For the past two decades, the official stance of America’s top corporate executives has been that the interests of shareholders came before the interests of all others—workers, consumers, the cities and towns in which their companies operated, and society as a whole.
Today, that changes.
The Business Roundtable, a lobbying group composed of the nation’s leading CEOs, just announced that its members “share a fundamental commitment to all of our stakeholders”—each of whom “is essential”—while pledging “to deliver value to all of them, for the future success of our companies, our communities, and our country.”
With its “Statement on the Purpose of a Corporation,” the Roundtable has affirmed the need for “meeting or exceeding customer expectations”; “investing in our employees,” including by “compensating them fairly and providing important benefits,” as well as offering training and education so that they can “develop new skills for a rapidly changing world”; “dealing fairly and ethically with our suppliers”; “supporting the communities in which we work”; and “generating long-term value for shareholders.”
Jamie Dimon, the CEO of JPMorgan Chase and the Roundtable’s chairman, says he hopes that this declaration “will help to set a new standard for corporate leadership.”
It is, without question, a huge deal.
As I’ve detailed before, through the 1980s and most of the ’90s, the Roundtable held that companies had a responsibility to “carefully weigh the interests of all stakeholders,” as the organization described it, and that “the thrust of history and law” buttressed this kind of broad assessment.
In 1997, the Roundtable switched course. Suddenly, it proclaimed that “the paramount duty of management and of boards of directors is to the corporation’s stockholders” and that “the interests of other stakeholders are relevant as a derivative of the duty to stockholders.” (The Roundtable echoed that message in 2016.)
The Roundtable’s shift to a shareholder-first posture has been widely cited as a significant marker in the evolution of corporate America—both a reflection and reinforcement of an ideology that has thrilled investors, gripped executives, and knocked out a more enlightened form of capitalism that had emerged in the era after World War II.
Yet since then—and especially over the past 5 to 10 years—serving shareholders first and foremost has come under increasing attack. An expanding chorus of critics has made the case that this predilection has contributed to a short-term mindset among far too many executives, fostering a culture of indiscriminate cost-cutting and financial engineering, and has been a central reason for the explosion in income inequality.
“A return to common-sense principles”
“I read the Roundtable’s statement as a return to common-sense principles of management and the recognition that employees need a bigger share of the pie to assure a healthy economy,” says Judy Samuelson, executive director of the Aspen Institute’s Business and Society Program.
The pressure for business to put an end to shareholder primacy has been building from a variety of quarters. Younger workers, in particular, are looking for employers that have a loftier purpose than merely maximizing their profits. More and more, customers are paying attention to which companies seem to be doing right by their people and the environment—and punishing brands that fall short. Socially conscious investors have started putting vast sums of money into financial products that use a “sustainable, responsible, and impact” lens.
Politicians have also taken up the cause. The Accountable Capitalism Act, proposed by Elizabeth Warren, the Massachusetts senator and Democratic presidential candidate, would require very large companies to obtain a new federal charter under which directors would have to “consider the interests of all corporate stakeholders.”
Meanwhile, the basic tenets of shareholder capitalism have been questioned by scholars such as the late Lynn Stout, a Cornell law professor and author of The Shareholder Value Myth, who cogently argued that executives and directors have wide latitude in deciding what is best for a company and don’t have any obligation—legal or otherwise—to elevate shareholders above everyone else. Journalists and think-tank types have weighed in along these lines, too.
My Dinner with Dimon
Among them has been me. As Fortune’s Alan Murray recounts, the Roundtable began to reevaluate its views on the relationship between shareholders and other stakeholders after a “testy, off-the-record dinner” last fall that I participated in. Dimon had invited four of us—including the Washington Post‘s Steve Pearlstein, Bloomberg’s Joe Nocera, and Samuelson of the Aspen Institute—to JPMorgan headquarters to better understand why we kept insisting that corporate America had become overly obsessed with shareholder value and, as a result, was damaging society.
Dimon’s perspective—then and now—is that most big companies already take good care of their various stakeholders. “We relentlessly invest in employees, communities, and innovation,” he told me.
If that were true, of course, the new Roundtable statement would simply be codifying the current state of affairs. But with all due respect to Dimon, who deserves great credit for engaging with us and then guiding the Roundtable to recast its position, the numbers don’t back him up.
Sure, no company completely ignores all of its constituents save for its shareholders. If it did, it would soon be out of business. But as a study published last week by the Center for American Progress makes clear, things are terribly out of balance.
