Wednesday, August 21, 2019

Don't pave the road to hell with good intentions - From my FB page

Peter Lewin
This is an ominous development and reflects a deepening ubiquitous confusion.
Compliments to Michael Bordo who said: "the Business Roundtable’s new stance would have corporate executives behave like regulators".
Anything peaceful agreed to between shareholders and management is fine, but when third parties, like the Roundtable, react to popular, and populist, agitation by trying to force extraneous criteria into that agreement, this signals a very dangerous turn - underlined by the fact that so many CEO's felt constrained to sign the declaration. To think that large scale social benefits come from the good intentions of wealthy businesses is not only untrue, it is in most cases the very opposite of the truth. These "good intentions", insofar as they divert effort away from the creation of value for consumers and thereby shareholder value, contribute to the lack of success of business and reduce long term social benefits. We learned long ago from Adam Smith and others that it is not from the benevolence of the butcher that we get our meat, but from his attention to his own self interest in making a profit (that he might use for his daughter's college, or his favorite charity, or his extravagant vacation); and to require the butcher to act in a compassionate, community-based manner will, indeed, reduce his capacity to give us our meat - in the extreme it will drive him out of business. It is bewildering that this lesson has so thoroughly been forgotten, misunderstood and dismissed by otherwise intelligent people. Our very continued existence as a free and prosperous society depends on it.
·        To think we can produce good results by mandating good intentions is the epitome of what F.A. Hayek called the fatal conceit.


Move Over, Shareholders: Top CEOs Say Companies Have Obligations to Society

Business Roundtable urges firms to take into account employees, customers and community

By David Benoit
Updated Aug. 19, 2019 6:55 pm ET

The leaders of some of America’s biggest companies are chipping away at the long-held notion that corporate decision-making should revolve around what is best for shareholders.
The Business Roundtable on Monday changed its statement of “the purpose of a corporation.” No longer should decisions be based solely on whether they will yield higher profits for shareholders, the group said. Rather, corporate leaders should take into account “all stakeholders”—that is, employees, customers and society writ large.
It is a major philosophical shift for the association, which counts the chief executives of dozens of the biggest U.S. companies as its members. The group, led by JPMorgan Chase & Co. CEO James Dimon, is a powerful voice in Washington for U.S. business interests. It represents a broad swath of American industry, counting among its members the leaders of technology giants and manufacturing companies, airlines and institutional investors, to name a few.
The Business Roundtable’s old statement of purpose espoused economist Milton Friedman’s decades-old theory that companies’ only obligation is to maximize value for shareholders.
“Each of our stakeholders is essential,” the new statement says. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
A company’s position on the question of corporate purpose can influence issues as diverse as worker pay and environmental impact. It plays a central role in discussions about stock buybacks, corporate spending and how companies respond to activist investors agitating for moves meant to boost returns.
The change doesn’t, and can’t, require companies to change how they do business. Corporate boards have a legal obligation to protect the interests of shareholders.
But companies have a lot of leeway on matters that could affect their shareholders. Courts have given directors and executives substantial latitude to exercise their business judgment.
The new statement of purpose was endorsed by 181 of the Business Roundtable’s 188 CEO members, including the leaders of two of the world’s biggest investors: BlackRock Inc. and Vanguard Group Inc.
The Council of Institutional Investors, however, said the statement gives CEOs cover to dodge shareholder oversight. BlackRock and Vanguard are among the council’s members.
“There’s no mechanism of accountability to anyone else,” said Ken Bertsch, the council’s leader. “This is CEOs who like to be in control and don’t like to be subject to the market demands.”
Seven CEOs declined to endorse the statement, including Larry Culp of General Electric Co.and Stephen Schwarzman of Blackstone Group Inc. The private-equity giant had concerns about its own investor clients and the potential impact of such a broad statement, a person familiar with its decision said.
The statement says companies should work to deliver value to customers, invest in employees, deal fairly with suppliers and support communities, as well as generate long-term shareholder value.
It formalizes a stance taken individually by a number of executives in recent years. Mr. Dimon, for example, has challenged the shareholder-profit focus as too narrow and an impediment to executives’ ability to focus on long-term goals.
The leader of the nation’s biggest bank writes shareholder letters that touch on a range of topics, from corporate governance to politics to economic inequality. In 2016, Mr. Dimon, along with BlackRock CEO Laurence Fink, Berkshire Hathaway Inc. ’s Warren Buffett and other executives, pledged to follow a set of “common sense” corporate principles meant, in part, to redirect the focus from short-term gains.
Democratic presidential candidate Elizabeth Warren has argued that the primacy of shareholder returns has worsened economic inequality, enriching wealthy investors at the expense of workers. Last year, she proposed legislation that would require the directors of big companies to consider stakeholders beyond the shareholder when making decisions.
Martin Lipton, a Wall Street lawyer who has long said executives should have broad authority to make decisions about what is best for the long-term health of a company, praised the announcement as repealing a policy he believes increased inequality because it was based on statistical analysis that failed to take people into account. “To the extent shareholders were benefiting, the employees were suffering a very severe detriment and society was suffering,” Mr. Lipton said.
Still, the idea that companies have an obligation to society isn’t universally popular. Some activist investors and academics have said encouraging companies to focus on a range of stakeholders amounts to grandstanding that misdirects resources. They argue that shareholders, not CEOs, should be the ones influencing society.
“A pronouncement that attempts to change things shouldn’t be coming from the CEOs; it should be coming from investors,” said William Goetzmann, a professor at Yale’s School of Management.
In 1970, Mr. Friedman’s article “The Social Responsibility of Business is to Increase its Profits” set the standard that has long been followed.
“The businessmen believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends; that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers.” Mr. Friedman wrote. “In fact they are—or would be if they or anyone else took them seriously—preaching pure and unadulterated socialism.”
Michael Bordo, a Rutgers University economics professor and former student of Mr. Friedman, said the Business Roundtable’s new stance would have corporate executives behave like regulators.
“That’s not what business is; that’s what government is,” he said. “I still think Friedman was right.”
Write to David Benoit at

