The Purpose of a Corporation – do we applaud yet?

As we covered last time, America’s Business Roundtable has issued a Statement on the Purpose of a Corporation

In the words of the Roundtable’s own press release, the revised statement sets out “modernized principles (which) reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.” Put another way, it is “tremendous news because it is more critical than ever that businesses in the 21st century are focused on generating long-term value for all stakeholders and addressing the challenges we face, which will result in shared prosperity and sustainability for both business and society.”

As I covered last time, I couldn’t quite buy into this level of enthusiasm: at the very least, it seems to be necessary to wait and see. This was a far from uncommon reaction. One of the best expressions of it came from Farhad Manjoo in the New York Times:

  • It’s nice that C.E.O.s have vowed to turn over a new leaf. But their statement lacks any call for greater structural changes in the American economy — changes to how companies are taxed or regulated, or how executives are paid, or how they should be judged.
  • And because a public corporation’s most direct incentives — including the C.E.O.’s pay — remain tied to stock performance, there’s no reason to believe that corporations will voluntarily move away from pleasing shareholders alone, despite the new, high-minded ideals. In fact, the fanfare surrounding the Roundtable’s empty statement could be read as an effort to stave off structural economic reform rather than accelerate it. It’s a way for the C.E.O.s to tell us that they’re on the case, so we don’t have to resort to something unthinkable, like a Warren presidency.
  • If I sound cynical, it’s only because I’m not a complete idiot. In the Trump era, America’s C.E.O.s have become masterful at talking out of both sides of their mouths. They’ll rush to issue virtue-signaling denunciations of the latest outrage from President Trump in order to please their woke, restless customer bases, while on the down low, they’ll champion his tax cuts and regulatory dismantling. And when the president gets too rowdy, they’ll tell him to knock it off over a friendly dinner.

Or even worse, perhaps, a Sanders presidency. Talking of whom, as quoted by the Washington Post:

  • “I’m glad they now seem to recognize that the American people are sick and tired of their corporate greed that is destroying the social fabric of America,” said Sanders. “But we need more than a public relations stunt. We need a concrete plan on how they will bring back American jobs overseas, pay all workers a living wage with good benefits, stop attacking unions and start paying their fair share of taxes.”

The Post also quoted corporate governance professor Charles Elson:

  • “They talk about their great concern for the workers — well they’re the ones who’ve paid themselves so astronomically and created these pay gaps that are so dramatic,” Elson said. “I’d like each of them to volunteer to cut their own salaries by two-thirds and give it back to employees if that’s the way they feel.”

Others, such as the Council of Institutional Investors, saw no reason to feign even token enthusiasm:

  • Accountability to everyone means accountability to no one. (The Roundtable) has articulated its new commitment to stakeholder governance (which actually resurrects an older policy view) while (1) working to diminish shareholder rights; and (2) proposing no new mechanisms to create board and management accountability to any other stakeholder group. Americans depend on strong companies not only as employees and communities, but also as owners, including through pension funds and other retirement holdings. CII supports putting capital to its best use for long-term performance, which includes addressing stakeholder contributions to that objective. It is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value.

But on the other hand, societal objectives don’t just come to pass by government decree – they arise out of the workings of, well, society, and if it’s evident that government can’t or won’t respond to those objectives, then do we really expect companies to stand on the sidelines in feigned passivity?

I’ll end this brief survey by quoting the Harvard Business Review:

  • What the impact of this one letter from the Business Roundtable will be is hard to know. On the one hand, it might be a cynical response to election-year rhetoric and policy proposals that worry the member companies of this powerful lobbying group. On the other hand, it may reflect a deeper response of national leaders to the falling social mobility, toxic polarization, and reduced trust in traditional institutions that we are grappling with today. Societal shifts seldom come suddenly. They often manifest as the gradual erosion of support for one worldview and the rise in support of another. And with this letter, we may be seeing incremental steps in that direction.

I suppose those last two sentences are intended to be optimistic, but it’s probably correct that to foresee “gradual” and “incremental” change is about as strong as the optimism can get. In that case though, we can expect a lot more unchecked damage in the short term…

The opinions expressed are solely those of the author

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