This is Part 3 in an interview series I’m doing with Roy Swan, Director of Mission Investments at the Ford Foundation. In Part 1 we talked about his incredible life story. In Part 2 we discussed his work at Ford. At the end of the interview Roy introduced his concept of “Patriotic Capitalism.” In this interview he explains this idea in more detail. And it is a very good one.

 

Eccles: Roy, let’s just jump into it. Please explain more what you mean about “Patriotic Capitalism” and how it relates to your impact investing work.

Swan: Thanks Bob. Before diving into Patriotic Capitalism, I’d like to lay the foundation for this final chapter in our series:

First, I want there to be no confusion about the fact that I am an investor seeking to make an exorbitant amount of money for the Ford Foundation’s impact investing endowment. Many people automatically assume that “impact investing” can’t generate positive social impact and market rate returns. That’s an example of cognitive bias and lack of intellectual rigor. You can do both through careful portfolio construction, a rigorous manager selection process, and a dose of good luck; just like with traditional investing. We believe a carefully designed impact investing strategy can sustain a perpetual foundation which requires a long-term financial return equal to a foundation’s spend rate plus inflation. That’s harder to achieve than in traditional investing, because our universe of possible investments is limited by the smaller universe of double bottom line investment opportunities. But who doesn’t like a good challenge?

Eccles: Your 6% spend rate plus inflation is 9%. That seems like a high hurdle. With fewer investments to choose from, I see why your job is so hard. Thanks for the background. Any other context before diving in?

Swan: Yes, I’d like to add a bit of philosophical context underlying the Patriotic Capitalism idea. 

When I think about patriotism, iconic American figures come to mind. Some are well known like Harriet Tubman, Frederick Douglass, Louis Kelso, and Charlie Munger. Others aren’t so well known, like Andrew Goodman, James Chaney, and Michael Schwerner. What they shared in common was a love of America and a commitment to make America better. Their commitment was so strong that they put their lives at stake. Goodman, Chaney, and Schwerner lost their lives fighting for fairness.

Ideas like ESG disclosures and impact investing, and Patriotic Capitalism are intended to make the world better for everyone. Instead we’re seeing these ideas are met with  cynicism, resistance, and negativity from some powerful people. In brainstorming how to address those opposing forces, my mind wandered back in time to the most important single two-hour classroom session of my three-year Stanford Law School experience. 

Charlie Munger, Warren Buffett’s Vice Chairman of Berkshire Hathaway who recently passed away, endowed a professorship for a class called “What Lawyers Should Know About Business.” As part of his donation, Munger committed that he or Warren Buffett would visit for classroom discussion once a semester. I took the class the year Charlie Munger came to town.

Munger dropped many nuggets of wisdom during those two hours. One thing he said was particularly instructive:

“If you want to get someone to do something they wouldn’t normally do, don’t try to guilt or shame them into it. Appeal to their sense of greatness.”

I regret that terms like ESG and “woke” and even fairness have been twisted to trigger fear and negativity. On the other hand, the word “Patriotic” inspires positive thoughts like service to country, commitment to community, and duty to others. While “patriotism” is a pan-national term, in America it rouses lofty ideals like democracy and responsible citizenship.

I hope asset owners, institutional investors, the Wall Street research analyst community, elected officials, and policy makers will see the value of Patriotic Capitalism as a way to strengthen the U.S. economy through fairness and growth. At a time when an increasing number of Americans are losing faith in our economic and social systems, advancing economic opportunity and bolstering social stability is critical for the continued success and security of our nation, both domestically and on the global geopolitical stage.

Eccles: Thanks for the big picture context. Now for the details on how your six impact investing themes fit within your “Patriotic Capitalism” paradigm?

 

Swan: Bob, I’m sure you love all your children equally, as do I my own children. But, for the purpose of picking examples rather than favorites, I’ll go with our Quality Jobs and Diverse Fund Managers themes. 

The Quality Jobs theme is about fairness for workers. According to IRS data from 1980 to 2014, the real wages of the top 1% rose 176% while the real wages of the bottom 90% actually decreased by 3%. It’s hard to imagine how that horrifying statistic can be seen as fair for workers. 

History shows that democracies weaken when economic inequality widens. For the first time in American history, economic inequality has reached such desperate extremes that it threatens democracy. 

