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Weekend Briefing No. 289
Welcome to the weekend. Just a heads up, this briefing will be a little different from the typical briefing. Maybe you’ll dig it, maybe you won’t, but just wait a week, and we’ll be back to the normal briefings.
Everyone has dream – the ambition that gets you out of their bed with a fire in your belly to tackle the day’s work. I don’t know what that is for you, but my dream is to see 10% of US GDP be generated by social enterprises – companies that generate profit and purpose, that measure value creation by their social and environmental as well as financial impact.
This dream has been the driving force behind my career. I’ve been working with social entrepreneurs and writing on conscious capitalism (in law review articles, magazines, newspapers, and blogs) for over a decade. My book Profit & Purpose came out 5 years ago. Every year for the last 7 years, at Harvard Law School, I’ve taught a 3-hour lecture on the purpose of the corporation. In that lecture I question the concept of shareholder primacy and make the argument for inclusion of all stakeholder in the corporate purpose. Through the years this broader definition of corporate purpose I was promoting in my practice, writing and teaching was largely dismissed as a fringe idealistic concept that no serious business leaders, law professors or investors gave credence to.
This week we saw that fringe idea go mainstream.
The Business Roundtable made a significant announcement on corporate purpose that was signed by 181 CEOs of Fortune 500 companies. This group made up of Fortune 500 CEOs has historically affirmed shareholder primacy – the purpose of a corporation is exclusively to maximize financial returns to shareholders. However, in an atmosphere of widening economic inequality and deepening distrust of business, the powerful group dropped a bombshell of a statement redefining corporate purpose to include all stakeholders and not just shareholders. In fact, in the statement (see below) the word shareholder isn’t even mentioned until the very end.
People have been asking me what I thought about this statement this week. I don’t quite know how to respond. It feels a little surreal.
I think my immediate reaction is one of gratitude for the pioneers of this movement. I’ve included two of the pioneers (who I’m lucky to call friends) – Cathy Clark and Jay Coen Gilbert – in the briefing below. I’m grateful for all the work they’ve done to push this concept of stakeholder capitalism from the fringes to the mainstream. I wish Lynne Stout, the author The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (2012) was still around to see this statement.
I’m reminded of a quote from Ghandi, “First they ignore you, then they laugh at you, then they fight you, then you win.”
That being said. There’s a huge difference between making a nice statement and actually shifting the way business is done. It will take decades for real change to occur at these legacy companies. In the meantime, the young social entrepreneurs leading the next big companies will be the vanguard of change.
This has been a good week. The briefing is going to be exclusively focused on the shifting concept of corporate purpose. I’m looking forward to your feedback.
72 – 72% of Americans agree that public companies should be “mission driven” as well as focused on shareholders and customers.
64 – 64% of Americans say that a company’s “primary purpose” should include “making the world better” the same percentage that say it should include “making money for shareholders.”
45 – A 2018 Gallup poll found that 45% of young Americans viewed capitalism positively, a 23 percentage point drop from 2010, when Americans were still in the murky shadow of the Great Recession.
In a 1970 OpEd, Milton Friedman says: The businessmen believe that they are defending free enterprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact, they are--or would be if they or anyone else took them seriously--preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades. The discussions of the "social responsibilities of business" are notable for their analytical looseness and lack of rigor. What does it mean to say that "business" has responsibilities? Only people have responsibilities. A corporation is an artificial person and in this sense, may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible. The manager is agent of the individuals who own the corporation, and his primary responsibility is to them. New York Times (11 minutes)
What Friedman is describing is known as Agency Theory. Here are some flaws in that theory: (1) Agency theory is at odds with corporate law: Legally, shareholders do not have the rights of “owners” of the corporation, and managers are not shareholders’ “agents.” (2) The theory is out of step with ordinary usage: Shareholders are not owners of the corporation in any traditional sense of the term, nor do they have owners’ traditional incentives to exercise care in managing it. (3) The theory is rife with moral hazard: Shareholders are not accountable as owners for the company’s activities, nor do they have the responsibilities that officers and directors do to protect the company’s interests. (4) The theory’s doctrine of alignment spreads moral hazard throughout a company and narrows management’s field of vision. (5) The theory’s assumption of shareholder uniformity is contrary to fact: Shareholders do not all have the same objectives and cannot be treated as a single “owner.” Harvard Business Review (21 minutes)
If you were to trace the history of the shift in attitudes among Fortune 500 CEOs, you might start with the speech Bill Gates gave in Davos in 2008, in his last year of full-time service at Microsoft, calling for a new “creative capitalism.” As Gates told the World Economic Forum, “the genius of capitalism” lies in its ability to “[harness] self-interest in helpful and sustainable ways.” But its benefits inevitably skew to those who can pay. “To provide rapid improvement for the poor,” he said, “we need a system that draws in innovators and businesses in a far better way … Such a system would have a twin mission: making profits and also improving lives for those who don’t fully benefit from market forces.” The financial crisis of the late 2000s shook the foundations of the sprawling market economy and bared some of its uglier consequences: an enormous and widening gulf between the über-rich and the working poor, between the ample rewards of capital and the stagnating wages of labor, between the protected few and the vulnerable many. Compounding these inequities, moreover, was a sweep of disruptive business technologies that began to come of age in the wake of the crisis—from digitization to robotics to A.I.—and that made vulnerable workers feel ever more so. Fortune (17 minutes)
The Business Roundtable Statement
Statement on the Purpose of a Corporation
Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.
Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country. Business Roundtable (5 minutes)
The Council of Institutional Investors responds to the Business Roundtable: The Council has a productive relationship with BRT that has included discussion on corporate “stakeholder” obligations, but we respectfully disagree with the statement issued by the BRT earlier today. The BRT statement suggests corporate obligations to a variety of stakeholders, placing shareholders last, and referencing shareholders simply as providers of capital rather than as owners. CII believes boards and managers need to sustain a focus on long-term shareholder value. To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners. Accountability to everyone means accountability to no one. BRT has articulated its new commitment to stakeholder governance (which actually resurrects an older policy view) while (1) working to diminish shareholder rights; and (2) proposing no new mechanisms to create board and management accountability to any other stakeholder group. While it is important for boards and management to have and articulate long-term vision, and sustain focus on the long-term strategy where they have strong conviction, a fundamental strength of the U.S. economy has been and continues to be efficient allocation of equity capital. If “stakeholder governance” and “sustainability” become hiding places for poor management, or for stalling needed change, the economy more generally will lose out. Council of Institutional Investors (3 minutes)
Cathy Clark’s thoughts are: For me, accountability has three steps: intention, action, and metrics. Accountability always starts with a clear intention, and these 181 CEOs have expressed a very clear intention. And if they want to be taken seriously by others, they need to take clear actions that align with these intentions. I think they know that, and I think they’ve given themselves a strong platform in which the best action steps will now be directly sent to them about what they can do next. They launched the idea, and they are now crowdsourcing actions. Linkedin (6 minutes)
Action > Words
Jay Coen Gilbert’s thoughts are: While it is appropriate to note, even celebrate, the Business Roundtable’s announcement as a sign of an accelerating culture shift, it is important to recognize that the people who are demanding this shift are demanding action. So here are three opportunities to ensure that the ideas raised by the Business Roundtable and capital markets leaders like Larry Fink become actions that benefit us all: (1) Corporate Governance Shift. The CEOs who signed the Business Roundtable letter have an opportunity to walk the walk by shifting to stakeholder governance, making their companies legally accountable to balance the interests of their shareholders with those of their other stakeholders. (2) Capital Markets Endorsement. To create an economic environment that favors long-termism, the capital markets need to shift from over-valuing the short term. (3) Public Policy Acceleration. Policy makers across the ideological spectrum—from Mike Pence to Marco Rubio to Elizabeth Warren—have identified shareholder primacy as an obstacle to high-quality jobs and shared prosperity. There is an opportunity for a bipartisan policy consensus to enable companies and investors to make this culture shift translate into meaningful and lasting behavior change that benefits workers, communities, the environment, and shareholders. Fast Company (6 minutes)
The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public by Lynn Stout. Executives, investors, and the business press routinely chant the mantra that corporations are required to “maximize shareholder value.” In this pathbreaking book, renowned corporate expert Lynn Stout debunks the myth that corporate law mandates shareholder primacy. Stout shows how shareholder value thinking endangers not only investors but the rest of us as well, leading managers to focus myopically on short-term earnings; discouraging investment and innovation; harming employees, customers, and communities; and causing companies to indulge in reckless, sociopathic, and irresponsible behaviors. And she looks at new models of corporate purpose that better serve the needs of investors, corporations, and society. Amazon
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Shareholder value is the dumbest idea in the world. -Jack Welch