TUESDAY, AUGUST 20 , 2019. THE WASHINGTON POST EZ RE A
shareholder value — grew to
prominence in the mid-1980s
and has since become a widely
accepted governance norm, one
that critics say has driven a
fixation on short-term results
and helped balloon the size of
CEO pay packages, fueled by
outsized stock awards.
An analysis released Aug. 14 by
the Economic Policy Institute, a
left-leaning think tank, found
that chief executive compensa-
tion has grown 940 percent since
1978, by one measure, while typi-
cal worker compensation has ris-
en just 12 percent over the same
period.
Elson, the corporate govern-
ance professor, noted that the
statement was problematic com-
ing from high-earning CEOs.
“They talk about their great
concern for the workers — well
they’re the ones who’ve paid
themselves so astronomically
and created these pay gaps that
are so dramatic,” Elson said. “I’d
like each of them to volunteer to
cut their own salaries by two-
thirds and give it back to employ-
ees if that’s the way they feel.”
Even in more recent guide-
lines, the idea that maximizing
shareholder value should be the
primary goal of a corporation has
been backed by the Business
Roundtable, albeit less explicitly.
In its 2016 document, the group
says management’s goal is “pro-
ducing sustainable long-term
value creation” and calls for com-
pensation committees to “incen-
tivize the creation of long-term
value.” While it also suggests the
board “may consider the inter-
ests of all of the company’s con-
stituencies,” it advocated doing
so when it “contributes in a direct
and meaningful way to building
long-term value creation.”
One CEO of a Business Round-
table company, who spoke on the
condition of anonymity to speak
freely, said the new statement
was not intended to suggest com-
panies should weigh the con-
cerns of all stakeholders equally
with each decision, but recogniz-
es that CEOs know they must do
all of these things well to main-
tain long-term value and brings
the group’s view more in line
with how CEOs are running their
companies.
[email protected]more. They put the customer first
and invest in their employees
and communities. In the end, it’s
the most promising way to build
long-term value,” said Tricia Grif-
fith, president and CEO of Pro-
gressive Corp.
The new statement includes
181 signatures of the 192 current
members of the Business Round-
table. Some companies that did
not sign were not eligible to do so
because an interim chief execu-
tive is in place or the company is
transitioning between leaders.
There were seven other CEOs
who did not sign for various
reasons: Roy Harvey at Alcoa,
Stephen Schwarzman at Black-
stone, Larry Culp at General
Electric, Bernard Tyson at Kaiser
Permanente, James Robo at
NextEra Energy, Thomas Wil-
liams at Parker Hannifin and
Michael Tipsord at State Farm. A
Business Roundtable spokesper-
son noted that a non-signature
does not necessarily mean the
CEO does not support the state-
ment.
Some governance experts were
critical of the announcement,
pointing out that a focus on
shareholders helped lead to gov-
ernance reforms and companies
could use the wider array of
interests as a dodge.
“It limits accountability for
these people to anyone,” said
Charles Elson, who directs the
John L. Weinberg Center for
Corporate Governance at the
University of Delaware. “You can
always make an argument that
no matter what you’ve done,
some stake[holder] will benefit.”
The new statement puts an
official stamp on a more stake-
holder-driven approach to gov-
ernance that some CEOs have
individually advocated for in re-
cent years. It comes more than
two decades after the lobbying
group, in a 1997 document about
corporate governance principles
that it has periodically updated,
took an explicitly shareholder-
first stance. “The Business
Roundtable wishes to emphasize
that the principal objective of a
business enterprise is to generate
economic returns to its owners,”
it wrote.
That concept — often known
as “shareholder primacy,” or a
corporation’s duty to maximizewill bring back American jobs
overseas, pay all workers a living
wage with good benefits, stop
attacking unions and start pay-
ing their fair share of taxes.”
A Roundtable spokeswoman
said the group welcomed a con-
versation on the issues.
Meanwhile, shareholder
groups raised concerns that their
interests would no longer be the
core concern of corporations,
underscoring the argument that
it is the job of government — not
companies — to make decisions
that are in the best interests of
society.
The Council of Institutional
Investors, an association of pen-
sion funds, endowments and
foundations, said it “respectfully
disagree[s]” with the statement,
adding that it “undercuts notions
of managerial accountability to
shareholders.”
But CEOs who favored the
move said it would benefit share-
holders in the long run as well.