Our Quality Jobs impact investing theme is based on the fact that superior operational design and superior human capital investment can generate superior financial returns. Estimates indicate that 70% of workers in America are disengaged, resulting in $550 billion in lost profits. Improvements in corporate culture, like fair treatment, on-the-job training, and fair pay increase employee engagement, which improves innovation, productivity, and profitability. Good corporate culture is key to unleashing a gusher of shareholder value by recapturing lost profits. If you apply the recent S&P 500 multiple of 23x to those lost profits, that’s $13 trillion in shareholder value.  Our Quality Jobs theme enriches workers and shareholders. It increases national prosperity, strengthens democracy and bolsters national security. That’s patriotic.

 

 

Another example is our Diverse Fund Managers theme. Of the $80+ trillion in assets under management in America, white men control 98.6% of that amount. That leaves a paltry 1.4%, crumbs for women and people of color who make up 70% of the U.S. population. The largest Black-owned and run institutional investment firm is 1/100^th the AUM size of the largest white-owned and run institutional investment firm. All Black-owned and run institutional investment firms combined have just 0.25% of all U.S. AUM. If that figure reflected the 13% Black population in America, it would be 52x higher.  

Not only are those statistics startling, but their consequences are devastatingly destructive to our economy, social stability, and national security.  America has lost $50 trillion in GDP since 1990 alone because of race-based barriers to opportunity and capital. Estimates show that the U.S. economy could add $5 trillion in just five years if we opened access to capital for Black people in America.

In the spirit of Charlie Munger’s advice, I hope Patriotic Capitalism inspires the power elite asset owners and institutional investors to rise above unfairness and embrace the empathy and fairness that is a true sign of greatness. Our Diverse Fund Managers theme is Patriotic Capitalism because it not only helps Diverse Fund Managers, it helps all of America.

Eccles: I know that “Patriotic Capitalism” is meant for the entire political spectrum, but in some cases, the term “patriotic” has become a dog whistle that signals conservative ideals around what a capitalist society should look like. Are there particular challenges in getting all Americans, including the full spectrum of liberals, on board with it?

Swan: If the goal is fairness and building a stronger America by improving the potential and prosperity of all our people, then I think that’s something both conservatives and liberals can get behind. 

Eccles:  What about the hard right end of the GOP who thinks that any discussion about racial inequality  is “anti-white.” I mean, in our previous interview you talked about investing in Appalachia so clearly inequality is something across races.

 

 

Swan: I think what unites most of us, regardless of what side of the political spectrum we fall on, is the shared belief in and respect for the democratic principles we hold dear in America. However, there are some very wealthy people who use racist tropes and age-old divisive tactics to stoke fear and keep the system rigged against regular families in America.  

One problem with averages and medians is they don’t capture individual situations. Oversimplifications and misrepresentations can paint a distorted view of what’s happening in communities across our country where an unfair distribution of resources and disinvestment leads to greater problems.  The experience of white people living in cities like Boston, where the average wealth for white families is over $250,000 compared with Black American wealth of $8, is vastly different than that of people living in the hills of rural, mostly white, Appalachia where a study by the Appalachian Regional Commission found that poverty rates range from 6.5% to 41% and another study found that 15% of all Appalachians live below the poverty level. My team announced an additional $10 million investment with Appalachian Community Capital to help spur job creation and economic growth in the region because we saw an urgent need to help overlooked white residents of Appalachia.  

Eccles: So, it sounds like you think it’s less about conservatives and liberals and more about the top 0.1% versus the rest of us?

Swan: I think there’s something to the wealth divide. I don’t mean to imply that being wealthy automatically makes you a bad person, but there are some wealthy people who don’t appear to demonstrate patriotic behavior. Their efforts to dismantle regulations, evade taxation, and treat workers like fungible expenses rather than valuable human capital assets are in direct opposition to Adam Smith’s conception of a moral and sustainable economic system.  

I hope Patriotic Capitalism inspires wealthy opponents of morality and fairness to rise beyond comfort and personal prestige to true greatness in the spirit of Louis Kelso, Charlie Munger, Harriet Tubman, Frederick Douglass, and lesser known people like James Chaney, Andrew Goodman, and Michael Schwerner.  It would be great if they used their wealth to unite rather than overpower, intimidate, and polarize.

Eccles: In a much earlier conversation we had that ultimately led to doing these interviews, we talked about a couple of things I’d like to go back to and then return to “Patriotic Capitalism.” One is, why is building wealth for Black families in America so important not only to improving their lives but also the lives of white people and others in the rest of country? Please explain that a bit more.

