Making an Impact — Investor Amnesia

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Caption: “You have qualified thoroughly as modern philanthropists, now why not do some good?”

“Illustration shows Puck tugging at the coat-tails of Andrew Carnegie, as he and John D. Rockefeller pile money bags around the base of a statue labeled “Fame”, which they seek by endowing libraries and universities; Puck is suggesting that they could do more good for society by endowing places like a “Home for Consumptives”.” (Source)


Visualizing History 

(Source: Global Financial Data)


From the Archives

Social Prospectuses – The Economist (1908)

An early look at what we would consider an ESG investment from 1908.


Sunday Reads

This week the ECB had a resounding success with their first social bond offering:

‘The European Union’s first offering of social bonds drew orders of more than 233 billion euros ($275 billion), likely to be the biggest ever for any debt deal… Social bonds are defined by funding for projects that help society, such as improving social welfare or serving disadvantaged populations. They are the “perfect financial response” to the shock that welfare systems experienced from the pandemic.’

That said, today we are going to talk about impact investing, sustainability, the responsibility of corporations, and all things related. But first, I want to talk about an old building in Washington, DC: The Carnegie Library. (stick with me….)

Carnegie Library – Silman

The Apple Store / Carnegie Library in Washington, D.C.

After selling Carnegie Steel to J.P. Morgan for $13 Billion in 1901, Andrew Carnegie became the richest man in the world. Upon selling his business, Carnegie retired and dedicated the rest of his life to giving away that fortune, with much of his efforts going towards the famous network of libraries established across America. A Bloomberg article stated:

‘Between 1893 and 1919—a three-decade run that librarians refer to as the Golden Age of the American public library system—Carnegie paid to build 1,689 libraries in the U.S. These seeded the DNA for nearly every American library built before the end of World War II. ‘

Carnegie and His Libraries

1,700 libraries – not bad. The Washington D.C. library is particularly interesting because of developments that transpired last year, but more on that later. The Washington Public Library (Carnegie insisted on not having the library named after him) opened in 1903, with Teddy Roosevelt conducting the unveiling ceremony.

Library Construction, 1901

ou may ask why out of all the philanthropic endeavors he could have pursued, Carnegie was so infatuated by libraries. The answer is found in his childhood upbringing:

‘Scottish immigrant Andrew Carnegie started working at age 13 in 1848 as a bobbin boy in a Pennsylvania textile mill. From there he rose through the ranks of the Pennsylvania Railroad and an iron-forging company before becoming a titan in steel. As a poor working boy in a city that charged for using its library, Carnegie could not afford to borrow books. Then a wealthy manufacturer opened his private library to the city’s working boys one day each week. Carnegie credited this experience of self-education with arming him to succeed in business. Equally important, it inspired him to fund the construction of public libraries.’

Carnegie, however, is a controversial figure. For despite all of his admirable philanthropy accomplished later in life, the funds for this philanthropy were borne out of ruthless business practices seemingly at odds with his charitable activities. The industrial titan had an intense hatred for Unions, as demonstrated by the anecdote below:

‘In 1883, Standiford claims Carnegie used a drop in steel prices to argue with the Knights of Labour and the Amalgamated Iron and Steel Workers at his Edgar Thompson Works in Braddock, Pennsylvania, for a 20% cut in wages. The alternative was that the plant would be shut down and the men locked out. The workers capitulated. But three years later the plant was shut down by Carnegie 10 days before Christmas when he discovered one of his rivals had achieved a cut in wages of between 15% and 20%.

Standiford said: “Carnegie had his plant manager post a notice that the works would close for an indefinite period and that 1,600 men would be put out of work with the stated reason being plant renovation. But Carnegie had resolved that the real purpose was to drive out the unions, only non-union men would be rehired when they reopened the plant. “By February of 1885, with the men facing starvation and freezing temperatures and no money to buy food or coal, they agreed to come back in under individual contracts, their wages decreased by up to 33%. The union was crushed forever at the plant”.’

Callous businessman, and generous philanthropist. A difficult combination for many of us to reconcile, but it was Carnegie’s philosophy. He aimed to squeeze the maximum profits out of his company and employees so that he could amass more wealth for redistribution through philanthropy. If that meant busting unions and forcing employees to work in squalor conditions while accepting hefty wage cuts, so be it. This was all done with the view towards greater charitable actions. In his book Gospel of Wealth, Carnegie wrote:

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‘While the law of competition may be sometimes hard for the individual, it is best for the [human] race, because it insures the survival of the fittest in every department. We accept and welcome, therefore, as conditions to which we must accommodate ourselves, great inequality of environment; the concentration of business, industrial and commercial, in the hands of a few; and the law of competition between these, as being not only beneficial, but essential to the future progress of the [human] race.

