August 25, 2020 by
Dan Mitchell @ International Liberty
Milton Friedman was one of the the 20th century’s greatest defenders of capitalism and individual freedom. He had marvelous insights on issues such as
fiscal policy,
Sweden,
tax competition, and
other people’s money, but one of my favorite Friedman quotes is about the role of business.
This should be non-controversial, but
we need to remember that big companies are
not necessarily strong proponents of free enterprise. Yes, they like lower tax rates and a few other market-oriented policies, but many large firms are
more than happy to
climb into bed with big government so they can
gain special advantage from subsidies, handouts, bailouts, and protectionism. So we shouldn’t be surprised to learn that the trade association for corporate CEOs of
has disavowed Friedman.
Business Roundtable is modernizing its principles on the
role of a corporation. Since 1978, Business Roundtable has periodically
issued Principles of Corporate Governance that include language on the
purpose of a corporation. Each version of that document issued since
1997
has stated that corporations exist principally to serve their
shareholders. …We therefore provide the following Statement on the
Purpose of a Corporation, which supersedes previous Business Roundtable
statements and more accurately reflects our commitment… This statement
represents only one element of Business Roundtable’s work to ensure more
inclusive prosperity.
You can read the new language
here. There’s only one pages of text and you’ll notice that it’s a lot of vapid jargon without any measurable commitments. Indeed, the letter is so vague that some observers think it’s irrelevant. In
a column for the
Washington Post,
James Copland of the Manhattan Institute points out that
profit-maximizing companies already consider the interests of so-called
stakeholders.
Critics and
supporters of business alike have characterized the statement as a major
shift away from “shareholder” capitalism toward an alternative
“stakeholder” model pushed by some progressive academics and
policymakers. It isn’t.
The Business Roundtable’s statement
unequivocally states that “the free-market system is the best means of
generating good jobs, a strong and sustainable economy, innovation, a
healthy environment and economic opportunity for all.”
To be sure, it proclaims that each of the chief executives signing on
shares “a fundamental commitment to all of our stakeholders” — including
customers, suppliers, employees and the broader community. But that’s a
truism. No business can long survive without meeting such stakeholders’
needs. …The corporate signatories do not suggest in any way weakening
the fiduciary duties of the boards and managers of ordinary for-profit
shareholder corporations to manage such companies’ affairs for
shareholders’ benefit.
…there is a big difference between saying that a
for-profit shareholder corporation should be sensitive to varying
constituencies’ concerns and saying that its principal purpose is
something different from the traditional view. One needn’t be an expert
in public-choice economics or corporate governance to understand that
politicizing corporate decision-making would be inefficient.
Lucian Bebchuk and
Roberto Tallarita of Harvard Law School, in
a column for the
Wall Street Journal, share some real-world evidence that the CEOs are engaging in empty posturing.
Although the Roundtable described the statement as a
radical departure from shareholder primacy, observers have been debating
whether it signaled a significant shift in how business operates or was
a mere public-relations move. …
We contacted the companies whose CEOs
signed the Business Roundtable statement and asked who was the
highest-level decision maker to
approve the decision. Of the 48 companies that responded, only one said
the decision was approved by the board of directors. …The most
plausible explanation for the lack of board approval is that CEOs didn’t
regard the statement as a commitment to make a major change in how
their companies treat stakeholders. …
a review of the board-approved
corporate governance guidelines of the companies whose CEOs joined the
statement…mostly reflect a clear “shareholder primacy” approach. …The
evidence is clear: Notwithstanding statements to the contrary, corporate
leaders are generally still focused on shareholder value.
I think these two columns are accurate. The vast majority of the CEOs who signed the Business Roundtable’s
letter presumably have no intention of making unprofitable decisions
solely to curry favor with the broader community. That being said, the letter is still bad news because it basically acquiesces to the left’s
misguided view that profits are somehow bad for society. The
Wall Street Journal made this point in an
editorial in defense of the Friedman position.
The mucky-mucks of the Business Roundtable are tweeting
in unison how “proud” they are to have abandoned the corporate purpose
of serving shareholders for the more politically au courant
“stakeholder” model. …media cheerleaders seem especially pleased that
the CEOs have thrown the late, great economist Milton Friedman over the
side.
