‘Stakeholder Capitalism’: Roundtable for One

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Statue of George Washington overlooking Wall Street in Manhattan, January 20, 2016 (Mike Segar/Reuters)

Last year the Business Roundtable issued a grand-sounding ‘Statement on the Purpose of a Corporation’, which basically rejected the quaint idea that a company’s primary duty was to its owners (the shareholders) and replaced it with a commitment to ‘stakeholder capitalism’.

Stakeholder capitalism? In essence it’s an expression of corporatism, an idea with a distinctly mixed intellectual and political history, but which, very broadly, means that the running of the country is, to a greater or lesser extent, the business of large interest groups, all, of course, subordinated to the state, an organizing principle that leaves little room for the individual.

Turn to the ‘Statement’, which is signed by a large number of CEOs, quite a few of them prominent, and we find this:

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.

A list of stakeholders then follows including customers, suppliers, employees, and “the communities in which we work.”

Good deeds too are promised, including, inevitably, embracing “sustainable practices across our businesses.”

Last on the list of those to be looked after are shareholders, although their role in providing “the capital that allows companies to invest, grow and innovate” is acknowledged.  Thanks for the money!

Back in February, George Shultz, Michael Boskin, John Cogan and John Taylor, writing in Real Clear Markets, took aim.

Here’s an extract:

The BRT has scrapped its longstanding view (since 1997) that “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.”  In its place, the BRT stipulates that U.S. companies should consider the interests of numerous stakeholders – including employees, customers, and communities in which the company operates, along with shareholders when making corporate decisions. Underlying the Roundtable’s new view is its belief that companies have a social responsibility that transcends their role as producers of goods and services in a freely competitive economy.

The Business Roundtable’s examination of the conduct of U.S. corporations is welcome, but wrong-headed. The organization consists of highly respected leaders both within and outside of the business community. Their collective views carry a large weight in public policy deliberations in Washington D.C.

But we believe the BRT’s new statement of corporate purposes that places shareholders as an “also ran” alongside other stakeholders, especially an ill-defined group of “communities,” is misguided.  The statement lends credence to an incorrect view of the way American businesses operate in today’s economy; it fundamentally misunderstands the role that business plays in a free market economy; and it fails to consider the practical, real world, adverse consequences of demoting shareholders’ interests.

“Misunderstands” is too kind a word. The BRT knows exactly what it is doing.

Meanwhile, Bloomberg’s Matt Levine has also long been skeptical about the BRT statement, but from a different angle:

My view was that these CEOs didn’t really mean that they would give up power, that they would add further constraints on their decisions, that they would refrain from doing things that they wanted to do because those things would be bad for workers or communities or whatever. Instead, I figured that the CEOs just meant that they would increase their power, that they would eliminate constraints on their decisions, that they would do more things that they wanted to do, even if those things were not what shareholders wanted, by saying “oh well they’re good for some other stakeholders.” You could imagine a CEO who answered to shareholders and workers and communities, and therefore was more restricted in what she could do; you could also imagine a CEO who said that she answered to all those different constituencies, but decided herself which one to prioritize at any time, and did whatever she wanted. I figured the latter was more likely. I wrote: “The managers and the board, in this version of the corporation, are the only ones representing all of the constituencies, so they are the only ones qualified to evaluate their own performance.”

But:

I was too generous to the CEOs! I shouldn’t have said “and the board.”

Levine has now come across a study that involved contacting the companies whose CEOs signed the BRT statement and asking “who was the highest-level decision maker to approve the decision”:

Of the 48 companies that responded, only one said the decision was approved by the board of directors. The other 47 indicated that the decision to sign the statement, supposedly adopting a major change in corporate purpose, was not approved by the board of directors. …

Oh.

The researchers asked:

What can explain a CEO’s decision to join the Business Roundtable statement without board approval? Even “imperial” CEOs tend to push major decisions through the board rather than disregard it. … The most plausible explanation for the lack of board approval is that CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders.

To which Levine adds:

They’re probably right, but my own preference is to assume that a CEO who signed the Business Roundtable statement is particularly likely to be an imperial CEO, that she is particularly likely to be a CEO who does not want to have to listen to or consult with shareholders, because that is actually what the Business Roundtable statement is about. If you assume the signing CEOs are the ones who don’t want to listen to shareholders, it’s not so surprising that they don’t bother consulting their directors either.





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