WEBVTT - How Corporations Can Do Good for All

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<v Speaker 1>You're listening to Bloomberg Business Week with Carol Messer and

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<v Speaker 1>Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. Well. Bloomberg

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<v Speaker 1>story earlier this year found that corporate values do have

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<v Speaker 1>a market price, specifically noting some studies suggesting that investors

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<v Speaker 1>punish the valuations of companies that either breach their corporate

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<v Speaker 1>responsibilities or over promised on their greenness. So with a

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<v Speaker 1>historical view on companies and how they pursue profits and purpose,

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<v Speaker 1>let's get to it with William Magnuson. He is associate

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<v Speaker 1>professor at Texas A and M Law School. His new

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<v Speaker 1>book for Profit, A History of Corporations. He's also taught

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<v Speaker 1>at Harvard. He is also the author of Blockchain Democracy,

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<v Speaker 1>and he joins his via zoom from Austin, Texas. Professor Magnuson,

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<v Speaker 1>nice to have you here with Paul Sweeney and myself.

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<v Speaker 1>So tell us about this book. What was your thesis

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<v Speaker 1>going into it? Well, thank you so much for having

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<v Speaker 1>me on. When I first started writing this book, I

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<v Speaker 1>really didn't have a thesis. My idea was I wanted

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<v Speaker 1>to explain where this institution, this economic institution that affects

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<v Speaker 1>all of our lives in so many ways, where it

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<v Speaker 1>came from and why we created it in the first place.

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<v Speaker 1>And so I started with ancient Rome. I began looking

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<v Speaker 1>at where corporations first arose. And the first economic institution

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<v Speaker 1>that really starts looking like a modern corporation was ancient

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<v Speaker 1>Rome Or. They had something called Associetatis publican norm, and

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<v Speaker 1>I then explored it through the chapters, how they evolved

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<v Speaker 1>over time, from ancient Rome through the Medici Bank through

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<v Speaker 1>the East India Company, and I spotlighted these important points,

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<v Speaker 1>these turning points in history when the corporation truly changed

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<v Speaker 1>and until until it eventually evolved into the institution that

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<v Speaker 1>we know of it as today. Professor in business school,

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<v Speaker 1>I learned that it was the role of the corporation

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<v Speaker 1>to maximize profits for shareholders full stop. Now that seems

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<v Speaker 1>to be evolving to maybe something broader, maybe maximize the

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<v Speaker 1>good of the common stakeholders, maybe the common good. That's

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<v Speaker 1>how do you see that playing out? Is that really

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<v Speaker 1>being embraced across corporate America? That's right? And I think

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<v Speaker 1>that is corporate law one oh one right. Corporate law

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<v Speaker 1>one on one tells you the purpose of a corporation indeed,

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<v Speaker 1>the duty of a corporation is to maximize profits. That said,

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<v Speaker 1>that is a relatively recent development. Right before the twentieth century,

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<v Speaker 1>no one would have ever told you that the sole purpose,

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<v Speaker 1>the only thing a corporation was supposed to be thinking about,

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<v Speaker 1>was profits for shareholders, right and Eliza elizabethan England. When

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<v Speaker 1>the East India Company was first formed, it didn't promote

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<v Speaker 1>itself by saying, We're going to enrich this small group

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<v Speaker 1>of merchants in London. No I told Queen Elizabeth that

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<v Speaker 1>it was going to expand the trade, the international trade

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<v Speaker 1>of England. When the Medicie Bank was formed in Florence,

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<v Speaker 1>it didn't say, well, I'm going to enrich this small

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<v Speaker 1>medici family. It said we're going to contribute to the

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<v Speaker 1>flourishing of Florence. It did lead, indeed to the enrichment

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<v Speaker 1>of that city. And so I think that that the

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<v Speaker 1>idea that corporations are solely supposed to pursue profit is

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<v Speaker 1>a relatively recent development. Part of it has been driven

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<v Speaker 1>by developments in the law. Right, So, developments in the law.

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<v Speaker 1>In the last uh century and a half or so,

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<v Speaker 1>corporations have gone from institutions that had to be formed

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<v Speaker 1>by the monarch or the government and you had to

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<v Speaker 1>petition it for a charter. So now it is very simple.

