Davos Seeks a Better World, But Who's Going to Pay for It?

(Bloomberg Opinion) -- If investors want a better world, they’ll have to pay for it.

The world’s uber-elite converged on Davos, Switzerland, on Tuesday for the World Economic Forum’s annual meeting. The group of more than 2,000 is worth an estimated $500 billion and includes at least 119 billionaires. This year’s theme is “Stakeholders for a Cohesive and Sustainable World” and includes panels such as “Averting a Climate Apocalypse” and “Balancing Domestic and Global Inequality,” so you can count on plenty of chatter about the world’s most pressing problems.

Aside from the obvious point that no one wants to hear about wealth inequality and climate change from a gaggle of billionaires whose carbon footprint dwarfs that of an ordinary person, the gathering comes amid growing suspicions that many of the corporate titans expected at Davos aren’t just casual observers of the world’s ills but actively perpetuate them in the pursuit of profits.

Corporate executives seem to be coming to that realization themselves. The Business Roundtable, an association of U.S. CEOs, abandoned the principle of shareholder primacy last August, pledging instead to “lead their companies for the benefit of all stakeholders,” including customers, employees, suppliers and communities. The move is an implicit — if not explicit — admission that, as my Bloomberg Opinion colleague Joe Nocera put it last week, “Shareholder value has caused much harm in the three decades since it became the core value of American capitalism: diabetics who can’t afford insulin; students ripped off by for-profit universities; patients gouged by hospital chains; and so much else.”

That singular focus on profits has also been an undeniable windfall for shareholders of U.S. companies. Consider that from 1871 to 1979, earnings per share for the S&P 500 Index grew 3.4% a year, according to numbers compiled by Yale professor Robert Shiller. In the late 1970s and early 1980s, a new generation of executives, including most famously General Electric Co.’s Jack Welch, made profit maximization their single-minded priority. Since 1980, earnings have grown 5.6% a year.

Earnings are the invisible hand that drive stock returns. The S&P 500 returned 11.8% a year during the four decades from 1980 to 2019. Of that, nearly half came from the 5.6% of earnings growth. Dividends contributed 3% and change in valuation kicked in the remaining 3.2%, as measured by change in the 12-month trailing price-to-earnings ratio. Earnings have been even more of a workhorse in recent years as dividend yields have declined and — contrary to popular perception — investors have been reluctant to pay more for stocks. Of the 13.6% annual return from the S&P 500 from 2010 to 2019, a whopping 10.2% came from earnings growth and just 3.4% came from dividends and change in valuation.

It’s hard to see how that pace of earnings growth — and the return from stocks by extension — is sustainable if companies decide that shareholders are no longer their only concern. Sure, some efforts to broaden the base of stakeholders may contribute to future growth, or at least not detract from it. Germany, for example, has a decades-old tradition of co-determination in which workers are represented on corporate boards, and German companies have generated higher earnings growth than their U.S. counterparts since Germany enacted co-determination in 1976.

But the scale of the problems contemplated at Davos this week is likely to require more drastic intervention. Taking on inequality is likely to mean retraining millions of workers for higher-value jobs and paying them accordingly. Confronting climate change will require significant spending on research and in some cases abandoning whole lines of business. Those costs will be borne by shareholders big and small, from the bigwigs gathered at Davos to university endowments to pension funds to ordinary retirement savers.

And not just in the U.S. The swell of protest and populist movements around the world is in part a reaction to the negative effects of shareholder primacy. Executives appear to be listening. Days after the Business Roundtable ditched shareholder primacy in the U.S., Business for Inclusive Growth, a coalition of 34 multinational companies, announced an initiative to tackle inequality with help from the Organization for Economic Cooperation and Development.

There will be no shortage of observers calling the gathering at Davos an empty gesture this week, but the billionaires are right about one thing: Ignoring inequality and climate change is no longer an option. Now let’s see who’s willing to pay for it.

To contact the author of this story: Nir Kaissar at nkaissar1@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

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