US Business Roundtable: A victory for the good guys?

Capitalism needs rejuvenating if we want to be able to tackle the problems of the world today. That means re-examining what may have been seen as fundamental beliefs.

Yesterday’s statement of corporate purpose issued by the US Business Roundtable – a grouping of the CEOs of a large proportion of the leading companies in the US – may prove to be a key stepping-stone.

Business Roundtable announces the release of a new Statement on the Purpose of a Corporation signed by 181 CEOs who commit to leading their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders. https://t.co/ZWMRTDZRqA . pic.twitter.com/8Kd4IVFjva

— Business Roundtable (@BizRoundtable) August 19, 2019

The new Statement on the Purpose of a Corporation explicitly states: “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.”

The CEOs recognise a duty to shareholders by committing to “generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate”. But they end the statement with the words: “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.”

Stakeholders vs shareholders

Nobel Laureate Milton Friedman promoted the idea of the supremacy of shareholder value maximisation over all other objectives. In a 1970 article in the New York Times, he argued that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”. 

Academics and business leaders have been promoting Friedman’s view as a cornerstone of capitalism for decades.

The Business Roundtable went so far as to formally proclaim this philosophy this in a statement of corporate purpose in 1997, stating: “The paramount duty of management and of boards of directors is to the corporation’s stockholders. The interests of other stakeholders are relevant as a derivative of the duty to stockholders.” 

For proponents of ESG investing, this stance is an anathema. Friedman argued that companies should not “make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment”.

The support of the Business Roundtable for Friedman’s philosophy has been a critical element of the argument that shareholder value maximisation should override obligations to other “stakeholders” – which, of course, means everyone else impacted directly or indirectly by a company’s activities. 

There are three strands to the debate around stakeholders’ and shareholders’ interests, and advocates of ESG need to follow all three.

(1) Legal frameworks

As economists such as Friedman and Harry Markowitz would argue, the objective of maximising shareholder value is subject to the constraint that it has to be within the law. As companies have to act within the law, it is up to politicians to set the framework and rules by which companies can operate. As such, lobbying for policy changes that fall under ESG plays a key role.

(2) Sentiment

This is arguably the primary driver for incorporating ESG criteria: individuals – and, increasingly, the institutions they work for – believe it is the right thing to do. Or, more cynically, they believe that unless they join the bandwagon of “virtue signalling” their ESG credentials, they will lose out. While cynicism plays a part, the end results can still be positive.

(3) Academic evidence

Economics is not a science with immutable laws. It is the study of human behaviour, particularly the behaviour of crowds. Human behaviour is not governed by pure self-interest, but also includes ideas such as altruism, and posterity – concerns over timescales way beyond any individual lifetime.

Friedman’s philosophy has led to a damaging road for economic theory. It needs to go back to basics. As Adam Smith argued: “Markets are sustained not merely by incentives of gain or loss, but by laws, institutions, norms and identities, and without those things they cannot be adequately understood.” 

If the new stance of the US Business Council – supporting the interests of all stakeholders – means anything at all, beyond representing a change of sentiment, it should be reflected eventually in the legal framework governing corporate activities and academic theory. Economists take note!