With the turning of the decade, let’s consider an aspect of investing beyond a better return: what makes a moral company?
The study of economics grew out of moral philosophy. Before he wrote “Wealth of Nations,” Adam Smith wrote “The Theory of Moral Sentiments,” which begins, “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.” The fortune of others, Smith observes, has meaning — even if it is only “the pleasure of seeing it.”
Today economics is treated as science, reduced to numbers and detached from morality. Anyway, what is morality? It may be the rules that are handed down by the creator, or, sans creator, the “natural” moral rules upon which we generally agree, or, cynically, rules that other people believe that can be exploited for one’s benefit.
Morality in business and investing is worth considering for two reasons. First, our lives are finite: is there some other pleasure besides maximizing returns? Second, while money is seen as a panacea for all problems, it does not usually improve people who get it: comfort often leads to self-satisfaction, pettiness, and a craving to impress. Conversely, suffering often removes the veil of self-delusion, invokes a desire to improve the world, and inspires sympathy for other people. If wealth has a negative component — “the love of money is the root of all kinds of evil” — then considering a moral approach to wealth and to investing can improve not only our accounts, but our society and ourselves.
The moral underpinnings of the United States are set forth in the Declaration of Independence: “We hold these truths to be self-evident” — these ideas are natural laws that everyone ought to understand — “that all men are created equal, and that they are endowed by their Creator with certain unalienable Rights” — no person is naturally more important than another, and each person has rights that cannot be denied. The three fundamental rights are “Life, Liberty, and the pursuit of Happiness.”
As Adam Smith notes, we are naturally interested “in the fortunes of others.” Those fortunes are established through our work, which occupies much of our time and thought. Though we complain about work, it is the central activity of our lives. We like working with other people, making things, contributing, innovating, improving, getting feedback, and sharing in successes.
More than anything, most of us want to feel appreciated and to feel some passion in our lives. It’s why we have employees of the month, community service awards, and black-tie dinners. We seek authentic appreciation wherever we go, and, when we are unappreciated, we soon leave. It is the law of customers, employees, and volunteer groups.
Most of us would like to be part of something that is “changing the world” for good — improving communications or crop yields, curing a disease, educating people, or providing new opportunities. We are drawn to passionate companies that proclaim their mission because it’s fun to experience their products and services. Though hard to imagine today, people in 2008 sacrificed 168 hours of their lives to wait in line for the precious iPhone 3G.
Tesla owners speak rapturously of their cars. One told me that he can relax in the Lincoln Tunnel because his Tesla Roadster drives itself in tunnel traffic. This past week, Tesla’s (TSLA) market cap (the total value of all Tesla shares) surpassed $89 billion, $2 billion more than the combined value of GM and Ford (F). Tesla’s trailing 12-months sales are $24 billion; GM and Ford combined sales are about $302 billion. In good times, passion rules.
Whatever we do, most work involves helping to move technology to the next step. Our economic system is built on the creation, sale, and use of tools. We have moved from swords and plowshares to missiles and software, but we now make tools that can turn the world into a paradise for human beings: never have we had greater access to knowledge, food, goods, and even healthcare.
Since we are interested in both ourselves and the good fortunes of others, the most moral tools may be those that generally increase happiness and well-being — tools that keep people safe, fed, informed, healthy, connected, and fulfilled.
Tools can be used in at least four ways: to create, control, addict, and destroy — and companies tend to fall into these categories. Most companies start with a single, creative idea. Trex (TREX) makes alternative-wood decking from recycled materials. Universal Display (OLED) develops low-power, bright organic LEDs for phones, TVs and lighting. Nordic Semiconductor (NDCVF) makes low-power wireless chips that connect “the Internet of Things.”
Sometimes companies discover new uses for their tools. Nvidia (NVDA) sold graphics processors that were adapted for artificial intelligence and deployed in everything from cars to the world’s fastest computer. Apple (AAPL) put computers in pockets, and, through apps and services, devoured consumer electronics including almost everything ever sold by Radio Shack.
Established companies often turn to control rather than innovation to grow. Adobe (ADBE) bought popular graphics software competitors like Aviary, shut them down or re-branded them, and demanded that its user base pay annual subscriptions. The business model for selling graphics software had run its course, so Adobe converted to a cash-flow model and invested its cash in digital marketing software. Adobe is now a large company with a $161 billion market cap but with a less innovative proposition than it had years ago.
Some companies make tools that actually control people: for instance, public prisons in the U.S. and facial recognition networks in China. When prisons make profits, they seem to become less humane. One federal judge called a private prison company, “a cesspool of unconstitutional and inhuman acts and conditions.” Imprisoning people may be a growing, profitable business, but not one that I trust or one from which I want to profit.
Every company would like to compel customers to buy its products, but some of the most profitable companies are built upon addiction itself. The owners of opiate companies accepted tens of thousands of deaths while gilding their reputations with gifts to museums and charities. Owners of tobacco companies see new opportunities to hook the next generation on nicotine with e-cigarettes. Even candy company owners have shrewdly re-branded sugar as “energy,” which helps drive obesity and, the CDC says, an “alarming” rise in diabetes.
Gambling ruins so many lives that the industry advertises that one should “Bet with your head, not over it.” Former Philadelphia Eagles owner Leonard Tose gambled away the Eagles and his entire fortune in Atlantic City. Considering Atlantic City’s bankrupt casinos and corruption, a better bet on urban renewal could be banning liquor sales as in family-friendly Ocean City or just waiting for a turnaround as in economically resurgent Asbury Park.
The most addiction-driven businesses may be medical companies that optimize prices for life-saving drugs and procedures. Martin Shkreli, the poster boy for price gouging, raised the price of the antiparasitic drug Daraprim from $13.50 to $750 per pill, but even mainstream companies have aggressively inflated prices.
The inventors of insulin sold their patent for $1 for the good of humanity, but between 2007 and 2017 insulin manufacturers pushed Medicare insulin expenditures up 840 percent from $1.7 billion to $13.3 billion; Internet sites memorialize people who have died from rationing expensive insulin. In dialysis two companies control 80 percent of the $35 billion market, which accounts for only 1 percent of Medicare patients but 7 percent of expenditures.
It sometimes seems like addiction-driven and medical companies are working together to extract maximum profits and reduce life expectancy in the U.S., which is now 12th in the world and has decreased for the last three years — largely because of drug overdoses, suicides, alcohol-related illnesses, and obesity. A Harvard study found that 62 percent of all personal bankruptcies are caused by medical bills — even though 78 percent of filers had some form of health insurance. Since 1970 healthcare expenses have grown from 7 percent to 18 percent of gross domestic product (GDP).
One of the great questions of life is: just because we can do something, should we? Which companies would we like to own both because of their prospects and because of the good they can do?
Let’s consider a three-point “Declaration of Independence Test” for moral companies:
(1) Life: the company does something creative that improves the human condition;
(2) Liberty: the company makes the economy more efficient, thus providing greater opportunities for people;
(3) The Pursuit of Happiness: the company demonstrates an appreciation for its customers, employees, and shareholders — and it conveys an authentic sense of passion about its mission.
Such companies often have excellent customer service, make exciting products that are delightful to experience, are changing the world for the better, and are led by a passionate, creative person. These are the same attributes that can cause a company to grow quickly and can provide an excellent return on investment.
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