DIRECTORS’ ROLE: Editorials: Edition: March / May 2020

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Sage as spoiler

Buffett pours cold water onto new-found ESG orthodoxy. He begs to differ on companies’ priority.

For almost half a century, one view on the responsibility of business has stood supreme. It was narrowly defined by Chicago University economist and Nobel Prize laureate Milton Friedman as to “increase its profits”. His view is being rapidly overtaken (see Cover Story).  But not without prominent dissenters from the “profits with purpose” theme. Most prominent Friedman adherent is Berkshire Hathaway chairman Warren Buffett, known as the Sage of Omaha, whose exceptional investment performance over many years has earned him armies of devoted followers. Even if Berkshire did know what was right for the world, Buffett has told the Financial Times, it would be wrong for companies to invest on this basis because they were simply agents for shareholders: “Many corporate managers deplore governmental allocation of the taxpayer’s dollar but embrace enthusiastically their own allocation of the shareholder’s dollar.”

At Berkshire, charitable contributions are ruled out on principle. And yet, in contrast by personal example, Buffett is one of the world’s most generous philanthropists from his private fortune by having helped set up the $50bn Bill & Melinda Gates Foundation.

Buffett separates shareholders’ money in the company he runs from his own. In the company, he seeks (most successfully) to maximise profits for shareholders’ benefit. From the rich stream of dividends then accruing to him as a shareholder, he does with it as he wishes.

It was wrong, he said in the interview, that companies attempt to impose on society their views of “doing good”. What made companies think they knew better than individual shareholders? “If you give me the 20 largest companies, I don’t know which of the 20 behaves the best. It’s very hard to evaluate. I like to eat candy. Is candy good for me or not? I don’t know.” Last year Berkshire, through one of its many businesses, invested $30bn into wind turbines and infrastructure in the US state of Iowa. The goal is to turn Iowa into the “wind capital of the world, the Saudi Arabia of wind”. Proponents of the revised capitalist consensus would applaud the investment as socially responsible, illustrative of Berkshire’s support at heart for moves from fossil fuels to renewable energy, and thus to do well by doing good for society.

Buffett puts it differently. Berkshire was investing in wind only because the US government paid it todo so: “We wouldn’t do it without the production tax credit we get.” He isn’t alone. Hardly had the ink dried on the declaration of the US Business Roundtable than the chairman of the $1bn industrial group Cognex argued in its annual report that asset managers were out of line in using their proxy-voting powers — loaned to them by investors in mutual funds – to “pressure ‘their’ companies to include ESG (environmental, social and governance) factors when making business decisions”.

Ok then, let’s see how Cognex chairman Robert Shillman will respond when confronted at a shareholders’ meeting by the sheer weight of ESG-driven investment funds. Guess who’ll buckle first. Incidentally, it’s worth noting that Berkshire wouldn’t pass the basic test of SA’s King code on corporate governance for the separation in roles of chairman and chief executive. Buffett occupies both positions. He is deputised in both by founder colleague Charlie Munger. What bothers investment managers is less that this governance contravention continues, but that at some stage on the passing of these octogenarians it cannot continue. What’s good for Berkshire….