business is that it involves the separation of ownership and control––that the corporation has become a social institution that is a law unto itself, with irresponsible executives who do not serve the interests of their stockholders. This charge is not true. But the direction in which policy is now moving… is a step in the direction of creating a true divorce between ownership and control and of undermining the basic nature and character of our society. It is a step away from an individualistic society and toward the corporate state.’ In other words, corporations are the instruments of individuals, their shareholders, and ‘“ business” as such cannot have responsibilities… only people can have responsibilities.’


And the responsibilities of those running business are clear. ‘In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.’  


This is unequivocal—the purpose of business is exclusively to make money for the owners of the business, while sticking to the letter of the law and the spirit of social conventions. The executives are the owners’ hired hands who have no right to deflect from furthering their owners’ interests for one moment. Executives’ own preferences and interests are irrelevant and must be subsumed to the greater good of their owners. This is simple, clear, and uncompromising. It derives from what is described as ‘a property view’ of the firm—shareholders are owners of the firm in the same way as they possess a home or a washing machine. They have purchased it and in the process acquired the right to require it to act in their own interest and to direct it to do so.


An Alternative In fact, the analogy with home or washing-machine ownership is a poor one. It does not work for the simple reason that in the case of the home or washing machine, you and you alone are affected by what you do with them, provided of course that in the process of using them you do not harm or inconvenience others. That is clearly not the case with a business. It does not even apply to small local firms. A decision of the grocery at the end of my street to shut up shop can deeply affect my well-being. This takes on multiple orders of greater significance in relation to whether General Electric (GE) decides to shut up shop. GE’s actions affect not just its shareholders but also its millions of customers, employees, and local communities around the world. The assets of the firm have been accumulated on the back of the investments of virtually every segment of society—employees, suppliers, communities, nations, and nature—on the basis of extensive privileges and protections deriving from incorporation and limited liability.

Shareholders do not and should not have rights to do with their companies what they please, even while staying within the law and social norms. They have roles and responsibilities as well as rights and rewards deriving from their dependence on and obligations to the societies in which they operate. Equally customers, employees, and communities do not ‘own’ cooperatives, mutuals, or public enterprises any more than shareholders own companies. Their responsibilities are as great and rights as restricted as those of shareholders. Instead, the corporation should be recognized for what it is—a rich mosaic of different purposes and values. It exists to do what it sets out to do, to fulfil its purpose—its rationale for its existence. Everyone else—shareholders, executives, employees, and suppliers—are there to help it do that.

The corporation is an employer, investor, consumer, producer, and supplier all rolled into one. It uses capital, labour, land, materials, and nature in varying proportions to produce a dazzling array of things that clothe, feed, house, entertain, and finally bury us. In other words it is a user of a range of inputs to produce an even greater number of outputs. The corporation is an extraordinary institution and we should recognize its potential to create remarkable benefits. It can contract and be contracted, employ and be employed, and sue and be sued—just like us. But it can achieve much more than we are capable of as individuals. It can provide degrees of commitment to which we can only aspire, and in the process it can overcome the deficiencies and failures to which we are prone. It can do this on account of the separation of ownership and control—the very thing that Friedman saw as a deficiency of the corporation is an attribute allowing it to balance the degree of commitment it offers to different parties with the control that it exercises over them. So not only does the corporation have the potential to determine an almost boundless set of purposes and objectives but, through its ownership and governance, it also has the means to ensure that it delivers on them. It is a vehicle for committing to the fulfilment of its stated purposes, and once freed from the shackles of particular interest groups, be they shareholders, employees, or governments, the corporation is capable of delivering substantial benefits to its customers and communities.

This repositioning of corporations, capitalism, and control has as fundamental implications for business, economics, and public policy as the Copernican Revolution had for astronomy. Corporations, business, and public policy do not and should not revolve around their shareholders any more than the planets revolve around the earth. There is a multiplicity of corporate systems with their own foci, and just as the planetary system is the richer for this diversity, so too is our world for the corporate diversity that it has created. In particular, this repositioning of corporations, their capital, and control has implications for the way in which businesses are owned, governed, and run, how academia analyses and models them, and how governments formulate economic and business policies towards them. It is central to the successful performance of business, to the competitive advantage of nations, and to the achievement of the goals of government. It determines not only economic efficiency but also the distribution of income and wealth, and it lies at the heart of growing disparities in developed economies.

