For anyone who cares about corporate America’s obligations to society, it has been hard not to applaud the Business Roundtable’s steady stream of actions the past few weeks.
The lobbying group, which is made up of the country’s top CEOs, began by promoting a move away from quarterly earnings guidance, saying that “companies should be managed for long-term prosperity, not to meet the latest forecast.” Given that most public companies have already abandoned the practice, with less than a third now following it, one could argue that it was as if the Roundtable had decided to root for the Golden State Warriors after the team had taken a 3-0 series lead in the NBA finals. But, late or not, it was still a welcome pronouncement.
The Roundtable followed this up with a forceful denouncement of the Trump administration’s policy to separate children from their parents at the border, characterizing it as “cruel and contrary to American values.” And on Friday, the organization unveiled a plan for the CEOs of IBM, Boeing, Ernst & Young, and other major companies to partner with local colleges and universities to support promising workforce training efforts.
And yet for all of these developments, the Roundtable is failing in an area that lies at the very core of the connection between business and society: It continues to elevate shareholders’ interests above everybody else’s, helping to cement this pecking order as the national norm.
To be sure, the Roundtable’s stand on the subject is not cast in black-and-white, either-or terms. It does recognize a corporation’s responsibility to others beyond shareholders. But, in the end, Roundtable leaders leave no doubt about whom they think a company is ultimately there to serve.
“Building shareholder value is the primary goal of a business,” Jamie Dimon, the CEO of JPMorgan Chase and chairman of the Roundtable, has asserted, “but it is simply not possible to do well if a company is not properly treating and serving its customers, training and motivating its employees, and being a good citizen in the community. If they are all done well, it enhances shareholder value.”
The Roundtable itself declares that “long-term interests should be the driving factor in board deliberations” and may take into account “the interests of . . . employees, customers, suppliers, and the community in which the company does business—when doing so contributes in a direct and meaningful way to building long-term value creation” for shareholders.
A HIGHER PURPOSE
To critics, such a framing misconstrues why companies are founded in the first place. “Apple was never formed with the primary goal of creating value for shareholders,” says Miguel Padro of the Aspen Institute’s Business & Society Program. “Facebook, same. Google, same. Tesla, same. Ford Motor, same. Johnson & Johnson, same.”
Paul Slaggert, director of the Stayer Center for Executive Education at the University of Notre Dame’s Mendoza College of Business, agrees. “A company exists for a higher purpose,” he says. “Shareholder return—that’s a scorecard, pure and simple.”
This isn’t just a philosophical debate. When a company’s primary goal is fostering shareholder value, it becomes all too tempting to manufacture short-term financial results at the expense of everything and everyone else. In fact, nearly 90% of executives and directors feel most pressured to demonstrate strong financial performance within two years or less—the Roundtable’s calls for maintaining a longer-term perspective notwithstanding.
When there are difficult trade-offs, as there invariably are, it’s the pursuit of maximum profit and shareholder value that more often than not becomes a company’s default position.
What’s more, when the considerations of other constituencies are, by definition, made secondary—and mainly seen as a means to give a lift to those who own a company’s stock—at least some of these stakeholders are certain to find themselves on the short end of things.
Nowhere has this become clearer than with employees. Over the past 40 years, the vast majority of the workforce in the United States has struggled with stagnant wages and shrinking health and retirement benefits. Meantime, with labor getting less, shareholders have been handed a larger and larger slice of the profit pie (increasingly through stock buybacks).
Rather than automatically putting the shareholder first, “you have to balance among a variety of interests,” says Steven Pearlstein, a professor at George Mason University and author of the forthcoming book, Can American Capitalism Survive?. Instead of meeting customers’ needs, nurturing workers, and tending to the community with the explicit aim of generating shareholder value, “you should be doing these other things for their own right—from both an economic standpoint and a moral standpoint.”
Others size it up the same way. “Business should be about creating value for everyone,” says Alexander McCobin, the CEO of Conscious Capitalism, which advocates a stakeholder orientation and has about 1,200 companies actively involved in its network. “We shouldn’t be delineating shareholders from society as a whole.”
A PAGE FROM THE ROUNDTABLE’S OWN BOOK
Strikingly, such a worldview is not too different from one that the Roundtable itself once had.
