Power to Truth: Rethinking Corporate Responsibility with Karthik Ramanna and Anat Admati

Introduction and background on thin political markets

• Anat Admati is the faculty director of the Corporation Society Initiative (Cassie) and is hosting an episode of the series "Power to Truth" with guest Karthik Ramanna, who has a new book titled "The Age of Outrage" (19s).
• Karthik Ramanna is a professor of accounting, formerly at Harvard Business School, and has written a book about the politics of financial reporting accounting standards (FASB) (1m20s).
• The concept of "thin political markets" was coined by Karthik Ramanna, referring to situations where experts with conflicts of interest create rules, such as accounting standards (1m48s).
• Thin political markets occur when a small group of informed people, often with 5-50 individuals, have the expertise and commitment to create rules, but may also have conflicts of interest (4m10s).
• Karthik Ramanna became interested in the process of creating accounting rules while teaching accounting and discovered that a small group of people were involved in creating these rules, which led to his research on thin political markets (3m32s).
• The concept of thin political markets has been applied to various areas, including accounting rules for mergers and acquisitions, derivatives, and related-party transactions (3m57s).
• Anat Admati and Karthik Ramanna collaborated on a conference in 2020 titled "Corporations and Democracy," which included a session on thin political markets (1m54s).

The nature of accounting rules and public awareness

• A community of informed people with concentrated commercial interests can influence the outcome of political processes, often skewing the results in their favor, as seen in the case of accounting rules where expertise is often collocated with commercial interests (4m28s).
• Accounting rules, like many other esoteric areas in capitalism, are often considered boring and invisible to the general public, making it difficult for citizens to understand and engage with the issues (5m8s).
• The lack of media spotlight and superficial reporting on accounting rules can lead to a lack of accountability, as citizens may be outraged but unsure of how to take action (5m29s).

Issue salience and the example of Goodwill accounting

• The concept of "low issue salience" refers to the idea that certain issues, like accounting rules, are not considered newsworthy or important enough to elect politicians, making it difficult to hold those responsible accountable (6m5s).
• The accounting rule for Goodwill allows companies to claim benefits when an acquisition works out well, but not claim losses when it doesn't, which can be seen as a form of double counting (6m17s).
• The origin of this rule can be traced back to investment bankers who were involved in the rule-making process, highlighting the influence of commercial interests in shaping accounting standards (6m41s).

Political markets and the influence of commercial interests

• The concept of "political markets" refers to the idea that rules and standards are shaped by political processes and commercial interests, rather than being objective or neutral (7m1s).
• The complexity of banking rules and the lack of understanding among politicians and citizens can make it difficult to have informed conversations about these issues (7m18s).
• The realization that rules are made by people and are subject to political influence can be a revelation for finance and economics professors, and can change their career trajectory (7m53s).

The importance of education and structural awareness

• The importance of leadership and accountability in shaping accounting standards and rules has become a key area of focus for researchers in this field (8m11s).
• The importance of teaching students in business schools about the structural issues in capitalism and markets, and how they connect to the broader systemic structure, is emphasized (8m19s).
• The pursuit of profit can involve undermining the rules of the game, leading to a broken system, and this is not a political issue, as even Milton Friedman was aware of this problem (9m47s).

Friedman, Stigler, and the concept of the "free market"

• Friedman's friend, George Stigler, recognized that industry controls all rules, and this can lead to corruption, highlighting the need to use politics to do good rather than corrupt the system (10m3s).
• The concept of a "free market" coined by Friedman and others created a false comparison between capitalism and totalitarianism, implying that any regulation is equivalent to a communist state-controlled economy (11m38s).
• The idea that business schools should teach students to reflect on the implications of not paying attention to structural questions in capitalism and markets, and how they connect to the broader systemic structure, is discussed (8m32s).
• The need to champion capitalism while recognizing its nuances and the importance of a robust institutional framework is emphasized, as even the arch-advocates of a market society like Friedman recognized the potential problems (11m20s).

