The 2019 Business Roundtable statement was a welcome break from the position that the nation’s top corporate CEOs took in 1997, when the BRT pledged to prioritize achieving the highest returns for their shareholders. It will not, by itself, cause corporations to behave in the public interest, but it does help remove an excuse they have had over the last few decades for behaving badly.
Two tumultuous years have passed since the CEOs of 184 of the largest corporations in the US signed the Business Roundtable’s latest statement on the purpose of the corporation. The new statement made headlines at the time because in it, the BRT executives pledged to run their corporations in ways that serve the interests of all of their stakeholders. This was a sharp break from the position the BRT took in 1997, when the nation’s most prominent CEOs pledged to give priority to achieving the highest returns for their shareholders.
The contrast between these two BRT statements highlights a debate about the proper role of corporations that has taken various forms, and vexed corporate CEOs and directors for at least seven or eight decades. Broadly speaking, the view of the public toward corporations in the post World War II period until at least the 1970s, was that big corporations have responsibilities to the public as well as to their shareholders. Large US corporations were expected to lead the world in the development of new technologies, provide safe and useful products and services for consumers, good, stable jobs and benefits for their workers, and reliable tax revenues for the communities where they operate, all while keeping the skies and waterways clear of pollution.
Not all corporations succeeded at doing this, but the notion that they should had strong public support. CEOs in this era, too, generally supported the idea that a broad social agenda was the appropriate goal of publicly-traded corporations—after all, they wanted to be seen as civic leaders, as well as successful business people. US industrial might had been critical to winning the War and was seen as equally critical to powering the long post-War run of economic growth, both at home and throughout the developed, and developing world.
That attitude began to change in the 1970s, when economic growth slowed, companies in Japan and Germany began making better products at lower prices, inflation became a problem, and the stock market suffered a long slow slump. By the 1980s, interest rates shot up, so that low-risk bonds provided higher returns to investors than corporate equities. Financial markets scrambled for higher returns, and seized on a new tool—the hostile takeover—to try to squeeze higher returns out of corporations. To the new breed of financial buccaneers (CEOs promptly labeled them “raiders”), financial returns mattered most, and they didn’t hesitate to shut down factories, outsource production, slash spending on R&D, and siphon assets out of employee pension funds to achieve higher profits and drive up the prices of corporate shares.
Hostile takeovers and a hyper-focus on shareholder returns were supported by two parallel strands of academic thought: Finance theorists proclaimed in the 1970s that financial markets were “efficient,” and that therefore, the trading price of a share of stock was the best estimate of its true underlying value. And, corporate law scholars adopted the idea that corporate executives should be regarded as “agents” of shareholders, with shareholders said to be the true “owners” of corporations. Thus, legal scholars argued, corporate executives owed a duty of loyalty to shareholders, and that duty should not be diluted by concern for other stakeholders. Moreover, that duty required corporate officers and directors to try to maximize share value at all times. Economist Milton Friedman had paved the way for this set of ideas in his 1970 New York Times essay “The Social Responsibility of Business is to Increase Its Profits.” By the 1980s, business theorists and corporate law scholars began actively advocating for this philosophy of corporate management, which was labeled “shareholder primacy.”
The Business Roundtable did not initially buy into this view of corporations. But over the course of the 1980s and early 1990s, its various statements on the purpose of corporations moved in the direction of shareholder primacy, and by 1997, the position of the BRT was unequivocal: Its formal statement on the purpose of corporations issued that year declared: “The paramount duty of management and of boards of directors is to the corporation’s stockholders. The interests of other stakeholders are relevant as a derivative of the duty to stockholders.”
The new BRT statement in 2019 was the culmination of several years of behind-the-scenes meetings and negotiations among business people at high-level venues like Davos, Switzerland, as well as growing pressure from the public for business leaders to step up and do their part to respond to an array of worsening social problems. Importantly, big institutional investors, which had become the largest shareholders in corporations, began to worry about the global consequences of major social and climate problems, especially global warming, and the widening gap in income and wealth in developed countries.
The new BRT statement couldn’t have come at a better time: The Covid-19 pandemic in 2020 brought into sharp focus the huge inequities between the wealthy and the working classes, with the former actually growing more wealthy in 2020, while front-line workers in hospitals, clinics, meatpacking plants, warehouses, grocery stores, and delivery trucks struggled to pay rent, and often had no health insurance, or even paid sick-leave, when they came down with Covid—which they did, in large numbers. The lean supply-chain models that increased profits in the corporate sector failed, as factories, trains, and cargo ships were halted worldwide. Large parts of the corporate sector, it became clear, had been operating on fumes. Having squeezed out the slack in prior years to increase profitability, many corporations were left with no resiliency.
The harms from the pandemic have been hugely unevenly distributed. The travel, entertainment, and hospitality sectors and department stores—major employers of low-skill workers—were wiped out, for example, while a few corporations in the technology sector, such as Zoom, Netflix, Apple, and Microsoft, which do not generally hire very many low-skill workers, saw their businesses soar. Executives in tech firms, most of which did well, were more likely to be paid in corporate stock and stock options (This approach to executive compensation was preferred by advocates of shareholder primacy because it supposedly ties the pay at the top to the returns for shareholders.) so the pandemic made these executives and investors vastly more wealthy.
The huge social and economic inequities in the economy, laid bare by the pandemic, are, of course, compounded by systemic racism, and this dimension of the problem exploded into the nation’s consciousness when the 9-minute video of George Floyd’s murder at the knee of a Minneapolis cop went viral on the internet.
Meanwhile, massive heat waves, forest fires, and floods around the globe make global warming a frighteningly urgent problem.
Large corporations, of course, are not the only parties at fault for all of these problems, but they are hardly innocent. And, regardless of who is at fault, these social problems cannot be repaired without significant engagement by corporations. Pharmaceutical corporations (with some financial support and guidance from government agencies), for example, almost miraculously managed to marshal the resources to develop, test, manufacture, and distribute completely new vaccines in 2020 to combat the coronavirus. State agencies in China and Russia also developed vaccines, but when those vaccines had problems, there were no alternatives. In the US and Europe, meanwhile, competition among pharmaceutical companies helped assure a successful vaccine, and the manufacturing and distribution know-how of the private sector was critical to getting over 5 billion shots into arms around the globe within only about 20 months from the onset of the pandemic.
Other companies must similarly be part of the solutions to other social problems. Oil companies, for example, must move away from carbon intensive businesses. Utility companies must restructure to use renewable energy sources. Real estate developers must do better at providing low-income housing. Food corporations must rethink their models to reduce dependence on animal protein. And corporations of all types, and at all levels, must pay living wages to their employees, and end racial, ethnic, and gender discrimination in their hiring, promotion, and in how they market their products.
Shareholder primacy may have contributed to the high returns enjoyed by investors in corporate equities over the last few decades. But thirteen years ago, a pell-mell race by financial corporations in the US and Europe to maximize shareholder value by trading in sub-prime mortgages nearly plunged the world-wide economy into a deep depression. While corporations must find ways to earn profits, they cannot continue to do this at the expense of the larger society. The latest BRT statement on corporate purpose will not, by itself, cause corporations to behave in the public interest. But I believe that rhetoric matters because it exposes the signatories of the BRT statement to shame if they fail to follow through. At the very least, it helps to remove an excuse they have had over the last few decades for behaving badly.