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<v Speaker 1>Anybody could form a corporation. I could form a corporation

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<v Speaker 1>the next fifteen minutes if I wanted to. And so

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<v Speaker 1>that means that corporations no longer have to justify themselves

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<v Speaker 1>to a government. How many people, how much of maybe

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<v Speaker 1>when companies go wrong and things go wrong has to

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<v Speaker 1>do with companies are in the public markets, publicly traded,

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<v Speaker 1>and ultimately it is about as Paul was talking about earlier,

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<v Speaker 1>making money. Yeah, yeah, exactly. I do think that a

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<v Speaker 1>really important theme in the history of corporations is the

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<v Speaker 1>role of stock market. Right until the sixteen hundreds, there

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<v Speaker 1>was no real stock market. The East India Company was

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<v Speaker 1>one of the founding members of the London Stock Exchange.

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<v Speaker 1>And so nowadays they of course have become these all

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<v Speaker 1>powerful forces. We have shareholder activism, we have proxy contests. Uh,

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<v Speaker 1>they now exert a new kind of control. We see

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<v Speaker 1>corporations in many ways responding to the demands of shareholders.

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<v Speaker 1>And there's a big debate now in corporate law and

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<v Speaker 1>then the public and public discussion about just how the

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<v Speaker 1>effect just how stair shareholders affect corporations. Do they make

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<v Speaker 1>corporations Uh, turned to more short term oriented goals at

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<v Speaker 1>the cost of long term goals. And so that's one

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<v Speaker 1>of the big themes of the book is trying to

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<v Speaker 1>explore how do we make sure that corporations aren't just

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<v Speaker 1>focusing on short term profits but thinking about the long

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<v Speaker 1>term as well. Well, I guess you need propercentives. There

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<v Speaker 1>is that in order to impact behavior. I would think, yeah,

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<v Speaker 1>I think that it's a couple of things. One is,

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<v Speaker 1>you need incentives, right, you need laws, You need incentives,

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<v Speaker 1>You need economic structures that give corporations reasons, real tangible

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<v Speaker 1>reasons for thinking not just about the short term or

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<v Speaker 1>not just about shareholders, but also about other long term constituencies.

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<v Speaker 1>But you also need a cultural change, right. I think

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<v Speaker 1>that historically we have thought about corporations in terms of

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<v Speaker 1>civic common virtue. Right. We want corporations to contributing to

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<v Speaker 1>the common good. And I think that in order for

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<v Speaker 1>corporations and particularly corporate executives to have that in mind,

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<v Speaker 1>we need a change in the expectations, the cultural expectations

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<v Speaker 1>of them. So, Professor, I'm wondering, you know, giving your

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<v Speaker 1>research here flash if you know, fast forward to today,

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<v Speaker 1>are there any companies that are doing it right or

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<v Speaker 1>industries that are doing it right in terms of maybe

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<v Speaker 1>expanding how they view themselves within their markets, within society

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<v Speaker 1>more broadly. Yes, Well, it's hard not to think when

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<v Speaker 1>you think about a corporation that is considering all the

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<v Speaker 1>factors right, not just shareholder profit, but also other features,

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<v Speaker 1>the environment, workers, uh, the country. It's hard not to

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<v Speaker 1>think about Patagonia, right. Patagonia is a is obviously the

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<v Speaker 1>outdoor equipment maker and clothes maker, but there their founder

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<v Speaker 1>has always been deeply committed to promoting not just the

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<v Speaker 1>interests of shareholders, but also thinking about broader constituencies. And

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<v Speaker 1>so I think that that type of corporation something, a

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<v Speaker 1>corporation that has in mind not just their own independent

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<v Speaker 1>small fyfems, but increasing the the the flourishing of their

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<v Speaker 1>society and their community as well. That those kinds of

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<v Speaker 1>corporations I think are the ones that are going to

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<v Speaker 1>succeed long term. Why aren't there more Patagonias than today?

