The CEOs of 181 companies that are members of the Business Roundtable yesterday redefined the role of the American corporation -- and, for the first time since 1997, it will not be to primarily serve shareholders. Under the new Principles of Corporate Governance, the CEOs are committing “to lead their companies for the benefit of all stakeholders -- customers, employees, suppliers, communities and shareholders.”
It concludes: “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
“It’s possible -- the proof very much lies in the pudding here -- but it’s possible that decades from now economic historians are going to look back and say, ‘that day right there, the 19th of August of 19. That’s when it changed.’ It’s a long shot, but it could be …,” American Public Media’s “Marketplace” host Kai Ryssdal proclaimed with an equal tinge of optimism and skepticism yesterday.
Indeed, “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,” David Benoit writes for The Wall Street Journal.
The new principles are “aimed at millennials who are growing skeptical of capitalism, according to John Engler, the former president of the pro-business coalition,” writes CNBC’s Berkeley Lovelace Jr.
“CEOs from major U.S. corporations know they’ve ‘got to tell the story differently’ about capitalism, Engler said in an interview on CNBC’s ‘Closing Bell’ on Monday. ‘We better let the American public, especially this massive new generation that’s coming up, understand what’s brought them unprecedented wealth and success and opportunity,’ he said.”
It also comes as corporations are under attack, for one reason or another, from all sides of the political spectrum.
“President Trump and the candidates vying for the Democratic presidential nomination have taken aim at companies for putting profits before the needs of workers and customers on issues as varied as drug pricing, outsourcing and data privacy. And for decades, wages have climbed only moderately as the pay of top executives at public companies has soared,”writes Jena McGregor for the Washington Post.
“Trump, even as he has taken many pro-corporate actions including a big tax cut in 2017 and deregulation, has publicly shamed companies for moving jobs overseas and threatened to take more aggressive action against pharmaceutical companies,” McGregor points out.
“It was an explicit rebuke of the notion that the role of the corporation is to maximize profits at all costs -- the philosophy that has held sway on Wall Street and in the boardroom for 50 years. Milton Friedman, the University of Chicago economist who is the doctrine’s most revered figure, famously wrote in The New York Times in 1970 that ‘the social responsibility of business is to increase its profits,'” David Gelles and David Yaffe-Bellany remind us in The New York Times.
“This mind-set informed the corporate raiders of the 1980s and contributed to an unswerving focus on quarterly earnings reports. It found its way into pop culture, when in the 1987 movie ‘Wall Street,’ Gordon Gekko declared, ‘Greed is good.’ More recently, it inspired a new generation of activist investors who pushed companies to slash jobs as a way to enrich themselves,” Gelles and Yaffe-Bellany add.
As for today’s Wall Street, the new direction is best suited for those who take a long-term view.
“Investors who are looking to make a quick buck today, this week or this quarter might not be so jazzed about this room-for-all, better-together philosophy. Mike Useem, a professor at the University of Pennsylvania’s Wharton School, points to an example: when CVS decided in 2014 to stop selling tobacco in its stores, researchers calculated that decision took about a dollar off its share price,” writes Tracey Samuelson for “Marketplace” after interviewing Useem for a segment on the show.
“Short-term investors are going to think companies that do that are going to be less lucrative, less valuable, thus, will disinvest,” Useem tells Samuelson.
The Business Roundtable document “refers to creating ‘value for customers,’ ‘investing in employees,’ fostering ‘diversity and inclusion,’ ‘dealing fairly and ethically with suppliers,’ ‘supporting the communities in which we work,’ and ‘protect[ing] the environment,’” Alan Murray points out for Fortune.
“Friedman must be turning in his grave,” he concludes.
Along with Fortune founder Henry R. Luce, we imagine, who has been twirling over the changing media landscape for some time now.
It's pretty simple. Value for the customer now includes supporting their values.
Somehow, I take this sort of pronouncement with many grains of salt. It's almost like they cited every possible "stakeholder" they could think of---but did they also say how much weight each "stakeholder" group would get when making corporate business decisions? Or are they all of equal importance? I tend to doubt that. And what happens if a company starts losing money by altering its behavior in order to give its customers---or the broader "community" ---the best deal while sacrificing income to do so? How will its stockholders react? Or doesn't it matter?