Bridging the gap between policy and business schools

• The question of how to make politics work for good rather than corruption is raised, and the role of business schools in reinforcing this point is discussed (10m49s).
• The importance of recognizing that the pursuit of profit can involve changing the rules, and that this is not a legitimate social purpose, is highlighted (9m37s).
• Working in a policy school and a business school can make one a misfit, as the kind of work done makes them outsiders and novices in both environments, with differing views on capitalism in each setting (12m16s).
• The work involves bridging the gap between the two environments, with the goal of making capitalism work and understanding its potential to undermine democracy (12m48s).

The private sector's role and corporate personhood

• There is a blind spot in business schools regarding the interaction between the private sector and government, which is crucial in setting rules and contracting commercially (13m23s).
• The private sector plays a significant role in controlling the economy and interacting with the government, making it essential to understand this dynamic in a democratic capitalist society (13m41s).
• The concept of corporate personhood, which grants corporations rights similar to those of individuals, has been a topic of debate, with some arguing that it is absurd to consider corporations as equivalent to human beings (14m23s).
• The idea of corporate personhood was legitimized by Supreme Court rulings, which have been criticized by justices such as William Rehnquist, who argued that corporations are distinct from human beings and should not have the same rights (14m33s).

Exploring corporate personhood and its implications

• The book "We the Corporation" by Adam Winkler explores the concept of corporate personhood and the rights that corporations should have, highlighting that corporations can own property, sign contracts, and have other rights, but the question remains as to what rights are appropriate for them (14m58s).
• The concept of corporate personhood raises questions about the rights and privileges granted to corporations, such as limited liability, the right to own assets, and infinite life, which are not available to human beings (15m44s).
• The privilege of infinite life granted to corporations is a significant advantage that human beings do not have, making the corporate form a strong and sturdy organization (15m53s).

Corporate stability and its role in wealth creation

• Corporations can be more stable than political institutions, as politicians are often more shortsighted, and misconduct in corporations can be addressed by replacing the CEO, allowing for a fresh start (16m9s).
• Corporate forms have been instrumental in creating wealth, innovation, and human flourishing, as seen in the example of India's transition from socialism to a market-based economy (16m40s).

The role of government and defining corporate freedoms

• A trustworthy government is necessary to create good rules for corporations, enforce contracts, and enable markets to work, which is a matter of common sense (17m12s).
• The concept of a free market is often misunderstood, and it's essential to define what corporations should be free to do, just as there are limits to individual freedoms like free speech (17m36s).
• The case of the Telegram CEO's arrest in France raises questions about the limits of free speech and corporate responsibility, particularly when it comes to collaborating with investigations into serious crimes like child trafficking (17m54s).

The importance of democratic conversation and AI's impact

• The importance of democratic conversation and ongoing debate about the role of corporations in society is crucial, especially in business schools, to ensure that corporate elites are aware of their interactions with society (18m55s).
• The transformative potential of AI requires a vibrant conversation about its impact on society, just as the Industrial Revolution had a profound impact on creating prosperity and enabling wider democracy (19m17s).
• The Industrial Revolution's success in England was partly due to its liberal tradition, and similarly, the development of AI requires a thoughtful approach to its potential consequences (19m42s).

AI, decision-making, and the need for a broader perspective

• The example of Henry Ford, who believed in creating prosperity by allowing his employees to buy his products, highlights the importance of considering the social implications of technological innovations (19m52s).
• The current state of decision-making in the context of AI and corporate responsibility is characterized by a thin political market, where the benefits and costs are not evenly distributed, and the elite, including those educated at top business schools, will implicitly make decisions that shape the course of human history (20m16s).
• It is essential to equip future business leaders with the ability to think about the big picture and consider the moral implications of their choices, rather than just focusing on narrow, technical aspects of business (20m50s).

