Capitalism's 'Moment of Opportunity'

March 14, 2014

Geeta Aiye­r, MBA '85, invests in companies that have outstanding governance and that create innovative solutions to environmental and social challenges. This approach has yielded strong returns for the founder and president of Boston Common Asset Management, LLC, and landed Aiyer a spot on the 2013 list of the Top 100 Women-Led Businesses in Massachusetts.

Now, as climate change looms and policymakers argue about whether to put business or the environment first, Aiyer is one voice in a growing chorus that says investors don't have to choose between good works and good returns.

"You shouldn't have two pockets in your investment life, one of which divests your values," she said recently.

Aiyer shared her views during an open conversation titled, "Paths Toward Sustainable Capitalism: How Women Change the World." The talk was part of the Women's Studies in Religion Program (WSRP) National Leadership Conference (NLC). Michelle Clayman—founder and chief investment officer at New Amsterdam Partners, LLC, and also a lead volunteer and strategic adviser to the WSRP—joined Aiyer for the discussion. The two financial executives examined how corporations can make sustainable choices, and how women leaders can make a difference.

Aiyer explained that modern finance had its origins during the Age of Exploration 400 years ago, "when you had to be Queen Isabella and King Ferdinand to have enough capital on hand to supply an expedition."

Corporations were invented to allow groups of investors to pool the risk of investing in these treacherous journeys, while absolving individual members of full responsibility for loss.

"Corporations were always intended to allow risk taking that would benefit societies," she said.

Aiyer asserted that, although corporate capitalism has spread around the world, it doesn't necessarily benefit the public at large.

"By paying attention to certain things, we get profits privatized and risks socialized," she said. "We have made a set of value choices about what is of value to business."

As a case in point, Aiyer cited global retailer Wal-Mart. The company gives its workers instructions on how to apply for food stamps, she said, socializing the cost of paying them enough money to feed themselves.

"If this policy were fully costed back to the company, would it be preferred?" Aiyer asked. "You manage what you measure, and we're not measuring the right thing."

Need for conscientious investors 

Michelle Clayman said that downplaying risk can also destroy shareholder value. When British Petroleum paid lax attention to safety, oil spilled into the Gulf of Mexico "and the stock got trashed." She also cited the 1984 disaster in Bhopal, India, when a Union Carbide plant leaked toxic chemicals into the air, killing thousands.

"It's a bad investment to buy a company that could blow itself up," Clayman said.

Part of the problem is that corporate shareholders are "distanced by design" from the day-to-day workings of the firms they own, Aiyer said, and treated as though they're interfering with business when they start to ask questions.

Management often focuses on their own interests instead of the principals' concerns—and their interest often lies in maximizing their own short-term compensation instead of the long-term sustainability of the company or the community. Aiyer said stated that owners should know what companies are doing with their money.

"It's very old-fashioned capitalism," she said.

Aiyer argued that the solution lies in rethinking values and risk. She endorsed "shared value creation," which emphasizes the link between economic and social progress and long-term thinking, and was popularized by Harvard Business School professor Michael E. Porter and Mark R. Kramer, founder of the nonprofit consulting firm FSG.

"If you can just change the time horizon from short to long—two years maybe—you will have an advantage,' Aiyer said. 'By focusing on the long term, companies will make better decisions."

Companies also benefit from bringing outsiders into the boardroom—especially women. Clayman explained that women tend to be more conservative about taking risks. She cited studies showing that companies that have more women on the board have better financial performance, and that female hedge fund managers have better returns, though they find it harder to raise assets than their male counterparts.

"There's more discomfort on the [majority male] board [when women are included]... but they make better decisions," Aiyer said.

As the talk came to a close, Aiyer and Clayman asserted that the usual approaches to business and finance aren't working. Board members are typically volunteers who are pressed for time, Aiyer noted, and often invest funds conventionally.

"The orthodoxy has to change," she said.

The good news is that boards are ready to listen to new ways of managing risk—and to new voices, including those of women. Aiyer wondered out loud if the appetite for risk would have been different after the crash of 2008 if more women had been on boards? As painful as the last six years have been, she expressed hope that recessions could be "moments of opportunities" for changing finance.

—by Meg Muckenhoupt