In his provocative book Fixing the Game, Roger Martin, head of the Martin Prosperity Institute at the University of Toronto, distinguishes between two kinds of market activity.
The “Real” market includes everything needed to create goods and services for the customer—i.e. R&D, sourcing of raw materials, manufacturing and production, marketing, and all the labor and investment in infrastructure to support business activity.
The “Expectations” market, on the other hand, is where you bet on the future value of shares of stock—shares issued once-upon-a-time to raise cash to finance real business investment. The value of those shares, over time, connects to success in the Real market but the market price of a company’s stock is influenced by myriad events and forces that have little to do with the fundamentals of the business. Trade wars, consumer spending driven by larger economic forces, and the repurchase of stock on the open market all influence the share price.
In sports, Martin likes to point out, these two buckets of activity are kept quite separate from one another. Players on the field where the real game is played are not allowed to place a bet on the outcome of the game in Vegas.
At public companies, executives are expected to manage both.
The two games play out in a complex system of rewards and pressures for managers, who are incentivized to boost the share price for the Expectations market, while operating in a fish bowl that allows us to observe how their decisions affect the Real market—in whether to outsource jobs, for example, or create new ones in the community that offers the license to operate.
Who wins when these two games intersect? Who loses when they diverge? What do the decisions made by the company reveal about its real purpose—about what matters most? Clues emerge in the attitude of the company toward taxes, or share buybacks. How executives get rewarded is yet another arena in which the real corporate purpose is revealed.
When the Trump tax bill passed and the corporate tax rate fell in 2018 from 35% to 21%,the rationale was to boost capital investment in new equipment and the like. Labor would also benefit from the lower rate, and from a tax holiday designed to bring home cash held off shore. Instead, according to the New York Times’ examination of the early data, there has not yet been any correlation between the size of the tax cut and budgets for capital spending. Instead, the Times reports, share buybacks and stock dividends have tripled, and it’s the companies with the smallest tax cuts that have spent the most on plants and equipment. The benefit to shareholders is measurable, but the benefit in the Real market is thus far elusive.
As a result of the give and take between the Real market and the Expectations market, a healthy debate has begun to emerge about the consequences of shareholder-centric decisions—and about the right balance of incentives and metrics for managerial talent.
In August, the Business Roundtable formally abandoned its longstanding commitment to shareholder primacy. In its new statement on the purpose of the corporation, the powerful CEO lobbying group put investors on even footing with other acknowledged stakeholders, including employees, customers, and communities in which a company operates. The World Economic Forum, which has long sought to hold regulars at its annual Davos meeting to similar ideals, went a step further in November, updating its guidance for companies in the age of climate change, automation, and globalization. “Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives,” the World Economic Forum advised. “Executive remuneration should reflect stakeholder responsibility.” Individual CEOs have spoken out, too, like Tom Wilson of Allstate, and the chairman of the US Chamber of Commerce, who has called for companies to create higher paying jobs.
It’s all reminiscent of an idea that took hold during an earlier era of corporate power and big trusts. With a nod to Theodore Roosevelt’s square deal, let’s call it Market Civitas—the management and consideration of a company’s social and environmental values and impacts. Though the notion is regaining traction now, it still lives in a domain that exists outside the typical job description of the CEO.
Market Civitas, in this millennium, requires that managers pay keen attention to the health of the commons on which business depends: taxes to support infrastructure and an educated labor force; rational management of scarce resources; wise, public-spirited use of data; and—critically important—pulling out the stops to support policy to mitigate a warming climate. It will also require sharing the wealth with the wealth creators inside our companies, and equitable distributions of profits to societies that govern access to natural resources and commodities.
For a mining operation like the diamond company DeBeers, it means earning the political and community support to operate, for decades to come, in an environmentally sensitive region.
For Pepsi, or Levi Strauss, it requires deep understanding of the long-term effects of agriculture practices and future constraints on the availability of healthy soil and commodities like water or cotton.
An airline must anticipate future costs of carbon emissions; a tech company must lean into emergent global protocols for labor and access to engineers. In the United States, it means engaging in complicated coalitions working to produce public goods, from better education to better infrastructure. A company like FedEx or Amazon or Walmart needs to stay attuned to all of these conditions—requiring long-term investment and a fair balance between rewards to the workers and to investors who reap the rewards of a solid stock price.
Across industries, corporate boards are operating in an increasingly complex arena as employees sharpen their own expectations about how companies should be managed, according to personal values and principles or concerns that have only just begun to enter the realm of the workplace.
The company-specific benefits of gracefully navigating these pressures may indeed be real, but also may arrive so far in the future as to be unmeasurable, or even ephemeral. And the work involved to maintain key Real-market relationships that enable and directly contribute to growth and profits is often ill-defined under the all-encompassing rubric of “stakeholders.”
It’s easy to assign the important task of sorting out these future and non-specific costs of operation to government, but it is unrealistic to wait. What has shifted rapidly in recent years is the focus on business—a function of both its outsized influence in the public sphere and its problem-solving capacity on the ground.
We are seeing again a call for Market Civitas, and the need for far-sighted leadership in the private sector. It requires business acumen and emotional intelligence, and an acceptance of the idea that corporate purpose is less about mission statements and more about the complicated balancing act of managing at the intersection of a healthy business and a healthy society.
Watch this space. The rules of business in the Real market have changed. It won’t be long before business leaders managing the Expectations market catch up.
Author Judith Samuelson is founder and executive director of the Aspen Institute Business and Society Program. She is writing a book about real value creation and the new rules of business. Find her on Twitter at @JudySamuelson or on email at JSamuelson@AspenInst.org.