Unfairness fosters conspiracy thinking

Surely it can be no coincidence that Novak Djokovic, one of the world’s leading tennis players, was – temporarily – banned from Australia because of his unvaccinated status (and apparent vaccine scepticism) on the first anniversary of the Capitol Insurrection in the US, which was founded on dual conspiracy theories about a supposedly stolen Presidential election and a dominant cabal in the nation? According to some theories, both events also happened to occur the day after the point at which control was to be asserted over all vaccinated people, turning them into zombies. This too is surely no coincidence?

The world is flooded with conspiracy theories. So much so that it is not hard to believe that some might imagine a conspiratorial connection behind these random coincidences. Though many will blame social media, where the algorithm is the echo chamber, there are other foundations for this confusion. A crucial basis for conspiracy theories turns out to be that they thrive because of the extent of our current unfairness. That’s the clear conclusion of a recent paper in the Journal of Experimental Social Psychology. In the context of a global pandemic, some of those conspiracy theories are proving lethal.

The academic paper reports a series of studies that identify a strong coincidence between heightened levels of inequality – unfairness – and higher propensities to believe conspiracy theories. It then goes on to demonstrate causation as well as correlation. The researchers’ initial study reveals a reasonably strong correlation between inequality in countries, as measured by the Gini coefficient, and the population of that nation’s propensity to believe conspiracy theories. In a study of more than 500 Australians, the researchers furthermore identify a heightened tendency to believe conspiracy theories among those who perceive their country to be more unequal than among those who see greater fairness, concluding: “the perception of economic inequality … is positively associated with conspiracy beliefs”. This finding is reinforced by further studies on perceived inequality and its impact on conspiracy beliefs.

Overall, these results reflect and reinforce an earlier finding by a UK academic, Hugo Drochon (now at the University of Nottingham), based on a series of YouGov surveys:

“So countries in which inequality is higher and democracy is considered not to be functioning as well as it should – that is, where citizens feel excluded politically and economically – will exhibit higher levels of conspiracy thinking.”

This perhaps should not be surprising. As the world does not conform to our fundamental understandings of how it should work – among other things, our basic assumptions that fairness should prevail, that hard work should pay off, and that merit should be recognised and rewarded – people seek to find reasons for that disconcerting, upsetting reality. These are ideas that have been baked into the human psyche for millennia, so setting them aside is confusing and difficult to resolve. The researchers call this anomie, a sense that the world does not make sense.

Using conspiracy theories as a way of navigating this confusion has real world consequences. The proliferation of conspiracies around vaccines are particularly damaging to health outcomes, both communal and individual. In many ways, the whole pandemic has proven a massive experiment in social norms – the waning and waxing of mask use on the London underground being one insight into how people’s actions clearly influence each other. But the erosion of a willingness to respond to such social pressures, for example through the increasing willingness to challenge others who do wear masks, is a strong sign of growing frustration with others’ views, and growing inflexibility. In the context of a pandemic, the consequences of certain conspiracy theories can be lethal. It is another deadly consequence of unfairness.

The scale of that lethality is potentially indicated in this chart. This is from the vigorous team at Inequality.org (part of the US’s Institute for Policy Studies) and it deliberately tells a powerful story, expressed in its blunt headline. It is clearly a dated snapshot, and is rather selective in its tendency to focus on North America and Europe, but the story it tells seems unlikely to be undermined by any update of the numbers, or cumulative deaths analysis, nor by the inclusion of some of the more obvious omissions (for example, China, India, Japan, South Africa and the UK).


But to try to address the question of vaccine hesitancy and inequality more directly, I have created the following chart based on publicly available numbers. It maps aggregated unwillingness and uncertainty to take vaccines (from Our World in Data, latest available for each country) against the Gini coefficient (from World Bank, again latest, where available). By eye it is certainly suggestive that there is some association between greater inequality and higher vaccine hesitancy, but to be fair that is largely down to the single outlier – the US, with a Gini over 0.4 and with more than 30% of its population hesitant about vaccination.

The simple fact is that there are too few countries where the World in Data is able to calculate vaccine hesitancy (given the unfairness of vaccine distribution globally, it really only makes sense to calculate hesitancy in developed economies and this dataset includes only 15 countries), and given these have clustered Gini coefficients, there is little that can be clearly concluded from the data. That is, other than it is notable that none of these nations – even the most equal and fair – has succeeded in convincing more than 85% of their populations that vaccination in the face of a dangerous virus is a good thing.

While unfairness fosters them, conspiracy theories are not attractive only for those disadvantaged by society. Djokavic’s vaccine scepticism shows that even the most successful can find them seductive – and I’m sure many of us know extremely smart people who are attracted to at least some of these theories.

It’s not helped by a culture that fuels this thinking. Not least, the tendency to conspiracy thinking is seen by some politicians as an opportunity. Populists seek to foster hatred and anger as a political tool. Rather than seeking to address the underlying causes of that anger, the populist believes that he or she can win greater support by fanning its flames. Often these days, that means encouraging conspiratorial thought. The alternative approach – and the one that this blogger would favour – would be to seek to address the underlying unfairness that helps fuel the conspiracy thinking and sparks the anger.

If only we could use the frustrations evident in among the conspiracy theorists and use it to address and change unfairness, rather than see this energy being dissipated in what seem daft ideas on such things as zombie-causing vaccines and cannibalistic cabals. Unfortunately, the Journal of Experimental Social Psychology study showed that a greater belief in conspiracy theories only leads to a narrow encouragement towards actions to address inequality, as if conspiracy thinking ensures that the energy arising from unfairness is dissipated in other ways.

The world does need change. It needs to be more fair. But being drawn into conspiracy theories saps the energy from addressing this core issue. In contrast, addressing unfairness could free people from the unhappiness that leads them into some very peculiar conspiracy beliefs – and in the context of the global pandemic has the direct opportunity to save lives through encouraging more pro-social behaviour.

“Our results suggest that the building of more equal societies is one way in which we can tackle the spread of misinformation and conspiracy theories,” the researchers conclude, and so will this blogpost.

