The Best Type of Shareholder Value
I was very excited when I walked into my first Finance class, and when I saw the lecture was titled “How to Be a Greedy Capitalist”, I was immediately thinking about how I was going to get rich. Or at least rich enough to pay off my college tuition in only 10 years.
The projection displays a late 90’s Coca-Cola letter to shareholders by their legendary CEO Roberto Goizueta. Day 1. First lesson. The sole purpose of a business is to maximize shareholder value. The perfect line to have all of us greedy capitalists ready to keep the machine going.
But a week later another legendary CEO released his own letter that transcended the world of Finance. Larry Fink from Blackrock stirred up great debate when he wrote that companies must have a social purpose, and asked companies to explain how their business makes “a positive contribution to society” beyond financial performance. With the largest asset manager in the world taking a stand on improving society, other companies needed to follow suit or not take part in the $6.3 trillion of assets Blackrock has under management. The $6.3T not only provides massive investment in the businesses who get it to help implement their visions, but it also increases the value of the company for the shareholders. Blackrock is proving you can do both.
Perhaps the biggest reason Larry Fink directed his letter at corporate America is because he recognizes the continued rise of their influence on society and thereby the special responsibility they have to improve it. As much as our society is innovating and expanding economically, the benefits at this rate are likely to continue being asymmetrically skewed towards the already powerful and wealthy. Consider this chart representing productivity growth vs real earnings in the United States.
The productivity growth has gone up consistently, making sense as our GDP continues to grow. We’re doing more, but our wages don’t reflect it. More money is in the proverbial pot, but most regular people aren’t seeing that change their quality of life. In fact, when wages did rise way more than expected on February 2nd 2018, the Dow dropped an amusing 666 points - an unfortunate reality of the relation between the stock market and the real economy.
This relationship doesn’t end there. If one invests with $100 and gets a 10% return they can buy themselves a sandwich without a drink at Panera, but a $1,000,000 investment with the same return provides enough money to buy a Porsche 911. It’s not wrong, it’s just proportional. But with wages staying stagnant, this cycle could turn dangerous. If corporations and the richest of individuals have more money to work with it, the way they go about in allocating their funds is extremely important to how our society progresses.
One way to do this is to encourage the growth of smaller companies that are focused on advancing the world for the better. This strategy would be useful because smaller companies require less money to have more dramatic effects for their business progression, and would also stimulate the real economy and GDP growth at the same time. Criteria for selecting which companies provide this social advancement could be up for debate, but the 17 Sustainable Goals developed by the UN in 2015 would serve as a solid starting point as goals such as zero hunger, no poverty, and good health for the world aren’t controversial.
This summer, while interning with Keheala, I’m getting to see the idea of social progress combined with incredible growth and return potential first hand. One of the coolest aspects of Keheala to me is how surprised I am that it hasn’t been built it before. Tuberculosis, the world’s most deadly infectious disease, is almost always curable with antibiotics that are incredibly cheap or even free for patients. The medical side often isn’t the problem; instead simple behavioral tendencies are the real challenge that Keheala’s platform makes easy to overcome. And this platform has demonstrated a 96% treatment success rate.
The social impact of providing a platform to help both patients who currently have the disease and to lessen the impact of its spread to others is obvious to anyone, but the financial advantage of this approach is also tremendous. According to data from the pilot study of 1,180 patients in Kenya, 6 lives were saved while hundreds of retreatments and transmissions were averted, leading to an estimated $93,000 in cost savings for the Kenyan Ministry of Health. At scale in Kenya, this translates to 1,533 saved lives annually and over $24 million in cost savings - just for one disease and one country. Combined with the fact this application is incredibly low cost to maintain, scalability will increase our already high profit margin even more.
I believe that ground breaking companies like Keheala represent the type of ideas that need the most funding. If the same return/increase in shareholder value is provided from investing in healthcare saving lives, or a tobacco company killing their clients slowly, the choice is easy. A proven business model, easily scalable and with low costs, that benefits the community as a whole, is like donating to charity but then getting more money from that charity as it gets more successful. This also doesn’t even take into account the lives made better or saved across the world.
I’m very proud to be interning at a company with strong values and a bright path forward. I have been fortunate enough to travel to Africa twice before, (Ghana and Tanzania), and when I go back I am looking forward to going to Kenya to visit the team on the ground. However, I believe that in short time, I won’t have to travel as far to see Keheala in action.