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© 2019 TD Ameritrade IP Company, Inc.It seemed, at least on pa-
per, like a tectonic shift of
American capitalism: The
deviation from the long-held
conviction that shareholder
returns must always reign
supreme.
In a 300-word statement
released Monday, 181 leaders
of some of the world’s largest
companies endorsed a phi-
losophical redrawing of the
purpose of a corporation.
The goal, according to JP-
Morgan Chase & Co.’s Jamie
Dimon, chairman of the
Business Roundtable, must
be to promote an economy
that serves all Americans,
not just investors.
Critics quickly seized on
the unknowns. Would activ-
ist investors overlook stock
price dips if the cause could
be traced to higher wages
and better benefits for work-
ers? Can chief executives,
who last about six years on
average and mainly get paid
in company stock, reason-
ably be expected to run busi-
nesses with a decades-long
mind-set?
The group “should be
willing to be held account-
able in their efforts to transi-
tion this statement into real-
ity,” said Catherine Jackson,
a former senior advisor for
responsible investments at
Dutch pension fund PGGM.
“Stakeholders, including in-
vestors, need a line of sight
into how these commit-
ments are going to be ac-
tioned.”
Those who signed the
Business Roundtable state-
ment vowed to serve five dis-
tinct constituencies: cus-
tomers, employees, suppli-
ers, communities and share-
holders. The revision came
more than 20 years after the
group said its members’ pri-
mary goal was to increase
shareholder value.
The CEOs who signed —
including those of 3M Co.,
Johnson & Johnson and
Goldman Sachs Group Inc.
— agreed to provide workers
with fair pay, benefits and
training opportunities, and
to promote diversity, among
other things. The pledge
also called for respecting
residents in communities
where their businesses op-
erate and caring for the envi-
ronment by embracing sus-
tainable practices.
What constitutes fair
compensation is unclear.
The federal minimum wage
has remained unchanged for
a decade, while costs for
things such as healthcare
and higher education have
soared, prompting some
companies, including Ama-
zon.com Inc., to raise its
baseline and encourage oth-
ers to follow.
To some critics, that’s not
enough. This year, Walt Dis-
ney Co., which isn’t a mem-
ber of the Business Round-
table, faced repeated criti-
cism from Abigail Disney,
the granddaughter of co-
founder Roy O. Disney, who
said a $15 hourly wage
doesn’t go far for workers in
expensive areas of the coun-try such as Anaheim, home
of Disneyland and other Dis-
ney attractions. The com-
pany has rejected the criti-
cism.
It’s also unclear whether
the changing priorities will
be reflected in firms’ com-
pensation plans. Roughly
two-thirds of CEO pay for
those in the S&P 500 comes
in the form of stock awards.
Share performance is
among the most common
metrics to determine pay-
outs, appearing in about half
of pay plans for the CEOs of
the 181 companies that
signed the pledge, according
to data compiled by
Bloomberg.
At S&P 500 firms, the av-
erage ratio of the CEO’s
compensation compared
with that of the median
worker is about 280 to 1, the
data show.
“The rising income in-
equality between executives
and employees won’t be
meaningfully eradicated by
compensating employees
fairly unless executives are
willing to be paid less,” Jack-
son said.The Business Round-
table is a powerful lobbying
group in its own right. Led by
Josh Bolten, a former chief of
staff to President George W.
Bush, the group’s members
and their affiliates have
largely supported Republi-
cans with campaign contrib-
utions, but did donate to Hil-
lary Clinton in 2016. Its policy
goals include supporting
stock buybacks and
increasing the federal min-
imum wage.
Absent from the 181 sig-
natories were the leaders of
Roundtable members Wells
Fargo & Co., State Farm,
Parker-Hannifin Corp., Nex-
tEra Energy Inc., Kaiser Per-
manente, General Electric
Co., Blackstone Group Inc.
and Alcoa Corp.
Representatives for Kai-
ser and State Farm both
said their companies sup-
port the pledge but elected
not to sign it because they
don’t have shareholders. A
GE spokeswoman said CEO
H. Lawrence Culp Jr. consis-
tently makes public state-
ments about creating value
for stakeholders such as cus-tomers, employees and in-
vestors, but declined to com-
ment further. Wells Fargo
wasn’t invited to sign the
pledge because its current
chief serves on an interim
basis, a spokeswoman said.
The other companies ei-
ther declined to comment or
didn’t respond to requests.
Adherence to the share-
holder-first model is widely
traced back to a New York
Times column written by
Nobel laureate Milton Fried-
man in 1970, in which he
spurned corporate leaders
who “declaim that business
is not concerned ‘merely’
with profit,” but also things
such as avoiding pollution or
“whatever else may be the
catchwords of the contem-
porary crop of reformers.”
The idea of maximizing
shareholder returns took
hold in executive suites and
academic circles over the fol-
lowing decades, with some
even saying that companies
have a legal duty to do so.
There’s no U.S. law that
explicitly backs that up. Sev-
eral court cases have
broached the matter, includ-ing in Delaware, where many
companies are incorporat-
ed. Some legal scholars and
governance experts inter-
pret the court opinions as
prohibiting actions that pro-
mote environmental or so-
cial goals at the expense of
profits, but there’s no con-
sensus.
“The most frustrating
thing I ever hear is when
someone says that a board
of directors can’t do things
that are attuned to sustain-
ability under the current le-
gal system,” said Larry
Hamermesh, executive di-
rector of the Institute for
Law and Economics at the
University of Pennsylvania
Law School. “They can.
There is nothing in the law
that precludes this.”
Many companies vow to
do good things but often re-
sist releasing data to let oth-
ers independently verify
such promises, or cherry-
pick the data they do dis-
close. Many refuse to release
the gender and racial figures
they provide to the U.S. gov-
ernment.
It’s also unclear to what
extent the pledge will weak-
en the role of the stock price
as a CEO’s official scorecard.
A shifting of resources could
affect a company’s policy on
measures often seen as tak-
en to give short-term share
price boosts, such as stock
buybacks.
Activist investors have
for years shown willingness
to take on the biggest global
companies with lagging
stock prices, including Proc-
ter & Gamble Co. and GE.
Still, the breadth of signato-
ries may empower CEOs to
dial down their adherence to
short-term results.
“People treat it as a
trade-off — as a zero-sum
game,” said Martin Whitta-
ker, CEO of Just Capital, a
nonprofit that studies how
companies perform on a va-
riety of metrics such as
worker well-being and envi-
ronmental impact. “In the
short term, raising wages
may suppress the stock
price, but if you look over
time, you see these compa-
nies do better.”Melin and Green write for
Bloomberg.Devil is in details of CEOs’ social pledge
AMAZON.COM’SJeff Bezos was among the 181 chief executives who signed the Business Roundtable pledge.Emmanuel DunandAFP/Getty ImagesExecs vowed to serve
more constituents, not
just investors. Skeptics
want action not words.
By Anders Melin
and Jeff Green