The Promise of Sustainability. The Problem of Financialization.
In public discourse over social media, The Leaders Co-Lab Founder, Melissa O'Mara directed the conversation in this important direction:
I think you are making this argument: that [before we can change the way business does business] we need to first disentangle the finance industry and create a source of fiduciary finance and activism by focusing on pensions and endowments - which are a very specific kind of asset class.
Can you say more about what makes pensions and endowments specially fit for this purpose?
First, a clarification that helps us see how words matter, and how part of the disentangling of finance involves also disentangling the meaning of words that have become entangled in the entangling of finance:
Pensions and Endowments are not an asset class.
Asset = Financial Asset = legally equal, incrementally liquid, commodity shares in large-scale, long-dated agreements for financing enterprise securitized for trading at market clearing prices in markets for maintaining market-clearing prices for such shares, through volatility and growth in share prices.
Asset Classes = different shares in similar financing agreements with similar enterprises trading in specific markets, traded using similar trading strategies.
Pensions & Endowments are financiers, a unique part of the whole of Finance, who control vast sums of money aggregated into social trusts for allocating money as investment in financing for enterprise for income as well as safety to keep themselves ongoing and able to make the payments they are constituted to make as mutual aid societies for evergreen populations of current and future retirees, in the case of pensions, and for mission, in the case of endowments.
As trusts, they are governed by the laws of fiduciary duty. As applied to social trusts, these laws require and allow discretion within constraints of:
The Hypothetical Prudent Steward of a Social Trust.
Taking pensions as our paradigm, we can see the the Aims of these social trusts, as constituted by the private laws of their creation, are:
The Aims of Pensions & Endowments are longevity of quantities of money sufficient to quality of life. Not "outperformance" or "maximization" or "highest possible" or "purely pecuniary" or "extraction" or reckless disregard for the future physical consequences of present financing choices.
Their character, also a constituted by the private laws of their creation, includes:
The capacity they derive, as a matter of fact, from this character has, since their innovation in 1983, included the ability to use the technologies of spreadsheet math, desktop publishing and digital communication to negotiate with enterprise of any size, in any business, anywhere on the planet.
The law of fiduciary duty is often described as "in the best financial interest of the beneficiaries", which is true. But we still need to go back to the text to learn who the beneficiaries of a social trust are, and what interests they have in that trust. When we do go back to the text, we see that the beneficiaries are always an evergreen population of intergenerational ongoingness, and that their interest is always in the longevity of quantities of money sufficient to quality of life.
We can see proof of this capacity in the practice of Private Equity (which is an Asset Class within the Capital Markets part of the whole of Finance), that uses the capacity of Pensions & Endowments (as their primary source of funding) to financially engineer "value creation" for profit extraction.
We can see from common practice in Real Estate (as enterprise for renting space in buildings and built environments) that this capacity can also be used to financially engineer equity paybacks to an agreed cost of money, plus opportunistic upside, from enterprise cash flows prioritized by contract for suitability, longevity and fairness.
We can see by looking at Asset Allocation Strategies, that Pensions & Endowments are not using their capacity to financially engineer equity paybacks, outside of Real Estate.
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Why not?
Because back in the early 1970s, the special pleadings for the special interests of capital markets professionals succeeded in convincing our common sense that what made the most sense was to just let experts in the capital markets take control of the fiduciary money aggregated into social trusts for Pensions & Endowments.
At that time, the technology had not yet been invented for financially engineering equity paybacks. By the time it was invented, in the early 1980s, our common sense had been so effectively sidelined by experts in the capital markets that nobody noticed. Except for Private Equity.
So we got unchecked financialization that replaced the Enterprise with the Corporation and restated the purpose of the Corporation as growing its share price (derived from the Net Present Value (NPV) of anticipated future cash flows) to grow the Net Asset Value (NAV) of professionally managed asset portfolios to grow the Assets Under Management (AUM) of capital markets professionals to grow the fees and profits that capital markets professionals could extract from the Other People's Money that they manage, professionally, on the axiomatic assertion that more money for capital markets professionals will always also be a better quality of life for everybody.
This assertion has proven not to be true.
Sustainability has raised the call to return the purpose of business to improving the quality of life for people.
But this call to quality is being stymied by "the immune system of our culture" that protects the axiomatic assertion of equivalency between quantities of money in the capital markets and quality of life in real life, from ever being questioned.
The only way around this immune system is to reboot our common sense to reset the code of fiduciary duty as it applies to social trusts for Pensions & Endowments to purge the corruption of financialization and upgrade from Private Equity financially engineering the wrong economy to Social Equity financially engineering the right economy.
We can initiate this reboot by representing every enterprise as a configuration of Knowledge + Networks + Routines for converting cost-for-value into value-for-cost.
This allows us to see very clearly that every Enterprise needs money in order to make money.
Then we can see that when Enterprise needs money, Finance provides it.
Finance is the sociology through which society chooses where the money can, should and will be made to flow into enterprise to inform the economy.
This sociology today is whole made up of parts, each with its own subparts, as institutions of agency, authority and accountability that each have their own unique language and logic for deciding where the money made to flow into them, as aggregations of money set aside by others, for a purpose, for a time, as savings for investment in financing for enterprise, is made to flow out as allocations of those aggregation to enterprises, for their use in doing their work , for time, at a cost, and on terms, to inform the businesses that inform the technologies that inform the choices that inform the economy the informs society that informs our future.
Where an enterprise gets its money is very influential in how that business does business.
When enterprise gets its money from financialized capital markets, that money becomes decisive, at least as to the overarching value that every financialized enterprise must value first and foremost, before and, if necessary, at the expense of, all other values: growth in its share price to support liquidity in the capital markets, and profits for capital markets professionals.
So, if we want to change the values that business values, towards Sustainability, then we must first set Enterprise free from financialization.
And to set Enterprise free from financialization, we must first set Pensions & Endowments free from capture by the Capital Markets.