Milton Friedman, the 1970’s Nobel economist stated that “… there is only one social responsibility of a business, to engage in activities designed to increase its profits.”
And for over 47 years, the Business Roundtable (“Roundtable”), an association of CEOs of 193 companies with over $7 trillion in revenue and almost 15 million employees, followed his advice. Shareholder primacy was first and foremost for most American businesses and it was about providing returns to its shareholders.
In a 1997 statement on Corporate Governance, the Roundtable said ”the principle objective of a business enterprise is to generate economic returns to its owners… the paramount duty of management and of the board of directors is to the corporation’s stockholders.”
A new purpose
However, this month the Roundtable issued a different statement of Purpose of a Corporation. Signed by 180 of its members the 300-word statement proclaims “while each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders … which includes employees, communities and suppliers.” Note it now refers to “stakeholders,” not shareholders.
“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.”
“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.”
They commit to:
- Delivering value to our customers.
- Investing in our employees
- Dealing fairly and ethically with our suppliers.
- Supporting the communities in which we work
The Roundtable now focuses on generating long-term value for stakeholders, and it drops the former mandate that companies first and foremost serve their shareholders and maximize profits from first to last place.
As Jamie Dimon, Chairman & CEO of J.P. Morgan Chase and chairman of the Roundtable says, ”The American dream is alive but fraying, major employers are investing in their workers and communities because they know that it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
These assertions, however, are not new. Shareholder value should be a given, and respecting all stakeholders is a critical part of business. As Peter Drucker said in an encompassing statement 1954, “the only purpose of a corporation is to find the customer and provide value to them.”
As Dennis McCuistion, Executive Director, Institute for Excellence in Corporate Governance, The University of Texas at Dallas, says, “It’s ironic that 180 CEO’s of large corporations are just now discovering this, 65 years later? The question is, will they change their actual business model or is this just paying lip service to appease politicians and those who question capitalism?”
This new purpose does come about when many Americans are disillusioned with U.S. capitalism. And this could signal a meaningful change in the operation of the American economy.
There are some critical questions the Roundtable will have to answer if they intend for this new business purpose to gain traction and shareholders achieve meaningful change.
One question is: under what authority do CEO’s have the role of declaring the purpose of the corporation as broader than just shareholders when they are appointed by boards of directors representing shareholders?
Another significant question is accountability and the Roundtable acting on its own professed principles.
What do Apple, Wells Fargo, Citigroup, J.P. Morgan Chase, among many others, have in common? They have been splurging on repurchasing their own stock at a high dollar, diverting money from reinvesting in employees and capital expenditures and seeing the value of their stock purchases sharply decline.
And lets’ do not forget that among its members are J.P. Morgan Chase, $55 billion in stock buybacks and a history of mortgage fraud for which they were fined; General Electric, Boeing, and Johnson & Johnson, for its opiate issues, and the list goes on.
Times are changing
The times are definitely changing. Last year Blackrock’s Larry Fink, himself a Roundtable member, began calling on companies, “Purpose is not the sole pursuit of profits but the animating force for achieving them.” Fink wrote in his 2019 annual letter to shareholders, “As divisions continue to deepen, companies must demonstrate their commitment to the countries, regions, and communities where they operate, particularly on issues central to the world’s future prosperity.”
Mr. Fink said that fundamental economic changes and the failure of the U.S. government to provide lasting solutions has forced society to look to companies for guidance on social and economic issues, such as environmental safety and gender and racial equality.
There is no doubt that corporations are focusing more on ESG factors (environmental, social, governance). There is no question that we need to look at how the market and our society needs to change. Crony capitalism has left many with a bad taste.
The millennial generation, much more so than their parents and grandparents, demand change and they will eventually drive the change.
And while I may sound cynical, many of our politicians, including Bernie Sanders and Elizabeth Warren, are continually beating the drums for stakeholder value focusing on ESG values overall.
So, is this what’s driving this new purpose for the corporation, the realization that people are demanding change? Is this just an expedient political move? At least these companies recognize that people expect a lot more from them. That’s what hopefully is forcing change.