Lies, Damned Lies, and Statistics

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Lies, Damned Lies, and Statistics

• The origin of this blog posts title could serve
  as an interesting topic in and of itself (long
  story short, the phrase was popularized by Mark
  Twain but its derivation is unclear). However, to
  the extent that there is often a significant
  amount of ambiguity in the ESG world, it strikes
  me as an appropriate warning.
•  
• As an example, a colleague recently circulated an
  article from the New York Times titled Is
  Capital or Labor Winning at Your Favorite
  Company? Introducing the Marx Ratio. The article
  highlights that as a byproduct of the 2010
  Dodd-Frank law, one can now easily compare
  companies across Corporate America based on
  shareholder returns relative to rank-and-file
  compensation. More specifically, the so-called
  Marx Ratiocoined by the articles author, Neil
  Irwincontrasts the return to capital on a per
  employee basis to median employee compensation.

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The name is, of course, a nod to philosopher Karl
Marx, who famously argued that there is a
fundamental and perpetual conflict between the
interests of capital and labor. Marxs
capitalistic opponents argue that capital and
labor are inherently linked given that profitable
businesses create a virtuous circle that rewards
investors and workers. The article does a good
job of highlighting the ways the Marx Ratio can
be useful, as well as its limitations. However, I
do see two additional issues.   1) Without
getting too philosophical, its probably not a
good name to use. Not necessarily an inaccurate
one, but not a wise one. If one conflates Marxism
and Communism (and not everyone does), lets just
say that the track record in terms of both lives
lost and economic success is dreadful. Even if
one doesnt equate the two, Marxisms track
record isnt too good (an understatement). To the
extent Irwin or anyone else wants to popularize a
metric and gain broad appeal with mainstream
capitalists, its probably best to choose a
different name.
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2) Metrics like this tend to get tossed around in
overly simplistic ways. It reminds me of the
widely publicized CEO to average worker pay
ratioone that has value in an era when CEO pay
has skyrocketed, but also meaningful limitations
and potential unintended consequences. The
Harvard Business Review explored this topic in an
article titled, Why We Need to Stop Obsessing
Over CEO Pay Ratios.   Reality Check On June 11,
2018, Robert Jackson Jr., a member of the
Securities and Exchange Commission, put forth
evidence that many top US executives have been
selling their shares just after announcing major
share buybacks, profiting from the stock price
rally that typically follows a repurchase
declaration. Jackson and his team assessed
activity at the 385 companies that announced
buyback programs in 2017 and the first quarter of
2018. They found that the announcements boosted
share prices by 2.5. Meanwhile, insider selling
occurred twice as often in the eight days after a
repurchase announcement. In that eight-day
period, insiders sold an average of 500,000
worth of stock each day, five times the daily
level from before the buyback announcement.
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This is just a small example of how many
management teams operate. Theres nothing at all
illegal about it (at least not yetJackson is
working on that). Rather, they often operate
within the existing rules to help feather their
own nest. One could argue as to whether the
self-serving approach is a fundamental
shortcoming of capitalism, a result of
perpetually lax regulation, or simply an
unfortunate but ultimately minor byproduct of
human nature in the most successful economic
system the world has yet to know. However, the
reality is that executives are exceptionally
adept at finding ways to exploit
loopholes.   That same deftness is apparent when
corporate executives are assessed on specific
metrics. As the Harvard Business Review article
argues, executives will routinely find ways to
navigate around virtually any metricoften to the
detriment of both shareholders and workers. When
called out by the media or shareholders for
having a high CEO to average worker comp ratio,
why not simply outsource lower paying jobs? Or
better yet, automate those jobs into
non-existence?
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Improving ESG Measurement So if many C-Suite
inhabitants will consistently find ways to stack
the deck in their favor, how do asset owners
best identify the companies that dont play games
and that do operate in the best interest of their
shareholders, employees, and society at large?
How can we effectively motivate more companies to
behave responsibly? For starters, its certainly
more difficult to game a system with dozens if
not hundreds of relevant metrics than a small
handful. As such, we think the folks at JUST
Capital who rang the opening bell at the NYSE on
June 13, 2018, are onto something. JUST is Paul
Tudor Jones foray into socially responsible
investing. For almost two years, the JUST team
has been closely tracking the performance of
Americas largest 1000 companies based on about
one hundred metrics related to workforce
management, job creation, the nature of their
products, environmental impact, community
relations, and management/governance. The
specific criteria reflected extensive polling of
the American public regarding the values they
deem most important. Companies are ranked across
all industries (except tobacco) in large part to
identify the companies that rank toward the
bottom of their respective industries and to
encourage them to improve.
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Weve heard Mr. Jones, a legendary hedge fund
billionaire and philanthropist, exclaim that JUST
has the potential to be the largest thing hes
ever done. Sure enough, the bell-ringing was to
celebrate the launch of JUSTs new ETF, in
collaboration with Goldman Sachs Asset
Management, which includes the companies that
rank in the top half of their respective
industries. Suffice it to say that the launch
from one of Americas foremost capitalists will
be an interesting test of the ESGs worlds
promise to do well by doing goodby incorporating
a broad array of metrics that collectively are
almost impossible to game. Article Resource
https//www.athenacapital.com/blog/lies-damned-lie
s-and-statistics/