(I doubt many of my readers missed this news item, but late in August, the Business Roundtable — CEOs from the country’s biggest companies — put forward new principles of business. For the first time in decades, they said that shareholders were not the only stakeholder that mattered. Below was my take on it in HBR. After a couple of months reflection, I’m still unsure how much it all means, but it could be an important turning point for business and sustainability — if we all hold our companies to their words.)
(Image by Free-Photos from Pixabay)
I arrived back from a news-fast vacation to an assortment of stories, both weird and important. The U.S. tried to buy Greenland (what?), the Amazon is burning, billionaire David Koch died, and CEOs from 181 of the world’s largest companies — as part of the lobbying group The Business Roundtable (BRT) — declared that the purpose of a corporation is not just to serve shareholders (their official position since 1997), but “to create value for all our stakeholders.”
This latter story is what I’ll focus on here, but, oddly, these stories are all connected. Let me explain.
The BRT announcement certainly sounds like a big deal. Shareholder primacy has been the core operating principle of public companies for about 50 years, since economist Milton Friedman famously declared “the social responsibility of business is to increase its profits.” These ideas have been promoted for decades by a very well-funded and wildly successful effort — with the Koch brothers at the core — to make the free-market, shareholder-primacy, neoliberal philosophy the dominant global economic model.
Multiple think tanks funded by the Kochs and others make this case daily. They also have worked to undermine climate science, which is very much related to maintaining the power status quo. The death of David Koch, the same week CEO’s pushed back on narrow, shareholder-only thinking, is symbolic. (A quick disclosure: I’ve consulted for or spoken at events put on by dozens of the BRT companies.)
To understand why the BRT statement matters, how it ties into all this other news, and what actually will (or won’t) change about shareholder capitalism, three points and a question are worth bearing in mind.
Shareholder primacy can’t solve our current problems.
Business leaders are feeling pressure to rethink the role of business in society for a number of reasons. First, social norms are changing and expectations from employees, customers, and even investors are rising fast. Second, there’s a growing realization that a focus on one key stakeholder or metric is as flawed as using your cholesterol level as the only measure of your health. Third, investors like Blackrock’s CEO, Larry Fink, are increasingly pressing companies to focus on their purpose and how they contribute to society.
But fourth, and perhaps most importantly, the world faces enormous, thorny challenges that business is feeling: climate change, growing inequality (and awareness that these CEOs make hundreds of times more than their employees), water and resource scarcity, soil degradation and loss of biodiversity, and more. These issues require systemic efforts, cooperation, and pricing of those “externalities” (like pollution and carbon emissions) that business has been able to push off to society. The current shareholder-obsessed system is not fit for this purpose. Individual profit-maximizing businesses will not be incentivized to tackle shared global challenges.
But despite big company CEOs feeling pressure to state their purpose differently, we’re a long way from truly addressing the biggest issues that threaten our economies and our collective well-being. In fact, our inability to confront society’s most pressing problems goes beyond over-reliance on shareholder value – a relatively new idea – which may be more a symptom of our real problem than its actual cause.
Shareholder primacy has always had skeptics.
Go back 10 years and you’d hear GE’s Jack Welch, the paragon of the modern cost-cutting CEO, declaring that focusing on shareholder value as your core strategy is “the dumbest idea in the world.” Also in 2009, Unilever’s then-new CEO, Paul Polman, told shareholders he would manage for the long haul and not meet with them quarterly. He shifted his owner base to investors wanting to hold the stock longer, and his company outperformed peers in the 2010s.
But we can go much further back than Polman and Welch. Most famously, Johnson & Johnson published its “Credo” in 1943, laying out its prime responsibilities to the world at large. Robert Wood Johnson describes his company’s responsibilities in this order: patients/doctors/nurses, customers, business partners, employees, communities, the environment and natural resources, and then, after all that, “stockholders should realize a fair return.” The Credo shows that thinking about stakeholders is an old idea, more in line with why most companies were founded. (More on J&J in a second.)
Shareholder primacy is a problem but may not be the real one.
Economist Alfred Rappaport is one of the fathers of the idea of shareholder value. But in his book Saving Capitalism from Short-Termism, he makes a compelling case that our real issue is short-termism and how we think about “value.” Basically, if you manage for long-term value, of course you need to account for customers, employees, communities, and more. When we define value as this quarter’s profits, we don’t invest (and we certainly don’t prioritize long emergencies like climate change). I believe that the current economic model incentivizes the liquidation of natural capital for profit. But how much of that is due to concern about investors per se, or focus on short-term profit only? For this reason, the final commitment in the BRT statement — where they commit to long-term value — is possibly the critical element.
What would it really mean for these companies to follow these principles?
This is the big question. To prove just how complicated “putting stakeholders first” really is, consider this contrast. As I wrote the sentences above about J&J, the news broke that a judge had ruled against the company, fining it $572 million for its alleged contribution to the opioid crisis in Oklahoma. Even if J&J appeals successfully, the situation shows that (a) companies are increasingly expected to play a positive role in society and take responsibility for the broader effects of their actions and products, and (b) companies are complicated — their actions and words don’t line up perfectly. A company can have the right principles on paper but, at times, lose sight of what serving multiple stakeholders really means.
Here’s another example: The increased burning of the Amazon is largely due to policies to help industrial agriculture and meat industries, all enabled by a Brazilian president that wants to monetize natural capital. What responsibility do businesses have to prevent this degradation? Presumably, companies signing a statement like the BRT’s wouldn’t buy from meat suppliers that burned down the Amazon to create grazing lands. And companies that truly put stakeholders and long-term needs ahead of short-term investors would proactively fight these kinds of devastating policies. In a similar vein, signatories should become loud, vocal advocates for a price on carbon.
For many of the BRT signatories, truly internalizing the meaning of their words would require rethinking their whole business. Fossil fuels powered the development of the modern world. But burning them now is not compatible with life. Will the fossil fuel companies on this list develop plans to sunset their core businesses (like Danish energy company Orsted has done over the last decade)? Or will these same firms forgo digging up arctic and Greenland’s natural resources, which are now more accessible because we melted the ice by burning fossil fuels to begin with? Not likely.
In fact, many of these signatories have fought any action on climate, even while making public statements in support of a price on carbon. This isn’t ancient history. In the 2018 election, a ballot initiative in Washington state proposed a modest carbon price. Money poured in from fossil fuel interests, including many of the BRT signatories, to defeat the initiative.
In my experience, some of these CEOs really mean what they say and do want to find purpose and build their legacy. But it’s really hard to take some of these signatures seriously, which somewhat undermines the whole effort. ExxonMobil has spent decades questioning climate science and slowing global action (check out the powerful podcast Drilled for the whole sorry tale). How much could a company like that care about “stakeholders”?
The BRT statement is a nice start. This new discussion of purpose is good, and it mirrors what some big investors are saying. But we need a much bigger pivot to circular, renewable-energy-based business models that value the long-term, protect natural capital, and invest in human development and equality. That level of change is currently light years beyond the BRT statement.
So, by all means, let’s hold these companies to their words — as employees, customers, community members, and shareholders. Let’s demand that they truly embrace longer-term thinking and fight for policies that enable a thriving world. Otherwise, it’s just empty rhetoric.
(This post first appeared in the Harvard Business Review)
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