For decades, corporations in the United States have enjoyed the luxury of operating with a single-minded focus on creating shareholder value. They’ve had the clarity of knowing that all management decisions would be evaluated based on how much they helped the bottom line. As long as they were maximizing revenues, companies were doing their job.
If you think that’s still the case, allow the Business Roundtable to disabuse you of that notion. The influential group of CEOs just released a new statement on the purpose of corporations. Jamie Dimon, the CEO of JPMorgan Chase & Co. who also serves as the Roundtable’s chair, noted that the new version reflects a belief that “the American dream is alive, but fraying.” It says that in addition to working for shareholders, companies should be responsible to a variety of “stakeholders,” including customers, employees, suppliers and local communities.
“Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term,” Dimon said. “These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
That sound you hear is Milton Friedman spinning in his grave. Of course, the Chicago School economist never witnessed an economy quite like the one we have today, nor is he watching the current activity among public interest groups, employee advocates, activists, governance watchdogs and others demanding greater levels of accountability from companies.
Unsurprisingly, the Council of Institutional Investors, an influential group of big-money shareholders, was nonplussed about being lumped with other constituencies in the Roundtable’s new paradigm. The organization raised the possibility that management teams could use their obligations to stakeholders as a shield against garden-variety incompetence: “If ‘stakeholder governance’ and ‘sustainability’ become hiding places for poor management, or for stalling needed change, the economy more generally will lose out.” Instead, according to the CII, “societal objectives with limited or no connection to long-term shareholder value” should fall under the domain of government agencies.
But are maximizing shareholder value and the new stakeholder model really in conflict?
The famed corporate lawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz would likely say no. As a longstanding advocate for the stakeholder approach, Lipton praised the Roundtable’s statement and took the CII to task for its response. Corporations really have no choice in his view but to begin addressing what he termed “existential threats” like climate change and income inequality. Otherwise, according to Lipton, government takeovers of corporations will become a reality as U.S. officials seek to limit the damage from these threats.
In fact, the line dividing shareholder and stakeholder concerns is hard to identify. If climate change makes certain locales uninhabitable, for instance, that would create serious problems for companies operating there. Similarly, companies that don’t get tough on issues like sexual misconduct face potential problems attracting and retaining talented workers – not to mention a backlash from consumers.
None of that is good for shareholders. In other words, in Lipton’s eyes at least, the Roundtable’s statement is as consistent with creating shareholder value as it gets.