For more than 20 years, the Business Roundtable, a lobbying group consisting entirely of chief executive officers, has maintained that the primary mission of corporations is to serve the interests of their shareholders. Now the group wants the world to believe that it values other fundamentals as well.
In a new statement signed by 181 CEOs, the Business Roundtable has declared that companies should exist “for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.”
So much for the principle of shareholder primacy, which has been wielded to justify any number of cutthroat actions by corporations over the decades.
“The American dream is alive, but fraying,” Jamie Dimon, chairman of the Business Roundtable and chairman and CEO of JPMorgan Chase & Co., declared in a recent statement. “Major employers are investing in their workers and communities because they know 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.”
Dimon and his cohorts are placing distance between themselves and the ultra-capitalist mandate espoused by influential economist Milton Friedman, who wrote back in 1970 that “the social responsibility of business is to increase its profits.”
Friedman and his “Chicago School” of thinkers drew heavy criticism for that statement, some from within the walls of corporate America. Former General Electric CEO Jack Welch famously called shareholder primacy “the dumbest idea in the world.” For the most part, however, CEOs have marched to Friedman’s tune, fearing shareholder rebellion if they didn’t show relentless short-term growth at the expense of all other considerations, including workers, the environment and community interests.
For all its lofty and aspirational language, however, the Business Roundtable’s “Statement on the Purpose of a Corporation” gives rise to an obvious question: Do the group’s members mean it?
Cynics might call the statement a desperate public-relations gambit, calculated to sooth friction over what many have identified as a widening gap between rich and poor in America, caused in part by slow wage growth relative to corporate profits. But roundtable members insist that the action is sincere. “The new statement better reflects the way corporations can and should operate today,” said Alex Gorsky, chairman and CEO of Johnson & Johnson, and chair of the roundtable’s Corporate Governance Committee.
At least some outside observers are buying the group’s proclamation. “It’s definitely something of real substance,” says Troy Keller, attorney and lobbyist with Dorsey & Whitney LLP. He has extensive experience in mergers and acquisitions, corporate governance and government relations.
Dorsey says the roundtable’s statement “reflects a trend of something happening in corporate governance, slowly but surely, over the last several years.”
While many professed surprise at the group’s apparent about-face, Dorsey has witnessed a growing sentiment by CEOs about the need to be good corporate citizens — indeed, that such a stance constitutes a “license to do business.” Executives have frequently complained about the pressure they’re under to post quarterly results at the expense of long-term investment. What’s more, the doctrine of shareholder primacy has been repeatedly used by corporate raiders to break up functioning companies, or saddle them with crushing debt in order to enrich the coffers of rapacious investment bankers.
Keller cites the words of Martin Lipman, a founding partner of Wachtell, Lipton, Rosen & Katz, a specialist in depending against hostile corporate takeovers. Lipton has repeatedly argued for the right of boards to consider multiple interests beyond those of shareholders. He has railed against “short-termism,” a stance that pushes companies to react instantly to downturns in profits rather than wait for economic cycles to correct. Or they might choose to boost share value through stock buybacks, instead of plowing back earnings into growing the business.
Many CEOs have been nervous about publicly stating their distaste for shareholder primacy, Keller says. But the recent rise of corporate social responsibility (CSR), and the notion of investments keyed to environmental, social and governance (ESG) guidelines, are providing a measure of public cover for timorous executives.
Regulators are following suit. Bond-rating agencies now include ESG performance in their deliberations.
And the state of Delaware, official “home” to more than half of all publicly traded U.S. corporations, allows businesses to grade themselves on sustainability, Keller notes.
The doctrine of business judgment is “sacrosanct” under Delaware law, Keller says. Even though the state holds shareholder profits to be the primary purpose of a corporation, it doesn’t specify a time frame for return on investment.
“If directors say it’s in the best interests of the company to take a long-term view to promote a social cause, reinvest in communities or give employees a raise, Delaware law won’t second-guess that,” he says.
As the next presidential election grows near, some companies might be acting to head off proposals from Democratic candidates for intensified government oversight of business. Others could be seeking to placate activist shareholders, or consumers concerned about the misbehavior of well-known brands when it comes to the treatment of factory workers overseas. Still, the roundtable’s new statement signals a growing awareness that pure profits for shareholders can no longer be the sole guideline for doing business in the coming years.
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