“CEOs work to generate profits
and return value to shareholders,
but the best-run companies dodampen short-term pressures
and make investments” in em-
ployees, communities and broad-
er society. She said the new
statement will “stiffen [CEOs’]
resolve to make the kind of
long-term investments that ben-
efits the long-term health of the
enterprise.”
Rep. Joe Kennedy (D-Mass.)
called it “a welcome step toward
a more moral capitalism,” while
the U.S. Chamber of Commerce
said it “agreed wholeheartedly
with the renewed focus.”
But the firms also opened
themselves up to a range of
criticisms, raising questions
about how much the new state-
ment would lead to real change.
Some prominent politicians said
the statement may be too vague
to correct for corporate failures.
“I’m glad they now seem to
recognize that the American peo-
ple are sick and tired of their
corporate greed that is destroy-
ing the social fabric of America,”
Sanders said. “But we need more
than a public relations stunt. We
need a concrete plan on how theyover part of their board of direc-
tors to members chosen by em-
ployees. Sen. Bernie Sanders
(Vt.), also vying for the Demo-
cratic nomination, would prohib-
it corporations from buying back
their own stock — a move that
drives up share prices — unless
they offer a certain level of pay
and benefits for workers.
Trump, even as he has taken
many pro-corporate actions in-
cluding a big tax cut in 2017 and
deregulation, has publicly
shamed companies for moving
jobs overseas and threatened to
take more aggressive action
against pharmaceutical compa-
nies.
By making the statement, said
Judith Samuelson, executive di-
rector of the Aspen Institute’s
Business and Society Program,
“the voice of corporate America
— the Business Roundtable —
has now signaled how much
things have already changed.”
The organization “is really
playing catch-up with any num-
ber of members of their organiza-
tion that have been working toBY JENA MCGREGORA group representing the na-
tion’s most powerful chief execu-
tives on Monday abandoned the
idea that companies must maxi-
mize profits for shareholders
above all else, a long-held belief
that advocates said boosted the
returns of capitalism but detrac-
tors blamed for rising inequality
and other social ills.
In a new statement about the
purpose of the corporation, the
Business Roundtable, which cur-
rently represents the chief execu-
tives of 192 large companies, said
business leaders should commit
to balancing the needs of share-
holders with customers, employ-
ees, suppliers and local commu-
nities.
“Americans deserve an econo-
my that allows each person to
succeed through hard work and
creativity and to lead a life of
meaning and dignity,” said the
statement from the organization,
which is chaired by JPMorgan
Chase CEO Jamie Dimon. “We
commit to deliver value to all of
them, for the future success of
our companies, our communities
and our country.”
The statement comes amid a
growing national debate about
the responsibilities of corpora-
tions at a time of stark economic
inequality. President Trump and
the candidates vying for the
Democratic presidential nomina-
tion have taken aim at companies
for putting profits before the
needs of workers and customers
on issues as varied as drug pric-
ing, outsourcing and data priva-
cy. And for decades, wages have
climbed only moderately as the
pay of top executives at public
companies has soared.
A range of lawmakers have
been trying to force companies to
consider society’s larger goals
when they do business or be
penalized. Sen. Elizabeth Warren
(Mass.), a Democratic presiden-
tial candidate, has proposed re-
quiring U.S. corporations to turn
What most
distinguishes
America’s brand
of capitalism is
the widely held
belief that the first duty of every
business is to maximize value for
shareholders.
The benign version of this
credo is that there is no way to
deliver maximum value to
shareholders over the long term
without also satisfying the needs
of customers, employees and
society at large. But in its more
corrosive application — the one
that is inculcated in business
schools, enforced by corporate
lawyers and demanded by activist
investors and Wall Street analysts
— maximizing shareholder value
has meant doing whatever is
necessary to boost the share price
this quarter and the next. Over
the years, it has been used to
justify bamboozling customers,
squeezing workers and suppliers,
avoiding taxes and lavishing stock
options on executives. Most of
what people find so distasteful
about American capitalism — the
ruthlessness, the greed, the
inequality — has its roots in this
misguided notion about what
business is all about.
Which is why today’s statement
by the Business Roundtable
disavowing shareholder primacy
is so significant and so welcome.
In the Roundtable’s new
formulation of corporate purpose,
delivering value to customers,
investing in employees, dealing
fairly and honestly with suppliers,
supporting communities and
protecting the environment all
have equal billing with generating
long-term value for shareholders.
