Rethinking Corporations and Capitalism

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Anat Admati: “I want big-picture thinking to infiltrate everything we do.” | Nancy Rothstein

Anat R. Admati often shares a particular New Yorker cartoon when she talks to people about the Corporations and Society Initiative that she recently launched at Stanford Graduate School of Business. In the cartoon, a man and three children are sitting around a campfire. The man’s business suit is tattered, and in the distance behind them a smoking city lies in rubbles.

“Yes, the planet got destroyed,” the man says to the kids, “but for a beautiful moment in time we created a lot of value for shareholders.”

“That cartoon just about covers it,” says Admati, the George G.C. Parker Professor of Finance and Economics. She has spent much of the past two years trying to persuade faculty and students at Stanford GSB to examine how their work affects not just the business world but also society at large.

“By teaching what we teach and through our research and other activities, we may tolerate or enable, maybe even subtly encourage, harmful actions,” Admati says. “We may do it inadvertently or not be aware of it, but that’s what we’re sometimes doing.”

The initiative grew out of a pilot visitors program that over the last two years has brought more than a dozen scholars, policymakers, and authors to Stanford for up to two weeks. The visitors engage with students and faculty at the business school and beyond in the hope of breaking silos and engaging in a discussion of broader issues that cut across disciplines.

Admati hopes to work with students, faculty, and staff to evolve and expand the set of activities. She also hopes to engage with alumni and has already met multiple times with Stanford GSB alumni in the Washington, D.C., area — a group that she describes as “very, very engaged” — to discuss the challenge of ensuring that leaders in the private and public sector take actions that work better for society.

“These topics are top-of-mind for a lot of us here in Washington,” says Amita Shukla, MBA ’03, president of the Stanford GSB Alumni Washington, D.C./Baltimore Chapter. “And there’s no doubt they’re much more a part of conversation today than they were before the last presidential election.”

Amit Seru, the Steven and Roberta Denning Professor of Finance at Stanford GSB, hopes that the initiative helps encourage and support more research as well as engagement on how better governance and sensible policy can enable corporations to serve society. “There is a vast set of complex issues in this area that we do not yet understand and that we should explore more deeply if we want to remain a leader and have the best impact we can have on the world,” Seru says.

In a recent interview, Admati shared some of her thoughts about the Corporations and Society Initiative — where it’s been and where it’s going.

You spent many years studying the details of financial markets and contracts, portfolio management, asset pricing, and the like. Was there a moment of epiphany for you when you decided you needed to move beyond those topics?

During the financial crisis, I started looking into banking, and that’s when I saw a disconnect. Because financial firms can do all the things that we tell them to do to maximize shareholder value and yet still mess up everything.

Mess everything up in what way?

Make reckless mortgage loans, bundle and sell them around the world, and create a fragile system that takes down the global economy when homeowners start defaulting, for one thing. How can that be? How is that tolerated? It turns out the rules were bad, and our assumptions about markets were wrong. Worse, as I looked more closely I encountered false or misleading claims that seemed to support and enable the system. Our teachings and research assume or suggest that if corporations maximize “shareholder value” or stock price, that’s good for society. But it turns out you can do considerable harm as you chase these targets.

What caused you start looking beyond the fields of financial economics?

As I engaged on the issues around financial regulations, I realized that I couldn’t understand what was going on without turning to research in other fields such as political science, psychology, sociology, and law, which took me completely out of my silo. I became familiar with concepts in these other fields; for example, about how people make sense of reality in their own mind and how narratives help us rationalize and justify our own actions and the status quo. I started getting a better understanding and insight in ways that I would not get from the standard models in economics and finance. And I began to question a lot of our basic assumptions.

Does that idea of questioning assumptions and crossing disciplines play a part in deciding which visitors to invite as part of the Corporations and Society Initiative?

Yes. The visitors we invite communicate across different disciplines and often bring into the discussion expertise in areas that we don’t have here. For example, we don’t have legal experts, but a lot of issues we should be talking about concern the rules of the game and their enforcement, which are fundamentally in the law. U.S. District Judge Jed Rakoff, for example, who visited Stanford for a week last year, spoke to my Finance and Society class this year, and his first line was, “I met a lot of very brilliant people in my visit to the GSB. But they were clueless about the law.” We look for people who are connected to what’s really going on in the world and can enrich our teaching, research, engagement, and impact.

What’s the elevator-pitch summary of the message you’re trying to get out?

That it is critical for all of us to look at a bigger picture regularly, as a habit. And that what we do here — what our students and our faculty do — can make a more positive difference than it currently does. I’m trying to change people’s mindset in terms of their awareness of the broader issues and work with students, faculty, and alums to find specific ways to make that positive difference.

Are you running up against resistance?

I’m running up against inertia, against status quo, against beliefs that are hard or inconvenient to change. People often have a certain way of viewing the world, which involves implicit, maybe even subconscious, assumptions. I’m hoping to create more recognition of such assumptions so people can examine them more critically.

How would that work? New courses?

A new course is a possibility and, indeed, I hope that the initiative is useful for developing materials and tools for covering these topics in a sort of “Capitalism 3.0” type of course. Meanwhile, beyond one course, I want big-picture thinking to infiltrate everything we do. For instance, in finance we teach students how to avoid paying taxes. We show them, in particular, how to use debt to create a tax shield. It’s in the textbooks and on the exams. But we never really stop to ask whether the tax rules are good and justified. We don’t ask, “Why do we have this tax code? Why does it have so many loopholes? Who ultimately benefits and who loses?” I want us to teach students how to get in the habit of asking those questions, instead of just showing them how to avoid the taxes.

You’ve talked a lot about increasing the school’s engagement with and impact on public policy. Can you give more details about that?

It goes back to Arjay Miller [Stanford GSB dean from 1969 to 1979, who died in November]. I consider him the intellectual father of this initiative. I had a two-hour conversation with him after he was more than 100 years old, which was amazing in and of itself. He was very aware of the importance of good public policy since his experiences back in the 1960s, and in coming to lead Stanford GSB, he insisted that the school would have a public management program. He thought business schools should focus not only on teaching private-sector leaders how to increase profits, but also educate professionals who could move fluidly between industry and government — who could read a balance sheet as well as grasp societal issues such as education, poverty, and public safety. I think we need to go back to his original mission. Stanford GSB should be a better citizen of the world and use its resources and expertise to that end. We have a unique opportunity to shape the future of capitalism.