….

Why do companies exist? The question is so fundamental that it is barely ever asked or, when it is, the Friedman Doctrine is cited as the answer: to make money for shareholders. That is how virtually every business school course begins. The purpose of business is to make money for shareholders and everything—accounting, finance, marketing, operations management, and strategy—follows from that. In fact, the answer is much more straightforward—the reason why companies exist is to fulfil their purpose. That is self-evident because the definition of purpose is the reason that something is created, exists, and is done, and what it aspires to become. So the purpose of the corporation is its reason for existing. Tautological though this may seem, it is actually of fundamental significance. It establishes purpose as an ultimate goal, not an intermediary objective in the attainment of something else. Our purpose is our purpose. Corporations exist to fulfil their purposes. We do not pursue purpose just to achieve happiness, and they do not pursue purpose solely to promote profits. On the contrary, our happiness and their profits may both be inputs into the achievement of both of our purposes, not vice versa.

The importance of this stems from the fact that while the significance of purpose in the promotion of corporate success is increasingly being recognized, it is in the context of creating success as conventionally defined—namely profits. So long as purpose contributes to greater profits, it is unequivocally desirable—‘ win–win’, to use the oft-repeated phrase of losers. ‘Doing well by doing good’ describes the process of making money (doing well) through benefiting others (doing good).

Who could possibly quarrel with that? In fact, there are at least two reasons for objecting to it. First, it constrains company purposes to doing good, when in fact many at best do not purport to save the world and at worst positively damage it, and in most cases do a mixture of the two. Car companies allow us to travel comfortably (good), but pollute the environment and kill us (bad). Confectionary companies feed us and give us pleasure (good), but make us fat and cause diabetes (bad). Teaching in Oxford University, I am instructing young and bright minds (good), but also advancing a privileged and exclusive elite (bad). Second, if purpose is constrained to enhancing corporate profits, it is just another input or hidden ingredient in the promotion of the Friedman Doctrine. This prevents purposes that diminish profits from being pursued and it requires those that are no longer enhancing profits to be discarded. In other words purpose is not intrinsic in its own right but instrumental in the attainment of profit. It thereby lacks authenticity and justifiably should be regarded cynically by those dependent on it as self-rather than selflessly interested. Companies are not charities; they need to be able to finance their functions but they do not function to fund their financiers either. ‘Doing well by doing good’ is a dangerous concept because it suggests that philanthropy is only valuable where it is profitable, and it converts charity into profit-generating entities in the way in which we have transformed utilities and other public services into shareholder-value-maximizing organizations. We have turned our models of businesses on their heads and lost sight of what they and we are trying to do. We are all here to fulfil our purposes, not necessarily as a means to either a greater or a richer end. We should not moralize our goodness or maximize our greediness but instead recognize our humanness and humaneness. Put simply, the traditional view that the structure of companies drives their conduct, which in turn determines their performance as measured by their profits and share prices, is wrong. It is the purposes of companies that determine both their structure and conduct which in turn determine their performance measured in relation to their purposes. It is only once one has defined a company’s purposes that one can ascertain either its appropriate structure and conduct or its performance. Until one knows what the corporation set out to do, one has nothing to say about how well it has done.

Is it practical? Can businesses survive in a world of intense and intensifying competition? Will they be able to earn a sufficient return on capital in the brutal product, labour, and financial markets in which they compete if they do not prioritize profits and shareholder interests above all else? There is one answer to all three questions: yes. If they focus on their purposes, companies are more likely to succeed in achieving them than if they do not. It is a failure to prioritize purpose that is the source of their failure to flourish financially and fundamentally. There is nothing to stop companies emphasizing shareholder interests where it contributes to the fulfilment of their purposes, and the book will describe the circumstances and types of companies to which this applies, but there is nothing to suggest that it always does.

