How DEI and ESG helped SVB and FTX DIE

The collapse of Silicon Valley Bank has terrified many people on Wall Street and main street. There is understandable fear that 2023 is the new 2008. Not helping matters, one of SVB’s top executives also was a top executive at now-defunct Lehman Brothers. SVB’s demise comes on the heels of the meltdown of Sam Bankman-Fried’s Futures Exchange (FTX) Trading.

On the surface, SVB and FTX are completely different. SVB was a bank while FTX was a cryptocurrency trading company. Yet both firms were done in by a combination of corporate negligence, incompetence, and alleged malfeasance and criminality. In reality, these companies were doomed from the start because their entire foundation was based on a flawed premise. New concepts of socially responsible investing turned some businesses upside down.

Economic genius Milton Friedman remarked in 1970 that “The social responsibility of business is to increase its profits.” Friedman devotees understand that the purpose of a business is to provide a good or service in exchange for capital. Businesses are not charities. The sole function of a business is to enrich their stakeholders. For publicly traded corporations, stakeholders are shareholders.

In the decades since Friedman’s maxim of maximizing shareholder wealth, a new and dangerous school of thought invaded far too many businesses. This new school demands that businesses improve the lives of overall society. The Diversity, Equity and Inclusion (DEI) movement mandates that corporate and government boards be structured to reflect the overall American makeup and right past injustices. The Environmental, Social and Governance (ESG) school of investing teaches that sustainability and eco-friendliness hold major sway.

This directly contravenes Friedman. As long as a company obeys blackletter law, Friedman believes profits matter first, last and always.

Friedman has repeatedly been proven right. The notion that social responsibility and profits can coexist has been thoroughly debunked. When the rubber meets the road, DEI and ESG have been albatrosses strangling corporate necks.

DEI keeps failing because it replaces excellence. Any shareholder would be thrilled with a corporate board consisting of only marginalized minorities if that board increased shareholder value. Diversity theoretically means hiring qualified people of all stripes. In reality, diversity obsession is more likely to lower standards. Companies seeking to virtue-signal too often hire unqualified individuals solely because they are minorities. Being a minority or a straight white male is not an accomplishment, skill or qualification. It is a state of being. Yet fear of lawsuits all too often makes corporate boards put identity ahead of merit.

ESG also increases bureaucracy. It wastes money and time. A certain percentage of a corporation’s profits must go into research and development. The threat of competition requires that new products and services be rolled out regularly to keep pace with changing times, trends, and threats. Climate change theory has nothing to do with the purpose of most companies. Every moment companies spend on compliance, paperwork and other unnecessary expenses are moments not spent on vital R & D. Resources and time are finite, precious commodities. DEI and ESG create extra expenses. By definition alone, expenses come at the expense of profits.

SVB and FTX mission statements had all the correct buzzwords. Much hay was made of how diverse, sustainable, equitable and virtuous these companies were. Left out were sound business decisions needed for survival.

It is perfectly acceptable and perhaps noble for wealthy successful business executives to use their private funds on socially responsible policies. It is absolutely irresponsible for these executives to use even one dollar of company funds on matters unrelated to the direct growth and profit of the company.

“Go woke, go broke” is too simplistic. There can be room for social responsibility and profit in overall society, but those contradictory goals must be delineated. People can and should be charitable on their own time and on their own dime. Any use of shareholder funds for socially responsible projects unrelated to the core business is a form of mission diversion.

SVB and FTX destroyed their own balance sheets by withdrawing customer and shareholder funds for non-core purposes. DEI and ESG policies further increased expenses and eroded profits. The inevitable financial collapses hurt the shareholders, customers, and the very marginalized groups the companies sought to help.

To prevent future business collapses, businesses must return to their core purpose as defined by Friedman. Governments offer plenty of social welfare programs. Charities provide significant help to impoverished and marginalized communities. Businesses often set up foundations to tackle many social problems. To fund these foundations, businesses must make money.

When earnings before interest, taxes, depreciation and amortization are up, businesses make more money. This leads to more hiring of all types of people at better wages. Everybody wins.

When earnings before interest, taxes, depreciation and amortization are up, businesses make more money. This leads to more hiring of all types of people at better wages. Everybody wins.

To prevent more financial meltdowns like SVB and FTX, businesses must let DEI and ESG DIE and return to their core purpose.

Eric Golub is a comedian, author and retired stockbrokerage professional living in Los Angeles. His interests include football, politics, Judaism, the stock market, and Angela Lansbury’s “Murder, She Wrote.”