FMGD TERM END ASSIGNMENT

SUBMITTED BY: YASHODHAN JOSHI

UM18068
XAVIER INSTITUTE OF MANAGEMENT
 Summary : Briefing: Corporate Purpose

The age old mainstream view of firm’s primary objective of maximizing

shareholder value stands somewhat challenged in the face of social injustice,
climatic change and inequality. Bluechip firms leadership have of late been
vocal about a sense of purpose, away from the usual course. The assets
managed under the ESG criteria in Europe, US, Canada, Japan and NZ have
risen from $ 22.9 trillion to $ 30.7 trillion. The idea has come to be backed by
some investors, with the current generation also following suit in search for
suitable employers . They see large firms as partially responsible for status
quo in terms of harm to the environment and society in their pursuit of single
aim to maximizing shareholders value. Elizabeth Warren has been batting for
obligatory charters on firms for them to pursue stakeholder interests. Some
have termes it a socialist move. Interestingly, among the youth, (Us, Age 18-
29) socialism has been found to be much more favourable (almost as fav as
capitalism) than it was, a stark contrast with the elder age segments.
The Business Roundtable of August 2019 resonated with Warren’s view but
was met with backlash from the Council of Institutional Investors, who termed
it the death of capitalism. This comes from the lack of direction rendered by
not choosing Stakeholders’ interests as the only objective. By not accounting
for the nuances of abiding by general ethical standards and the law,
Friedman’s assertion has been widely misunderstood and practiced. Some
attribute the above to the simpler times when Agency Problem ( aligning of
managers’/agents actions to /shareholder owners goals) was seen as the only
challenge. By this logic, still the onus of stakeholder protection should lie in
the hands of shareholders and not managers. But in the current context, it is
not possible for individual shareholders to affect a change even if they intend
to, due to political and legal mechanisms being present, which can be best
dealt with by the corporation. Raghu Ram Rajan proposes an alternative by
redefining firm value measures by considering specified set of non-financial
investments.

On the firms’ side, Nadella has urged platform based tech giants (
SaaS/PaaS) on assuming greater responsibility towards AI, cybersecurity and
consumer privacy. Top companies have volunteered by boycotting withdrawal
from Paris Trade Agreement while some consumer facing companies have
taken initiatives targeted at controlling global warming, though the impact
potential is still low. This is because massive emissions are caused by oil
companies, that on paper allocate carbon prices during investment analysis but
at the same time pump fossil fuels. The steps taken by companies come with a
risk of backlash (shareholders and at times stakeholders) and drop in the stock
value, which may or may not improve for the better. At times, they face the
risk of non-alignment within the organization. The leadership is seriously
entertaining the possibility of driving stakeholder welfare , targeted at
consumers and employees that are most sensitive to labour cost. But they
expect a cover as doing so alone (with competitors not following,
shakeholders revolting) comes with risks. The return to management
 capitalism, where partial alignment with shareholders and more with
stakeholders is being imagined, though it is far from being practiced.

In some businesses pursuing returns on investment should stay primary

purpose without compromise as it directly translates to welfare i.e, pension
plans, retirement accounts etc. The problem of accountability arises when the
company decides on not pursuing returns. In such a scenario, there are two
alternative approaches . One is to devise and implement a framework that
would make companies state their other goals besides making profits.
Alternatively, the company should be legally bound to state their
purpose(apart from Shareholders) in their Articles of association and provide
measures to prove their fulfillment. Capitalism as a whole need not be
compromised.

FMGD Perspective: My opinion based on the understanding of FMGD

At first glance, the article appears to be strangely taking the direction of a

perceived sentimental shift from pro-capitalism to pro-socialism with firm
leaderships advocating for a sense of purpose and stakeholder welfare as an
integral part of firm’s strategy. On closer consideration from the perspective
of a firm in the near future, the risks faced by them (one or more) are the
following:

1) Moving towards the boundary of depleting the natural resources

2) Risk of an aware and a non-aligned workforce with firm’s erstwhile

objectives which do not cover inclusion, equity, equality etc.
3) Risk of Capex required as an abrupt measure owing to sudden
government policy changes. Losing first mover advantage
4) Risk of being outpaced in adapting renewable technologies
5) Risk of losing relevance to the customer in market owing to their changed
preferences towards sustainable products

