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Spraying Intellectual Effort Up Against The Wall – Alternate Corporate Valuations

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As particularly silly attempt to redefine how corporations are valued. Via email, apparently only on Bloomberg terminals:

George Serafeim wants to revolutionize the
way businesses calculate their success.
Profit and loss aren’t enough, says the Harvard Business
School professor. Serafeim aims to do what no one has done
before: Put a dollar value on the impact of products and
operations on people and the planet, then add or subtract it
from companies’ bottom lines.

The first problem with this is that whatever values he applies will be subjective. For example:

Intel Corp. provides an example of both. Serafeim and his
five-person team credited $6.9 billion to the chipmaker in 2018
for paying its employees well and for boosting local economies
where it has offices. But they deducted $3.1 billion for what
they said was a shortage of women employees, the difficulty of
career advancement and not enough attention paid to workers’
health.

What actually is the value of nice careers for women? Sure, someone at Harvard can declare what he thinks such is worth but so what? Value is what is believed to be value by the rest of us. Which poses something of a problem for all these alternative value measurement systems. If we do value nice careers for women then we’ll preferentially buy from companies which provide nice careers for women. Which means that the value of the company, as defined by its equity value, rises.

That is, if we value nice careers for women then the standards shareholder value model works to provide nice careers for women. We don’t, if we value nice careers for women, need an alteration to standard shareholder valuations. Or, as this can also be put, the very insistence that stock values don;t reflect providing nice careers for women means that we don’t value nice careers for women. Not us out here that is and we’re the only people that matter.

So, we’re the standard logical problem with valuations, who is doing the valuing?

We’ve also a more detailed problem. Our man here isn’t measuring, and won’t measure, what he says he will. He’s claiming to be measuring the effect of a company on that wider world out there. OK. So, what’s the consumer surplus from the existence of the company? What do people gain from it?

We have an answer for Walmart:

There is little dispute that Wal-Mart’s price reductions have benefited the 120 million
American workers employed outside of the retail sector. Plausible estimates of the magnitude of
the savings from Wal-Mart are enormous – a total of $263 billion in 2004, or $2,329 per
household.

Even if you grant that Wal-Mart hurts workers in the retail sector – and the evidence
for this is far from clear – the magnitude of any potential harm is small in comparison. One
study, for example, found that the “Wal-Mart effect” lowered retail wages by $4.7 billion in
2000.

Our Harvardian will undoubtedly include that $4.7 billion as that’s deducting from women having nice careers. But he’s not going to include the $263 billion, is he? No, he’s not, because if he did then he’d end up with a valuation where all the things he’s worrying about turn out to be pissant tiny details.

This isn’t wholly and exactly true but given how old those Walmart figures are, and adjusting by eye for Walmart operating in more places than just the US, we could say that Walmart’s equity valuation back then was $263 billion. It’s about right at least, within a few tens of percent.

So, we’ve the shareholders, the capitalist oogie boogie monsters, with $263 billion of wealth and consumers with $263 billion of annual gains. We know how to convert any annual income stream into a capital valuation, that’s how Saez and Zucman estimate wealth. A reasonable rule of thumb is multiply by 20. So, the capitalists gain $263 billion, consumers $5 trillion.

See why the professor isn’t going to include consumer gains? Because the $5 trillion makes his $8 billion at Intel look entirely pissant, doesn’t it?

Friedman, the Nobel Prize-winning economist, declared that
a corporation choosing social responsibility over maximizing
profits was practicing socialism — a “fundamentally subversive
doctrine,” he called it in 1970. In a free society, Friedman
said, “there is one and only one social responsibility of
business — to use its resources and engage in activities
designed to increase its profits so long as it stays within the
rules of the game, which is to say, engages in open and free
competition without deception or fraud.”
Cracks in adherence to that philosophy are showing. Last
year, the Business Roundtable, a group of the largest U.S.
corporations, surprised many business leaders when members
committed to broadening the beneficiaries of their firms’ work
from simply shareholders to customers, employees, suppliers and
communities.
Serafeim’s work at Harvard could ease those changes by
putting number values on them.
“What we’re doing is empowering capitalism to really have
free and fair markets,” Serafeim said. “Otherwise, it’s kind of
a crony version of it.”

The one thing the ghastly little oik dare not count is that benefit to consumers. Which is why he isn’t and isn’t going to. Because how far are you going to get in academia by agreeing that free market capitalism is the socioeconomic system that delivers the goods?

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3 COMMENTS

  1. If he wants to value them differently, and buy and sell at different prices as a result, that’s up to him. The rest of us might make a little money off him selling things cheaper than they should be…

    • I agree. People found and run a business for reasons that seem good to them. The value we attribute to it is simply to allow us to work out whether it’s worth investing in or can meet its debts.

      A favourite example of mine is Newcomen’s engine. I’d argue that he didn’t spend 14 years producing the thing for wealth only. But he needed to make that money to make a success of his endeavour.

  2. The Sahara will run out of sand before the world runs out of self-important self-righteous [name of part of women’s anatomies].

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