On the contrary, a persistent preoccupation with shareholder interests is a serious constraint and divergence from the business of business. This is of relevance not only to business but also to academia and government. It means that twenty years of research on the relation between purpose and performance has focused on the wrong outcome (‘ dependent variable’ to use the econometrician’s terminology). The measure of performance that has been used to date has been financial performance, for example the stock-market value of a company. This presumes that the purpose is to maximize financial returns. If instead the purpose of the company is its objective then it is its success in the achievement of that purpose which is its measure of its performance. A successful company is one that delivers on its purpose and in the process may or may not make much money and therefore may be more or less profitable than others. The significance of this conception of the firm for government is that it too like a corporation has a purpose, to promote the public interest and to provide the goods and services that society needs. Private corporations are part of the attainment of that public purpose, and government establishes laws, regulations, taxation, and partnerships that align the private purposes of companies with the public well-being of societies. Through law it enables corporations to promote their private purposes, through regulation it restricts them, through taxation it incentivizes them, and through partnerships and public ownership it participates in them. It is therefore neither indifferent to nor presumptive about the validity and value of different corporate purposes but instead guides the corporate sector to the attainment of the greater good.

This concept is very different from the conventional one that on one side sees governments, lawmakers, and regulators setting the boundaries—the ‘rules of the game’—within which, on the other side, companies play hard and fast in the pursuit of their profit-led financial interests. It is a simple, clear framework within which everyone knows what is expected and permitted of them. The conventional view is powerful not only because it offers a laser-sharp view of the purpose of business but also because it precisely defines the role of other parties as well. Governments, regulators, and the judiciary set the rules of the game; business plays by them and makes profits. Other institutions, such as charities, religious and non-governmental organizations (NGOs), and civil society provide charity, and moral and social guidance. Economics adds a combination of contracts and competitive markets that together convert the self-interested pursuit of profits into the social benefits of the invisible hand. The world is neatly compartmentalized; confusion and obfuscation are avoided. It is analytically elegant and practically powerful. And nearly all policy in the post-WW2 period has been directed towards enhancing it: competition policy, monopoly regulation, investor protection, corporate governance, and corporate law all take this as their fundamental premise. After more than fifty years since the Friedman doctrine first appeared, we should therefore be nearing a state of nirvana. Instead, on the contrary, trust in business, government, and regulation has never been lower. The vision of the firm, law, and government in this book is the antithesis of this conventional view. It is cooperative not confrontational, permissive not restrictive, realistic not idealistic. It recognizes that the current paradigm does not work, has failed society, has undermined business and is not how any business, government, or regulation function or succeed in practice.

The problem with the Friedman view is that it is hopelessly naïve. It is based on a conception of the world that produces simple elegant economic models that simply do not hold in practice. It fails to understand what motivates people, what makes for good business, and what regulation is capable of achieving. I say this not as an anthropologist or sociologist but as an economist––and a financial economist at that––who has spent his academic career working on and producing such models. But I also speak as someone who has created and worked in business, government, law, and regulation and seen what motivates people at the bottom and top of organizations, and how law and regulation operate in practice. And the answer is that it most certainly is not the Friedman view of the world or its attendant global economic consensus. Of course money and profits are important. But they are not the main motivator of people or the primary source of success of companies. Of course regulation and laws are needed but stop believing that they can constrain anything or anyone who is given a sufficiently strong incentive to violate them. Where the current view of business and economics goes wrong is in suggesting that more profits (or increasing profits as Friedman put it) are better. This leads automatically to the economic statement that the function of business is to maximize profits subject to the constraint of regulation. It is this that has promoted the emergence of financial markets, takeover markets, financial institutions, and hedge-fund activists that seek more and more profits to a point that, unless directors of companies devote every waking (or preferably delete ‘waking’) hour of the day to producing them then their jobs and futures are at stake. And it is this that leads to ever more stringent regulation to restrain them from doing that and to ameliorate its disastrous consequences. This simply does not work, has never worked, and will never work. And everyone—business leaders, institutional investors, regulators, governments, and law enforcers––knows it but no one knows what to do about it and many are highly conflicted in benefiting immensely from maintenance of it and the pretence that everything is just fine.

