When the Business Roundtable, an organization of corporate CEOs, announced that its members were redefining the mission of their companies “for the benefit of all stakeholders,” I immediately thought of the Berkshire Hathaway mill on Cove Street in New Bedford, Mass.
From the latter part of the 19th century to the middle of the 20th, textiles were the biggest industry in New England. Red-brick smokestacks could be found along nearly every waterway, and Berkshire was the biggest producer.
At its peak, it operated 14 plants and employed 12,000 workers. But the industry went into rapid decline. In 1962, a private investment manager named Warren Buffett began to invest in Berkshire, and in 1965, dissatisfied with the results, he ousted the management and took over the company.
By then, Berkshire’s only significant asset was the plant in New Bedford — a major local employer and the biggest mill in the region. Buffett installed a manager named Ken Chace and instructed Chace to trim its use of capital by paring the inventory, the fixed assets and receivables.
“I have other places I can put the money,” Buffett, then 34, explained to Chace.
Buffett meant, simply and profoundly, that his job was to allocate the capital to provide the highest return to the owners, not for the short term but over the long haul.
He did not close the plant — citing its importance to the community — but repeatedly refused Chace’s request, and that of his successor, to reinvest in textiles. In 1985, when the mill could not avoid enduring losses, Buffett closed it. He justified his decision as the expression of benevolent capitalism or, as he put it: not Karl Marx, but not pure Adam Smith, either.
It’s hard to imagine, had the Business Roundtable been on the case, that they would have approved. Its statement of principles commits its chief executives to lead their firms for “all stakeholders — customers, employees, suppliers, communities and shareholders.”
Closing the mill was terrible for New Bedford, painful for the 400 employees who lost their jobs and harmful to the company’s suppliers. It was a familiar story.
In the 19th century, New Bedford was the center of the world’s whaling trade. As petroleum supplanted whale oil, the city’s whaling families gave their names to the new textile mills. More importantly, they redeployed their capital.
Buffett was following the same script. It did society no good to maintain whaling ships in an era of petroleum. The whaling families, of course, weren’t thinking of society, but of themselves. But in the very rough sense of putting their capital where it was needed, the two interests were aligned.
Buffett was not available to talk about the Business Roundtable decision, but it’s not hard to deduce what he might have thought of it. After he closed the mill, his next annual letter contrasted Berkshire to Burlington Industries, a competitor that had consistently plowed its profits into textiles.
Berkshire, meanwhile, had diversified into insurance, media, candy, furniture and a portfolio of stocks. Burlington’s share price over those 20 years was little better than flat. Buffett said it illustrated the price “when much brain power and energy are applied to a faulty premise.” Berkshire’s stock rose 190 times higher. (Disclosure: I’m a shareholder.)
But more than Berkshire’s owners benefited. That redeployed capital was used to build a portfolio of 75 or so businesses that today have 389,000 employees. The textile jobs disappeared, but they were replaced many times over. When you consider that its employees are spending and contributing to the economy, the multiplier effect is incalculable.
It takes some faith to believe that directing capital in the owners’ long-term interest is optimal for society. Investors certainly make mistakes. But the compass of self-interest, over the long arc, points in the direction of prosperity. This is what the Business Roundtable demonstrates a lack of — faith in the capitalist system.
Capitalism done well will benefit the so-called stakeholders, but they are not its purpose. Starbucks’s purpose is not to provide a pleasant environment for coffee drinkers, but the desire to build its business led it to do so.
The Roundtable’s new policy, which has no legal bearing, is the latest shot in a struggle between corporate owners and the hired hands that has bedeviled American business for a century.
Managers today are delegated enormous power. It was not always so. Until the early 20th century, the ownership interest went unchallenged. The emergence of the public corporation changed that. In 1932, Adolf Berle and Gardiner Means, authors of “The Modern Corporation and Private Property,” wrote with astonishment that, in an everyday sense, the owners were no longer in charge. They got to vote their proxies once a year but were otherwise distant from the business.
The shareholders were largely responsible. To many, “long-term” investing was measured not in years, but in hours. Turnstile ownership paved the way for managers to seize the agenda. How can you believe in the owners, or run the company in their behalf, when they change overnight?
The realignment of authority was widely praised, for a while. The modern manager was celebrated as professional, scientific. Then, in the 1970s, Wall Street noticed that the American corporation had become self-satisfied and lazy.
Its pinstriped chieftains were seen to be bureaucratic, focused mainly on enhancing their turfs. What was missing was the voice of ownership — of capital.
For business to perform better, managers had to be more entrepreneurial. This is why they were given bundles of stock options.
But stock options were egregiously abused, including by some chief executives on the Business Roundtable. The managers were still in charge, only now, they wore khakis, some of them, and they were loaded with options.
The problem — how to sustain an ongoing ownership interest when the stock market is open for trading five days a week — has not been solved. I’ll submit that corporations with large, stable ownership — perhaps a family, or the descendants of the founder, even an enlightened institution — get closer to the ideal, precisely because they represent an ownership stake that management cannot ignore.
The Roundtable policy, if it takes, would put managers more firmly in the saddle. Chief executives are not only setting strategy, they are hijacking the corporation’s purpose.
Some CEOs, in defending these principles, assert that it’s in the (long-term) interest of owners to pay decent salaries, be good citizens and so forth. That is very much true.
But owners don’t need the Roundtable to tell them to act in their self-interest. If they don’t appreciate the need to serve their customers, they won’t have customers.
In cases where the profit motive and the social good are in conflict, the Roundtable statement begs credulity. Two steel companies will not compete to see which creates less pollution, because the marketplace won’t reward them for it. Government, which embodies the social interest, has to step in.
To hazard an imperfect analogy, the National Football League creates a draft, worst teams pick first, to foster competitiveness. You cannot expect Tom Brady to take it upon himself to say, “Okay fellas, that’s enough touchdowns for today.”
Brady’s proper mission is winning. The mission of business is to earn a profit — within the boundaries of law, decency and hopefully wisdom. The Roundtable distorts the mission, in a direction sure to earn it political cover. The chief executives entrench themselves.
A manager working for one constituency cannot hide poor performance. A manager responsible for multiple agendas will, presumably, get a good mark on some of them.
CEOs are, already, the most coddled and overpaid class in America. I’ve written too many columns on this, but CEOs have long mocked the ethos of ownership by treating the job as a license to mint millions, succeed or fail. Many put little capital at risk, relying on the free lunch of options. No wonder they have a problem with capitalism.
The shareholder model is far from perfect, largely due to the disease of short-termism discussed above. But the remedy for capitalism done poorly, or greedily, is not to scrap it for a fluffy social agenda. The remedy is capitalism done better.