Mind-set on Profitability v. Liability
Harvard professer explains it is hard to succeed with a skeptic view in ESG
When the bubble economy burst in late 1980’s, young Tokyoities lost an incredibily huge assets in their personal balance sheets. Being in front of premature spreedsheet like Lotus-123, financers in dispair started to look for another opportunity and tried to stay the standard of living at the minimal level. I was at loss.
At an investment arm of Swiss Bank Corporation, now part of United Bank of Swizerland in Tokyo, a team of 20 analysts and economists fled to the new world. Most young analysts, including myself, went to business schools in America to in search for another job opportunities. What was going on with financial market?
Most investment banker read Michael Lewis’s legendary book, “Liar’s Porker”, my favorite story in Solomon Brothers. The book depicts the reality of inside the trading floor next to the equity research department. Huge loss incurred with financial terms and massive reduction of jobs. Is it just money and job?
What disappreared was more than personal asset and work but genuine leadership and connected community. Professor Geoffery Jones of Harvard Business School outlined his upcoming book in the online Zoom event of profit v. purpose on January 27th, 2022.
Professor Jones appeared in the early morning at 8 a.m. before 430 audience who signed up the event. HBS Club of Japan, with the cooperation of Academy Hills Roppongi, hosted it and had him deliver the ethical message to a total of 1,700 registered members with graduate program in the Boston area.
The presentation of an English historian has two parts: one is the message that value of ethical leader is hard to succeed. The other unfolds the failed attempt of institutional investors to achieve social and ecological purpose in the troubled world.
Half through way to his slides share with patient audience, he showed a dozen of historical figures in black-and-white photos. His research finds three distinctive characteristics of good leaders in the past; choice of industry, humble relations to stakeholders, and passion to community. These three traits origninates, he explained, from persistent endeavor to acquire virtue and spirituality. These are a value to succeed.
But he said that it is hard to succeed the value with his disappointment. He didn’t forget to remind the audience that the theory does not imply religion and philosophy, which also kept losing in America. His honest and holistic research didn’t stop there.
In the second-half of the promotional event, he cast the critical point on the current stage of ESG institutional investment. The attempt to provide a social solution from financial side has something to be desired. It raised a huge amount of capital and logically use it to put the pressure to the board of directors in such corporation as Exxon Mobil, a carbon emission polluter. Logically feasible, but it failed to achieve the climate goal by 2050. The audience is likely to see poor performance in years ahead. The accumulated wealth is not enough to fix social goals.
For one thing, the matrix of green finance is not complete. The carbon emissons has not been accurately caputured in the financial portfolio. He also mentioned an issue of transparency, which I think and he didn’t mention, that it requires the new method of disclosing information to track emissions and avoiding double-counting emission figures across supply chain of the entity.
The other point takes a case of categorical sorting to the adequate selection, B Corporation. Among the representations, a body selected only seven Japanese firms to meet the criteria. That is even absurd given the fact that Stewardship Code has been in effect more than seven years in Tokyo. The code of conduct has already spread among the public and institutional investors but the corporations in Tokyo continue to fail the standard.
Last year, Toshiba, 145-year technology conglomerate, unveiled its accounting scandal. Mizuho Bank runs ATMs throughout the Japan and their machines came to halt nine times last year. Even the technical trouble continued, the top management executed a 60% lay-off of engineers in turmoil. The disoriented board didn’t pay attention to the Code.
As a final remark, Professor Jones advocated a change of rule among instututions with mind-set. With long-term views, new leadership seek innovative approach with deep responsiblitiy to social and ecological purpose to the community. That is hard to achieve, too.
Unfortuniately, elite schools in America may not listen to his valuable signal. Instead, young minds rush to the computer terminal to spend a good portion of their time before shreadsheets, creating slides for presentations before investors. A real challege in one-hour event was very clear.
Value is lost. It is not easy to succeed in transition. The green finance has attracted huge amount of capital, but the finance alone is unlikely to achieve the unrealistic climate goals. Governance is not enough at poor practice in Tokyo. If the products of business schools pay little attention to his message by seeking profitability of corporations, it is self-evident that the massive liability piles up in right side of the hidden balance sheet.
No matter how much time to spend, no one can see the leadership quality in the balance sheet from the current accounting practice. For young eager minds of tommorrow, it is your power to restore lost leadership and community. The social balance sheet is dangerously red.