See also: The missing actions on vaccine fairness

The impact of economic inequality on conspiracy beliefs, Bruno Gabriel Salvador Casara, Caterina Suitner, Jolanda Jetten, January 2022, Journal of Experimental Social Psychology 98(4)

Who believes in conspiracy theories in Great Britain and Europe? Hugo Drochon in Joseph Uscinski (ed), Conspiracy Theories and the People Who Believe them, 2018, Oxford University Press


Willingness to get vaccinated against COVID-19, Dec 15 2021, Our World in Data

World Bank Gini coefficient estimates

To combat conspiracy theories, fight social decay and inequality, Edward Knudsen, 26 October 2020, Dahrendorf Forum

Disinformation, Misinformation and Inequality-Driven Mistrust in the Time of COVID-19: Lessons Unlearned from AIDS Denialism, J. Jaiswal, C. LoSchiavo, D. C. Perlman, AIDS Behav. May 2020

Shelter in place? Depends on the place: Corruption and social distancing in American states, Oguzhan Dincer, Robert Gillanders, Social Science & Medicine, January 2021

Mother Nature’s recipes

An interesting organisation called the Fairness Foundation was recently launched, to promote the centrality of fairness to the world we need to be building, for ourselves and for our children. Actually, the Foundation’s focus – for the time-being at least – is the UK rather than international, so that ‘world’ doesn’t quite (yet) have its usual geographical reach.

The Foundation has at the centre of its messaging 5 core elements, which it calls the Fair Necessities. These are powerful and simple concepts, which chime well with people’s thinking but which would lead to dramatic shifts in politics and behaviour:

“We propose a definition of fairness in terms of five ‘fair necessities’ that could form the basis of an organising philosophy that most people in Britain would support. This in turn could underpin a platform for root and-branch reform of the way that our society and economy is organised, which could draw support from a wide range of political traditions and parties,” it explains.

The Foundation goes on to say: “Most people recognise that the society we live in is increasingly unfair. The majority of people believe that everyone should have the same opportunities to succeed, and that social and economic inequalities have become so stark that this is often no longer possible.” It notes current UK failings of fairness across democracy, education, environment, health, housing, justice, social security, taxation, wealth and work, and starts to set out ways forward on these. It also emphasises how universal is the sense of fairness, and the need to reflect it in political platforms. Clearly, this blogger would agree on the scale of the problem of unfairness – that’s why I have long been focusing on fairness as a way through our current challenges, addressing many of these same issues. It’s very welcome to see others so forcibly joining in making these arguments.

The Fair Necessities are a powerful and simple set of messages, and a strong beginning for the new organisation. I for one look forward to seeing how the Fairness Foundation develops. It is eager to use the political moment created by the coronavirus pandemic, when we are all more conscious of the unfairness around us, to press for change:

“We need to change the terms of the debate, as well as changing policies. Building a fairer society will not only generate significant social and economic returns; more fundamentally, it is a moral duty of the state to ensure that everyone has equal life chances…Fairness is the key organising logic that underpins how we can (and must) build a positive future for humanity.”

I’m told there’s no plan to write the lyrics to a full version of a Fair Necessities song, based on Baloo’s Bare Necessities in the Disney version of Rudyard Kipling’s Jungle Book. That seems a shame; as the title of this blog suggests, not every word of the original would need to be changed. Further, we could all do with rather fewer worries and strife; greater fairness must be one way towards achieving that.

The Fairness Foundation

The Fair Necessities discussion paper, November 2021, The Fairness Foundation

Fairer futures

“Every board needs to be exposed to things that make them uncomfortable, and make them realise how disproportionately comfortable we are.”

These are the words of my friend Mark Goyder, who was consistently challenging when he led think tank Tomorrow’s Company, and who remains challenging now. The words are quoted in a recent remarkably accessible report, What is the role of business in creating a fairer future?, from Board Intelligence, a tech business that provides a portal for board papers and reporting.

Based on more than a dozen roundtable discussions including over 100 business leaders from a full range of scales and natures of organisations (most of them much more senior than me), the report is deeply engaging and challenging. Perhaps it is invigorated by the fact that the discussions included not just established individuals but also 60 future leaders. In my experience, the very way in which Board Intelligence sought to have the conversations ensured that they were rich and inclusive rather than narrow in focus.

“Not only are most businesses not doing enough to tackle unfairness, in many cases — such as climate change — they’re exacerbating it,” the report reads. It challenges us all to do better in terms of opportunity, environment and technology, recognising the need to address the constraints imposed by the current way we assess what is valued, and the way in which leaders are insulated from many people’s ordinary lives, and the consequences of their decision-making.

There is much that is highly thought-provoking in what is a short report. I particularly liked this simple comment from the ever-thoughtful Baroness Patience Wheatcroft, now a non-executive director at St James’s Place: “I’d like to make the mission of every company: people working for them didn’t need government handouts to survive.” The discussion of opportunity and how to unpick barriers to opportunity, and to stop them developing once again, is especially powerful.

And I really like one of the very simplest ideas in the paper, of adding an empty chair at the board table. It reflects the beautiful old tradition, typical in remote rural communities where mutual assistance is provided without being asked, of always being ready to welcome an unexpected guest. But in this case the guest is an implicitly excluded one: the stakeholders who are not represented within the board room. The chair is a reminder that there are other voices that are not heard and need at the very least to be considered.

This feels like an interesting beginning, though it is only that. It’s welcome that the Board Intelligence bunch are committed to pursuing these discussions further and trying to uncover ways that companies can practically deliver more fairness. They invite us all to get involved.

What is the Role of Business in Creating a Fairer Future?, December 2021, Board Intelligence

Report launch webinar

The missing actions on vaccine fairness (II)

The emergence of the Omicron strain of the coronavirus not only teaches many of us a further letter of the Greek alphabet but also provides a further education on both the politics of the pandemic, and its simple geography. As UNICEF points out, a pandemic cannot be solved one country at a time: “The pandemic will not be over anywhere until it is over everywhere.”

Many South Africans feel that they are being punished for their unusually strong approach to genomic sequencing. Their leading scientific position has enabled the early identification of this new strain, as it also did of the so-called Beta variant from the earlier stages of the pandemic (and of the Greek alphabet). It’s unlikely that South Africa is a particular hotspot for the development of new strains of the virus – though it is possible that the presence of a relatively higher population of immuno-compromised individuals because of the HIV/Aids challenge in that nation may provide some driver and scope for evolution of the virus. Much more significant is that the country is better than almost any at genomic sequencing of the virus and so is quicker to pick up issues than others.

