The document specifically rejected the previous bedrock principle that corporations exist principally to serve their shareholders, committing to such matters as investing in employees, supporting communities, and delivering value for all stakeholders. With With 200 “who’s who”-level signatories including the heads of Apple, Amazon and JP Morgan Chase, the initiative struck the New York Times as being sufficiently important that it occupied the lead place on its website for several hours. However, I found myself in line with one commentator’s reaction: “What I see are well-meaning activities that are virtuous side hustles, while key activities of their business are relatively undisturbed … Many of the companies are focused on doing more good but less attentive to doing less harm.”
I went on:
- And it pretty much has to be that way, if those companies are to continue operating at all. Amazon for example is environmentally unfriendly by its very nature, follows a business model that depends in large part on low-wage workers, and has generated an obscene amount of wealth and power for its leader, among other things. No doubt it can find ways to sprinkle more virtue as it goes along, but the hole may be so deep that it can never climb out. So it’s fair to question what form of commitment is actually represented by Jeff Bezos’s signature on the document.
Well, now The Atlantic gives us the following:
- The Wharton management professor Tyler Wry has been compiling data on the signatories’ behavior since. “We were interested in whether these statements were worth the paper they were printed on, or just symbolic,” he told me recently. “When COVID hit, it was a natural experiment and a chance to see if companies were living up to their word.”
- The results have startled him. As COVID-19 spread in March and April, did signers give less of their capital to shareholders (via dividends and stock buybacks)? No. On average, signers actually paid out 20 percent more of their capital than similar companies that did not sign the statement. Then, as the coronavirus swept the country, did they lay off fewer workers? On the contrary, in the first four weeks of the crisis, Wry found, signers were almost 20 percent more prone to announce layoffs or furloughs. Signers were less likely to donate to relief efforts, less likely to offer customer discounts, and less likely to shift production to pandemic-related goods. “Signing this statement had zero positive effect,” said Wry. Why, though, would it produce a negative effect?
- Wry told me he has yet to nail down a causal explanation. (His first theory—that signing the statement drew counterpressure from institutional investors—found no supporting evidence.) But he said his findings are not inconsistent with psychological explanations. Behavioral psychologists have observed an effect they call “moral self-licensing”: If people are allowed to make a token gesture of moral behavior—or simply imagine they’ve done something good—they then feel freer to do something morally dubious, because they’ve reassured themselves that they’re on the side of the angels.
- And therein lies the danger of tokenistic statements. They carry little risk of fooling the public—and a lot of risk of fooling the people who issue them. Which may partly explain why a decade of corporate commitments to “expanding diversity” has yielded so little palpable progress. In 2002, there were four Black CEOs atop Fortune 500 companies. Today there are … four.
As I’ve said before, I’m truly not terminally pessimistic about the capacity of corporate reporting to achieve something worthwhile. But to fawn over initiatives like the Business Roundtable’s grand pronouncement, or the plethora of would-be environmental reporting game-changers, is to succumb to dizzy naivete. To build on Wry’s comments above, it’s likely that the ability of profit-generating entities to flourish in the long-term essentially demands that they work against the common good. To return to the example above, Jeff Bezos may be commonly acclaimed as a great visionary and a net “positive” for society, but his astonishing net worth is essentially an accumulation of wealth that would otherwise be far more equitably distributed, with more socially stable results. This leads me to a similar conclusion as that expressed by Binyamin Applebaum:
- There is an air of desperation about the incessant efforts to address these problems by jawboning corporations to be better citizens: the pleading with Facebook to take responsibility for the filth it publishes; the campaigns to convince banks to steal less money from customers; the public shaming of restaurants that refuse to give paid leave to sick employees…
- …there is no sense in waiting for corporations to disarm voluntarily. The rules must be changed, and the process begins at the ballot box.
- Corporations have a valuable role to play in American society, and they contribute primarily by trying to make money…the missing part is the role of government in ensuring those profits do not come at the expense of society.
Of course, financial reporting is only a secondary part of the problem. But those of us who practice IFRS might at least attempt to be more realistic about what financial statements actually depict, and the (at best) mixed virtue of the investing infrastructure they help support…
The opinions expressed are solely those of the author