The concept of "power to truth" and carbon accounting

• The concept of "power to truth" is crucial in understanding how individual actions fit into the larger picture and how they can contribute to addressing global challenges (21m10s).
• A significant project currently underway is focused on carbon accounting, which is plagued by issues similar to those found in financial accounting, including a lack of solid accounting expertise and the influence of corporate interests and ideology (21m28s).
• The current approach to carbon accounting, particularly scope 3, is flawed and defies basic accounting principles, such as verifiability and mutual exclusivity (23m30s).
• The goal of the carbon accounting project is to bring truth back to the system and align the interests of corporations with social purposes, addressing the global challenge of climate change (23m20s).

Addressing flaws in current carbon accounting practices

• The project aims to address the absence of solid accounting expertise in the development of carbon accounting standards and to promote a more objective and logical approach (22m44s).
• The experience of working on financial accounting and leadership has informed the approach to carbon accounting, highlighting the importance of leadership in society and the need for a more nuanced understanding of the role of business in addressing global challenges (21m47s).
• The goal of carbon accounting is to create a verifiable and truthful way to physically count the molecules of CO2 and other greenhouse gases that go into the atmosphere from various corporate activities, which is relatively straightforward to do using existing technology in inventory accounting and cost accounting (24m48s).

Technological advancements and the potential of distributed ledgers

• The recordkeeping element of carbon accounting has become vastly cheaper in the last 5 to 10 years due to the development of distributed ledgers, making it a socially useful application of the technology (25m15s).
• The use of distributed ledgers can help drive a solution that aligns business with the goal of reducing greenhouse gas emissions, and can be used to create a performance measurement system that unleashes value (25m51s).

Creating value through emissions-based competition

• The introduction of a new dimension, such as emissions, can create win-wins for companies, similar to how the introduction of just-in-time inventory management systems created a new dimension of timeliness as a basis of competitive differentiation (26m47s).
• Companies can compete on producing products that are the least emissions-intensive, such as oil companies competing on producing barrels of oil with the lowest emissions, and cement companies competing on producing bags of cement with the lowest emissions (26m59s).
• The creation of a performance measurement system for emissions can unleash value and create a new basis of competitive differentiation for companies (27m21s).

A centrist approach to carbon management and accounting

• The current approach to carbon management is based on an ideological project that views capitalism as the root cause of all evil and climate destruction, which has perversely set back the decarbonization objective (23m59s).
• The project on carbon accounting aims to bring a radically centrist and moderate approach to the issue, focusing on common sense and verifiable truth (24m34s).
• The goal is to create a system where companies' accounts are mutually exclusive and collectively exhausted, and where carbon emissions are counted in a way that is transparent and verifiable (23m40s).

Information supply, carbon accounting, and the power of truth

• The concept of information supply creating its own demand is crucial, and having the right numbers can impact what people compete for and ultimately lead to the truth having power (27m29s).
• Carbon accounting is considered easier than financial accounting due to being constrained by the laws of thermodynamics, which provide an inherent check in the system (27m48s).
• The combination of basic chemistry and centuries-old accounting principles can create a powerful system that aligns companies and competitive markets to solve global challenges (28m28s).

Bottom-up decarbonization and the need for coordination

• This system can work more effectively than top-down market design by governments, as the necessary information for decarbonization will come from billions of bottom-up decisions (28m45s).
• A coordination mechanism is still needed to ensure the reporting and rules of the game are in place, which is where the E-Liability Project comes in (28m57s).

The E-Liability Project and its goals

• The E-Liability Project, which stands for Environmental Liability, aims to provide a system for environmental accounting and reporting, with all papers and algorithms available for free in the public domain (29m6s).
• The project has no commercial intent, with the goal of doing what is good for the world, similar to the founders of Google's approach to search (29m20s).
• While companies may make money from this system, the key is that the algorithms are free and available for public use (29m41s).