It is very likely that Omicron has been active in a number of countries for some time but remained undetected until it came to the attention of the greater sequencing in South Africa.

Whatever its origin, the key lesson of Omicron is as a reminder that we need to share vaccines more fairly. We will not be able to prevent the development of new strains of virus and their spread unless there is much greater vaccination globally. Even if the rich North continues greedily to vaccinate its populations, the under-vaccinated nations of the global South are likely to prove pools of further and future infection – by strains that may not prove as mild in their health impacts as Omicron currently appears to be.

This is also why the pills now being offered cheaply in developing economies are not the answer. That’s not only because Merck’s pill now appears to be only 30% effective, not the 50% previously reported (note, this is the US, not the German, Merck). It is also that these pills – the Pfizer one will also be made available cheaply in these countries – are a treatment to alleviate the worst symptoms of Covid. It is great that they save lives, but they do not stop people getting (or, very likely, passing on) Covid, they just render the virus less lethal.

This means that the disease persists, and potentially mutates further and more lethally. Meanwhile, the pharmaceutical companies can continue to sell their vaccines at high prices in developed economies. In effect, booster jabs become a rich world (double) annuity for them. The pandemic persists, the fear persists – and the profits persist.

See also: The missing actions on vaccine fairness

An open letter on vaccine dose donations, UNICEF to G7, June 7 2021

Merck and Ridgeback Biotherapeutics Provide Update on Results from MOVe-OUT Study of Molnupiravir, an Investigational Oral Antiviral Medicine, in At Risk Adults With Mild-to-Moderate COVID-19, Merck, November 26 2021

The missing actions on vaccine fairness

The G20 has let the world down. This is not – yet – a comment about the ongoing climate talks in Glasgow, but about the undertakings made at the recent Rome summit relating to Covid-19 and vaccinations. Perhaps companies and investors are letting the world down too.

The G20 Rome Leaders’ Declaration recognises that global vaccination is a global public good, and undertakes to “advance our efforts to ensure timely, equitable and universal access to safe, affordable, quality and effective vaccines, therapeutics and diagnostics, with particular regard to the needs of low- and middle-income countries”. Yet while recognising the World Health Organisation’s vaccine equity goals – already somewhat limited and not fully fair – of vaccinating 40% of the population of all countries by the end of 2020 and 70% by mid-2021, the Declaration is aspirational about aims rather than solid in providing genuine commitments.

The comments of Amnesty International were fairly typical of the excoriating response of civil society organisations to the statement. “These vague promises are an affront to those who have died, and to everyone still living in fear of Covid-19,” said Tamaryn Nelson, Amnesty’s Advisor on Right to Health. It suggests 500 million doses of vaccine are potentially available for redistribution to poorer countries but remain in the stockpiles of richer nations. “With just two months left of this year, only a radical change in approach will close the shameful vaccine gap. If we continue down our current path, the end of the pandemic will remain a glimmer on the horizon.”

We have a long way to go, according to figures provided by the campaigning coalition the People’s Vaccine Alliance:

Amnesty, in its 100 Day Countdown launched in September, quotes numbers as of late October that tell a similar story:

  • About half the global population yet to receive a single dose
  • Just 1.4% of people in low-income countries, and 17.5% in lower-middle income countries, are fully vaccinated
  • Only 2.8% of people in low-income countries have received at least one dose, and 35.6% in lower-middle income countries. This compares to 70% in high-income countries.

Amnesty’s comments highlight the core of the stupidity of the Covid vaccine inequality. It is not just that restricting the distribution of vaccines to poorer nations is unfair. It is also foolhardy because of the scope for new variants to arise in unvaccinated populations, or those with low vaccination levels. As we used to say early in the pandemic, but seem to have forgotten, ‘none of us is safe until everyone is safe’. That’s true globally, not just within individual countries. Any single country might be a source of fresh infection for the rest of the world; at the moment that remains likely to be significant a risk for more than a further year:

While the numbers now look a little better than these from early this year, we are still a very long way from delivering on the WHO targets.

The G20 has failed us. But perhaps also companies, and investors, have failed us. The pharmaceutical industry does not have a great record on sharing its output fairly around the world, preferring to oversupply the rich economies that pay generously and undersupply poorer markets that cannot afford similar prices. This remains too often the case despite the efforts of the wonderful Access to Medicine Foundation, which produces an index of the pharma businesses and how well (or badly) they share their output fairly around the world – and which inspires investors to challenge companies to do better and fairer.

But much more clearly needs to be done with regard to vaccines. The backdrop isn’t great: according to Access to Medicine (admittedly in a report that is now a few years old), the major vaccine businesses generally are simply not investing in new products that would address the challenges of much of the world:

That seems a very unfair sentence to write given how swiftly the industry did respond to the challenge of Covid and how efficiently it has produced remarkably effective vaccines against the pandemic. I personally am grateful for my AstraZeneca jabs, and grateful too for the Pfizer jabs that are protecting a number of my loved ones.

But the industry must bear some blame for the remarkable unfairness in the distribution of these wonderful products. It is clear that most of the vaccine producers are prioritising making money from their products, monetising the pandemic, ahead of delivering to developed markets. Indeed, a cynic might suggest that they have an interest in prolonging the pandemic risk, not least given that the rich economies are now happily paying for the first round of booster shots as the initial immunity from the first vaccinations begins to fade.

And some criticism is particularly pointed and specific. The remarkable podcast Pfizer’s War from the excellent journalists at Tortoise Media suggests that Pfizer in particular has chosen not just to promote its own vaccine offering but also to denigrate others’ – notably the AstraZeneca one. Public comments by the purportedly independent non-executive director Scott Gottlieb certainly seem surprising. According to the podcast, Gottlieb’s CNBC interview on February 14 (quoted extensively at around minute 15) was pointed enough to spur the AstraZeneca general counsel to write a blunt letter to his equivalent at Pfizer calling the comments misleading and worse.