This belief promoted the notion that because inequality and monopolies were necessary evils for achieving societal progress, the wealthy elite profiting off of this progress were responsible for efficiently redistributing their wealth for the benefit of broader society.

[The man of wealth] “is strictly bound as a matter of duty to administer [wealth] in the manner which, in his judgment, is best calculated to produce the most beneficial results for the community…. “the man of wealth thus becoming the mere trustee and agent for his poorer brethren, bringing to their service his superior wisdom, experience, and ability to administer, doing for them better than they would or could do for themselves”.’

Now, you would be expected to ask the immediately obvious question concerning Carnegie’s theory: Why not aim to improve society and the “poorer brethren” through methods allowing them to participate in the wealth creation process, rather than merely relying on the philanthropy of wealthy elites after they have reaped their success? Carnegie’s answer: It would be a waste

If distributed in small quantities among the people [through higher wages],this surplus wealth would have been wasted in the indulgence of appetite, some of it in excess, and it may be doubted whether even the part put to the best use, that of adding to the comforts of the home, would have yielded results for the [human] race.

With these quotes from the man itself, it is clear how he reconciled the approaches to business (notoriously ruthless) and philanthropy (notoriously generous). Yet, there were many people at the time that questioned Carnegie’s contradictory approach:

‘I for one believe that it is unwise to take millions from the pockets Homestead and build useless libraries. Better forget the name of Carnegie and leave that money with the men who earned it, and make their homes happy. I believe in law and order, but if I lived in one of those miserable hovels in the iron and steel districts and needed money for a loved one, I should not view the founding of these libraries with complaisance.’

A similar view is expressed in the illustration below, where it is pointed out to Carnegie that perhaps he should allocate some of his vast wealth back into his own factory conditions and improve the lives of his employees rather than funding a new library or donating to universities.

Okay, so why the hell have I spent so much of this introduction talking about a random library in DC and Andrew Carnegie? 

Well it just so happens that I moved earlier in the month and now live a 5 minutes walk from this Carnegie Library, except it is no longer a library. Since it re-opened its doors in May of 2019, this former library is now home to Apple’s newest DC location. Perhaps I’m just scarred by the dreaded class I took at King’s on buildings serving as a living history of cities (enthralling stuff, right?), but to me it feels like this transition from the Carnegie Era to now is significant. On a larger scale, this transition also feels like a perfect juxtaposition for the two schools of thought on how corporations should (if at all) better society and give back to the community.

We already covered Carengie’s views on this topic so there is no need to repeat it here, but compare Carnegie’s views with this excerpt from Apple’s Investor Relations website page on ESG:

We believe business can and should be a force for good. Achieving that takes innovation, hard work, and a focus on serving others. It also means leading with our values in the technology we make, in the way we make it, and in how we treat people and the planet we share. Apple is dedicated to leaving the world better than we found it, and to creating powerful tools that empower others to do the same.’

Bit different than Carnegie’s approach, eh? Consider the environment, for example. There is no question that under Carnegie’s philosophy the right approach would be to use the cheapest energy source, no matter the environmental repercussions, as this would maximize profits that could then be redistributed to a philanthropic endeavor. In the modern era of ESG, sustainability, and corporate responsibility, however, Apple takes the opposite approach of weaving in initiatives like using renewable electricity to power all of its stores, offices, and data centers while also striving to be carbon neutral. Like their website states, incorporating these initiatives as part of their process is their preferred approach.

Now the simplistic answer would be to state that Carnegie’s approach is wrong, and Apple’s is great. Obviously, however, there is much more nuance to this or I wouldn’t have written this long introduction on the topic. Despite the criticisms levied at how Carnegie accumulated the wealth required to construct his libraries, the fact remains that his libraries offered a valuable institution and service to the public that allowed enterprising individuals to advance themselves in life. The crucial part here is that it was accessible to all rungs of the socioeconomic ladder. It was a public library.

