Shareholders or Stakeholders?

In the past couple of days, we’ve seen a renewed interest in corporate governance, the role of CEOs and boards and about the relationship between corporations and society. The triggering event was the release of a new statement on August 19, 2019 by the Business Roundtable, a non-profit organization with the CEOs of major US corporations as its members. The statement, entitled “Statement on the Purpose of a Corporation” is less than a page long. The statement is neither a diktat nor a commandment - but a reflection of what at least the 181 signatories seem to feel was a guiding principle going forward. As with any pronouncement that has substantial public policy implications, this one too has generated a vigorous public debate. Opinions on the statement have varied widely, ranging from (i) congratulatory to (ii) suspicion/cynicism to (iii) opposition/downright derision.  

What’s causing all this interest? Well, for one, the Business Roundtable has shifted the debate from a purely shareholder-centered focus to a stakeholder-centered focus. So, if maximizing shareholder value was the central focus of US corporations for the past few decades, then this marks a visible shift in what the CEOs of major US corporations appear to believe and will support going forward. That shift could be summed up as follows: while shareholders remain important and central to corporations, other stakeholders are now important as well and need to be part of the calculus. 

And who are these stakeholders mentioned in the statement? Five of them - customers, employees, suppliers, communities and shareholders. Any other reasons for the interest in this topic? Perhaps. Maybe given today’s incredibly shrinking world where news and information travels almost instantaneously, there is increasing awareness of economic disparity among groups? And could it also be that the growing political polarization in today’s societies in many parts of the world makes this topic particularly germane?

I was curious about the nature of the early reactions. The first group, those in favor of the Business Roundtable’s August 19th announcement, point to the need to get away from short-termism and see the announcement as a positive. They see it as a sign that some of America’s largest companies have recognized the problem and working to resolve it – that corporations have finally realized that a focus solely on corporate profits is not sustainable in the long run and that the corporate world needs to look at a broader stakeholder group. A second group, those disenchanted with the Aug 19 statement, seems to tie the historic focus on corporate profits to the loss of jobs and disenfranchised communities. Additionally, those who viewed the August 19th announcement with cynicism, point to statistics that show average CEO compensation today to be 200 times that of the average worker; they further point out that over the past four decades, the rate of increase in compensation of the top 350 CEOs was nearly 80 times that of the average worker. And then we have a third group, those opposed to this shift from a sharp focus on shareholders to what they perceive as a dilution of the whole objective of a corporation. This group feels that by bringing a group of stakeholders into the picture, the objective and soul of a corporation is muddied, and this move will likely lead to potentially poor performance at best and may possibly undermine the very nature of capitalism at worst. 

Each of the above groups have some facts in their corner. There is statistical evidence that supports aspects of each one of those viewpoints – not wholly or completely but certainly gives credence to some aspect of those views. It seems to me that the CEOs who comprise the Business Roundtable have likely been aware for some time of a growing disparity among economic groups within their sphere of influence. It also seems evident that those disparities have become apparent and that news travels fast. It is further likely that these CEOs have probably faced these very same questions and concerns – in board rooms, in the news media and shareholder meetings, and in their own introspections. Can corporations exist in a vacuum? Can they proceed along a path that might prove unsustainable? Could social, environmental and economic sustainability make good business sense? Is there a solid, long-term labor force available for their companies to function? Will there be a large consumer base for them to sell their goods and services? Will there be a long-term viable and sustainable supplier base for all the parts and components they need to produce their end-product but where it does not make sense to backward-integrate? I suspect different CEOs came up with different answers, but as a group, while they may have varied in terms of degree and magnitude, they probably found a common direction. The Business Roundtable statement, innocuous as it might sound, was not just written up overnight. On the contrary, the statement we saw probably went through months of deliberation, edits, debates and discussions before we got what came out on August 19th. 

But what about the view that a corporation must be a single-focused entity and cannot be all things to all people? What about the cogent argument that Milton Friedman made in his typically lucid and intellectually rigorous fashion – sometimes paraphrased as his saying that the business of business is business. As some writers have pointed out - Milton Friedman in his classic 1970 article in the New York Times Magazine - made it quite clear that a corporate executive must do what the owners of the business want her or him to do, “…which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.” 

To me it seems that Milton Friedman was right at many levels. Yes, a business must make money – if it is not commercially viable and is not profitable, it is not sustainable. I also agree with his second point – that the owners of the business are still the singularly most important voice in what the company should do. But in today’s world, maybe the owners – the shareholders of the various corporations – may be seeking something more than just profits? Two trends suggest this might be the case.

One, with increasing concentration of stock ownership, much of it held by large institutional investors including index funds and pension funds, the voices of these “super-shareholders” are becoming increasingly noticeable and influential. And these shareholders are demanding more and better adherence to ESG standards, and more generally, to sustainability, setting the stage for a stakeholder-centered corporation. Secondly, we must also consider that CEOs no longer live in isolation - they see and face the changes that happen in today’s world – be it climate change, income inequalities, labor force composition and preparedness and they likely see the impact this will have on their businesses in particular and on society in general. Is it possible that both these forces could have gently broadened the objectives that corporations and CEOs must adhere to? In other words, perhaps in the five decades since Friedman wrote his article, could it be that the “basic rules of society” or “ethical custom” that he referred to may have changed?