Clayton Christensen on Religion, Markets, and Investors
On his passing, a look at the business and religious leader’s legacy of innovation and insight
On January 23, 2020, the investor, Harvard Business School professor, and religious leader Clayton Christensen passed away. I was and am an enormous fan of Clayton Christensen and his work. He had a clarity of thought and a way of storytelling which made not only compelling listening but helped spark insight.
Here is a great, lesser-known example of his wisdom which has often led me to pause and think:
Here, Christensen makes two provocative and interesting points:
- He argues that without an instinct for following the rules (which have often come from Western religious traditions) and honesty, then capitalism simply doesn’t work.
- He then goes on to argue that economists have done a “great disservice to capitalism” by promoting the notion that management is responsible for maximizing shareholder value.
If you know me, you’ll know that I’m not personally religious. I also don’t believe that the only way that the necessary moral imperative Christensen talks about can come about is through religion. Still, however these moral imperatives come about, it seems to me that he is right in saying that a certain core honesty and willingness to play by the rules is key for functioning economies.
Capitalism doesn’t really reward the just. Unchecked, this leads to fundamentally corrupt business practices.
Point #1: Capitalism doesn’t work without core ethics of honesty and rule-following
While this seems obvious, this isn’t necessarily the case. Western governments have often sought to set up market economies without the necessary sound public institutions in place. Capitalism as a market mechanism arguably has no “core ethic” associated with it. The only driving force is that more returns/profits drive success. It’s even the case that more success often leads to accelerating advantage and therefore dominance. As a result, it is arguably rational to use any loophole or trick, no matter how unethical, to grow one’s share. If you win, your winnings will probably allow you to erase your competitor’s objections entirely. Capitalism doesn’t really reward the just. Unchecked, this leads to fundamentally corrupt business practices. Even if you’d like to play by the rules you are at a huge disadvantage if you do so.
Christiansen argues that even if there is the risk of punishment when caught (a helpful deterrent) it is the fundamental honesty and willingness to stick to the rules that keep Western economies on the rails. A tradition that may now be eroding.
I would argue this is all down to the strength of the institutions in a country. This point is well made in the fascinating book Why Nations Fail by Daron Acemoğlu and James A. Robinson. The authors argue convincingly that open, distributive economic institutions are what really accelerate growth. Closed, extractive economic regimes stunt growth and impoverish nations. Institutions are collective tricks of the mind. They are systems humans build up and need to believe in to maintain. The greater the general benefits of an institution the less its practitioners will be happy to see it subverted. While it’s human nature to seek an advantage here and there, there is a strong incentive to play by the rules when they fundamentally work.
The challenge is that this belief is fragile. Whether we’re educated in a moral religious tradition or not, if institutions are routinely subverted and nothing is done about it, it’s likely markets will become increasingly disrespected.
Point #2: Maximizing shareholder value
Christensen argues that the notion that company management is responsible for maximizing shareholder value was dreamt up by economists. In reality, he says they are primarily speculators. Shareholders of public companies today often hold the stock for very short periods rather than for the long haul. His argument is that rather than maximizing shareholder outcomes, CEOs and management should instead advocate for optimizing for the long-term health of the company, prosperity of employees, and the prosperity of the communities in which we do our work.
This makes a lot of sense to me. Short term profit thinking can be extremely damaging to long term company prospects and it is incredibly hard to get away from for public companies.
Unfortunately, it’s not quite as simple as wanting to change. In reality, many public companies are in very large part owned by the market investors. In other words, the vast majority of their voting stock is owned by external investors. In the major U.S. indexes, almost all companies are less than 20% inside owned (which means 80%+ of their stock is owned by third parties).
This, in turn, means shareholders very often do have the power to fire (or conversely incent) the CEO and management team to focus very much on their interests. The list of names of the largest U.S. companies that have more than 50% employee ownership doesn’t contain too many immediately recognizable names.
Interestingly amongst some of the most successful forms, there are significant numbers where the original founders still run the company and hold very significant stakes. These include Amazon, Google, Facebook, and Tesla. One might argue that they are all technology companies and that is the reason for their success. Potentially this is true. However, I suspect having a small group of leaders with enough control to push back on short term concerns is likely an important factor in their success.
Some argue that this has made the companies arrogant and causes them to act in dangerous ways (Facebook’s data usage springs to mind). Some of this is true, but I can’t help thinking that founder independence is likely leading to bigger beneficial leaps for society as well. The vision of a few employees sometimes gets you further than the hour-by-hour voting of shareholders on the stock market.
A version of this post was previously published in Infinity Welcomes Careful Drivers.