October 11, 2020
Moving Beyond ‘Greed Is Good’
by Paul Carroll
I think the insurance industry can support what might be thought of as a "beyond greed" movement, and even ride it.
Last month marked the 50th anniversary of Milton Friedman’s defining essay on the role of the corporation, which concluded that “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”
That conclusion has been taken to such extremes — think, “Greed is good,” the signature line from the movie “Wall Street” — that a backlash has been developing. I think the insurance industry can support what might be thought of as a “beyond greed” movement, and even ride it. Doing so would help our public image, while benefiting the customer and — dare I say it? — perhaps even increasing industry profits.
Now, there’s lots of power to Friedman’s argument. Otherwise, it wouldn’t have guided business for so long. Businesses need to generate profits to keep investing and improving in ways that benefit us, the customers — think of all the things that Amazon has been able to deliver cheaply and quickly to you since the start of the pandemic because of Jeff Bezos’ ferocious investments in his business. (Who knew I even needed eight sets of chopsticks, an air fryer and 63 plants?) Profits also provide feedback that help businesses get better at serving us. If a company is generating lots of earnings, the market is telling the company that it’s doing well. If not, the company needs to try something different.
My old friend Andy Kessler notes in a column in the Wall Street Journal this week that Friedman specified that a company focusing solely on profits must “stay within the rules of the game, which is to say, engage in open and free competition without deception fraud.” Andy says that, within the right structure, Friedman’s focus on profits produces huge benefits for society.
But cracks have been appearing in that structure. For instance, tobacco companies lied for decades about the dangers of smoking, and oil and gas companies likewise hid what they knew about greenhouse gases and climate change. Profits thrived. But did the companies show social responsibility? Not so much.
More recently, social tensions have heightened about income inequality, which can be traced in part to the laser focus on profits. That focus has certainly pushed the upper end of corporate pay far higher by creating a vicious circle (a virtuous circle if you’re one of the senior executives benefiting). The circle looks something like this:
To encourage the CEO to drive profits and nothing but profits, his or her pay is tied to the stock price — boost earnings, giving the stock price a kick, and you win big. CEOs are then evaluated against a peer group and are slotted into a quartile. They are paid like others in that grouping. Sounds fair enough, right? But who wants to tell the CEO that he or she is below average? In fact, in the chumminess of the board room, CEOs are almost all stars. That means they are paid above average — which raises the average, again and again and again, for each annual review cycle. Add in the potential for big gains on stock options, and the system looks increasingly unfair to anyone not fortunate enough to be at the high (and always getting higher) end of the scale.
Meanwhile, wages have been stagnant in the lower ranks of businesses. In the past, gains from productivity tended to be shared with workers, in the form of higher wages. In recent decades, almost all the gains have been captured by companies feeling pressure to produce maximum profits.
With the sense building that the pursuit of profits and nothing but profits has taken us too far to the greed end of the scale, the Business Roundtable released a statement in August 2019 signed by 181 CEOs “who commit to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.”
Such an approach, known as “stakeholder capitalism,” turns out to be easier to articulate than to execute. For instance, Marc Benioff, CEO of Salesforce, who was one of the champions of the Business Roundtable statement, declared a “victory for stakeholder capitalism” in late August when he reported quarterly sales exceeding $5 billion — then announced the next day that he was cutting 1,000 jobs. He argued that the cuts weren’t inconsistent with a pledge to benefit all stakeholders, but the 1,000 people losing their jobs surely felt differently.
A study looking at all the companies whose CEOs signed the “stakeholder capitalism” statement found, a year later, that they hadn’t followed through. I’m not especially surprised. You may value your employees greatly, but, if you’re Walmart, you’re not going to suddenly start paying clerks $15 or $20 an hour unless you know that your competitors will, too. Otherwise, you’d cede an advantage to them. So, I don’t think much will change until there is some kind of public pledge by all companies to do a series of very specific things for employees, communities, etc. or until government mandates something such as an increase in the minimum wage.
But the sentiment is there. There is a movement afoot to get businesses to look beyond profits and focus on broader issues, and it sounds to me a lot like what insurance is all about: We’re here to help clients reduce their risks and to recover quickly when the inevitable losses occur. We don’t sell widgets; we help people in their time of need. Who better to lead a “beyond greed” approach to business?
Back in the early days of the personal computer, when I was covering technology for the Wall Street Journal, the CEO of a successful software company told me his strategy consisted of trying to spot a parade. He didn’t have to organize the parade. He just had to put on a drum major costume, jump in front of it and lead it somewhere.
The more-than-profits movement seems like a parade that could — or even should — be led by insurers.
My suggestion would be less “stakeholder capitalism” as the starting point and more Peter Drucker. Drucker, the management guru whom I had the privilege of interviewing twice, began with the customer. Rather than the diffuse focus of “stakeholder capitalism” or the harsh emphasis on profits that Friedman advocated, Drucker argued that “the purpose of business is to create and keep a customer.”
That focus on the customer not only fits the historic ethos of the industry but seems to be where we’re heading. I’ve never seen an industry talk so much about the customer experience or the customer journey. And I’ve started to see the industry’s focus shift to what customers really want: to avoid losses, rather than to be reimbursed after they occur. Just in the past couple of weeks, Travelers announced that it was using artificial intelligence to help clients survey their workplaces and spot ergonomic issues that could cause injuries, and CSAA announced a pilot program to provide fire retardant that Californians can spray on brush surrounding their homes as a wildfire approaches. The list could go on.
Focusing on the customer could lead as far as insurers wanted to go into the “stakeholder capitalism” movement, with its emphasis on communities, employees and suppliers, as well as customers and shareholders. After all, clients live in communities that would welcome fewer car accidents, a reduction in home invasions and theft and other benefits that insurers could facilitate. Insurers will invest in employees and relations with suppliers as part of caring for customers. And if Drucker was right — he almost always was — focusing on creating and keeping a customer will make the profits flow, keeping those shareholders happy.
In fact, I’d argue that the industry is at a point where attaching to the hip of the customer could lead in all sorts of interesting directions and new revenue streams. Why just focus on serving a client after a car accident? Why not begin the relationship way upstream, installing a camera that watches both the road and the driver and uses AI to make sure the driver is paying attention as he heads into a known danger spot like a blind intersection? Why not continue the relationship way downstream, helping a client run errands via Uber or Lyft while waiting for a car to be repaired?
When I hear complaints about capitalism, I think of the line concerning democracy that is generally attributed to Winston Churchill, that “democracy is the worst system of government — except for all the others.” I’d agree that capitalism is the worst economic system — except for all the others. Capitalism, while messy, drives an extraordinary amount of innovation and has been the engine driving the progress of civilization for centuries now.
But maybe it can be a little better. And maybe the insurance industry can help lead the way.
P.S. Here are the six articles I’d like to highlight from the past week:
Life insurance can move past the 250-year-old, risk-focused transaction and become a core component within a life, wealth and health ecosystem.
Risks associated with GL and AU claims can be managed, even with “social inflation,” “nuclear verdicts” and tough jurisdictions.
Claims data within insurance companies is being increasingly seen as a key asset, not a byproduct of the claims process.
In 2021, there looks to be a major increase in overall tech spending and a rapid acceleration of digital transformation plans.
Insurtechs are important for the development of the industry — but as tools. Incumbents must still get the real transformation done.
Organizations that adhere to a rigid hierarchy throw up roadblocks to diversity & inclusion due to preconceived notions.