You may be forgiven if you aren’t aware of it, but in August of 2019, there was a major shift in emphasis in modern economic philosophy. For one, the event wasn’t much reported in any of the mainstream news media. For another, it doesn’t seem to have caused a pronounced observable shift in the activities of capitalist societies or of Fortune 500 corporations. That is probably because it wouldn’t exactly have been a welcome development among the most influential groups of investors (oligarchs). At this time, let it be said simply that on that date the Business Roundtable (BRT) produced a document that supported a seismic change in the operating principles of corporations.
In the previous life of the BRT, which was formed in 1972, the guiding philosophy was in line with neoliberal dogma, which stated that the primary business of business was maximization of shareholder returns (i.e., profits, share values, dividends). That led almost all corporations to focus almost exclusively on short-term profit-maximizing strategies, anything that would lift the stock price at the end of the current quarter. If you think this is business as usual, you would be right, but you would be ignoring the broader philosophy of major corporations of the immediate post-WWII decades, in which they generally expressed support for the cities in which they operated, the families of people they employed, and their customers as part of their mission statement.
In the past five decades the doctrine of shareholder primacy has led to a variety of common but questionable choices. Manufacturers have laid off workers, reduced wages and benefits, sold real assets, and reduced the quality of input materials to cut costs. They have outsourced labor to distant countries to reduce wages or to avoid payments to mitigate the environmental impacts of their operations. Some of these actions were taken to reduce the effects of temporary financial setbacks, especially during the 2008 recession, but most occurred during periods when corporate profits and management compensation were already at record levels. After the 2017 tax relief, most large corporations used almost all of the billions they received in tax savings to buy back their own stock and, in so doing, raise the value of their shares.
The stockholder-centric fetish and its hold on corporations has been strengthened by narcissistic investors who have sued companies in which the management has “unnecessarily” chosen to raise wages or benefits or to abide by environmental or health regulations, or indeed where mangers made any other foolish decisions that might, god forbid, reduce short-term profits. It was also encouraged by the practice of paying top managers with stock options, giving leadership yet another motive to focus only on equity prices. But the most egregious example of investor-exclusive attitudes has come as I write these words. As the fatal effects of the COVID pandemic continue to spread across the world, investors, CEOs, hedge-fund managers, and other self-obsessed oligarchs are strongly encouraging President Trump to end the shelter-in-place strategy that has effectively reduced national mortality. For them, restarting the economy and reversing the recent stock market shortfall overrides all of the other negative impacts of the disease, including the likely threat of a deadly resurgence. This is stockholder primacy at its most virulent; the idea that the role of the United States government is to maximize financial growth above all else, even public health.
We can’t ignore the lengthy wave of market deregulation that was inspired by investor-centered economic theory, starting with the Nixon administration but continuing through the 1999 Gramm-Leach-Bliley Act and the following explosion of derivative finance. Deregulation brought us such entirely avoidable disasters as the Savings and Loan collapse of the late 1980s, the dot-com bubble of the late 1990s, and the great recession of 2008, all of which would have been virtually impossible if we had retained and enforced the New Deal laws and rules put in place during the 1930s and if we had retained the multiple stakeholder ethos of the 1950s.
One of the guiding principles of the New Deal, and of the economic revival that followed World War II, was that financial prosperity should not be the sole measure of progress. There were other goals that a moral nation and its corporations should consider as part of “the pursuit of happiness”. Those goals recognized that there were a number of stakeholders who were important to the national well-being and who were not defined solely by financial characteristics. We almost entirely forgot about them and that multiplicity of characteristics during the last half of the twentieth century.
Now the BRT, a collection of almost 200 CEOs from major corporations, has produced a list that remindes us about what we have lost. Their document states that they make a “fundamental commitment” to all of their stakeholders, specifically mentioning the following:
- Delivering value to our customers.
- Investing in our employees.
- Dealing fairly and equitably with our suppliers.
- Supporting the communities in which we work.
- Generating long-term value for shareholders.
It is notable not only that shareholders are the last item on this list of important stakeholders, but that they chose to define shareholder value as “long-term”, not just limited to the next quarter’s numbers. A company that recognizes and affirms its responsibility to all of these stakeholders and to the long run cannot be the type that moves its operations overseas for a two-percent bump in profits.
However, there remains the question of whether or how this document will be put into practice. This is what Andrew Winston wrote in the August 19, 2019 Harvard Business Review:
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.
Of course, this Winston commentary was given the skeptical headline, “Is the Business Roundtable Statement Just Empty Rhetoric?” Many of the companies represented on the BRT have not been exactly devoted to long-term planning, stakeholder interests, or broader societal concerns. Notably, they include fossil-fuel processors who have denied climate change and fought efforts to mitigate it, pharmaceutical producers who have over-promoted highly addictive drugs in pursuit of massive profits, and financial firms that continue to follow many of the risky and often fraudulent investment strategies that resulted in the 2008 great recession.
It remains to be seen how effective the Business Roundtable statement will be in modifying the single-minded attitudes and policies of its members, the companies they represent, and other global corporations, but the mere recognition of other stakeholders is a start.