By David L. Bahnsen
Thursday, May 26, 2022
I recently watched not one, not two, but three
different streaming series, each about high-profile companies of the last
decade. Apple TV’s series, WeCrashed, starring Jared Leto and
Anne Hathaway, told the story of the spectacular rise and fall of Adam Neumann,
founder of the shared-office-space company, WeWork. Showtime’s Super
Pumped told the story of Uber and the removal of its controversial
founder, Travis Kalanick (played by Joseph Gordon-Levitt). And finally,
Hulu’s The Dropout depicted the fraud of Theranos, and the
eventual conviction of its founder, Elizabeth Holmes, for fraud and other
crimes against investors.
All three shows have their own strengths and weaknesses.
Certainly the real-life stories being depicted all distinguish themselves from
each other in various ways. Yet watching all three series and being quite
familiar with their subjects made me realize that there is not only a specific
thread connecting these three dramas to each other, but also one that connects
their stories to what may be the key lesson of our business era.
National Review’s Capital Matters has been a leader in critiquing the
so-called “stakeholder capitalism” movement. I have lectured on the topic extensively myself.
My agenda here is less to reaffirm the self-defeating folly of this movement
and more to demonstrate how the failures of these companies illustrate the fact
that everyone agrees the movement has failed. There are
varying degrees of self-awareness and consistency, but the societal response to
each of these three debacles indicates the same thing: Stakeholder
capitalism is a fraud. And a significant part of current market
challenges comes down to the need to relearn the lessons that basically were
forgotten in the insanity that these three drama series capture.
The premise behind a market economy is human action: the
reason, rationality, and self-interest of created beings acting with the
dignity God imbued them to practice self-preservation, self-advancement, and
ultimately, the cultivation of things they care about (their families, their
dreams, their passions, their aspirations, etc.). Those critiquing stakeholder
capitalism do not argue that business actors should be agnostic about the well-being
of employees, vendors, suppliers, and the community in which the business
exists. Rather, they argue that, in honoring their fiduciary loyalty to the
equity owners of the business, they will inevitably serve well the needs of the
aforementioned actors. And yet, when the primary function of the
business is lost — that is, the profitable delivery of goods and
services toward the aim of a better enterprise — not only do equity
shareholders suffer, but so also do bondholders, employees, vendors, et al. The
preservation of a business’s core mission is the sine qua non to
all of the other peripheral advantages one hopes will come out of the
enterprise (e.g., higher wages, charitable contributions, friendly treatment of
vendors, improved environmental conditions, etc.). The modern movement of the
Business Roundtable and ESG zealots to confuse fiduciary duty and primary
loyalty is not merely misguided; it is self-defeating. Any company more focused
on “world consciousness” than “growing revenues” is dead on arrival.
And with that, meet WeWork. Whenever people talk about
WeWork’s failure, they do not talk about the company’s failure to deliver
consciousness and peace. They talk about the company’s losing money. Adam
Neumann did not merely fail to turn office lobbies with kegs into
multibillion-dollar profit centers; he also failed to deliver profitable stock
options to his underpaid employees. He delivered sermon after sermon promising
nothing short of global utopia — all from the spiritual nirvana that would take
place when an unemployed graphic designer would smoke a joint with a similarly
unemployed consultant. Actual grown-ups evaluated this business model, listened
to this young man sell his snake oil, and responded not by calling building
security, but by writing him checks for billions of dollars. Well, people make
bad investments, I guess, though this one is as mysterious as anything I have
ever seen in 25 years of studying investor madness. But the entire autopsy of
WeWork has focused on exactly what the focus should be: the failure to deliver
returns to shareholders, worthless stock options, and the capital destruction
that accompanied this debacle.
The WeWork example is a brutal one, with a one-time $47
billion valuation now sitting at a $4.6 billion valuation in public markets
(and declining still). The infectious charisma of its leader made it a perfect
Apple TV drama. But the underlying narrative of such a failed enterprise is
hardly unique: The basic exercise of a company profitably delivering
goods and services is considered irrelevant at best, and cause for revulsion at
worst. The substitution of the core function of business for some
other agenda ends in tears.
