The Financial Express

The social costs of financial returns

| Updated: October 20, 2017 23:23:18

The social costs of financial returns

Two business plans are on the table for the $491 million leveraged buyout of Landmark Luggage by KMM Capital. One promises to make about 3.2 times its money, the other 3.5 times. Neither plan is a sure thing. So which should the principals at this fictional private-equity firm choose?

That’s the tension at the center of an entertaining off-Broadway play, “Dry Powder,” which opened this week at New York’s Public Theater. Like most post-crisis dramatizations of high finance, playwright Sarah Burgess engages in caricature. So don’t expect to find Wall Street denizens like Blackstone boss Steve Schwarzman chortling in the aisles.

Yet the production asks a question that increasingly occupies corporate boardrooms: To what degree can or should investment returns be adjusted for social impact? The whole concept, which a few years ago might only have been mentioned at an Occupy Wall Street rally, has moved squarely onto financiers’ radar screens. Amid rising inequality in America, social upheaval has become a tangible risk factor.

With tabloid stories about lavish parties and their names chiseled into the facades of public institutions, buyout barons are easy targets in this wider debate, which has propelled the presidential ambitions of Donald Trump on the right and Bernie Sanders on the left.

“Dry Powder” makes opportunistic but generally good-natured use of the LBO cabal’s many foibles to make broader points about how a widening disconnect between the haves and have-nots could ultimately hurt the former group. Hank Azaria plays Rick, KMM’s president, under press siege for announcing big layoffs at a supermarket chain in the firm’s portfolio on the same day he has thrown an engagement bash that featured an elephant (only one, Rick is forced to remind on multiple occasions).

The negative coverage proves life-threatening for KMM when investors withdraw their money from the firm, forcing Rick and his two feuding partners – Jenny, played by “Homeland” star Claire Danes, and Seth, by John Krasinski of “The Office” – to kowtow to a Chinese gangster to keep the lights on and the deals alive.

That investors would pull their money out solely on the basis of an article in the New York Times – and, to Rick’s later shock, one in the Wall Street Journal – is a stretch. Not only did Blackstone survive Schwarzman’s elaborate 60th birthday back in 2007 (the guest list included Trump and his wife Melania), the firm went public and today manages around $300 billion of assets.

But reputational risk has arguably increased since the 2008 crisis, and boycotts like the fictional one in “Dry Powder” do happen. Look no further than the pressure brought to bear on Cerberus Capital Management, the private-equity shop run by Stephen Feinberg. Cerberus sold Remington Outdoor, the maker of the AR-15 used in the Sandy Hook School mass shooting of 2012, after public pension funds threatened to take their money away.

On the stage, Rick’s dilemma is a choice between two different business models for Landmark Luggage. The one proposed by Seth will make more than three times KMM’s investment. It involves keeping, and possibly adding to, the luggage firm’s 600-odd U.S. staff – a plan that would put an end to the media barrage. Jenny’s model would make about 10 percent more for KMM, but it requires a colder heart. All but a handful of American employees would be fired, and production moved to Bangladesh.

Are the extra few million dollars promised by Jenny’s plan worth further damage to KMM’s reputation? KMM’s job is to maximize returns for its investors, a refrain that Jenny embraces with religious zeal. But Seth’s alternative would avoid doubling down on the risk of bad publicity and further exodus of investors. There is little doubt about the playwright’s view: Socially reprehensible, or at least tin-eared, behavior carries its own cost.

Burgess has many corporate allies on this front. John Browne, former BP boss and co-author of a new book on corporate social responsibility, said in a recent interview that “on average, 30 percent of the value of a company is at risk when they break the bond with society.” He cites Volkswagen, whose stock plunged by 30 percent as a result of its emissions scandal, as a case in point. Emptying the corporation’s “reservoir of goodwill” with the public turned out to be bad business, Browne says.

One flaw in “Dry Powder,” though, is Jenny’s abrasive embodiment of almost all the finance industry’s worst clichés. She has no life, she doesn’t take vacations, and she doesn’t even know the name of an overworked subordinate who has been hospitalized for exhaustion. The more subtle argument isn’t about whether maximizing returns is callous or not per se, it’s about the balance between the health of one person’s pot of retirement savings and the security and quality of life provided by another individual’s job.

Browne and others in his camp would probably cringe at such oversimplifications while sympathizing with the thrust of “Dry Powder”’s drama. Audiences may just enjoy it – but like, say, Academy Award-winning movie “The Big Short,” it should also make them think about how the profit motive stacks up against purer ones.

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