“Shareholder Value Is No Longer Everything, Top C.E.O.s Say,” read the headline on the New York Times business page. Most readers probably just skimmed by, without taking much notice. It reminded me of the long-ago Times of London contest – to see who could write the dullest headline. The winner was, “Small Earthquake in Chile. Not many dead.”
But dull headline aside, this is undoubtedly the big economic news of the year. It will—gradually—change the way business operates. The Times’s “Top C.E.O.s” make up the Business Roundtable, comprising the heads of America’s leading companies. It’s the most powerful and prestigious group of business leaders in America. For decades its statement of corporate principles held that corporations exist principally to serve shareholders.
Milton Friedman, the Nobel Prize-winning economist and the guru of corporate America, put it this way, in a 1970 article that formed the bedrock of every argument about corporate purpose,
“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it … engages in open and free competition without deception or fraud.”
Friedman’s dictum has for decades loomed over every business conversation about what the corporation owed society. Purists said, “Friedman says profits first and only.” Discussions of worker benefits, charity, environmentalism, relations with suppliers, all were overshadowed by Friedman.
No longer, according to America’s top business leaders. They announce that the corporation purpose has changed from serving shareholders to serving stakeholders, that is, customers, suppliers, workers, and communities, as well as shareholders.
Do they mean it? Undoubtedly they are influenced by the current anti-business rhetoric and animus showed by today’s talking heads and Democratic Presidential candidates. Some CEOs will treat it as window dressing and continue on the path they were on. But many behave—or at least, lean—that way already.
As a DuPont executive once told me, “We don’t want to pollute the air—we breathe the same air as our critics.” Or as a Merck chemist told me about a major new drug approval by the FDA, “We didn’t have our celebration upon getting the approval—we had our big party only when the new medicine was in the hands of patients.”
Howard Schultz justified Starbucks’s generous health care benefits by saying, “My mantra is ‘We’re all in this together,’ but how could I say that to an associate if the company is providing health care benefits to me but not to her?”
But below the CEO level, and in company training programs and at business schools, whenever a question is raised about doing a little more for conservation, or for charity, or for the community, the ghost of Milton Friedman rises up and cries, “STOP! Your only responsibility is to increase profits.”
No longer. Corporations, at least those headed by the 188 CEOs who signed the new Statement on the Purpose of a Corporation, commit to:
- Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations. [Emphasis added]
- Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
- Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
- Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
- Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
Notice where shareholders come in that order!
Corporate America doesn’t turn on a dime. But this new statement of corporate purpose will provide a healthy nudge toward socially responsibility. And that’s big news.
Ethics Bob 
September 17, 2019 at 1:18 pm |
I’m deeply cynical. Perhaps it’s a personal failing, but then again, I’m told that it’s a fairly standard trait among Generation X, and I’ve always said that when one person is a certain way, it’s an anecdote, when two people are a certain way, it’s a coincidence, but when an entire generation of people are a certain way, then maybe they came to it honestly.
Regardless, like I said… Cynical. I honestly can’t picture what this looks like in practice, never-mind the path from here to there, and I don’t know what shareholder response will be.
That last one, I think, is going to be interesting. The single largest voting block of shareholders in America is pension funds, and their holdings are enormous. As of January 2018, The Canada Pension Fund owned a 16.5% stake in Macerich, which at the time managed 53 million square feet of shopping malls. It’s well and good, I think, for people to voice their support for the idea of a more sustainable business environment, but will they be so eager if it means they have to hold off retirement a year or two?
But that won’t be the issue, because the average pensioner doesn’t grasp the monolithic power structures that they are parts of. And plan management will most likely be able to make these changes without their pensioners knowing. Hell, seeing what some of the plan management fee structures look like, I’d argue that this wouldn’t even be a huge departure from the norm. I’d even argue that the proclivity of pension plans to have huge retail real estate portfolios is borderline mismanagement, as these plans continue to invest in brick and mortar while the market moves online.
Regardless, that scales up, but your more traditional investor will absolutely know that their investments aren’t performing optimally because of corporate culture. While I’m sure that there will be some people willing to put their money where their mouths are, it will be all too easy to move from investment vehicles that return 2% but makes you feel warm and fuzzy to something that returns 8%, and I don’t think that will be the path less traveled.
In other words, unless every corporation started simultaneously putting shareholder wealth behind other considerations, and the management teams weren’t immediately liquidated by their boards, I’m almost certain that the market would long-term self correct, and savvy (read: already well informed and disproportionately wealthy) investors would leave those corporations for greener pastures, leaving behind self-aware quasi-philanthropists, and investment blocks of financially illiterate pensioners.
.
September 18, 2019 at 11:04 pm |
I’m not cynical about this. There will certainly be businesses who put short-term profit above all–even above ethics and the law, but many of the most successful corporations already behave in accord with the new “purpose.” To them the total emphasis on shareholder value has always been secondary, or at least shared with the good of stakeholders. Treating workers well, responding to community concerns have to them long been important. The new statement of purpose will legitimize their long-standing practice.
In addition, there are corporations that have been inhibited from doing what they thought was right by their shareholders. The new purpose will free them to do what they think is right.
September 19, 2019 at 6:18 am
Sorry, and this might be the cynic in me, but I think that’s more asiprational than reality describing, although I accept I could be wrong.
Can you give an example of a business that actually put employees first, for instance? Maybe I’ve just been steeped in evil corporate culture too long, but I can’t even picture what that would look like. While I’m sure that there are companies that make lip-service to ideals like this, or even follow through to some extent, I have the base assumption that those situations are either a PR strategy rather than an actual assessment of values or an extreme outlier.
Having signed a letter of intent to put profit generation on the backburner won’t save the jobs of the CEOs who get fired by boards, or save the boards who get replaced by their shareholders if profits really start to suffer.