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A Bloomberg article from last year made me think about this dichotomy even further:

If Tim Cook were a philanthropist of the likes of Andrew Carnegie, then the company might have renovated the library for the city. Carnegie built some 1,700 public libraries at a cost of about $1.3 billion—an act of industrial whitewashing, for sure, but one that also transformed society. Apple is doing something like the reverse, scouring the world for historic sites to convert into retail outlets, from Melbourne to Madrid, on the flimsy premise that hosting classes on editing in iMovie constitutes culture. The world needs a better class of robber barons…. 

The city has converted a cultural gem entrusted to the entire city into an exclusive outlet that serves only the few. Let’s call a spade a spade: The city’s historic public Carnegie Library is now a cellphone store.’

This Apple vs. Carnegie philosophy is really what is at the core of most debates surrounding ESG / SRI investing and what the priorities of a company / investor should be. Should a company’s sole role be maximizing profits for their shareholders? Or should they attempt to better society as part of their business operations while also pursuing profits?

It is a difficult question because of all the ramifications either answer produces. For example, should pension funds be invested in ESG funds that avoid high-returning but anti-ESG stocks like tobacco companies? What is their fiduciary duty?

As we will look at today, over the centuries there have been many attempts to marry investor’s goals of generating returns on their capital with their desire to make a positive societal impact. In late 19th century London, for example, this approach was not called ESG… but “Philanthropy & 5%” (due to the commonly paid 5% dividend). Let’s dive in!

The Making of Edward Guinness – Late Victorian Elite Formation and Philanthropy

Nazi links and colourful history of Beamish and Crawford

Not all business tycoons of the time adopted Carnegie’s approach of treating his employees so poorly, though. This article is a fascinating look at how the Guinness brewing company made a concerted effort to look after the wellbeing of its employees after becoming such a profitable business. The article states that ‘by the end of the nineteenth century, the brewery had one of the most comprehensive social security systems in the UK.’ When investors criticized Guinness for spending so much of the company’s funds on building housing for his poor employees, Guinness responded that it would actually help business: ‘In defending the rational of his philanthropic investments, Edward argued that better living conditions improved his profits.’

‘When Edward Guinness died in 1927, Guinness brewery accounted for roughly one-third of the recorded value of industrial output in the Irish Free State. Under his direction the firm had become one of the largest companies, and the largest brewery, in the world. With some of the immense wealth generated. he became the most significant philanthropist in Ireland and one of the most important within the United Kingdom. However, the only biography of him to date was published privately. 1 Although a business history (covering the period between 1886- 1939) has revealed much about the brewery, it provides little insight into Edward’s philanthropy, or his private life,2 though the latter has been touched upon to a limited degree in recent works on the Guinness family.’ The housing trusts he established have been researched by Aalen and Malpass: but largely from the perspective of the wider social history of housing and the institutional history of the trusts. This paper provides an alternative perspective, arguing that his family background and his ambitious social aspirations were critical factors in shaping the nature and extent of Edward Guinness’s philanthropy.’

 

Market Solutions for Social Problems: Working-Class Housing in Nineteenth-Century London

This article provides a fascinating look at a 19th century example of socially responsible / impact investing that I have not seen discussed anywhere else. With lower-income housing becoming a real issue in Victorian England, a solution was developed that combined the same concepts driving impact investing today: Positive Social Impact & Investment returns.

In fact, investors at this time had another term for what we call this type of investing: “Philanthropy & 5%”. The idea being that investors could commit to a philanthropic cause, while earning a 5% dividend or return on their investment. Sounds familiar…

The market solution to Victorian London’s housing problem was ‘Model Dwelling Companies’, or MDCs:

‘From the 1840s a new group of institutions was formed which attempted to find a way to combine the public and private interest in improving working-class housing. The Metropolitan Association for Improving the Dwellings of the Industrious Classes (MAIDIC) was the first organization to be founded in response to the London housing problem.’

The reason this specific article is interesting, is that there is evidence that these impact investments in MDCs did not result in any material sacrifice in returns.

‘The article demonstrates that MDCs were far more important than all local government agencies in providing low-cost working-class housing in London before 1914, and that patrons were offered rates of return broadly comparable with those they could obtain from alternative domestic investment opportunitiesWe must now return to the question of whether investors were sacrificing personal profit for collective good by investing in MDCs.’

The dividends were comparable as well:

‘Dividends were comparable with those paid by other property companies and for most of the period the annual average realized returns offered were not markedly different from those paid to holders of other domestic assets.’