For me, though, the most shocking element of that interview was the reference to AstraZeneca’s vaccine as being based on a chimpanzee virus. At the very least this seems to play up to the unscientific fears about vaccines in some way risking a crossing of the barrier between species. Such fears date back to the very first vaccination, Edward Jenner’s use of cowpox to immunise people against smallpox (the very word vaccine is sourced from the Latin for cow because of this use of cowpox). Cartoons of the vaccine turning people into cattle were rife, and similar false nonsenses are being spread as part of the antivax movement now. For someone medically trained with scientific authority because of his past role at the FDA and current role on a vaccine producer’s board to risk fuelling such fears seems – to say the very least – badly misjudged.

If I were still wielding the votes of an institutional investor, having listened to the Pfizer’s War podcast I would have no hesitation in voting against Scott Gottlieb’s re-election to the Pfizer board. His comments sound much more like those of a cheerleader for Pfizer than showing the independence and challenge that we expect and require from independent non-executive directors.

And I would feel obliged to ask some very tough questions of Pfizer, and indeed all the vaccine producers. Not enough vaccines are getting to the world’s poorest. That isn’t fair because it leaves them exposed to great risk, but it also leaves us all open to additional unnecessary risk because it means the pandemic persists. Too many of the pharmaceutical companies seem content with that – super-profits persist for as long as the pandemic does, a cynic would note.

But while investors may be making enjoying the benefits of those super-profits in the pharma sector, we are all harmed by the economic damage that the pandemic is causing in our wider portfolios – harm that goes on in spite of the current bounce back to growth. For investors that are universal owners there is a strong interest in seeing an end to the pandemic and a fuller return to normal. Even from a purely financial perspective, this ought to lead to much more pressure on all the pharmaceutical companies to address the unfairness of current vaccine distribution.

As investors consider social issues more actively, and think about systemic risks beyond climate change, these issues deserve their attention. I’m aware of various shareholder resolutions on these issues being filed (or prepared for filing) at some of the pharmaceutical businesses. They deserve strong investor support but not as stand-alone actions; instead this should be a reflection of ongoing active engagement, including strong support for Access to Medicine on this crucial area.

None of us is safe until we are all safe. We all need greater vaccine fairness, and that will need more action from governments, from companies, and from investors.

See also: The missing actions on vaccine fairness (II)

I am grateful to Raj, the investment industry’s favourite Jiminy Cricket conscience, for pressing me to write about this issue (sorry it’s taken a while, Raj!)

G20 Rome Leaders’ Declaration, October 31 2021

Vaccine Equity, World Health Organisation

G20’s vague vaccine promises ‘an affront’ to five million dead, Amnesty International, October 31 2021

Dose of Reality: How rich countries and pharmaceutical corporations are breaking their vaccine promises, The People’s Vaccine, September 21 2021

100 Day Countdown, Amnesty International

Access to Vaccines Index 2017, Access to Medicine Foundation

Pfizer’s War, The Slow Newscast podcast, Tortoise Media (also available on your usual podcast provider), September 27 2021

A ‘little PRIC’ that we all need: Pharma Responsible Investor Coalition, Ishwar Gilada, Lieve Fransen, Mamphela Ramphele, Raj Thamotheram, Preventable Surprises, September 22 2021

Squid Game ‘fairness’

Fairness matters to the organisers of the games in Squid Game – Netflix’s breakout foreign language show from South Korea. But it is a peculiar and unconvincing form of fairness.

Everything is peculiar about Squid Game. Though there is a sense of positive determination around the key character, overall its worldview is darkly dystopian, reflecting the darkly dystopian view of those organisers, that no one is to be trusted and everyone is banally evil, by omission at least, if not commission.

It is episode 5 that is called A Fair World, but it is the start of episode 6, Gganbu, where their peculiar version of fairness is made clear. There is typically brutal treatment meted out to those handful of guards and player who had sought to take advantage of the situation for their own benefit. It is explained and reinforced by a public announcement to all those remaining:

“You are witnessing the fates of those who broke the rules of this world for their own benefit and furthermore tainted the pure ideology of this world. Here you are all equal, with equal opportunity and no discrimination. We promise to prevent such misfortunes from happening again. We truly apologise for this tragedy.”

This nearly sacred treatment of the concepts of fairness and equality struck me as odd, not least because the term had not seemed to feature up to that point – though I am now highly alert to the words fair and fairness, I hadn’t noticed them prior to then.

The peculiar form of fairness that the organisers have in mind is that the players are obliged to take decisions prior to games behind a veil of ignorance about what those games are. They need to decide their teams before knowing what skill or ability will be favoured – or whether they will be competing with other teams or with the other members of their own. They need to decide who goes first in a game without knowing whether the first or last will be favoured.

Of course, the organisers do not really believe in fairness. There isn’t much scope for real fairness in their dystopian world. After all, they are not above unfairly changing the rules of the game partway through to drive particular results (think of the turning off of lights in the middle of one game). Rather than fairness, they want randomness, driven in part by the chance choices made behind that veil of ignorance.

The veil of ignorance is a key concept in thinking about fairness. Philosopher John Rawls, perhaps the main thinker about the concept, used the veil as a way to understand what a fair world might look like. In his ideas (set out originally in A Theory of Justice, but perhaps more accessibly in Justice as Fairness), societies must develop structures and frameworks to deliver fairness – not least protections and support for those most vulnerable and needy – without any of the individuals involved in that development knowing the nature of their own circumstances. In the Rawlsian world, this ignorance about individual starting positions removes the natural prejudice that tends to favour the winners, and ensures instead that there are genuine protections and support for all. The veil should ensure that no one is disadvantaged unfairly by the chosen system.

It’s the opposite of the Squid Game world. There, each game is biased against all players, though a few will have some natural advantages. The weakest are rapidly abandoned – it is a dystopia after all. The only benefit of the ignorance is to maintain randomness, not any meaningful fairness. That’s why I don’t believe the organisers and their statements about the fairness of the world they have created. It is a very peculiar world, and a very peculiar form of fairness.