The statement rejects the whole
idea of “maximizing” one value to
the exclusion of all the others.
Instead, it acknowledges the need
for balance and compromise in
serving all of a company’s
stakeholders.
Skeptics will probably see the
announcement by the country’s
leading corporate executives as a
public relations gimmick that will
do little to change the way
American corporations are
managed. But the significance is
not so much that it will change
corporate behavior, but rather
that it confirms a shift in attitude
that has already occurred.
In many ways, the Roundtable’s
new policy represents a return to
a view of corporate purpose that
prevailed during the era of
“managerial capitalism” of the
1950s and ’60s. “For years, I
thought what was good for our
country was good for General
Motors, and vice versa,” Charles
Wilson, the carmaker’s chief
executive, declared at his
confirmation hearing to be
defense secretary in 1952.
But after the decade of the
1970s — during which stock prices
failed to keep up with inflation
and American businesses started
to lose out to foreign competition
— investors began demanding a
new focus on profits and share
prices. And executives who
refused to get with the new
program soon found themselves
at the receiving end of a hostile
takeover bid by “corporate
raiders” or competitors who
promised to send them packing.
Indeed, by the time the
Roundtable issued a new
statement of corporate purpose in
1997 declaring that “the principal
objective of a business enterprise
is to generate economic returns to
its owners,” it was merely
acknowledging what had already
become the new norm. Executives
had become so fixated on
maximizing shareholder value
that some (Remember Enron and
WorldCom?) even began cooking
the books to prevent those same
shareholders from learning the
true state of the business.
Although chief executives were
happy to get fabulously rich on
stock options meant to focus their
minds on the share price, many
chafed under the regime. They
resented analysts and traders who
punished them for missing an
earnings target and feared and
loathed the plaintiff lawyers and
“activist investors” who were
ready to pounce at the first sign of
trouble. They despaired at the loss
of respect they had suffered from
employees, the media and the
public, as well as their own
children.
My hunch, however, is that
what finally led members of the
Roundtable to jettison the idea of
shareholder primacy has been the
growing recognition that there is
a new generation of employees
and consumers who will not work
for, or do business with,
companies they believe to be
socially irresponsible. This is one
area where social media seems tohave had the effect of improving
norms of behavior, even at
companies as powerful as
Facebook, Disney, Uber, Walmart
and Amazon (whose chief
executive, Jeff Bezos, owns The
Washington Post). Executives also
have discovered what Warren
Buffett and Steve Jobs learned
long ago — namely, that refusing
to bow to Wall Street’s incessant
demands for double-digit
earnings growth can actually
attract a larger and better class of
investors.
Still, while norms of business
behavior can sometimes be
altered by pressure from below,
business institutions rarely
change without leadership from
above. The Roundtable’s
chairman, Jamie Dimon of
JPMorgan Chase, its president,
Josh Bolten, and the chairman of
its governance committee, Alex
Gorsky, deserve lots of credit for
initiating this rethink of
corporate purpose. It is also
noteworthy that all but a dozen or
so of the Roundtable’s 180-odd
members stepped forward to sign
the statement.
There is, as you may imagine, a
political context to all of this. Two
of the leading Democratic
presidential candidates — Sens.
Bernie Sanders (Vt.) and
Elizabeth Warren (Mass.) — have
made curbing corporate greed the
centerpiece of their campaigns,
while in the Democratic House of
Representatives, much of the
energy has shifted to a liberal
wing that is determined to raise
wages, raise taxes and strengthen
environmental regulation. With
Republicans in control of
Congress or the White House for
most of the past 20 years, the
business community has been
able to achieve much of its policy
agenda by playing an inside game.
But with Democrats threatening
to retake the White House and
possibly the Senate in 2020, and
the Republican Party lining up
behind a Republican president
spouting populist rhetoric,
business leaders feel some
urgency to re-engage in the public
debate. By disavowing
shareholder primacy and
embracing a broader vision of
corporate purpose, the
Roundtable has enhanced the
political legitimacy of such
efforts.
[email protected]Business leaders can regain legitimacy
by valuing the well-being of society
J. LAWLER DUGGAN FOR THE WASHINGTON POST
JPMorgan CEO Jamie Dimon is chairman of the Business Roundtable, which said business leaders
should balance the needs of shareholders with customers, employees, suppliers and communities.Steven
Pearlstein
CEO group shifts view on maximizing shareholder profits
Statement calls for
a balance as income
inequality widensLooking for the right
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