Reforming Corporate Behavior

We have heard for years that the sole purpose of a corporation is to make money for its shareholders, end of story. This notion gained ascendancy after a 1970 article published in the New York Times by economist Milton Friedman, who huffed that the idea that corporations have a broader responsibility to society is “pure and unadulterated socialism.”

Friedman’s article provided intellectual cover for the slash and burn corporate greed in the following two decades. But today Friedman’s article seems like an odd period piece and his ideas out of step. In fact, the Business Roundtable (BRT) recently repudiated Friedman’s view and announced henceforth that satisfying other corporate stakeholders, such as employees and customers, will be given equal importance to producing wealth for shareholders.

The Roundtable, formed in 1972, is a group of about 200 chief executive officers of America’s largest corporations. Chief executives are employees of the corporations they lead, although clearly the most important and influential of them. CEOs are hired by corporate boards of directors and these directors are elected by shareholders. So CEOs lack the power to declare unilaterally that the mission of their corporation will change. The recent statement of the BRT is not binding on anyone, but each CEO certainly sought the approval of his or her directors before signing on to it.

The BRT’s original leadership were bi-partisan business statesmen. But the BRT soon evolved into a forum for chief executives to attack labor unions and the taxation of business. These were the libertarian views of the infamous Koch brothers and their ilk, who spent millions of dollars promoting this “free market, shareholder primacy” concept using an army of captured think-tanks. And the BRT began functioning like a trade association for chief executives, lobbying for compensation tied to corporate share price.

Much blame for today’s lack of corporate social responsibility has been placed on using short term financial results and share price to determine executive compensation. Large, publicly-traded corporations must report quarterly to the Securities and Exchange Commission on their financial and business position. These reports often drive share price. Short-termism encourages a focus solely on the near term results of a particular activity or policy, instead of on the value that can be created by long-term investment in employees, customers and communities.

Writing in the Harvard Business Review, author Andrew Winston neatly sums up the problem this way.

The world faces enormous, thorny challenges that business is feeling: climate change, growing inequality (and awareness that these CEOs make hundreds of times more than their employees), water and resource scarcity, soil degradation and loss of biodiversity and more. These issues require systemic efforts, cooperation, and pricing of those “externalities” (like pollution and carbon emissions) that business has been able to push off on society. The current shareholder-obsessed system is not fit for this purpose.

It is probably most accurate to say that the BRT’s new policy statement is a recognition of the change that has already taken place in the business environment, rather than an exercise in leadership. As The Economist magazine put it, the CEOs “have either seen the light or caved in, depending on whom you ask.” As one example of the change around them, polling among millennials reveals that this important demographic does not want to work for, or patronize, businesses that do not share their more progressive viewpoint.

Of course there are skeptics and opponents of the new policy statement. Some ask how we could expect a corporation like ExxonMobil, which has spent decades questioning climate science and undermining global action, to act responsibly now merely because its CEO has signed the BRT statement. Not likely because the energy giant would have to rethink its entire business. Energy companies have billions of dollars worth of coal, oil and gas still underground. Corporate managers cannot by law intentionally erode the value of the investments of their shareholders, many of whom are retirees, widows and orphans.

Former Treasury Secretary Lawrence Summers notes that most of the Roundtable’s CEOs are sincere and want to do the right thing. “But in a world of fierce competition, good intentions are not enough.” He advocates a program of legislation and regulation to complement and implement the BRT statement. These would include raising the federal minimum wage and penalizing the transfer of jobs overseas.

Assuming that the CEOs have “seen the light,” it may be because important political figures are also calling for better controls on how corporations behave. Businesses have no “right” to operate as a corporation. Corporations are chartered by the states in which they are organized and must follow the legal rules of those states. Theoretically, nothing prevents the state of Delaware, where many large corporations are headquartered, from amending its law to require, say, a ceiling on the difference between a CEOs compensation and that of the average corporate employee in the state.

Massachusetts Senator Elizabeth Warren has a plan for that, as she does for most everything. Recall that the basis of the Citizens United case that opened the floodgates of corporate money into politics was that corporations are to be treated like people under the First Amendment. Warren’s plan turns the tables. If corporations are to have the rights of people, they should have the corresponding obligation to act like good citizens, not like sociopaths whose entire obligation is to make money.

Warren’s proposal is called the Accountable Capitalism Act. It would require any corporation with revenue over $1 billion to obtain a federal charter, which would obligate the corporation to consider the interests of all stakeholders in corporate decisions. Under the bill workers of the corporation would elect 40% of the directors, and corporate political activity would have to be authorized by 75% of the shareholders and 75% of the directors, many of whom would be workers.

Writing in the online journal Vox, Matthew Yglesias says that there is “no getting around the fact that Warren’s proposal would be bad – really bad – for rich people.” So you can expect them and their political allies to marshal every resource at their disposal to oppose it. Warren’s entire proposal might be difficult to enact even if Democrats sweep in 2020. But you can be sure that pressure on corporations to act in more socially responsible ways will be on the political agenda for years to come.