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ONE YEAR ON

Who’s winning the battle for stakeholder capitalism?

REUTERS/Feline Lim
Shareholders vs. other stakeholders.
  • Judy Samuelson
By Judy Samuelson

Executive director, Aspen Institute Business & Society Program

Aug. 19, 2020, marks one year since the Business Roundtable released a new statement about the purpose of corporations, choosing so-called “stakeholders” over shareholders in pursuit of an “economy to serve all Americans.” It was a bold move that jolted the business press to life in the sultry days of August and offered some welcome news to those who believe we need business to make progress on significant challenges, from climate change to inequality. It felt long overdue.

Business executives interviewed at the time said the old mantra of “shareholder value” was out of touch with the complexity of managing a global enterprise. They signed a statement that elevates the constituents and natural resources that business depends on the most, including workers and host communities that bear the brunt of the ebb and flow of commerce.

But you can’t dismantle a half-century of shareholder primacy, or the scaffolding that supports it, in a day—or even a year.

It was exactly 50 years ago this September that the economist Milton Friedman published his doctrine (pdf) in the New York Times Magazine under the headline “The Social Responsibility of Business Is to Increase Its Profits.” Friedman’s message in 1970 may not have created a media storm, but within a few years, with the economy in the doldrums and US companies beginning to lose ground to global competition, the message of a single objective function—stock price—began to take root in boardrooms and business-school classrooms alike.

By the mid-1980s, Michael Jenson of Harvard Business School and Eugene Fama of the University of Chicago had helped to anchor Friedman’s idea into a way of keeping boards and executives accountable: pay the CEO in stock. The tech industry started issuing stock options to attract top talent and activist investors—raiders—were making their desires known. The organizational principles that still keep shareholders in the driver’s seat began to take hold. Management scholars, especially in finance, still teach profit or “shareholder value” as the single best measure of success, and students exit business programs with the incorrect impression that companies are bound by law to put the interests of shareholders first. Wall Street continues to punish—at least in the short term—companies that invest in good jobs and R&D.

While the idea of managing effectively to a straightforward, if simplistic, financial measure is seductive, it falls short in a world where the most important assets are intangible:  access to talent, intellectual property, reputation, and the license to operate. The global enterprises represented by the CEOs who make up the Business Roundtable lead remarkably complicated operations with long supply chains, tens of thousands or even hundreds of thousands of employees, and a drumbeat of demands—from watchdogs, governments, NGOs working to protect forests to fisheries to human rights.

How to tell who’s winning

So who’s winning the battle for business? And, if stockholders aren’t supposed to call the shots, who will hold companies accountable?

Shareholders are a polyglot group with different time horizons and expectations but for the most part they are aligned with the interests of the finance sector while relegating the needs of society to a secondary concern.

Jamie Dimon, CEO of JPMorgan Chase, was chairman of the BRT as it began to retool its mission statement. He had this to say when the statement was released, months before Covid-19 put the economy in a free fall: “Capitalism may be at a tipping point. For too long, policymakers, governments, and business leaders have done a poor job of helping those who have been left behind, and lost sight of how capitalism can create more opportunity for all.”

Yet it feels like Friedman is still winning plenty of battles, especially against the backdrop of an economically devastating pandemic and an inexplicably roaring stock market that reinforces income inequality and is disconnected from the realities of workers and the economy.

A version of governance that appeases shareholders first and trumpets a company’s good works while ignoring the fundamental costs of the business model is insufficient.  We know we are still operating by the demands of profit maximization and shareholder primacy when we contract out jobs that are the entry point for less-skilled workers, when the priorities of the company’s lobbyists are disconnected from statements of corporate purpose, and as long as tax avoidance and transfer pricing schemes keep accountants and tax attorneys employed. We know it when companies are winning by the old rules that are out of sync with the vision the BRT lays out.

The change that is needed will require a reset of priorities in the boardroom and the C-suite. And while 2020 may not be the best year to make substantial progress against retooling jobs and economic opportunity for all, the public isn’t in the mood to wait.

A system still geared toward shareholders

When the BRT published its statement of corporate purpose last year, the mantra about the primacy of shareholders had begun to unwind, but the system overall is still geared toward shareholders. Even in the “ESG” world of data collection and ubiquitous survey instruments to track progress on environmental, social, and governance matters, the metrics and measures are designed to serve investors, not business decision-makers.

And yet, it’s business that has the power and influence—and increasingly the motivation—to change operating protocols and systems; to redesign and reorient governance and decision rules; and to respond to this moment and make real progress against the need for better outcomes to save capitalism. Importantly, the most committed change agents and business allies are already inside the tent. It’s the employees who have business insight—knowledge of product and responsibility for quality control, the user experience, and the health of the supply chain—and share an understanding of both the impediments to change and the cost of inaction.

Successful executives today have begun to listen to their own workers—who are citizens and family members first. The next generation of business managers are equipped to hold business to account and are more aligned with the long-term goals of corporate health than disparate investors with a one-year time horizon. #MeToo, #BlackLivesMatter, and #ExtinctionRebellion are touchstones for internal activism; the growing number of employee-led campaigns reflect impatience for change and anxiety about the future as inequality grows and climate change increases in severity. Employees are in a unique position to mark their own employers’ progress against racism and ecological limits, and toward a system that offers a fair share to labor.

Outcomes and intentions

Is it fair to judge the sincerity of CEOs while they still operate in a shareholder-first system?

The Business Roundtable convenes 200 of America’s most influential business leaders. They run companies where executives and boards have control over who to hire and how much to pay. They determine which jobs are on the payroll with benefits, and which ones are outsourced—a significant factor in growth in poverty in the US. And, with the support of their boards, they have complete decision-making authority over the share of profits retained for workers and long-term investment, versus returned to stockholders.

To realize the promise of the statement released in August 2019, the members of the BRT have two complementary approaches to driving change. The first is to elevate examples of companies taking on these issues directly, to influence both the culture of business and the stories that will be told about job creation and job quality. The second is about collective action where policy change is needed—whether it’s about finally recalibrating the minimum wage to capture lost decades, or to reset the conversation about pricing carbon and reigniting public sector leadership to put the brakes on global warming before it’s too late.

Trade associations like the BRT are complex institutions. They tend to operate by consensus and have to resolve competing interests within the membership to take a stand, but here’s one fact that speaks to their common experience: today, on average, over 90% of profits of public companies are paid out in the form of dividends and share repurchases. When Friedman first weighed in on business purpose, 50% of profits were retained for workers and investment in the future of the enterprise. This change in priorities is where the decades of shareholder power is felt most clearly.

Amid the chaos of the current moment, the business community remains a kind of touchstone of normalcy, an environment in which leaders still have choices to make, and agency to affect the lives of others. This power is hard to replicate elsewhere.

To hardwire business for a different outcome starts with intentions. I believe the BRT statement is a strong signal we have won that battle; we see signs of change at the helm of business and have begun to experience a powerful form of accountability from employees and social media platforms. Much more progress is needed. Can we move fast enough?

Judy Samuelson is Executive Director of the Business and Society Program at the Aspen Institute, and author of Six New Rules of Business: Creating Real Value in a Changing World (Berrett-Koehler, January 2021.)

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