Stakeholders, CEOs and the role of corporations

See The ‘Stakeholder’ CEOs: Executives who abandon shareholders won’t appease the socialists. WS editorial. Excerpt:

"Politics aside, the moral and practical superiority of the stakeholder model is hardly clear. CEOs are themselves employees hired by directors who are supposed to be stewards of the capital that shareholders have invested. One virtue of the shareholder model is that it focuses the corporate mission on measurable financial results.

An ill-defined stakeholder model can quickly become a license for CEOs to waste capital on projects that might make them local or political heroes but ill-serve those same stakeholders if the business falters. Students of corporate governance have devoted years to analyzing the “agency problem” of holding CEOs accountable to the business owners. So-called activist investors who challenge underperforming managers are one market response.

Consider the long, slow decline of General Electric , which for decades helped mom-and-pop shareholders provide for their retirement. Former CEO Jeffrey Immelt was the model of the stakeholder executive, posing in Vanity Fair as a spokesman against climate change, issuing pronouncements after the 2008 panic about the failures of capitalism.

Yet Mr. Immelt failed in his core duty to find a post-panic business model that enhanced profits and shareholder value. That failure served neither customers, employees, suppliers, communities nor shareholders. From a moral point of view, GE did far more social and economic good when it was wildly profitable and its shareholder retirees could sleep better at night confident in its dividend."

Milton Friedman on CEOs: The late, great economist anticipated the Business Roundtable. WSJ editorial:

"The mucky-mucks of the Business Roundtable are tweeting in unison how “proud” they are to have abandoned the corporate purpose of serving shareholders for the more politically au courant “stakeholder” model. We wrote about it Tuesday, and the CEOs no doubt enjoyed their smooch from Fortune magazine more than they did our editorial.

The media cheerleaders seem especially pleased that the CEOs have thrown the late, great economist Milton Friedman over the side. So we thought we’d reprint nearby excerpts from Friedman’s 1970 essay, “The Social Responsibility of Business is to Increase its Profits,” from the New York Times magazine.

The entire essay is worth reading, but two points from the excerpts are worth stressing for the CEOs who almost surely never read it. The first is that Friedman never said a business should ignore the “basic rules of the society, both those embodied in law and those embodied in ethical custom.”

The attempt to smear Friedman’s counsel as amoral is false. His point was that profitable businesses serve the common good better than executives who spend money on “social responsibility” but preside over business failure.

The second point is Friedman’s warning that CEOs who put social responsibility above shareholders will find it redounds to their detriment. They feed the public belief that free markets and business are “wicked and immoral” and must be curbed by “external forces,” which typically means politicians.

Once those forces are unleashed, the arbiters will not be the “social consciences” of “pontificating executives.” The controlling power will be wielded by the iron fist of government. Nearly 50 years ago, Friedman anticipated the CEOs of the Business Roundtable."

See Milton Friedman on Corporate Responsibility: ‘Businessmen seem to me to reveal a suicidal impulse.’ From The WSJ.

"In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom. . . .

Whether blameworthy or not, the use of the cloak of social responsibility, and the nonsense spoken in its name by influential and prestigious businessmen, does clearly harm the foundations of a free society. I have been impressed time and again by the schizophrenic character of many businessmen.

They are capable of being extremely far-sighted and clear-headed in matters that are internal to their businesses. They are incredibly short-sighted and muddle-headed in matters that are outside their businesses but affect the possible survival of business in general. This short-sightedness is strikingly exemplified in the calls from many businessmen for wage and price guidelines or controls or income policies. There is nothing that could do more in a brief period to destroy a market system and replace it by a centrally controlled system than effective governmental control of prices and wages.

The short-sightedness is also exemplified in speeches by businessmen on social responsibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal a suicidal impulse."

See CEOs for President Warren: The Business Roundtable throws shareholders under the bus, even if just for show. Excerpt:

"introduction of the word “stakeholders” on the way to delivering these bromides is what set the media aflame this week. By whomping up the significance of this rhetorical innovation, we are invited to hurry past an obvious question: How can shareholder wealth ever be created except by satisfying stakeholders, who include customers, workers, suppliers and the communities that create the legal environment in which firms operate?