Profit is not a purpose any more than the pursuit of happiness is a purpose of mankind. Indeed profit maximization is as unlikely to create wealth as hedonism is to achieve happiness. Profits and happiness are the products of a successful commercial venture and a fulfilling life, and the outcome of the attainment of success and fulfilment. That confusion between purpose and product is a natural consequence of an economic paradigm in which companies and individuals trade goods and services at given prices and the invisible hand guides them in the direction of attaining their goals of value and utility maximization. But in a world of creation rather than consumption where companies and individuals are innovating not just implementing then this mechanistic view of institutions and individuals as automatons guided by unobservable forces cannot apply. Elegant and precise paradigms of economics descend into a babble of amateur biology and psychology, captured by such concepts as ‘animal spirits’ and ‘creative destruction’, when confronted with matters of innovation. Once economics strays from the confines of markets and contracts then it has little to say about processes that involve the creation of products and processes, which previously had not even been contemplated. Innovation and invention involve the binding together of many different types of capital in a way in which financial capital on its own cannot capture. For one thing, financial capital is a small component of the total capital of the world.

According to the 2014 UNESCO Inclusive Wealth Report, 5 just 32 per cent of the world’s wealth is attributable to produced capital. Fifty-five per cent of it is accountable by human capital and 13 per cent by natural capital. At the very least then focusing on financial capital misses a vast segment of the world’s capital. But there is a more fundamental reason why the traditional concept of the corporation, capital, and control are wrong. It cannot capture how the world evolves. Placing financial capital at the epicentre of business and economic systems is to elevate it to a position of importance that it cannot possibly command in the innovations that drive radical change. It is not just the mind of the financier that lies behind the most important innovations and inventions that have occurred, and it is not the pursuit of money alone that drives the minds of those who innovate and invent. To put financial capital at the heart of capitalism is to make the heart of man the master of his mind rather than just one of a complex system of interacting organs. Once one understands the failure of business studies and economics to explain adaptation and change then their broader deficiencies in relation to economic performance, distribution of income and wealth, and social well-being become evident. In particular, the intensifying tensions that have emerged in economies and societies around the world and the cynicism that pervades popular perceptions of business and politics are inevitable consequences. They reflect a failure to appreciate that the motivation of man is not, as traditional economics would lead us to believe, the pursuit of happiness or utility but the creation and building of worthwhile endeavours. As a holocaust survivor of Auschwitz and someone who lost his family in concentration camps, Victor Frankl drew on the extremity of human suffering and man’s inhumanity to man to identify the source of man’s humanity. It is in such extreme circumstances that the importance of Frankl’s phrase, ‘It is not what you expect of life but what life expects of you’, becomes clear. What the holocaust demonstrated to him was the significance of hope and love in circumstances where there appeared to be no hope: the one tree that the dying woman saw as symbolizing eternity of life; the fact that there was someone somewhere to whom everybody’s thoughts could go; the realization that there was an incomplete piece of scholarship and unresolved scientific enquiry. This explained what every human, animal, and insect seeks to achieve—some contribution, some project, something that will allow them to have left a lasting legacy however small in the world from which they can then depart in contentment. Frankl observed that it was those who lost sight of this, who felt no purpose or reason to go on living, for whom there was real misery in conditions of misery. For the others they rode above this as ‘angels lost in perpetual contemplation of an infinite glory’. In reversing the question from what should one expect of life to what should life expect of us, Victor Frankl identifies what one should be looking to achieve. It is not simply pleasure but the pleasure one derives from a fulfilling existence and the contribution that one makes to a bigger endeavour. To see one’s existence within oneself is therefore destined to fail because it has no meaning. To see one’s existence within the context of the communities of which one is a part and the attainment of a common goal is the source of happiness. Economics errs in drawing an incomplete set of prescriptions of what enhances people’s well-being. It focuses on individualism when the purpose of life derives from community. It suggests that the purpose of work is to earn and survive when it is also to participate and contribute. It suggests that consumption is desirable when production is sought. It suggests that the accumulation of wealth is a primary objective when its production and disposal are of greater significance. We derive well-being from a sense of purpose, achievement, and contribution not just profit, income, and consumption. We seek to fulfil larger goals and the importance of the corporation is in its ability to assist us in this. We once constructed temples, pyramids, and shrines to satisfy the gods, but we now make washing machines, cell phones, and movies that contribute to our material more than our spiritual well-being. This is not a theory of socialism, or mutualism, or stakeholder capitalism. It is not about the sharing of benefits to different parties in organizations. It is not about the adoption of religious principles or moral dogma. It is about creation, development, and innovation—how we as individuals and societies can together build a better world for the benefit of all both today and in the future—and the purpose of business as producing profitable solutions to problems of people and planet. We all want to contribute to that endeavour, and the corporation is a vital component in our ability to do so…”