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Financing Black Business in the 1920s

This article from the Museum of American Finance is an inspiring story of unity and perseverance in the face of adversity. The piece tells the story of competing organizations focused on the financing, investment, and development of black-owned businesses in America. A particular focus is paid to the Allied Industrial Finance Corporation (AIFC) and National Negro Finance Corporation (NNFC), both of which formed as offshoots of the National Negro Business League (NNBL) founded in 1900 by Booker T. Washington.

Maggie Lena Walker probably was no longer surprised that she was the lone woman among the 50 or so African American business, banking and insurance leaders attending a banquet in late 1924 in New York City. The banquet had been called ‘to stabilize, strengthen, and protect Negro business.’ As president of the St. Luke Bank and secretary-treasurer of the Independent Order of St. Luke (IOSL) in Richmond, Virginia, Walker stood as the most powerful Black woman in the financial industry. She had worked most of her life to prove that women could excel in the financial world, and her presence lent legitimacy to, if not full acknowledgment of, women’s critical roles in the financial industry. She surely wondered whether her lifelong efforts counted for much, because here she was again: the only woman in a room full of Black men who were charting, as they imagined, the economic future of  the race.

The select group of business leaders outlined plans for the National Negro Finance Corporation (NNFC), a million dollar corporation that would launch Black business into a new financial age. Walker took advantage of the novelty of her presence. She offered the St. Luke Bank as a model to emulate for the young finance company. She told the austere group, ‘We shall not stop, but put our moneys and brains together and achieve a commercial emancipation.’ Walker echoed her call to IOSL members two decades earlier, when she had first shared her vision for a bank that was largely owned and run by women for women.”

National Negro Finance Corporation (NNFC)

The NNFC was founded in 1924 as a response to the establishment of the AIFC in 1920 by the new leader of the National Negro Business League, Emmet J. Scott.

“Fearful that Scott’s AIFC might actually succeed and best the NNBL, in early 1924 Charles C. Spaulding arranged a secret meeting in Durham with a select group of businessmen and then an open organizational meeting in early June. Spaulding, co-founder of the North Carolina Mutual Insurance Company and president of the Mechanics and Farmers Bank in Durham, was arguably the most well-known and respected Black businessman in the country. At the banquet in New York City in November, where Maggie Lena Walker had declared “a commercial emancipation,” Spaulding officially announced the launch of the NNFC.

While not all of the NNFC’s objectives were fulfilled, they were ambitious in their goal of improving the socio-economic status of black Americans in the face of institutionalized racism that obstructed the development of black-owned businesses. The excerpt below is from the NNFC’s own announcement of its plans, including the establishment of a black stock exchange since black-owned businesses were barred from American exchanges:

The importance of such an organization was outlined in a 1925 issue of the Opportunity journal, a National Urban League publication known for spurring the Harlem literary movement:

Investing in Charities in The 19th Century: The Financialization of Philanthropy

‘This study deals with the impact of financialisation on the development of charity during the 19th century. We argue that this has two key aspects, firstly the growth of charitable provision via limited companies and secondly the financial audit by charities of the claimants who approached them, Limited companies operated mainly in the field of subsidised housing. These offered investors a satisfactory return, but at the cost of requirements re the level of rent and the behaviour expected from tenants which restricted the number of potential beneficiaries. The evaluation of claimants by charities was pioneered by, but not limited to, the new Charities Organisation Society. This constituted a form of audit, with enquiry into claimants’ behaviour, financial status and prospects, and refusal to support those seen as unreliable or unpredictable. We argue that these developments have significant implications for the social enterprise movement of the 20th and 21st centuries.’

The Philadelphia Saving Fund Society in the Mid-19th Century

Lost Potential: Banking On A Better Future For PSFS Building

‘Those who founded and managed savings banks put forward a rationale of benevolence. PSFS, in its first public statement, defined savings banks as charitable institutions “to promote economy and the practice of saving amongst the poor and laboring classes of the community.”‘ They saw their institution as an appropriate place for saving motivated by precautionary, target, and life-cycle objectives. A pamphlet, laced with homilies from Franklin, publicized the bank’s founding and trumpeted the virtues of “gradual accumulation and ultimate provision for the casualties of life and the wants of age.” In a series of examples of accumulation based on regular deposits, the pamphlet shows how an apprentice could save enough to set up his own business and a family could provide dowries for children.’

 

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Jamie Catherwood
My name is Jamie Catherwood, and I’m a Client Portfolio Associate at O’Shaughnessy Asset Management. Get your financial history fix through reading my articles, or those that I link to in my weekly “Financial History: Sunday Reads”.
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