There are numerous reasons for current market distress,
but the 12 percent downturn in the Dow pales in comparison to the 50–80 percent
downturn (or worse) in so much of the “insane” parts of the market (to use a
non-technical but charitable term). The same economic culture that celebrates a
shared office rent company as a “tech unicorn” with a $47 billion valuation is
the culture that wants desperately to believe a Stanford dropout with
absolutely no science pedigree at all had invented an entirely new way to test
human blood. And as harsh as it sounds, this economic culture is part and
parcel of an economic culture that believes value is magically created with
NFTs, or that a company of exercise bicycles with iPads on top is worth $50
billion. The carnage in the “cool tech” moment of SPACs, electric vehicles, hot
IPOs, work-from-home Covid discoveries, and all such frivolities is essentially
the same carnage — the inevitable result of detesting the core function of
business.
I should point out, Uber is neither in the same camp as
WeWork (a 90 percent destruction of value) or Theranos (a criminal fraud), but
it is fairly described as a “shiny object” unicorn of the first degree. It is
“only” down 63 percent from its all-time high as a public stock. More
problematic: Its Series G round in private markets was done at a $69 billion
valuation; it today trades at a $44 billion market cap. But does a company
deserve to be associated with a cult-like phenomenon like WeWork or a criminal
enterprise like Theranos just because it has lost money? Of course not. In this
case, the difference is of degree, not kind. Their admiration of the
permanent state of profitlessness as if it were some sort of noble or
sustainable reality is why they draw my ire. A robust brand name, a
disruptive industry presence, an iconoclastic and charismatic founder, a
Silicon Valley ethos, and yes, gazillions of dollars of capital destruction.
I am all for identifying the Federal Reserve’s
culpability in facilitating bubbles and manias, and monetary policy since the
Great Financial Crisis has its fingerprints on the stories I mention here. But
monetary policy did not alter human nature. It can provide cheaper capital to
finance bad ideas, and it can alter behavior to the point of outright
distortion. Gasoline? Yes. The initial spark? No way.
The initial spark to the insanity of the last decade —
from WeWork to Uber to Theranos to Peloton to Zoom to crypto — is a very simple
thing: ignoring the fundamental purpose of a business. Whether this act of
ignoring, discarding, or forgetting was done for the social cause of world
consciousness, the planetary cause of environmentalism, or the crass cause of
speculative hope over basic rationality matters not a whit. The outcome is
always the same, no matter the cause. Hope is not a strategy, and world
consciousness is not a viable business model. It is adorable, but it is not for
grown-ups.
Profitable investing in a market economy involves the
risks and rewards of discounting future profit expectations to a present value.
There is a lot that can go wrong there. Risks can be miscalculated. Rewards can
fail to materialize. Profits can be diminished. The discount rate used to value
those future profits can increase. The timeline can change. It isn’t easy. But
in all of those challenges, there is one way that the entire exercise can be
futile from the very beginning: apathy about the very concept of profits,
hopefully present ones, but at the very least, future ones. This is so
elementary that it is embarrassing to be writing it in an article intended for
adult readers. But apparently, the most significant institutional investors in
the world forgot it over the last decade. In fact, the religious mob of ESG
zealots is consciously trying to reprogram all investors from ever thinking it
again.
So the madness will continue. For every Bitcoin, Peloton,
and WeWork of the last couple of years, there will be another in the years to
come. The manias that come from the madness of crowds are a permanent fixture
of the investing public. But perhaps our economy would be better off if these
futile endeavors and horrific outcomes were limited to the greed and immaturity
of speculators who need to learn the hard way just once or twice, and did not
reflect the official platform of the Business Roundtable or the SEC or the
largest asset manager in the world.
There is a better way. Even before we get monetary policy
right and solve for so many of the structural challenges of this economy, a
renewed focus on the core business of business is the need of the hour. But as
long as we act as if profits, cash flows, fundamentals, management, and
shareholder value are relics of the past, we will at least have one business
line that is going to do just fine: streaming drama series on business
implosions.
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