A Theory of Justice, John Rawls, 1971

Justice as Fairness: A Restatement, John Rawls, 2004

What’s the purpose of purpose? (III)

It is two years on from the Business Roundtable’s supposedly historic ‘restatement’ of the role of the corporation in the US. In a further excoriating article, my friend Harvard law professor Lucian Bebchuk and his colleague Roberto Tallarita have again shown the lie of this restatement, demonstrating that it is no more than a cover for business as usual.

A year ago, Bebchuk and Tallarita had already suggested this might be the case (see also What’s the Purpose of Purpose? (II)). Now they bring forward further evidence.

The BRT’s Statement on the Purpose of a Corporation was signed by 181 corporate CEOs. Bebchuk and Tallarita study the 136 US public companies that were involved, assessing their public documents and statements to see if anything had changed because of the Statement, in particular if there had been any switch from a shareholder-centric approach to one that more fairly accommodated the interests of stakeholders. They studied the companies’ governance guidelines (whether or not updated since the Statement was published), their bylaws, their proxy statements, and also the assertions of companies in opposition to the more than 40 shareholder proposals asking for implementation of the Statement. Bebchuk and Tallarita’s findings contrast strongly with the BRT’s own recent assertion that “Two years later, CEOs have powerfully demonstrated their commitment to work for the benefit of all stakeholders.”

In short, the evidence shows that these companies see the Statement as meaningless and as not making any difference to their ongoing shareholder focus:

  • Of the 99 companies (73%) that have amended their corporate governance guidelines since the Statement was published, 92 have left their corporate purpose unaltered, and 57 left shareholder primacy intact as the core driver for director decision-making; this does not include a large group of companies still employing a traditional US formulation of directors’ duties as acting “in the best interests of the company”, which (in the US at least) is not generally understood to encompass stakeholder interests.
  • Companies whose CEOs were directly involved in drafting the Statement are if anything less likely to have adopted stakeholder-friendly language in their governance guidelines.
  • Of the 136 companies, their bylaws emphasise the primacy of shareholders; only five mention social or environmental issues at all, though even then not to an extent that implies a stakeholder approach. Mentions of employees are restricted to discussions of senior executives and governance practicalities. The sole exception identified is consumer goods company Procter & Gamble which states that the interests of company and employees are “inseparable”, giving rise to an expectation of some form of profit sharing and voice for employees in the conduct of the business. This more stakeholder viewpoint (at least with regard to a single stakeholder group) is apparently unique among this group of US corporations.
  • Fully 117 of the 136 companies included no reference to the Statement in their proxy statements (the formal US annual disclosures to shareholders on governance matters) – though note that the academics excluded from consideration mentions forced on companies by the presence of shareholder proposals on these issues. Of the 19 that did reference the Statement, fully 10 asserted that it made no difference as it simply reflected their longstanding approach to business.
  • Perhaps most striking is the corporate reaction to the 43 shareholder proposals that were submitted to 27 signatory companies of the Statement in either 2020 or 2021, calling for an implementation of the Statement’s aims. 15 companies sought SEC permission not to put these proposals before their shareholders, 11 of them saying that the Statement made no difference to them as that was how they already ran their businesses (among them, pharma business Johnson & Johnson, pointing to its Credo). In total, 28 proposals went forward onto the AGM agendas of 21 companies over the two-year period. All companies opposed the proposals, 12 of them explicitly saying that they already applied the Statement’s expectations prior to signing it.

The academics accompanied their formal article with a Wall Street Journal op-ed published on the second anniversary of the publication of the BRT’s Statement. This op-ed easily lives up to the bluntness of its headline, Stakeholder Talk Proves Empty Again. As Bebchuk and Tallarita say: “If CEOs weren’t intending to deliver value to all stakeholders, what were they trying to do with their statement? One potential motivation is to make corporate leaders less accountable to shareholders…Another potential motivation is to release pressure for stakeholder-protecting regulation.” Neither represents an edifying conclusion, nor one that moves companies towards fairness.

See also: The living dead: rise of the zombie company

What’s the purpose of purpose? Will the focus on corporate purpose deliver real change in the way companies behave?

What’s the purpose of purpose? (II)

Will Corporations Deliver Value to all Stakeholders? Bebchuk, Tallarita, forthcoming, Vanderbilt Law Review Vol 75 (May 2022)

The Illusory Promise of Stakeholder Governance, Bebchuk, Tallarita, 106 Cornell Law Review 91 (2020)

Statement on the Purpose of a Corporation, Business Roundtable, August 2019

‘Stakeholder’ Talk Proves Empty Again, Bebchuk, Tallarita, Wall Street Journal, August 19 2021

The living dead: rise of the zombie company?

This morning, Vectura, a UK pharmaceutical business specialising in the treatment of lung ailments which has developed unique inhaled drug delivery technologies, announced the success of a takeover offer from Philip Morris International, the global arm of the Marlboro cigarette business. Fully 74% of Vectura’s shareholders have accepted a bid around 60% above the undisturbed share price, in spite of the qualms that many had over turning over a pharmaceutical operation to a company whose core business causes the deaths of around half its customers.

While some have called it a greenwashing transaction, it is easy to see a commercial reason for the deal from PMI’s perspective. The company states that it is aiming to go ‘Beyond Nicotine’ and has built a series of inhalation operations, including inhaled over-the-counter and prescription therapies. A cynic might note that advanced inhalation technologies may also be useful for delivering its preferred approach in substituting for declining cigarette demand – the delivery of nicotine through heat-not-burn tobacco products.

It is this apparent attempt to reinvent the PMI business that is the theme of this blog. Given that the world economy must decarbonise over the next few decades, many – even most – company business models will need to be wholly reshaped. The decision is most stark for the fossil fuel businesses, and the association between PMI’s transition and the oil transition is brought to life by the ‘Beyond Nicotine’ slogan, with its clear echoes of the now largely notorious bid by Lord Browne to reinvent BP as ‘Beyond Petroleum’, while largely maintaining investment across its oil and gas businesses.

The key question is whether such businesses should reinvent themselves or whether they should stop reinvesting except on a care and maintenance basis, and instead run themselves for cash and run themselves down. Should they turn themselves into the living dead, zombie companies? With the need to decarbonise the whole economy, the corporate world may become littered with zombies if that is the route chosen.