Launched in 1972, the Roundtable was led early on by a circle of executives who, while quite conservative, carried forward the prevailing attitude of business that had emerged after World War II: that a company, in the words of General Motors, was “to make a profit” so that it could “pay for research and improved tools and methods” in order to turn out better products for its customers; “provide jobs and opportunities for employees”; “earn a satisfactory return for investors”; “help others progress, including dealers and suppliers”; and “pay our share of the heavy cost of government.”
Reg Jones, the CEO of General Electric and co-chair of the Roundtable from 1974 to 1980, was typical. “He saw himself as a caretaker and a trustee for a very big group—not just shareholders, but customers and employees and communities,” says Vincent Mai, the chairman of Cranemere, a private holding company dedicated to furnishing businesses with long-term capital so as to “create value for all stakeholders,” and a protégé of Jones. “Most CEOs today don’t have that modus operandi.”
In 1981, the Roundtable put out a lengthy statement on corporate responsibility in which it touted “balancing different constituent interests” as “an integral part of the corporation’s decision-making.” It noted, approvingly, that “some leading managers have come to believe that the primary role of corporations is to help meet society’s legitimate need for goods and services and to earn a reasonable return for the shareholders in the process.”
“The shareholder must receive a good return,” the Roundtable said, “but the legitimate concerns of other constituencies must also have the appropriate attention.”
In 1990, the Roundtable reaffirmed that “the thrust of history and law strongly supports the broader view of the directors’ responsibility to carefully weigh the interests of all stakeholders as part of their responsibility to the corporation or to the long-term interests of its shareholders.”
By this time, though, the business landscape had been dramatically altered. A band of activist shareholders—”raiders,” as they were then known—were pushing back against the idea that the interests of all stakeholders should be balanced. Buoyed by the theories of the University of Chicago’s Milton Friedman, the University of Rochester’s Michael Jensen, and other academics, they contended that a company’s singular focus should be on boosting shareholder value.
Investors had been emboldened, in part, by the sense that if any corporate stakeholder had been neglected during the 1970s and early ’80s, it was the shareholder. Indeed, the Dow Jones Industrial Average reached 1000 in 1972—and, buffeted by recession and poor corporate performance in the face of rising global competition, wouldn’t hit that mark again until 1982.
“Shareholders deserved better, and they said, ‘Enough of that,'” Pearlstein explains. “And, boy, did they get their revenge.” Maximizing shareholder value was suddenly the dominant ethos of business.
A “NEW, DRIVING LOGIC”
In 1997, the Roundtable—while saying that it didn’t regard a shareholder-first model and a stakeholder model “as being in conflict”—offered up “clarification of the relationship between” the two. And it left no doubt about who stood where.
The Roundtable expressed that it is “in the long-term interests of stockholders for a corporation to treat its employees well, to serve its customers well, to encourage its suppliers to continue to supply it, to honor its debts, and to have a reputation for civic responsibility.” But it added that “the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders.”
Trying to balance all of these interests was deemed to be outside the correct functions of a corporate board and, as a practical matter, “unworkable.”
Many observers have cited the Roundtable’s shift as an important milestone—a signal that shareholder capitalism now represented a “new, driving logic” and that stakeholder capitalism “had been effectively repudiated,” as Harvard Business School’s Bruce Scott has put it.
The Roundtable’s latest statement on governance, issued in 2016, is a little softer in some respects than the 1997 proclamation. But it reinforces the same basic message: The paramount duty of corporate boards and executives is to the shareholder.
Why has this mindset endured?
Some of it is stick; some is carrot. CEOs who don’t keep shareholder value as their primary goal may well find themselves in Wall Street’s crosshairs—and soon out of a job. At the same time, more than half of CEO compensation these days comes in the form of equity awards, a key reason for the explosion in executive pay. For CEOs and shareholders, it has become a case of they are us.
A Roundtable spokeswoman says that the organization’s stance on shareholder value has been “consistently held” through the years. But others don’t read it like that.
The Aspen Institute’s Judy Samuelson, who runs the Business & Society Program, suggests that “the trajectory” of the Roundtable’s statements from 1981 until today offers “a window into the general thinking of business—maybe the least common denominator thinking” at this point.
“Why not take a bolder view?” Samuelson asks. “The Business Roundtable represents companies with remarkable reach and problem-solving capacity. What is this capacity being used for? We need Roundtable members working to reknit the fabric of society and create broader economic opportunity—to ensure the economic system itself survives. It’s a time for real leadership.”
A good first step would be to go back to where their Roundtable predecessors were decades ago.