• L' Aparté

L’Aparté, a new column by Amiral Gestion

From the end of history to responsible investment

The End of History… and of all the rest

Francis Fukuyama declared in 1992 that liberalism and the universal values of the enlightenment period had triumphed. "The End of History"(1) was nigh, with the dissolution of the USSR and the resolution at last of centuries of ideological struggle and social transformation by a combination of democracy and free-market economics. Liberal democracy would signal the end point of mankind's ideological evolution and would thus be able to set the world in a stable state of equilibrium operating in accordance with its principles.

At the same time, the ideas of Milton Friedman have become embedded in business which has gradually become a one-dimensional concept, that of creating shareholder value. So-called "agency theories" are overhauling governance models to ensure that a company's managers are unfailingly and exclusively aligned with the interests of its shareholders. The company, too, is said to have reached the culmination of its secular transformation, caught in an unrelenting economic mechanism of creating financial value and generating perpetual growth.

"Technological innovation adds further impetus to the spread of liberalism and convergence of models."

The digital revolution is ultimately breaking down national borders and combining cultural identities in what has become a "flat" world, a concept rendered popular by another Friedman(2) describing a form of globalisation that is both unavoidable and positive.

Just as this new vision of the world was beginning to dominate, the TMT bubble burst in 2001 followed by the Great Recession of 2008, reviving the trauma experienced in 1929 and eroding confidence. These breaking points serve as a reminder that cycles can be very violent and throw us back into the type of upheaval experienced during the course of history by raising the spectre of far-right movements and revolutionary excesses.

The approach taken by Fukuyamaist capitalists in response to the risk of falling into such a trap is to adapt this time around by putting an end to economic cycles. The age of quantitative easing has begun. The flaws of liberalism must be concealed. The role of central banks is to do away with recessions by taking on endless debt and using it to buy up all the market's risky assets if necessary. This is to deny reality and believe that risk no longer exists. The strategy nonetheless proves effective in the short term and economies manage to avoid the worst in 2008.

Having chalked up such victories, the engineers in Silicon Valley have taken things even further by declaring war against mortality and announcing the "death of death"(3). Mankind, as a neoliberal shareholder, turns to transhumanism and dreams about developing an "augmented" version of oneself, one that never dies, and about sitting back and watching as one's "central bank assets" gain value throughout one's eternal life. Otherwise, what is the point of piling up billions that can never be used over the course of a human life; we need to live for centuries to make the most of these billions. Such a promising future is worthy of a fairy tale, at least for the privileged few who are rich and educated enough to gain access to the latest biotechnological innovations and to join the new species of Sapiens that Yuval Noah Harari(4) talks about.

So liberal democracy triumphs as the ultimate accomplishment of human society, companies become financialised, economies become digitised, the world flattens, economic cycles are eradicated and, to top it all, the death of death is declared; this is truly a glorious "End of History", a happy end of the like found in American blockbusters. This fable is being theorised and spread around by a triumphant Western elite but needs to be put into perspective and face reality if it wants to avoid entering the failed utopia hall of fame. It needs to pinpoint its failings and reform itself, even at the risk of being overtaken by alternative approaches.

Back to reality

The Covid-19 pandemic has revealed just how fragile we are and could prove to be a turning point for mankind in acknowledging this and becoming somewhat more humble. We once again face the prospect of a major economic crisis. Central banks find themselves trapped by the accommodative monetary policies of the past ten years and are having to step up their efforts to eliminate all traces of a recession by taking on ever more risk. Having initially bought up government debt and investment grade corporate bonds, the Fed is now hoovering up high-yield debt.

Ironically it is capitalism itself that is being crushed under the weight of thousands of billions of dollars spent on stimulus plans and asset buying. The market economy is turning into an administered economy with prices being set by central banks. The further they lower interest rates and the more risk they assume, the greater the risk taken and the bigger rescue plans need to be in the event of a hard economic blow. Botox injections may start off being administered evenly but then give way to too many facelifts and an increasingly deformed face(5).

It is even more dangerous to keep forging ahead like this as only a minority of asset owners are benefiting. The middle classes, meanwhile, are losing their purchasing power(6). They have no savings and not enough income to make the most of low interest rates, take on debt and buy assets at prices that have been pushed up to sky-high levels by the central banks.