‘Beyond’ businesses

Just as with BP’s unconvincing rebrand nearly two decades ago, it is important to put PMI’s ‘reinvention’ into context. The company’s stated aim is to achieve $1 billion in revenues from ‘Beyond Nicotine’ activities by 2025. Its net revenues for the 2020 year were $28.7 billion (deducting the $47.3 billion in excise taxes PMI pays from total revenues of $76 billion). While disclosure does not allow analysis of the different margins for non-nicotine businesses, one assumes that the pricing power enabled by a highly addictive product enables much greater profitability from nicotine than is possible ‘beyond’ it.

If we are to shift the world economy to a low carbon one, the transformation of fossil fuel businesses will need to be more real than this change appears to be. Replacing former businesses with new ones goes to the heart of Austrian economist Joseph Schumpeter’s vision of capitalism as ‘creative destruction’. This sees capitalism as a way to shift money from old and historic activities into newer and more innovative businesses that offer the prospect of greater profits. Money seeks the opportunity to make more money, which will often be in places other than where money has been made in the past. The old and the historic is left to decay, or is destroyed more actively as the new takes its place.

The key question is whether this is best done within individual companies, or whether it is better delivered by those historic companies being replaced by new innovators in fresh business structures. And that gives rise to the key question for the directors of those old businesses: should they be seeking to reinvent their companies, to go beyond whatever their own inheritance is, or alternatively turn themselves into zombie businesses? When faced with directors’ duties – in the UK expressed as ‘promoting the success of the company’ – is it a valid decision to work towards the destruction of the company?

Companies do not have a right to persist forever, and the assumption that they will is in many ways an odd one. Indeed, the original companies were established for limited periods, covering single trading journeys, the creation of specific infrastructure, or for terms fixed by an arbitrary number of years. Even when the law changed so that they were no longer limited by time, the role of each company was constrained by the objects clause in its constitution, which tied the business to a certain set of activities. Careful legal drafting of objects clauses made these constraints obsolete even before the 2006 Companies Act swept them aside altogether. But whether it is right – economically coherent and in stakeholders’ interests – that companies should be free simply to reinvent themselves is another question.

The discipline of the objects clause, which could only be changed with the voting support of a super-majority of shareholders, had a real value. Shareholders being able to express a clear view before the nature of their business is changed beneath their feet is powerful. After all, not every transformation works or adds value. Many investors still bear the scars from the transformation of the UK’s GEC into Marconi through selling off its aerospace and defence businesses and becoming a pure telecoms equipment business. Deals at the height of the dotcom bubble led to a spectacular business failure. This is but one particularly painful failed transformation that greater constraints on reinvention might have prevented.

This cannot be a call for ossification. The flexibility for companies to persist and to change has had huge benefits. It is one of the theses of Duke professor Timur Kuran’s persuasive and remarkable The Long Divergence that the restrictions of Islamic commercial structures are one of the main reasons that European economies were able to overtake the Middle East’s former business leadership between 1000 and 1800CE. The greater flexibility of corporations under European legal systems, and the growth of the banking sector, enabled developing business models and the build-up of capital to reinvest into the necessary changes. But clearly the flexibilities of modern banking and financial services mean that we face little risk of economic stagnation even if individual companies are hindered from reinventions.

With responsive investors, creative destruction can happen as readily through the creation of entirely new companies as it occurs through the repurposing of existing businesses (and, to be clear, I would classify the relaunch of cash shells as the former rather than the latter). Think electric vehicles: it is far from certain that Tesla and its fellow new electric insurgents will win out against the incumbent manufacturers, but it is clear that there is a good deal of creativity going on, as well as plenty of destruction of prior business models.

Fair use of shareholder funds?

As some of my new colleagues have pointed out, reinventing a corporate business model is a risky activity, and shareholders should want to see that they are properly compensated for shouldering that risk. The ratings of the incumbent carmakers suggest that the market does indeed derate transitioning businesses such that this risk is at least in part priced in. That protects investors from some further downside, but it does not guarantee that there will be none, and nor does it mean that investments into new businesses will be money well spent. It is far from certain that incumbents will have a competitive advantage in the new business lines they seek. Further, the urgency of the need for transition – and the application of arbitrary timelines and targets (such as PMI’s $1 billion revenues by 2025) – increase the risk of overpayments for acquisitions and misallocated capital.

It turns out it is indeed possible within directors’ duties to dismember a company and bring its existence to an end. When challenged to come up with examples of companies that have in effect run themselves down, rather than involuntarily failed, the one that comes to my mind is Old Mutual PLC. The South African insurer in 1999 became a dual-listed entity, with linked corporations in South Africa and the UK, using the London arm as the base for a series of acquisitions. The tacit aim appeared to be geographical diversification away from Africa. By 2016 this geographic expansionism was seen not to be in shareholders’ interests, and through a process of ‘managed separation’ Old Mutual PLC tore itself to pieces, selling off the US operations, and demerging the UK wealth business and the bulk of the South African bank. The rump of Old Mutual PLC has now been subsumed as a largely dormant subsidiary of the continuing Old Mutual in South Africa. Through many discussions with the PLC board over this time, it was clear that their decision-making was not in any way constrained by concerns about whether dismembering the company was a fulfilment of their duty to ‘promote the success of the company’ but rather they saw their central challenge as being how to keep and motivate the central team to the end of a process that would inevitably lead to their losing their jobs.

So it can be done. Carbon Tracker has done some typically great work on how run-down of businesses may actually drive greater returns for shareholders than continuing to pursue investment in lower returning assets (their 2014 report on ExxonMobil is a great example). And the argument that winding down fossil fuel exposure is within directors’ duties is even stronger, for the UK law definition places promoting the success of the company in the context of shareholder interests, and also the interests of broader stakeholders – explicitly including “the impact of the company’s operations on the community and the environment”. Thus, where there is a clear environmental interest in the ending of a business model, it may be easier to explain such a move as being fully consistent with directors’ duties.

