Is shareholder capitalism dying?
Hundreds of US’s biggest public companies have shed their shareholder-first ideology
BlackRock founder Larry Fink said companies must ‘demonstrate their commitment to the countries, regions, and communities where they operate’ and that ‘purpose is not the sole pursuit of profits’. Photograph: Michael Cohen/Getty Images
For decades, American companies took it as read that their purpose was simple: to make as much money as possible for their shareholders.
That has now changed, with hundreds of America’s biggest public companies recently scrapping their shareholder-first ideology. Is change afoot in corporate America? Since 1997, the Business Roundtable, a business group representing almost 200 American corporations, has said that “maximising value for shareholders” is the “sole purpose of a corporation”.
The notion of shareholder value was in vogue in corporate America long before that 1997 statement – as far back as 1970, Nobel economist Milton Friedman argued that the “one and only responsibility of business” is to “engage in activities designed to increase its profits” – and many company boards have seen it as their legal duty to do just that, thereby benefiting the shareholders who own the company. But shareholder value has now been replaced by stakeholder value.
A statement from the Business Roundtable last month, signed by 181 chief executive officers including figures such as Apple’s Tim Cook, Amazon’s Jeff Bezos, JPMorgan’s Jamie Dimon and David Solomon of Goldman Sachs, emphasised a company’s purpose must be to serve all its stakeholders – with customers, employees, suppliers, and the community in which the company works now getting equal billing with shareholders.
The new wording doesn’t reflect a sudden outbreak of CEO altruism but a recognition, said Dimon, that companies invest in their workers and communities because it “is the only way to be successful over the long term”.
The change had been coming; Dimon’s warning that the American dream is “alive, but fraying” is just the latest in a series of statements from the JPMorgan man arguing for a more inclusive form of capitalism. Such sentiments have become increasingly mainstream.
Another signatory, billionaire BlackRock founder Larry Fink, has been stressing corporations’ societal obligations for some time, saying in his 2019 shareholder letter that companies must “demonstrate their commitment to the countries, regions, and communities where they operate” and that “purpose is not the sole pursuit of profits”.
Earlier this year another billionaire, hedge fund manager Ray Dalio, warned that US inequality is a national emergency which represented an “existential threat” to the US due to the risk of left- and right-wing populism and even “revolutions of one sort or another”. Another hedge fund manager, Oaktree Capital founder Howard Marks, has also written about inequality-fuelled populism and the “rising tide of anti-capitalism”.
Embracing a more compassionate vision of capitalism makes political sense for CEOs concerned by the prospect of curbs on big business from the left of the Democratic party. And it’s surely no co-incidence that the Roundtable statement echoes the wording of Democrat presidential hopeful Elizabeth Warren’s proposed Accountable Capitalism Act, which calls on corporations to be responsible to all, including “employees, customers, shareholders and the communities in which the company operates”. But politics is not the only concern.
A 2018 Gallup poll found that 80 per cent of those aged 25 to 34 want to work for “engaged companies”.
CEOs, who have traditionally shied away from socio-political debates, have become increasingly prepared to endorse causes popular with both staff and customers. Microsoft, Facebook and Google have each pledged hundreds of millions in order to tackle housing shortages in Seattle and San Francisco.
Companies such as Google, Ebay, Twitter, Coca-Cola and Qantas called for Yes votes ahead of same-sex marriage votes in Ireland and Australia, while a whole host of tech giants protested against Donald Trump’s attempted travel ban on people from several mainly Muslim countries. The Roundtable statement, then, didn’t come out of the blue. Does it matter?
Critics of the concept of shareholder value say the focus on rising share prices has encouraged short-term thinking and underinvestment, ultimately hurting both long-term investors and the wider economy.
Even Jack Welch, the former head of General Electric, who many saw as the embodiment of the concept, dismissed shareholder value as the “dumbest idea in the world” in 2009, saying higher stock prices must be “a result, not a strategy”. Bill McNab, former CEO of index fund giant Vanguard, says the official shift in thinking will allow boards to focus on creating long-term value that would benefit everyone, including investors.
CEOs to benefit?
Less attention has been paid to another group who could benefit from any change in focus – CEOs and company management in general. Management can come under intense scrutiny when share prices are in the doldrums, especially from activist investors who buy company stock and demand changes in the way the company is run.
Activist arguments can be boiled down to this: you (executives) work for us (the shareholders) and you’re not doing your job very well, judging by the share price.
As Bloomberg’s Matt Levine points out, there is now “no single measuring stick to decide what to prioritise”. Management can respond to disgruntled shareholders by stressing their long-term vision and emphasising their obligations to customers, employees, suppliers and so on. Lower profits may not be a signal managers are performing poorly; rather, they can be viewed as evidence they’re taking care of people other than greedy short-term shareholders.
As Levine puts it: “When an association of big public-company CEOs gets together and declares that corporations should serve the community, take care of the environment, and be responsible to employees and customers, not just shareholders, that might be because the CEOs have thought it over and decided that employees and the environment are getting a raw deal, but it is also possible that the CEOs have thought it over and decided that shareholders are annoying” – a humorous take that likely contains more than a little truth.
Of course, it’s too early to say if genuine change is afoot. Former US treasury secretary Larry Summers is worried the Roundtable’s new-found emphasis on stakeholders “is in part a strategy for holding off necessary tax and regulatory reform”. Money manager and Bloomberg columnist Barry Ritholtz is also taking a wait-and-see approach.
The 181 signatories to the Roundtable memo is a “Who’s Who of corporate behaviour that has burdened and disadvantaged the very stakeholders they will now champion”, says Ritholtz. They include Visa, Mastercard and American Express, who Ritholtz called on to to simplify the “incomprehensible small print” in cardholder agreements and to “spell out in clear language the terms and penalties for late payment”.
They include brokers and insurers that have been “zealous opponents of the fiduciary rule” that puts clients’ interests ahead of their own. They include Coca Cola and Pepsi, who “should acknowledge and warn customers of the consequences of consuming too much of their products, and accept the same kinds of taxes and health warnings now affixed to cigarettes”.
Other critics make the same point, noting that many signatories have terrible reputations for customer service and have sought to prevent lowering barriers to entry in their oligopolistic industries.
The Roundtable statement is encouraging, says Ritholtz, but “the proof will be in the follow through and the actual actions” of American companies.