This op-ed was published by Barron’s on April 20, 2022
There are few better illustrations of the malign underbelly of capitalism than in the public markets’ best-managed companies.
Consider venerable Procter & Gamble . P&G (ticker: PG) began its fiscal year in July of 2021 with $16 billion in the bank. Forget profits for the moment and focus on cash. P&G operations threw off $18 billion, which combined with $16 billion in the bank, bestowed upon the company a horde of $34 billion.
What did it do with this abundance? First, it invested about $3 billion in property, plant, and equipment, which even nonbusiness types would see as a good idea.
Of the rest, about $8 billion went to paying dividends, while another $11 billion went to buying back its own stock. And in the epitome of prudence one would expect from a company with Midwestern values, P&G tucked several billion aside for a rainy day.
I’m not going to demonize these activities. Dividends don’t go just to fat cats. They go to cops and teachers whose pensions invest in companies like P&G. And buying stock back tends to have the same salubrious effects on the wealth of cops, teachers, and individual investors who, like me, have owned P&G since 1992, amassing a tidy sum from a modest investment.
P&G leadership should be commended for setting up an enterprise that can throw off $18 billion in cash with a relatively modest “maintenance” investment of $3 billion in property, plant, and equipment. And it has done more or less the same for years. This morning’s earnings report for the third quarter with sales and profits above expectations, demonstrates that the cash keeps steadily rolling in at P&G.
P&G is generating so much cash that, paradoxically, its options for what to do with it are rather quite limited. It can pay dividends, buy back stock, or reinvest in the business, though needs there seem to be modest .
Could P&G do more? Diversify, in the way that Amazon moved on from books, which now represent just a fraction of its revenues? Spend billions in areas where it has no experience? To move the needle for a company with $76 billion in revenue and $14 billion in profits, how many billions would need to be put at risk, when, with so much cash coming in there is no real imperative?
One need to look no further than General Electric’s troubled foray into financial services to understand the perils of unbridled expansion. And when it all comes down in a heap—again, see GE—what is P&G supposed to tell its shareholders? “We did it because we didn’t know what else to do with all the money”? If doctors are guided by the principle, “First do no harm,” CEOs are guided by, “Don’t choke the golden goose.”
P&G—and legions like it—have reached a state of capitalist nirvana. But profit maximization is an authoritarian proctor, and there are potent enforcement mechanisms for disciples who stray.
Remember, in 2017 P&G got into a nasty proxy fight with activist investor Nelson Peltz who at the time called the company a “suffocating bureaucracy,” pushing hard for and winning a seat on the board of directors.
With that in mind, imagine what would happen if P&G diverted a few of its billions on hand to fully eliminate the hard plastic packaging used in its deodorant brands, which will remain on this earth long after anyone reading this article. The company tested an all-paper version in 2020 but didn’t commit to fully replacing plastic. Likewise, what would happen if it doubled the salary of every warehouse worker? Or set a minimum wage standard of $25? Or put in place ground-breaking parental leave benefits? P&G can afford to do these things, but it won’t. In its defense, it can’t.
If it takes any of those steps, the Chicken Little scenario will go something like this: Investors like Peltz will divert capital to Unilever, Clorox, and Kimberly Clark, where profits, hence value, is maximized. P&G’s stock price will fall. The company will not be able to recruit top-tier talent because stock-based incentive compensation will be subpar. Under poor leadership, the stock price will fall further, and the house of P&G will fall too, perhaps spending its remaining days as an Amazon brand, a la Whole Foods.
However, P&G and others like it might be able to mollify the barbarians eyeing their gates if they adopt and espouse some of the principles of impact-weighted accounting. The proposition here is simple: Companies don’t pay for all of the costs associated with earning their shareholder’s profits. Impact accounting shows who does and how much.
The results can be dramatic. The Harvard Impact-Weighted Accounts Project reports that a set of nine oil and gas companies with a positive margin of earnings before interest, taxes, depreciation, and amortization over multiple reporting periods swung to a negative 329% margin when taking into account environmental impact, such as the degraded water consumers drink as the companies drill. This is net of the positive impacts of meeting basic needs and addressing underserved markets.
For a set of 13 packaged food companies, research by the Harvard project showed operating earnings swung to negative 103% when taking into account externalized costs. Distributing foods with high sodium and sugar levels is profitable for these companies, but the attendant healthcare costs, plus environmental impacts, analyzed in impressive detail, are losses the public bears.
I’m not suggesting that P&G ought to pay for the external costs its profits necessitate, whatever they might turn out to be. At least not at the moment. Nor is the point that P&G is somehow avoiding action on environmental, social, or governance issues. The point is if P&G were to quantify and publish all of the costs associated with making its shareholders’ profit it would represent a moment of total honesty among all stakeholders. Perhaps that information would show the billions it has demonstrated little motivation to do anything else with are needed to re-engineer its products and processes to mitigate costs others bear on its behalf.
Dividends and buybacks are shareholder entitlements. The question investors and the board need to ask is, should they continue ad nauseam, at the same rate, when some of the costs of doing business are in many cases unnecessarily shifted onto others?
Harvard says just 56 companies engage in impact-based accounting. P&G is not on the list. So P&G, which declined to comment on the matter, may not know its full impact on wage structures, consumer health, or the environment. If it really doesn’t know, what blissful, profitable ignorance. Regardless, with all that cash on hand, it has plenty of resources to figure it out.