The zombies already among us

The boundary between involuntary failure and run-off is not as clear as might be assumed. A number of the retailers that have failed on both sides of the Atlantic in recent times were taken into private equity (or other private) hands and run for cash. Typically, the first step of this process was to load the companies with high levels of debt, and their failures came when the declines of the businesses in the face of the shift to online trading (and often, long-term underinvestment) meant they could no longer sustain their significant debt burdens. Private markets always tend to value low-growth companies – of which zombies would be a particularly extreme form – much more highly than public markets have, largely because of this scope to gear up their balance sheets to levels which traditionally companies with public traded shares have always baulked at.

In many ways this may be what the future of the fossil fuel business looks like: taken into private hands, loaded with further debt so that they have in large part paid for their own takeovers and the equity financing is skinny. This juices up the private returns while reducing risks for the owners. Run for cash with maintenance minimised, they will become zombies. And they will fall over when the change in the world economy means that they can no longer prosper from the public subsidy that comes from being able to externalise the costs of their carbon footprint onto the environment and wider society.

In effect, a number of such zombies already walk amongst us. The US unconventional oil business already looks very like this, with most of its financing coming from the higher yield end of the debt markets. Equity markets increasingly are dominated by lower carbon tech, financials and healthcare businesses (summing to around 46% of the MSCI ACWI, for example), with energy and utilities each only about 3% of the indices. In contrast, debt markets, particularly in the US and particularly in high yield, are much more skewed to energy, utilities and basic industry – typically collectively more than 20% of US debt makets – with commensurately greater carbon footprints. Energy is the largest sector in US high yield, driving typical carbon footprints of portfolios invested in these markets above 450t CO2e/£m invested, in contrast to the nearer 150t CO2e/£m invested in the MSCI ACWI. This tripling of the carbon intensity is the footprint of the zombies already among us. From my discussions with asset owners, these zombie companies will face increasing refinancing risks.

Many in the ESG investment community worry about the sale of fossil fuel businesses to private holders. Perhaps they need not worry so much: potentially, this is the destruction side of creative destruction in action; it is these businesses entering their living dead zombie phase. These companies will fail, no matter who their owners are, if the governments of the world take the right policy decisions and move to make the world economy shift from its fossil fuel dependency. As we know, COP-26 in November is the crucial moment for this to happen.

However, if the signals from our politicians are unclear and the shift does not happen rapidly, then the zombies will be with us a while longer. But the simple inevitability of a shift to a lower carbon world, including a carbon price in one form or another, will lead these zombies to stagger more quickly under the weight of their debt finance – particularly as mainstream investors become increasingly queasy about funding them.

Ensuring fair process

One of the things that some less scrupulous private equity players or other private investors have profited from is an arbitrage between the strict legal requirements and the moral and reputational standards which public companies feel the need to espouse. Any world of the living dead may need to have stricter legal requirements, and stricter enforcement of them, in order to ensure that moral expectations are not avoided.

This may be critical to minimising the collateral harms of these business failures when they inevitably come. In the absence of such greater legal protections, we may see more profits struck while workers’ pensions are denuded, worker pay and benefits cut, and governments bilked of taxes due. Particularly critical legal constraints for fossil fuel businesses will need to be the proper funding of care and maintenance capex, and of the remediation of sites after extraction ends. Both costs must fall on the businesses that have profited from their damage (and their owners if need be) rather than falling to taxpayers to cover. Given that analysis of company accounts indicates that remediation costs continue to be postponed far into the future even while the urgency of the carbon transition grows, there is an increasing risk that not enough money has yet been put aside to cover these costs.

The zombies, if that is what the world’s fossil fuel businesses become, must be required to tidy up their own mess, and not allowed further to offload the burdens onto the shoulders of society. Engagement surely has a significant role to play here, in encouraging companies towards the zombie phase, and then in keeping them on the public markets while they are undead. If they remain on the public markets, accountability and transparency will be greater and the world will have greater assurance that these companies are doing the right thing and playing fair.

PMI, for one, seems determined not to become a zombie. Only time will tell whether that’s the right decision for its own shareholders – or for Vectura’s.

See also: What’s the purpose of purpose? Will the focus on corporate purpose deliver real change in the way companies behave?

What’s the purpose of purpose? (II)

The Long Divergence: How Islamic Law Held Back the Middle East, Timur Kuran, Princeton University Press, 2010

Response to Exxon: An analytical perspective, Carbon Tracker, March 2014

MSCI index carbon footprints

Climate Accounting Project

Flying blind – The glaring absence of climate risks in financial reporting, Carbon Tracker, September 2021

Playing fair: the oddly inequitable world of sport

“People — for all our differences politically, regionally, economically — most folks understand sports. Probably because it’s one of the few places where it’s a true meritocracy. There’s not a lot of BS. Ultimately, who’s winning, who’s losing, who’s performing, who’s not — it’s all laid out there.”

So said US President Obama in a March 2012 interview with Bill Simmons of ESPN, setting out his view of why sport seems so engaging*.

It’s a view shared by many.

Yet in a summer of much remarkable sport, including events in 2021 proudly badged as 2020, having been delayed because of the Covid-19 pandemic (congratulations, Italy; thank you, Tokyo), the stories that stick particularly are more suggestive of unfairness and the sense in which elite sport has become unhealthily detached from the rest of humanity – perhaps even detached from reality. Meritocracy may not matter as much as Obama says; community definitely does matter.

The sight of Indian Premier League (cricket) games continuing with all the razzmatazz of that competition whilst the latest wave of the pandemic swept by outside the stadiums felt almost obscene. Rarely has the language of Covid ‘bubbles’ for sports competitors seemed a more apt term. The reason the League (the richest competition in cricket) finally gave for calling off the tournament in May was safety of players and support staff, so it cannot be said with confidence that the IPL had come to its senses and recognised that the contrast inside and outside stadiums was unsupportable. But no doubt player embarrassment played some part in the decision-making, as well as the fear of illness.

That obscene sight occurred at the same time as the obscenity of the greed of the attempted breakaway European Super League for 12 of the continent’s leading football (soccer) clubs. Announced on April 18th, the concept had fallen apart within just 48 hours as the six English clubs withdrew. That withdrawal was remarkable as none of the clubs involved can have imagined the announcement would have been welcomed. Indeed, the fury of fans – who feel they have greater ownership of their clubs than those with mere legal title to them – was entirely predictable. The extent to which either fan pressure or political influence led to the abandonment perhaps will never be known, but the sight of politicians who care nothing for football talking about the importance of its traditions was at least a source of brief amusement.