Swan: In a capitalist system, if you don’t have access to capital you have a big problem. In my opinion, every social problem Black people in America face could be solved by more wealth. According to government statistics, if Black wealth equaled white wealth there would be about $15 trillion more wealth in Black America. That’s a lot of wealth that could be circulating in our economy. It’s not a zero sum game. As I mentioned earlier, discrimination against Black people has cost the U.S. economy $50 trillion since 1990, so racism, regardless of whether it is intentional or unconscious, is killing our economy and weakening us in every imaginable way.

Fostering an economy that provides equal access to capital is not just fair, it’s smart. I often wonder why some smart people are against DEI in business and investments when the data clearly show that DEI, which is simply a more descriptive term for fairness, results in a better bottom line and stronger economic outcomes.

Eccles: Roy, I think you already know the answer to that question. I recall the study you’ve told me about, which revealed that white people will trade off economic benefits to preserve their social status. Is that the answer to your own question?

Swan: Bob, I think you’re right. The grievance rhetoric and whining in mass media by wealthy people with access and megaphones was explained decades ago by Nobel Prize winning Economist Gary Becker, the author of “The Economics of Discrimination.” As unfair, immoral, perverse, and somewhat silly as it may sound, Becker’s research indicated white men’s willingness to pay a financial (and moral) price in order to maintain separation and superiority. Literally, Becker’s research found that white men are willing to lose money in order to preserve their social and economic status, and further perpetuate the  unfair discrimination against Black people.

The economic illogic is underscored even further when you consider research indicating that the US economy could more than double in size over just a few years if access to capital was more fairly available to Black investors and Black-led businesses.

The real impact of Becker’s research is that it destroyed the notion of the economically rational actor and illuminated the power of human nature, which can be economically irrational and psychologically rational at the same time. In other words, the emotional and self-esteem benefits of white superiority can be more important than wealth. It manifests itself in vocalizing grievances, whining, and scapegoating.

Eccles: One last thing. While the capital markets are a powerful tool for addressing systemic issues like inequality and climate change, they can’t do it by themselves. The public sector also has a role to play, as do other institutions. You told me a very moving story about an experience with the Church of England. Please say more about that.

 

 

Swan: Last July, I got a call from a search firm working on behalf of the Church Commissioners for England. That’s the entity that manages the Church of England’s £10 billion+ pool of assets and properties.

I was stunned to hear about the Commissioners’ research on the Church of England’s sponsorship of the transatlantic chattel enslavement trade of African people. The research resembled a “Truth and Reconciliation” process and involved forensic accounting to trace investments in human cargo ships and actual trades of human beings. Not only did the Church Commissioners acknowledge the immorality of the Church’s financial investments; they owned its complicity in the horrific dehumanization, violence, and murder that accompanied chattel enslavement; and they created a £100 million fund for impact investing, grantmaking, and more research to build a better future for the descendants of the African people trapped in chattel enslavement. 

I was surprised and thrilled by the Church Commissioners’ authenticity, especially at a time when my home country America denies, deflects, and distracts to evade responsibility for past and present oppression and discrimination.

Although the financial gesture of just £100 million is quite small relative to the enormous toll on Black people and the profits immorally extracted over centuries and continuing today, it has the potential to encourage others to join the effort. 

During that call, the search firm asked me if I’d be interested in helping the Church Commissioners develop ideas for the design and deployment of the £100 million fund.

Fast forward, I found myself at Bishopthorpe Palace in England standing before the Archbishop of York and the Church Commissioners board presenting recommendations for the design and strategy of the impact investing fund… on Thanksgiving Day.

Eccles: I’m afraid to ask whether your family saved you any turkey for when you got home from England; don’t want to pour salt on open wounds!

Swan: While I didn’t get home in time for the turkey, that presentation at Bishopthorpe Palace was one of the most important moments of my career. Not only is the opportunity to take part in such an innovative and historic undertaking something that I am honored to have been asked to lend my expertise toward, but I think the Church Commissioners are opening the door to a new era of moral capitalism; a form of capitalism that aligns with renowned philosopher and economist Adam Smith’s core principle that morality is vital to a healthy and sustainable society. I also believe the impact investing fund will generate attractive financial returns to be redeployed towards a better future for all.

Eccles: Thanks for all your time in these interviews, Roy. I’ve learned a lot and I look forward to learning more from and continuing to work with you.

Swan: Thanks, Bob. It has been my pleasure. I’m grateful for the opportunity.