Link to book here:

https://amzn.to/2RtIx6L


Martin Wolf on his review:

https://www.ft.com/content/786144bc-fc93-11e8-ac00-57a2a826423e


Capitalism without Capital

https://www.thendobetter.com/investing/2017/11/14/the-rise-of-intangibles-capitalism-without-capital


On Tyler Cowan’s Stubborn Attachments

https://www.thendobetter.com/investing/2018/11/21/tyler-cowen-vision-of-free-prosperous-and-responsible-individuals


Impact Investing papers on return, healthcare over 200 years

Two short papers for ESG/IMpact and one for healthcare specialists

 Impact funds earn 4.7% lower IRRs compared to traditional VC funds (Barber et al, 2015, update 2018)

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705556

“We document that investors derive nonpecuniary utility from investing in dual-objective venture/growth equity funds, thus sacrificing financial returns. In reduced form, impact funds earn 4.7% lower IRRs compared to traditional VC funds. Likewise, random utility/willingness-to-pay (WTP) models of investment choice indicate investors accept 3.4% lower IRRs for impact funds. We rule out alternative interpretations of risk, liquidity, and naiveté. Development organizations, banks, public pensions, Europeans, and UNPRI signatories have high WTP; endowments and private pensions have none. ..”

But also see -  https://hbr.org/2019/01/calculating-the-value-of-impact-investing

“…Over the past two years the organizations we work for—the Rise Fund, a $2 billion impact-investing fund managed by TPG Growth, and the Bridgespan Group, a global socialimpact advisory firm—have attempted to bring the rigor of financial performance measurement to the assessment of social and environmental impact. Through trial and error, and in collaboration with experts who have been working for years in the field, the partnership between Rise and Bridgespan has produced a methodology to estimate—before any money is committed—the financial value of the social and environmental good that is likely to result from each dollar invested. Thus social-impact investors, whether corporations or institutions, can evaluate the projected return on an opportunity. We call our new metric the impact multiple of money (IMM)….” Note, TPG are actively promoting their fund - serious investors, but expect them to be arguing this case.

One confounding problem on IRR, returns is that the idea of the risk taken to achieve those returns is difficult to assess - one could argue practially impossible - and thus risk-adjusted comparisons which would better will never be known and thus this question not ever fully answered.

*

Two Hundred Years of Health and Medical Care: The Importance of Medical Care for Life Expectancy Gains (Catillon, 2018)

https://www.nber.org/papers/w25330

H/T Tyler Cowen, is a long reaching look at how medical care has impacted life expectancy (or not) over 200 years of data in the state of Mass, US.

“Using two hundred years of national and Massachusetts data on medical care and health, we examine how central medical care is to life expectancy gains. While common theories about medical care cost growth stress growing demand, our analysis highlights the importance of supply side factors, including the major public investments in research, workforce training and hospital construction that fueled a surge in spending over the 1955-1975 span. There is a stronger case that personal medicine affected health in the second half of the twentieth century than in the preceding 150 years. Finally, we consider whether medical care productivity decreases over time, and find that spending increased faster than life expectancy, although the ratio stabilized in the past two decades. “