The Business Roundtable’s Recipe for Confusion

When companies try to do the government’s job, inefficiency and uncertainty result.

By Richard J. Shinder. He is a financial services executive living in New York. Excerpts:

"In elevating the concerns of other stakeholders above those of shareholders, the Business Roundtable has made an unfortunate mistake—one that will prove costly. No one can serve two masters.

In a modern industrial economy, commerce at scale is largely conducted through corporate entities, which shield shareholders from liability for company actions. The rise of increasingly large, operationally complex corporations allowed businesses to raise money more efficiently through capital markets and internalize components of their value and supply chains. This led, in turn, to further growth. As companies became larger and more complex, founders and owners enlisted professional managers to operate them.

Finance theory has long noted the existence of the “agency problem”: The objectives of managers and owners are not always aligned. The agency problem is exacerbated by the problem of asymmetric information. The CEO typically knows more about what’s going on in the business than shareholders do. Even the most engaged board of directors can provide only so much oversight. In recognition of these challenges, standards of corporate governance evolved toward a clear charge for managers: Maximizing shareholder value is your sole concern. 

This laserlike focus on shareholder value doesn’t eliminate the agency problem entirely, but it makes clear to managers that their only objective is to deliver a return for the owners of the enterprise of which they are stewards. The scorecard is relatively simple. Is the company profitable? Are its profits increasing? Is the share price going up? Are new customers being obtained on a profitable basis? If the answer to these questions is yes, everyone can rest assured that the people running the business are in sync with the people who own the business.

The Business Roundtable must no longer see the benefit of this arrangement. In addition to “generating long-term value for shareholders,” the organization’s statement offers four new objectives for corporations: delivering value to customers, investing in employees, dealing fairly and ethically with suppliers, and supporting the communities in which they work. While all are worthy objectives, they are either derivative of the objective to maximize shareholder value or a distraction from it. Either way, things aren’t likely to end well for any business that opts to please stakeholders over shareholders. 

A management team that doesn’t focus on and care for its customers, employees, suppliers and communities won’t be able to sustain a profit for long. And a company that sets aside profitability and focuses only on the Roundtable’s new objectives risks putting those objectives in conflict with one another. For a company in crisis, are suppliers more important than customers? Is community degradation a price worth paying for creating high-wage jobs? Companies facing these questions will be forced to make trade-offs that could ultimately cause them to go out of business.

Limiting themselves to a single question—Is what we do creating value for shareholders?—has the benefit of clarity. When businesses add social objectives to their missions, they muddy the distinction between the private and public spheres. Individuals and companies pay taxes to governments to fund collective action on issues that are in the common interest. 

People with altruistic motives can (and should) contribute their time and resources to charity, but that is (and should be) an individual choice. To have such choices made for shareholders by agents acting at a corporate level—and using investors’ capital—invites myriad opportunities for abuse, resource misallocation, malfeasance and inefficiency. 

As a capital budgeting exercise, is a $1 million charitable contribution more wisely spent than an investment in plant and equipment? What of corporations with attractive products and profitability that hold strongly partisan notions about what it means to “support the community?” JP Morgan, Nike and Gillette have all found themselves in the spotlight for charitable contributions and ad campaigns that put a seemingly greater focus on social-justice themes than either profit maximization or customer fulfillment.'

"private enterprise usurp public-policy functions risks further confusing society’s understanding of exactly who is supposed to do what. When people look to corporations to do what government should do—and vice versa—everyone will end up dissatisfied with all aspects of the political economy."

"Elevating other objectives—even with shareholder value maximization primus inter pares—risks failing to meet any of them."