A Change in Corporate Culture

Tuesday’s edition of the Wall Street Journal contained two seemingly unrelated articles. The first was headlined as Turnover In CEOs Is Most In Over A Decade and details how major companies are changing leadership in unprecedented numbers – one in every nine CEOs was shone the door. The Journal attributes it to “a grand experiment in corporate leadership” as companies grapple with AI, new trade practices and a volatile economy. It went on to say that many of the replacement CEOs are younger. I think that is an artful way of saying that investors view their leaders as inept and more concerned with social engineering than profit and with globalism than job creation. And that “younger” means that they are less likely to engulfed in the same mistakes as their predecessors.

The second headline was titled Goldman To Scrap DEI Criteria For Board and detailed how Goldman was abandoning the requirements that board members reflect “race, gender identity, sexual orientation and other diversity factors.” Wow! What a concept.

And while the authors of these two stories made no attempt to tie them together, I think that common sense, a little appreciation of economic history and an understanding of human nature weaves these two stories together as tightly as quality canvas. First, I spent twenty years of my professional life working for a major publicly traded corporation. I worked my way from being a company lawyer to holding a number of different positions as an elected officer of the company. During that time I worked through three different mergers and six different CEOs – some better than others. I pretty much get what drives decision making at a senior officer level.

So let’s understand a little about corporate governance. Publicly traded companies are a bit like representative democracies. Corporations are in essence a gathering of investors who then elect people to manage their common business enterprises. Like government, because there are so many investors it would be impractical to seek concurrence of every shareholder on every decision a business must make on a daily business. And while the management of government and business may appear similar, there is one significant difference – fiduciary duty. It is the responsibility of those elected to corporate offices to manage the affairs of the business in the best interests of the shareholders. (No such duty is imposed on members of Congress.) There is a lot of leeway in that duty but in its simplest terms you cannot use the resources of the company to further your personal choices to the detriment of the shareholders.

A prime example of that was the decision by major corporations like
Goldman and other major companies to engage and promote Diversity, Equity and Inclusion in a fashion that placed them above competency, capability and knowledge. It is the difference between hiring someone because she is the most competent, capable and knowledgeable who happens to be a woman or to hire a woman to a job simply because she is a woman. The same goes for race, sexual orientation and ethnicity. As the general attorney in Oregon for the telephone company I was asked during an executive meeting of state managers whether a particular person should be promoted even though he was gay. I responded by relating a similar situation presented to Sen. Barry Goldwater (R-AZ) when asked about the inclusion of gays in the military. Mr. Goldwater responded with common sense when he asked whether being gay had anything to do with pulling the trigger on an M16 rifle. In this instance the question then was what does being gay have to do with performing the job? None. By the same token hiring or promoting someone because of their gender, race, sexual orientation, etc. was equally disabling when pursuing the interests of the shareholders.

The same is true with the very nature of globalism. I recognize that we live in a global economy but that simply means that we recognize the economic diversity of the marketplace. It does not mean that you manage the business of your company to promote a global economy at the expense of domestic business. In its simplest form than it means that you do no ship job and manufacturing the China when it adversely effects jobs and manufacturing in the United States.

Okay, that is the basics. That’s what should bet done. However, when senior management officials (like politicians) surround themselves with sycophants who tell them how smart they are, who they should be associate with to bolster their reputations, what social affairs that they should attend and which politicians they should grace, the attention to the fundamentals of a fiduciary responsibility are buried in the virtue signaling of people with money to spend. However, in many of these instances the money spent is the corporation’s money and the causes for which it is spent are often antithetical to the corporation’s interests.

What investors have learned over a very short period of time is that the returns on investment for many of those companies that were the bulwarks of DEI and globalism were significantly less than their peers who declined. Some of these corporations like Blackstone abandoned any pretense of DEI early, others like Black Rock and Goldman are backing away slowly. And along with abandoning DEI and globalism as guiding principles, the shareholders are abandoning those who promoted it – CEOs and Directors alike.

That is the first step to returning to common sense. Hopefully the next generation of corporate leaders will not repeat those practices.