Wages for the majority of the American workforce have been stagnant for 40 years, while their health coverage and retirement security have eroded. At the same time, corporate profits—high by historical standards—are mainly being used to reward shareholders, including CEOs themselves. Their compensation has gone up 940% since 1978; typical worker compensation has risen 12% during that time, according to the Economic Policy Institute.
For the Roundtable’s statement to mean something—and not stand as empty rhetoric—this picture can’t be allowed to continue.
With that in mind, I asked a half-dozen colleagues who’ve been at the fore of fighting shareholder primacy what would it take for them to be convinced that CEOs across the business landscape had genuinely embraced stakeholder capitalism.
For starters, several say, companies must curtail stock buybacks, if not stop them altogether. These repurchases have become a financial narcotic, with a record volume of shares being snapped up, largely in an attempt to pump up their price.
Some, including Roundtable President Joshua Bolten, defend the practice as an efficient way to deploy capital and help the economy grow. But buybacks plainly favor shareholders (including, again, CEOs), and every dollar of profit spent on them means one less dollar that can go directly to bolster worker pay, training, R&D, and other areas.
“I would make it the primary obligation of all business corporations to ‘retain-and-reinvest’: retain profits and reinvest in the productive capabilities of employees,” says economist Bill Lazonick, who is perhaps the country’s most outspoken detractor of buybacks. “I would place constraints on ‘downsize-and-distribute’: downsizing the company’s labor force and distributing corporate cash to shareholders.”
“The entire human race depends on it”
Environmental stewardship is another proving ground. Some big companies score high marks in this arena right now. But with climate change posing an existential crisis, it’s crucial that corporations do far more.
“Why I’m passionate about ending shareholder primacy is that I truly think the future of the entire human race depends on it, and I’m not trying to exaggerate,” says Lenore Palladino, an economist at the University of Massachusetts Amherst. “For corporate leaders to show they are committed to stakeholder capitalism, we need to see a commitment to the health of the environment as a business priority . . . a dramatic strategic reorientation towards reversing the current damage and reengineering businesses to be productive for the long term.”
For sustainability pioneer John Elkington, another sign that a stakeholder model hadreally taken root would be for companies to no longer speak with two voices: one from the C-suite and another via the Washington influencers representing them.
“They would resign from all trade and industry groups which lobby to slow or stall necessary systemic changes” that would enhance the simultaneous creation of economic, social, and environmental value, says Elkington, who coined the term “triple bottom line.” Then they would turn around, he adds, and “forcefully and publicly lobby for a meaningful price on carbon and for the breakup of monopolies and oligopolies.”
To give the Roundtable statement some teeth, they’d also take a fresh approach to organized labor. “Welcoming, rather than fighting, a union would be a big one,” says Andy Green, managing director of economic policy at the Center for American Progress. Research shows that nearly half of all workers not in a union want to join one. Yet many companies do all they can to keep this from happening.
Samuelson, for her part, would be impressed by companies “dampening down the intense focus on stock price in CEO pay.” More than half of CEO compensation is share-based these days, much of it tied to short-term financial measures. Instead, executives should be paid—and to a meaningful degree—on a mix of environmental, social, and governance metrics.
The University of Toronto’s Roger Martin, who has been recognized as the world’s number-one management thinker, wants to see a reversal of something that, for many of the most senior executives, is even more deep-seated.
Rather than concentrate on stock price, he says, they should expressly concentrate on serving customers or developing employees or tackling some social need through innovation. Ultimately, Martin has maintained, that’s the best means of taking care of shareholders anyway.
“For me, the key would be to view shareholder value creation as the logical consequence of other things, not something that you can directly pursue,” he says. “It is like Aristotle who pointed out that if a person sets out to be happy, the person is unlikely to end up happy. However, if the person sets out to lead a virtuous life, the person will probably end up happy. If I could only have one thing, it would be that.”
Others made additional suggestions: Companies should guarantee a living wage for all workers, including contractors. Stakeholders of different stripes (employees, sustainability experts, even everyday taxpayers) should be given seats on corporate boards. Executives should lean on business schools to stop teaching that shareholder value is the be-all and end-all of capitalism.
Much of this agenda may be dismissed as unrealistic. Certainly, none of it will be easy to achieve. And none of it is meant to imply that the Roundtable’s statement isn’t, in and of itself, a monumental step.
Words matter. The words of the Roundtable—a Who’s Who of those at the helm of the largest U.S. corporations, from Abbott to Zebra Technologies—matter a lot. In the end, though, it is the actions of Roundtable members that will matter the most.