Meanwhile, technological innovation, or the supremacy of digital oligopolies to be exact, has raised some unexpected existential issues. The infotech and biotech revolutions combined have completely changed the way we look at mankind, the limitations of our private lives, our place in the job market, our ability to compete with new forms of intelligence and our biological future. We find our social purpose and human nature suddenly being "disrupted" by our own innovations, although without really being able to believe this is the case.

Even more seriously, this die-hard search for growth benefits only a few people but threatens the entire planet with an ecological meltdown, and the main victims will be the most vulnerable.

All these issues will need to be addressed if we want to avoid the end of the "liberal narrative"(7). The way forward cannot be mapped out by the megalomaniac babble of a few Silicon Valley gurus promising us that brain chips will protect us from artificial intelligence and that planet Mars will save us from an exhausted Earth. We might hope that human intelligence will seek to think carefully about the technology we create and to protect the planet that enables us to thrive, instead of looking for ways to survive and escape once the deluge has already been unleashed.

If liberal democracy still aspires to be a unifying model for the rest of the world, which we support wholeheartedly, it will have to resolve these issues which undermine it. It will not be able to win the battle of ideas if it is unable to incorporate as many people as possible, give meaning to its progress and protect our ecosystem. The solutions will undoubtedly have to be political as they will need to reinvent global multilateralism rather than unravel it. This is a vast topic and, as investors, we do not claim to know how to shape the best way forward.

However, we are entrepreneurs as well as investors, which means we have the responsibility and an opportunity to be agents of change. Capitalism does not depend only on its political governance but also on freedom of enterprise and the ethics of those who make the most of this freedom.

Ethics, enterprise and capitalism

At the start of the 20th century, Max Weber argued that Protestantism was at the source of the surge in modern capitalism(8). His view was that Protestant beliefs were embedded in the "spirit of capitalism" as they emphasised thrift and hard work as being values of the moral order. Capitalism is, above all, a form of ethic. The rational organisation of labour and search for economic gains, which are features of the modern firm, do not come from an appetite for money or a form of inherent human rationality but represent good itself(9).

Other thinkers say capitalism was created by Catholic merchants, others claim it came from the Jews; but this matters little. The link between ethics, entrepreneurs and capitalism has been established. The search to accumulate material wealth throughout one's life is not self-evident and alone does not explain the behaviour of homo economicus. Otherwise, capitalism would have always existed.

The very idea of a "spirit of capitalism" may today seem outlandish, even idealistic. We all know where the responsibilities lie. The company has gradually been emptied of its substance by the neoliberal economic theories of the past few decades, which have financialised them and subjected them to often short-term interests. Relations between stakeholders, and often between workers, managers and shareholders, have been modelled in the form of contractual networks based on purely rational considerations, i.e. financial incentives and profit maximisation(10). The damage to corporate image is enormous, with 54% of young people believing that a company's sole purpose is to generate money(11). This leads to disengagement and distrust.

The fact that Corporate Social Responsibility has been brought back to the fore in these circumstances seems to suggest a paradigm shift is underway that will open up new prospects. The concept of the company as a community rooted in its local environment and natural ecosystem has been revived. Relations between employees and most other stakeholders are no longer mere contractual bonds but actual human relationships where the issues of equality, trust and personal development are more important than maximising financial interests(12). Meaning and purpose once again prevail over any reductive analyses. Ethics is once again seen as being a source of a company's growth momentum and, in its wake, of liberalism.

So we are going back to reality, to what Ford described a century ago: "A company must make profits otherwise it will die. But if we want the company to only run for profit, it will also die since it will have no reason for being".

Back in 1972, Antoine Riboud provided a broader definition of a company's responsibility at the national convention of the CNPF (French employers' association) during a seminal speech in Marseille: "Corporate responsibility does not end at the factory gate or the office door. The jobs that it generates condition individuals' whole lives. Through the energy and raw materials that it consumes, it gradually changes the appearance of our planet. The public see to it that we are reminded of these responsibilities in this industrial society. […] It is clear that growth should no longer be an end in itself, but rather a tool used to serve the quality of life without ever being detrimental to it."(13). Fortunately, the notion of corporate responsibility has always existed and been kept alive. But it now needs fresh impetus to tackle today's issues.

It is in light of this overall diagnosis that we examined Amiral Gestion's purpose and social responsibility in order to find a way for us to participate in social progress and make a positive contribution. Such introspection is essential for an investment company. How can we credibly claim to assess the CSR policies of companies in our portfolio if we do not examine our own social responsibility, governance, engagement policy, environmental footprint and, more generally, our aspiration to take meaningful action?