These two parallel events suggest that the apparent meritocracy of sport may make some active in it believe that they are above criticism. It does seem to be true that there is more perfect information about skill and performance commitment in sport than in most careers (“it’s all laid out there,” as Obama says), enabling a more vigorous negotiation on the value that individuals bring to sporting clubs. Particularly in situations where there is free negotiation on salaries because of an absence of salary caps (introducing such caps was an important element of the European Super League plans – seen as necessary to make the financials work) and scope for player transfers between clubs, player salaries can rise dramatically.

For example, Lawrence Kahn (now a professor at Cornell) in a study of the US sports labour market notes a 38% rise in salaries in the year free agency arrived in baseball, and a further 22% rise the following year. Scope for such negotiation enables leading sporting stars (more specifically, their agents) to negotiate for greater reward, in effect taking the bulk of the benefit of increased media revenues. It is this that leads many clubs, despite their millions in revenues, to remain in precarious financial positions. As with many over-levered companies, the Covid-19 pandemic created additional pressure which made these debt burdens unsupportable – this seems to have been the key driver for the announcement of the European Super League.

But those events show also that the source of those media revenues, the fans, still have some influence. The fact is that strong tribalism about teams persists even despite the footloose international ownership of clubs and the mercenary guns-for-hire nature of many star players. This visceral tribalism, and its political sway, turns out to be enough to influence decision-making even among those divorced from the reality of the lives of those fans.

The community nature of sports, their grounded reality in society, turns out to be more important than many may have believed. The freedom that the apparent sporting meritocracy brings – whereby stars believe they are worth the huge sums that they are paid, and others around the sports also enjoy inflated salaries and inflated self-worth through proximity – turns out to be less important than the ongoing consent of the fans. Fans do not tend to complain about player salaries (unless an individual clearly underperforms the riches lavished upon him or her) or the broader excesses of the sporting world, but there is a sense in which this is only acceptable because of ongoing communal consent. Clubs take risks if they overstep the mark and lean too far on the apparent meritocracy of sport.

There is some sense too that meritocracy still has further to travel. Perhaps the story of the sporting summer was the distinct unfairness of the treatment of American Football players with brains damaged by repeated shocks to their head in the crashing contacts that make the sport such a spectacle.

Under so-called race-norming, black players were assumed to have had a lower starting cognitive ability than their white counterparts and so would receive smaller pay-outs from the $1 billion fund established to settle claims related to concussion and brain damage. According to the latest report on awards (which do not disclose racial statistics), more than 3,200 claims have been considered and nearly 1,300 are payable, with under 1,100 denied; average pay-outs are over $0.6 million. A number of black former players argue that their claims have been denied entirely because of the racism inherent in race-norming. The NFL only belatedly agreed to abandon the process in June this year.

Racism persists across sport. The shocking response by a few to the English football team’s failure (yet again) in a penalty shoot-out, no doubt permissioned in part by the response by some who should have known better to booing of players taking the knee against racism, shows that. But the strength of the anger that answered that racism, and the majority strong support for the players for taking the knee, shows that racism is eroding. Many fans recognised that the taking of the knee was a part of the team bonding as a team greater than the sum of its parts, and so played a key role in its progress through the competition. That team-building was (coach) Gareth Southgate’s gift to a mostly grateful nation.

Again, community appeared to triumph against a noisy minority. We have some way to go to real fairness, but sport – for all its tribalism – continues to work to bring people together.

I disagree with Obama. I don’t think it is seeming meritocracy that attracts people to sport. I think it is the sense of shared endeavour – a sense that exists even for those who only spectate. Of course, playing fields must be fair and referees and umpires unbiased. But it is the shared experience, the drawing of a community together, that is the key to why sport moves us. Long may it work to bring us together in joy.

See also: Bowling Together

* I am grateful to Michael Sandel’s remarkable The Tyranny of Merit for referencing this quote.
Read the book. It will change how you think.

I am also grateful to my friend Ben for encouraging me to write in this area, and for the thoughts inspired by his university dissertation.

US President Barack Obama interview with Bill Simmons of ESPN, the BS Report podcast, March 1 2012

VIVO IPL 2021 Postponed, IPL press release, May 4 2021

The Sports Business as a Labor Market Laboratory, Lawrence Kahn, Journal of Economic Perspectives, Vol 14 No 3, Summer 2000

NFL Concussion Settlement August 2021 summary report

NFL pledges to stop ‘race-norming,’ review past scores for potential race bias, June 2 2021

Diversity and fairness

Diversity in business is mainly driven by performance concerns: more diverse teams are shown to take better decisions, and recruitment and promotion approaches that fail successfully to encompass the whole population restrict the talent available to an organisation. But fairness is also one of the drivers for diversity in the business context. 

Advancing those who have previously been denied advancement is a matter of fairness, and a move to greater fairness sends a message to the wider organisation, its business partners, and to prospective recruits about the nature of the business and the role it wants to play in the world. Many will thereby see the company as a better business partner, a better potential employer, and a favoured choice for consumers.

According to my friends and former colleagues at Australian responsible investment shop Regnan, however, the role of fairness in diversity goes further than this. Their recent study of the literature reveals that diversity may deliver little on its own, unless it is accompanied by both equity and inclusion. By equity, they mean “fair arrangements that enable all people to access opportunities” and by inclusion, “workplace conditions that enable all individuals to make their fullest contributions at work”.

To deliver fair and equitable employment practices – a pre-requisite, they say, for delivering on the promise of the diversity agenda – Regnan argues that companies must eliminate bias throughout employment processes, including recruitment, remuneration, development and progression. To be most effective, this requires leaning proactively against biases and existing power imbalances. They highlight areas of focus to deliver this, and discuss metrics that may help to reveal more about it.

“Equitable employment practices and inclusive decision-making are direct levers for improving performance, irrespective of diversity. Failure to adopt these practices may indicate broader business issues (such as entrenched management)”

The paper is a thought-provoking and highly recommended read.

Beyond Diversity: Equity and inclusion as an overlooked opportunity for investors, Regnan, July 2021