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.
-PL
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.
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.
“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.”
[Also this]
The ‘Stakeholder’ CEOs
Executives
who abandon shareholders won’t appease the socialists.
By The Editorial Board
Updated Aug. 19, 2019
5:09 pm ET
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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.
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