What most distinguishes America’s brand of capitalism is the widely held belief that the first duty of every business is to maximize value for shareholders.
The benign version of this credo is that there is no way to deliver maximum value to shareholders over the long term without also satisfying the needs of customers, employees and the society at large. But in its more corrosive application — the one that is inculcated in business schools, enforced by corporate lawyers and demanded by activist investors and Wall Street analysts — maximizing shareholder value has meant doing whatever is necessary to boost the share price this quarter and the next. Over the years, it has been used to justify bamboozling customers, squeezing workers and suppliers, avoiding taxes and lavishing stock options on executives. Most of what people find so distasteful about American capitalism — the ruthlessness, the greed, the inequality — has its roots in this misguided notion about what business is all about.
Which is why today’s statement by the Business Roundtable disavowing shareholder primacy is so significant and so welcome. In the Roundtable’s new formulation of corporate purpose, delivering value to customers, investing in employees, dealing fairly and honestly with suppliers, supporting communities and protecting the environment all have equal billing with generating long-term value for shareholders. The statement rejects the whole idea of “maximizing” one value to the exclusion of all the others. Instead, it acknowledges the need for balance and compromise in serving all of a company’s stakeholders.
Skeptics will likely see the announcement by the country’s leading corporate executives as a public relations gimmick that will do little to change the way American corporations are managed. But the significance is not so much that it will change corporate behavior, but rather that it confirms a shift in attitude that has already occurred.
In many ways, the Roundtable’s new policy represents a return to a view of corporate purpose that prevailed during the era of “managerial capitalism” of the 1950s and 60s. “For years, I thought what was good for our country was good for General Motors, and vice versa,” Charles Wilson, the carmaker’s chief executive, declared at his confirmation hearing to be defense secretary in 1952.
But after the decade of the 1970s — a decade during which stock prices failed to keep up with inflation and American businesses started to lose out to foreign competition — investors began demanding a new focus on profits and share prices. And executives who refused to get with the new program soon found themselves at the receiving end of a hostile takeover bid by “corporate raiders” or competitors who promised to send them packing.
Indeed, by the time the Roundtable issued a new statement of corporate purpose in 1997 declaring that “the principal objective of a business enterprise is to generate economic returns to its owners,” it was merely acknowledging what had already become the new norm. Executives had become so fixated on maximizing shareholder value that some (Remember Enron and WorldCom?) even began cooking the books to prevent those same shareholders from learning the true state of the business.
Although chief executives were happy to get fabulously rich on stock options meant to focus their minds on the share price, many chafed under regime. They resented analysts and traders who punished them for missing an earnings target and feared and loathed the plaintiff lawyers and “activist investors” who were ready to pounce at the first sign of trouble. They despaired at the loss of respect they had suffered from employees, the media and the public, as well as their own children
My hunch, however, is that what finally led members of the Roundtable to jettison the idea of shareholder primacy has been the growing recognition that there is a new generation of employees and consumers who will not work for, or do business with, companies they believe to be socially irresponsible. This is one area where social media seems to have had the effect of improving norms of behavior, even at companies as powerful as Facebook, Disney, Uber, Walmart and Amazon (whose chief executive, Jeff Bezos, owns The Post). Executives also have discovered what Warren Buffett and Steve Jobs learned long ago — namely, that refusing to bow to Wall Street’s incessant demands for double-digit earnings growth can actually attract a larger and better class of investors.
Still, while norms of business behavior can sometimes be altered by pressure from below, business institutions rarely change without leadership from above. The Roundtable’s chairman, Jamie Dimon of JPMorgan Chase, its president, Josh Bolten, and the chairman of its governance committee, Alex Gorsky, deserve lots of credit for initiating this rethink of corporate purpose. It is also noteworthy that all but a dozen or so of the Roundtable’s 180-odd members stepped forward to sign the statement.
There is, as you may imagine, a political context to all of this. Two of the leading Democratic presidential candidates — Sens. Bernie Sanders (Vt.) and Elizabeth Warren (Mass.) — have made curbing corporate greed the centerpiece of their campaigns, while in the Democratic House of Representatives, much of the energy has shifted to a liberal wing that is determined to raise wages, raise taxes and strengthen environmental regulation. With Republicans in control of Congress or the White House for most of the past 20 years, the business community has been able to achieve much of its policy agenda by playing an inside game. But with Democrats now threatening to retake the White House and possibly the Senate in 2020, and the Republican Party lining up behind a Republican president spouting populist rhetoric, business leaders feel some urgency to re-engage in the public debate. By disavowing shareholder primacy and embracing a broader vision of corporate purpose, the Roundtable has now enhanced the political legitimacy of such efforts.