[Also this]
            REVIEW & OUTLOOK

The ‘Stakeholder’ CEOs

Executives who abandon shareholders won’t appease the socialists.

By The Editorial Board
Updated Aug. 19, 2019 5:09 pm ET
Today’s corporate CEO is a politician as much as business leader, and for proof look no further than the statement Monday from the Business Roundtable ostentatiously redefining its mission to serve “stakeholders” in addition to the shareholders who own the company. A close reading shows there’s less substance here than meets the media spin, but it’s still notable that the CEOs for America’s biggest companies feel the need to distance themselves from their owners.
“Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,’” says the headline over a press release Monday. “Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders.”
And sure enough, the 300-word “Statement on the Purpose of a Corporation” doesn’t get around to mentioning “shareholders” until the second-to-last paragraph. The statement instead stresses “a fundamental commitment to all of our stakeholders,” which it defines in listed order as customers, employees, suppliers and “the communities in which we work.” Shareholders ride the caboose in this new code of corporate purpose.
At a practical level this is largely symbolic, at least for now. To be successful, any company must serve its customers, adequately reward its employees, cultivate the loyalty of suppliers, and maintain good relations with the communities where it operates. At the Business Roundtable’s level of high-toned generality, who could disagree?
There is also more than a whiff of pre-emptive politics here. The executives—the Business Roundtable is led by JPMorgan CEO Jamie Dimon —know they are political targets.
They see socialism on the rise, with Senator Elizabeth Warren proposing to redefine corporate governance in law with explicit direction to serve “stakeholders.” Her goal is to redirect corporate capital to serve political goals favored by unions, environmentalists and trial lawyers. The CEOs no doubt want to get out in front of this by showing what splendid corporate citizens they are.
Yet these CEOs are fooling themselves if they think this new rhetoric will buy off Ms. Warren and the socialist left. It may even embolden them by implying that corporate rules that require a focus on achieving value for shareholders are somehow morally insufficient. The Roundtable CEOs may be selling Ms. Warren the political rope to hang them.
Politics aside, the moral and practical superiority of the stakeholder model is hardly clear. CEOs are themselves employees hired by directors who are supposed to be stewards of the capital that shareholders have invested. One virtue of the shareholder model is that it focuses the corporate mission on measurable financial results.
An ill-defined stakeholder model can quickly become a license for CEOs to waste capital on projects that might make them local or political heroes but ill-serve those same stakeholders if the business falters. Students of corporate governance have devoted years to analyzing the “agency problem” of holding CEOs accountable to the business owners. So-called activist investors who challenge underperforming managers are one market response.
Consider the long, slow decline of General Electric , which for decades helped mom-and-pop shareholders provide for their retirement. Former CEO Jeffrey Immelt was the model of the stakeholder executive, posing in Vanity Fair as a spokesman against climate change, issuing pronouncements after the 2008 panic about the failures of capitalism.
Yet Mr. Immelt failed in his core duty to find a post-panic business model that enhanced profits and shareholder value. That failure served neither customers, employees, suppliers, communities nor shareholders. From a moral point of view, GE did far more social and economic good when it was wildly profitable and its shareholder retirees could sleep better at night confident in its dividend.


CEOs aren’t popular these days, and it isn’t easy to defend profits. By all means CEOs should talk about the broad benefits that flow throughout society if their companies succeed. But sooner or later they will also have to defend the morality of free markets as the greatest source of prosperity for the most people in human history. Platitudes about stakeholders won’t stop President Warren from lining them up first for the gallows.