A few weeks ago, America’s corporate leaders downgraded “shareholder primacy” as the raison d’etre for corporations, and since then social change hopefuls have gone potty about it. Signed by nearly 200 CEOs, the statement of purpose of a corporation is being shared with hopes of how it marks the beginning of a new era. But all this hopey-changey talk masks serious realities that aren’t being talked about.
This isn’t the first time CEOs have denied shareholder primacy. Back in 1981, the Business Roundtable said corporations’ “importance to the well-being and quality of life of the average person has created perceptions and expectations that go far beyond what many considered their historic purpose, which was the creation of goods and services at a profit.”
It added that companies ought to “balance shareholder’s expectations of maximum return” with “legitimate concerns of other constituencies” – constituencies being community, employees etc. But by 1997, shareholder primacy came back to reign supreme at Business Roundtable statements of purpose and remained supreme until a few week ago.
This switch-on-switch-off isn’t the only reason why it’s too early to get excited about the latest statement.
The statement has been made by Business Roundtable, which is a non-profit body of CEOs of leading American companies. Unlike the U.S. Chamber of Commerce, which represents actual businesses, Business Roundtable only represents the CEOs, who are only agents of the shareholders. If shareholders signed a document saying that shareholder value isn’t the end all be all of business, then that would be the real meat. But that’s not the case here.
Granted that this progressive thinking by American’s CEOs was preceded by Larry Fink’s 2018 letter to the CEOs in which he advised them to respect society’s demand from companies to serve a social purpose. But while Larry’s BlackRock owns about $6 trillion in assets in some of these American companies, he is not the only shareholder. Nor are his sentiments shared by business owners. Already, the Council of Institutional Investors, which is an association of pension funds, endowments and foundations in the US reportedly said it “respectfully disagrees” with Business Roundtable’s statement.
The society doesn’t hire CEOs; shareholders do, and they are the ones who approve/disapprove their remuneration. Plus, when CEOs’ remuneration normally includes stock options (at least in the developed world), then which CEO wouldn’t like to increase shareholder value.
In a competitive, globalized world, different rules of engagement don’t work. When it will come to trade-offs, will the CEOs serve their paymaster or the society or resign in protest, especially when it’s easier to quantify the value of money, than social, environmental and other values. Until such time new sustainable technology becomes cheap, and global economy as we know it fully transforms, change for businesses will come at the cost of profits, and for consumer it will be at the cost of potential savings.
It’s worth nothing that ‘delivering value to customers’ is still the first item on Business Roundtable’s statement of purpose; community and environment fourth on the list and shareholder value fifth (and last). That doesn’t bode well in the context of climate change.
While there is faint hope that notions like “sustainable development”, “conscious capitalism”, “compassionate capitalism”, have been making rounds for the last ten years. Some also take cue from the fact various studies and surveys by the likes of Harvard University and Gallup poll point to fading support for capitalism as we know it, smack in the heartland of profit-maximization, America, a country which once believed in Milton Friedman’s argument that for a company to pursue anything other than (legal) profit would be “pure and unadulterated socialism”.
But is all this converting into consumer choices at the same pace? Nay! Ethical or sustainable consumerism is still far from being prevalent. It’s still alternate, despite being into conceptual existence since at least the 70s. This means ‘delivering value to consumers’ will come at the cost of climate, and communities.
For climate change and social change activists, the Business Roundtable’s recent statement is a false flag. They have gone back on their word before, and unless they begin to walk the talk, by not only correcting their own actions (such as undoing oligopolies of which many signatories are a part of) but also facilitating change by funding academic research to develop theory and models on how to precisely balance the apparently competing goals, these statements may well be a marketing fad.
And unless consumers en masse change their consumption choices and pattern, social and environment change will be difficult to get by.