It’s easy to be cynical about the Business Roundtable’s new statement on corporate purpose, but being cynical this time is a mistake. The declaration by the Business Roundtable, which represents roughly 180 CEOs of major corporations, has opened up an historic opportunity to reshape the relationship of business and society for decades to come.
Clearly some don’t see it that way. One critique in particular is confounding—that by abandoning shareholder primacy, and being accountable to “everyone,” corporations are going to be left accountable to no one. This is an odd assertion for two reasons. First, it ignores the role shareholder primacy played in unshackling corporations from accountability imposed by government and labor unions. Second, it suggests that society is best off relying on shareholders to enforce the social contract between corporations and society.
Shareholder primacy has been the dominant paradigm for corporate accountability for the past 40 years. But prior to shareholder primacy, corporate accountability was a blend of strong government regulation, strong labor unions, a consumer rights movement, and a strong belief among corporate leaders that their job was to advance the interests and well-being of their communities and their country. That system may have been slow and paternalistic, but relative to today, corporate accountability was expansive and thick. Corporations had to answer to a range of interests that had real power.
For several decades, the American economy blossomed under that system. Wages and productivity rose, social mobility was high, and inequality was low. But as the US economy stagnated throughout the 1970s, that thick accountability system was blamed for bogging down business. Shareholder primacy was offered as an alternative to liberate companies and reinvigorate the economy by shedding layers corporate accountability. It presented an elegant vision for encouraging corporations to focus on financial performance (i.e. cut costs) and take more risks. Thus, the rise of shareholder primacy coincided with vast deregulation of corporations by government, and the precipitous decline of unions and worker power.
Today, shareholders struggle mightily to hold corporations accountable even for their financial performance, let alone to enforce a legitimate social contract with wider society. Shareholder grievances about corporations are legion.
The typical corporate governance recommendation is to give shareholders more power. But that isn’t the answer; nor is it fair to either shareholders or society.
One of the big problems with the idea of shareholder primacy is that in fact there’s no such thing as a unified “shareholder interest,” and no one definition of what it means to “maximize shareholder value.” Even if we assume shareholders care only about stock price (an incorrect assumption for an increasing number of investors), shareholders have wide-ranging investment time horizons. In the short term, cutting costs is an easy way to boost stock price. But in the long term, investing heavily and wisely in workers, stakeholder engagement, and transformative innovation can pay off big. A company’s stock performance looks very different depending on whether a shareholder plans to sell this week or hold their shares for 25 years.
Shareholder primacy also has a serious demographics issue. Roughly 84% of corporate stock is owned by the wealthiest 10% of American households. As a group, shareholders are generally white and wealthy, and live in metropolitan areas. They are by no stretch representative of America as a whole. In effect, shareholder primacy requires that corporations be run by the rich and powerful for the rich and powerful.
But perhaps one of the biggest problems with shareholder primacy is that shareholders are in a particularly weak position today to wield that much power effectively. Our system of investment makes it nearly impossible for most shareholders to monitor companies closely. Most corporate equity is now managed by a handful of large institutional investment firms who oversee trillions of dollars of equity in virtually every public company in the world. That’s thousands of companies to oversee and tens of thousands of votes to cast each year on corporate ballots. Yet the best of those institutional investment firms rarely has more than a few dozen people tasked with monitoring those thousands of companies.
Average people who invest in the stock market must compromise; they invest through safe, highly diversified index funds with inexpensive fees to maximize their portfolio returns. That diversified portfolio has small stakes in hundreds of companies, though, and those low fees can’t pay for a big staff of people to monitor all of those corporations in their funds.
Of course, wealthy people have other options, including access to hedge funds and private-equity funds. These more concentrated funds are less diversified (and thus riskier) and they enable the fund manager to not only monitor a company closely from the outside, but also forcefully change it from the inside by perhaps taking a seat on the board of directors, influencing company strategy to advance the individual interests of the funds clients, and sometimes even breaking up the company. This is the strongest “accountability” that shareholder primacy offers—accountability to the few. It’s becoming clear that this simply is not good enough to satisfy society as a whole.
Don’t get me wrong, shareholders are an essential voice in corporate governance. No one is suggesting shareholders shouldn’t have a place at the table. But they are neither representative of society nor well positioned to succeed as enforcers of the social contract for corporations. And just as we shouldn’t expect corporations to solve all of society’s problems, we should not place the burden of corporate accountability on shareholders alone.
The Business Roundtable’s statement on corporate purpose is an important step in creating a much-needed new system. It has opened the door to expand corporate accountability and to empower corporate leaders to play a more constructive role in civil society. What remains to be seen is whether the shareholders and corporate leaders who control the system today will actually welcome other stakeholders when they walk through the door.
Miguel Padro is the senior program manager of the Aspen Institute’s Business & Society Program.