Corporate Social Responsibility and Responsible Investment

CSR and SRI are closely linked with each other. Socially Responsible Investment implies factoring in the CSR policies of the companies analysed in order to identify which management teams have a real vision and genuine resolve to incorporate all aspects of ESG into their corporate strategies.

To identify them accurately, our investment teams need to see evidence of much more than just an incentive to be politically correct. Managers must be true believers in ESG and incorporate this approach into their own values and into the company's sense of purpose. In this case ESG is no longer a constraint but instead becomes an opportunity for the company to rally its teams together in support of a more inspirational goal by complementing the search for performance with delivering a social benefit.

Even just a few years ago, the social dimension of our job as investors was limited to allocating savings to the most efficient projects. This was essential in a market economy but certainly not enough to convince a millennial. We are now able to achieve a broader and more ambitious impact. As SRI has become more prominent, investment funds have been given an opportunity to get involved in a company's transformation by working alongside management teams to steer their strategies and advocate a more responsible approach. This is what is modestly referred to as the "Dialogue and Engagement Policy", which has become the very backbone of Amiral Gestion's SRI strategy.

Negative selection, which means excluding certain companies based on their ESG profile, is already highly effective. The indirect impact this has on a company's valuation and financing capacity can encourage a company to make changes or, at the very least, to question its strategy. But it is even more satisfying to engage in real dialogue with management teams to share a diagnosis and establish scope for progress, whether this involves undertaking an industrial transformation to reduce CO2 emissions or instilling social progress in a services company with an important human capital dimension. Such an active and engaged approach to SRI is particularly well-suited to our investment philosophy, which takes a long-term view and is based on building up detailed knowledge of the business models of the companies we invest in and on establishing bonds of trust with their managers.

Amiral Gestion has embraced ESG for many years now and has been engaged in Responsible Investment since 2015 by managing SRI mandates on behalf of institutional investors specialising in the field(15). They have enabled us to develop and perfect our approach. We wish to continue building up our expertise and practices in this area by applying them to our investment universe on a broader scale so that we can make social impact a strategic objective. We are thus delighted to welcome the two founding members of the Efires consultancy into our team. They will add a decisive degree of impetus to our SRI and CSR objectives.

As committed entrepreneurs, we are prepared to assume our responsibilities. This is not only necessary but also provides Amiral Gestion with an opportunity to rally our staff members around an even more meaningful corporate project.

"Let us conduct our businesses as much with the heart as with the head, and let us not forget that if the earth's energy resources have limits, those of man are infinite if he feels motivated." Antoine Riboud, 1972.

  • (1) "The End of History and the Last Man", Francis Fukuyama, 1992
  • (2) "The World is Flat – A brief history of the twenty-first century", Thomas Friedman, 2005
  • (3) "The Death of Death", Laurent Alexandre, 2011
  • (4) "Sapiens – A brief history of humankind", Yuval Noah Harari, 2011
  • (5) The Fed's balance sheet has doubled in less than a year to 35% of US GDP and the money supply in circulation now corresponds to 25% of GDP, levels not seen since World War II – Federal Reserve data
  • (6) In the USA, the share of private wealth held by the 1% richest people has increased from 22% in 1980 to around 40% today, while the share held by the 90% poorest people has plummeted from 40% to around 25% – "The Triumph of Injustice", Emmanuel Saez and Gabriel Zucman, 2020
  • (7) "21 Lessons for the 21st Century", Yuval Noah Harari, 2018
  • (8) "The Protestant Ethic and the Spirit of Capitalism", Max Weber, 1905
  • (9) Calvinism stipulates that work plays an ascetic role and provides a haven from the state of existential anguish linked to predestination, hence the first capitalist entrepreneurs were guided by the search for salvation rather than personal gain
  • (10) "L’entreprise, objet d’intérêt collectif", Nicole Notat and Jean-Dominique Senard, 2018
  • (11) "The 2016 Deloitte Millennial Survey", a study carried out in 29 countries
  • (12) The three most important factors for a company's long-term success, according to young people, are "employee satisfaction/loyalty/fair treatment" (26%), "ethics/trust/integrity/honesty" (25%) and "customer care/focus (19%)" – "The 2016 Deloitte Millennial Survey"
  • (13) Terra Nova report on "L’entreprise contributive", 2018
  • (14) The FRR (Fonds de Réserve pour les Retraites, pension reserve fund) and ERAFP (Etablissement de retraite additionnelle de la fonction publique, supplementary pension institution for civil servants)