All of the above participate voluntarily. Apple , one of the signers, has never put a gun to your head and marched you down to the Apple store to buy its products. It doesn’t dragoon the best college graduates against their will to work for high pay and generous benefits in a building by Norman Foster.

Widely cited is the 1970 article by the late Milton Friedman, arguing that a public company’s purpose is to increase its profits legally and nothing else. Supposedly his wisdom is now obsolete. But his most important words, in the same article, may be a conditional statement questioning whether any corporate sloganeering to the contrary should ever be taken “seriously.”

After all, CEOs will still be hired by boards who are elected by shareholders; they will still be rewarded under contracts that pay them for producing sustainable increases in the stock price (that’s what those vesting requirements are for). Before this week’s statement, CEOs boasted freely about their employee-happiness ratings, their sustainability programs, their diversity efforts, as if these were perfectly consistent with shareholder wealth-maximization duties. What changed?

The press, in trying to make sense of nonsense, reliably takes refuge in the fallacy of conflating shareholder wealth maximization with short-run profit maximization.

These are completely different things. Any company can boost immediate profits by cutting customer service, advertising, product development, etc. But its share price would go down, not up.

Companies maximize shareholder wealth by optimizing (not minimizing, not maximizing) other values like customer happiness and worker satisfaction. If there’s a better way, let’s hear it. Maybe companies should be required to maximize shareholder wealth, minus 25%. How is this to be implemented? And why should America’s 3,600 public corporations bear special burdens in this regard? These companies account for less than one-third of the nation’s private-sector workforce and a tiny proportion of its 5.6 million employer firms."

See C.E.O. Pledge of Social Responsibility. Letters to the NY Times:

"The muddled and misguided concept of corporate social responsibility took one step forward and one step back with the Business Roundtable’s revised “Statement of a Purpose of a Corporation.”

Proponents of corporate social responsibility like Mr. Sorkin celebrated the death of “shareholder primacy.” Meanwhile, across a growing ideological divide, defenders of capitalism warned of an impending slide toward socialism.

The truth — and our country’s economic future — likely rests somewhere in the middle: Maximizing shareholder value over the long haul is socially responsible when corporations are forced to compete for customers and employees. 

The idea that shareholders’ caring about their returns means that they don’t care about customers or employees is nonsense. Shareholder returns depend on little else! The available evidence shows that customer satisfaction and shareholder returns go hand in hand. Similarly, unprofitable companies that close leave employees unpaid and unemployed. Profitable companies, on the other hand, make payroll.

As the Nobel Prize-winning economist Milton Friedman warned way back in 1970, seemingly innocuous speeches by businessmen on social responsibility “may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces.”

When corporations have to compete for customers and employees in the market, the line between shareholder and stakeholder interests blurs, and wonderfully so.

Reed Watson
Clemson, S.C.
The writer is an economics professor and director of Clemson University’s Hayek Center for the Business of Prosperity."

"Your coverage of a recent C.E.O. focus on constituencies other than shareholders ignores one critical group: bondholders. As a member of this group, I am often frustrated by management teams (compensated by stock options) and shareholder activists who agitate for debt-financed share buybacks.

Bondholder activism looks a lot like what other stakeholders — employees, customers, vendors — might request if they had a seat at the table: a healthy balance sheet, prudent capital spending (neither profligate nor stingy), disciplined mergers and acquisitions, and a measured approach to borrowing. Bondholders hate surprises (say, a customer boycott of a retailer who sells assault weapons) even more than shareholders do.

For the long-term viability of the corporations they run and the benefit of all their stakeholders, I would encourage Jamie Dimon, the chief executive of JPMorgan Chase, and the others to ask themselves: “What would our bondholders want?” It’s called a “balance” sheet for a reason, even if shareholders have managed to tip the scales in their favor.

Ellen Carr
Asheville, N.C.
The writer is a high yield bond portfolio manager."