If a firm does not make a transition , it might encounter one or more problems like an
increased cost of raw materials, specialized expertise to extract them, capex in buying
technologies that it failed to develop in-house, demotivated workforce with high
attrition rates, high costs incurred by the late mover in scaling up quickler than usual
to capture demand . All of the above would put a constraint on the rate of future
profit-growth (w) and DEFSCC would not happen. Over a period, this would result in
the stockmarket (Shareholders) penalizing the firm through its amplification-
acceleration mechanism( Double DEFSCC) and would quicken its demise from the
market. So the primary objective of the Firm’s apex behind advocating this transition
is their own ‘w’, to stay alive in future. All the others such as welfare would at best be
secondary objectives, if not by products of the transition. It wouldn’t be fair to rob the
firm apices off the credit towards initiating this change. But the primary factor
remains ‘w’. Thus, inferring it to be a transition to socialism would be erroneous. It is
very much in the capitalist interests of the firms. This brings us to the following
question : Though committed, why are firms apprehensive on making radical changes
and equivalent capex into supporting the stakeholders (ESG as a whole) ? The
probable answer is that they do not want to be the only ones in the market attempting
the change ( current &/ or some future cycle compromise) without the competitors
commiting to it as well. Since the double DEFSCC mechanism of the stock market
(shareholders) has the capability to crash a firm well before it actually should, this is
indeed risky. Hence they have limited themselves to incremental initiatives that the
markets can digest and Roundtable discussions (seeking unanimity) on the challenge
at hand.

SUMMARY : Rebooted ( Microsoft)

After a long hiatus, Microsoft has won back the global leadership in market
capitalization, standing at little over a trillion dollars. The fall had come about after a
lost anti-trust battle against the US justice department that had brought it extremely
close to division . Once ridiculed for being slow to change with the changing times
(debatable), it has posted a complete turnaround somewhat attributable to change in
leadership (Nadella). Also, a complete image makeover from that of an evil empire to
a trusted partner ensued. In current times, the following would be the key takeaways
for other competing tech giants :

1) Reducing dependence on most-valued product : For a long time, the ease of

use and installation had rendered windows as their major revenue grosser.This
made the management over-dependent on it and kept them from thinking of
innovations independent of Windows at the helm. Smartphones and social
network, which gave rise to giants like Facebook and Nokia had evaded
Windows. The shift of focus to cloud solution Azure has proved an absolute
blessing , with the division posting a YOY growth of 68% in 2019.

2) Doing away with greed and armtwisting: The transition from a coercive giant
to a partner conducive to mutual growth has helped build a huge customer
base of Linux (most fierce competitor ) users on Azure, with partners
perceiving a reduced risk of disruption from Microsoft.

3) Collaborative approach with regulators: Azure is designed in a way to

accomodate data protection laws. The leadership is committed to participate
in policy building and ensuring cautious use of Artificial Intelligence. This has
made them lesser vulnerable to backlash owing to violation of stakeholder
protection laws . Even Apple needs to learn a lesson in relationships with its
App store partners.

Not everything is perfect at Microsoft. But the lessons learned by them could
prove valuable to the other tech giants, should they pay heed.

FMGD perspective : (I have tried to write my opinion on the 3 learnings that

the article mentions from FMGD perspective)
 1) a) This is somewhat remnant of the Kodak example of being the market
leader with huge cash reserves but with very little promising investment
opportunities towards targeting the rate of future profit growth ( f(w)),
which is paramount to any firm. Unlike Kodak, Microsoft wasn’t
completely oblivious to the changing times . The anti-trust battle had
virtually driven them out of the search engine market which was one of the
most promising opportunities. Their saving grace was their Gaming
business. b) Microsoft didn’t have the most superior product in terms of
technology. But their value proposition was the best with ease of
installation, use and compatibility to H/w systems. Thus, it was able to
assume the largest market share and reduce its factor costs further which
reflected in its cheaper price with respect to Linux and other OSs.

2) a) The armtwisting and tweaking of Operating systems to drive small

players out was common practice at Microsoft before 1998. US anti-trust
laws protect companies against relative diversification. Microsoft is
probably wary of the close shave that it had in 1998.Interestingly, the same
laws had helped helped Microsoft grow as IBM was brought to court.
Thus, the governments have to intervene in order to manage the players (j)
if the firm tries to take ‘j’ to absolute 1 as Microsoft did with search engine
business.

3) I do not agree completely with what is stated as Microsoft’s collaborative

actions towards stakeholder protection. At a time when the world is
growing more and more susceptible of all tech giants compromising data
(Zuckerberg facing the senate and EU restrictions), this doesn’t sink in. In
a global research article (ref) Edward Snowden has been found to have
reported how Microsoft gave full unencrypted access of people’s data to
NSA as a part of project which started as early as in 2007. So its role in
this regard is somewhat debatable.

Link between the articles

1) As per article 1, Microsoft championed a turnaround of the organization by
rethinking stakeholder relationships. By building synergies with partners and
competitors (Linux OS on Azure et al), they were able to regain market
capitalization leadership. They used collaboration instead of competition in
managing stakeholders which inturn helped them build trust. Collaboration
could be the answer to the challenges present in the other article of addressing
stakeholders. Collaborations could be of competencies, workforce(Japan), user
base etc.

2) It wasn’t philanthropy but the very need for survival of Microsoft which
pushed the reforms in the organization. Similarly it is the dire need for future
relevance and existence which has pushed a transition towards “the purpose”
among business organizations.
Refrence : https://www.globalresearch.ca/microsoft-conspires-with-the-
nsa-in-spying-on-its-users/5342618