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<v Speaker 1>That's a very good question. I think there is that

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<v Speaker 1>there really has been a cultural shift. Now you don't

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<v Speaker 1>expect corporations to have those kinds of those kinds of goals. Right,

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<v Speaker 1>as we mentioned earlier, the today it is sort of

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<v Speaker 1>corporation corporate law one oh one that says that part

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<v Speaker 1>executives not only should be only thinking about profits, but

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<v Speaker 1>they actually might even have a fiduciary duty to only

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<v Speaker 1>consider uh profits. And so I think that is part

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<v Speaker 1>of it. There's pressure on executives to say, well, I

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<v Speaker 1>can't I can't frame my business strategy in terms of

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<v Speaker 1>anything but share older profits. And so my book and

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<v Speaker 1>in many ways, is to explore how that shift came about,

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<v Speaker 1>How why did this happen? Historically speaking, you know, environmental

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<v Speaker 1>social governance E s G investing, that's become a bigger

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<v Speaker 1>part of I think, the the investing landscape. Do you

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<v Speaker 1>think and you know, do you think shareholders may be

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<v Speaker 1>able to affect some change here? As even Blackrock, the

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<v Speaker 1>biggest you know, asset manager out there, is really pushing

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<v Speaker 1>its managers to incorporate E s G. Yes, E s

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<v Speaker 1>G is going to be an increasing trend. I think

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<v Speaker 1>in the history of corporations, I've always thought that environment

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<v Speaker 1>makes a lot of sense, social makes a lot of sense. Governance,

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<v Speaker 1>I think is it's sort of an outlier here, right,

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<v Speaker 1>the idea that we should be in moving the governments

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<v Speaker 1>of corporation doesn't quite seem like the environment and social causes.

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<v Speaker 1>That said, it's there's going to be increasing pressure. We've

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<v Speaker 1>already seen increasing pressure on corporation is to be considering

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<v Speaker 1>these other elements. Part of the problem, though, if with

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<v Speaker 1>the current E s G movement, is that they've been

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<v Speaker 1>struggling to find real metrics. Right. It's hard to find

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<v Speaker 1>a metric to say, well, this corporation is doing better

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<v Speaker 1>on E s G than this other one. That just

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<v Speaker 1>doesn't make a lot of sense currently. So history isn't

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<v Speaker 1>always a guide for what's to come. But based on

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<v Speaker 1>what you've learned about the history of corporations, where they

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<v Speaker 1>came from, where they went, um, can you get any

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<v Speaker 1>indication of kind of where they are going ultimately longer term?

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<v Speaker 1>Especially I think with Paul, you know, Paul and I

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<v Speaker 1>we talked about it all the time. Battle the money

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<v Speaker 1>going into E s G. You would think that might

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<v Speaker 1>have an impact in terms of companies initiatives and being

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<v Speaker 1>maybe more purpose driven as well as profit driven. But

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<v Speaker 1>where do companies go from here? Ultimately? Sure? I think

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<v Speaker 1>that the message that I take away when I examine

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<v Speaker 1>these historical corporations is that humanity works best when it

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<v Speaker 1>works together. Corporations are these tremendous vessels for improving economic efficiency,

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<v Speaker 1>for producing goods, for responding to the demands of consumers.

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<v Speaker 1>Right there, this tremendously efficient vehicle for doing that. But

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<v Speaker 1>they also have these flaws, and so each each generation

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<v Speaker 1>we have a new type of corporation. I think we're

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<v Speaker 1>currently living in the age of the startup, right, the

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<v Speaker 1>Facebook world, the Twitter world, and we're starting to see

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<v Speaker 1>some of the downsides of that startup world. Right, We've

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<v Speaker 1>got Twitter engaging in all sorts of difficult content moderation,

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<v Speaker 1>uh questions. We've got Facebook involved an election disinformation and

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<v Speaker 1>so we're going to be seeing a lot of developments

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<v Speaker 1>in the legal world in the next few years, and

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<v Speaker 1>I think we'll also developments and in corporations as well.

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<v Speaker 1>All it really appreciated. Uh. William Magnusson, Professor, Associate Professor

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<v Speaker 1>of at Texas A and M Law School, his new

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<v Speaker 1>book for Profited History of Corporations