…The attempt to smear Friedman’s counsel as amoral is false. His point
was that profitable businesses serve the common good better than
executives who spend money on “social responsibility” but preside over
business failure. The second point is Friedman’s warning that CEOs who
put social responsibility above shareholders will find it redounds to
their detriment. They feed the public belief that free markets and
business are “wicked and immoral” and must be curbed by “external
forces,” which typically means politicians.
In
a column for
National Review, Andrew Stuttaford also fears that the letter gives a green light to those who want more regulation by government.
The executives who retool a company’s mission to suit a
particular conception of “social responsibility” are spending
shareholders’ money on a moral agenda… Often repackaged as a demand that
corporations be measured by the extent to which they match arbitrary
and ever-tightening E (environmental), S (social), and G (governance)
standards, it
is now a way of corralling private enterprise without the bother of
legislation. …
the flourishing (and profitable) ecosystem that ESG
investing has created…encompasses consultancies, advocacy organizations,
“chief sustainability officers,” and many, many more rent-seekers
besides. ESG is bad news for investors, but it is not a bad way of
filling the wallets of those that feed off it. …
In effect, therefore,
many companies…will be forced to change the way they do business as they
try to keep up with ever-more-stringent rules set not by democratically
elected legislators but by the unaccountable, the ambitious, the
greedy, and the fanatical.
Speaking of unaccountable and greedy, that’s a good description of
Elizabeth Warren’s legislation to give Washington greater control of major companies. Professor Greg Mankiw of Harvard
opined about this issue last month for the
New York Times.
If you open any standard economics textbook, such as one
of mine, you will be told that a firm’s objective is to maximize profit.
…Given the vast range of economic and political problems the world
faces, this approach is often said to be too narrow....former Vice
President Joseph R. Biden Jr.,…joined in the criticism.
“It’s way past
time we put an end to the era of shareholder capitalism, the idea the
only responsibility a corporation has is with shareholders…
They have a responsibility to their workers, their community, to their
country.” …In forsaking a mandate of narrow self-interest for one of
broad social welfare, this approach to corporate management sounds
noble, perhaps even obvious. But it is more problematic under closer
scrutiny. …this approach to corporate management expects executives to
be broadly competent social planners rather than narrowly focused profit
maximizers.
It’s unlikely that corporate executives, with their
business training and limited experience, have the skills to play this
role well. …One lesson of Econ 101 is that the self-interested behavior
of consumers and businesses, directed by market forces and constrained
by competition, can lead to desirable outcomes.
In
an op-ed
earlier this year for the Wall Street Journal, Vivek Ramaswamy opined
that he and his fellow CEOs should not have a special role in
determining economic policy.
‘Stakeholder capitalism” is…the fashionable notion that
companies should serve not only their shareholders, but also other
interests and society at large. …
My main problem with stakeholder
capitalism is that it strengthens the link between democracy and
capitalism at a time when we should instead disentangle one from the
other. …Managers of corporations gain their positions by maximizing
profits and minimizing losses. …But
these business leaders have no special standing to decide whether a
minimum wage for American workers is more important than full
employment, or whether minimizing society’s carbon footprint is more
important than raising prices on consumer goods. …
I have no special
standing to legislate my morals because I am a CEO. I do, however, make
the final decision about our company’s research-and-development budget.
…the reason many corporate executives are speaking up in favor of
stakeholder capitalism is that they think they will gain popularity at a
time when it is unpopular to be perceived as a pure capitalist. …
Some
may argue that companies will be more successful in serving shareholders
over the long run if they also serve societal interests. If that’s
true, then classical capitalism should do the job, since only companies
that serve society will ultimately thrive, and “stakeholder capitalism”
would be superfluous.
But some CEOs can’t resist the temptation. The
Wall Street Journal opined about the social-justice posturing of one of the the CEOs who signed the Business Roundtable’s letter.
BlackRock CEO Larry Fink…has assumed a role as
self-styled conscience of the business world in telling CEOs how to run
their companies. …BlackRock is the world’s largest asset manager, with
some $7.43 trillion in client assets.
He is now threatening to vote
against corporate directors and management if they don’t do what he
says, and he is especially exercised about climate change.
…Corporations in which BlackRock invests will also have to comply with
the rules from a “Sustainability Accounting Standards Board” on issues
such as labor practices and workforce diversity.
…Like his friends at
the Business Roundtable, Mr. Fink is big on “stakeholder” capitalism.
…If he means serving employees, customers, suppliers and communities, he
is merely saying what any successful company already does. But our
guess is that by stakeholders Mr. Fink really means regulators and
politicians. …We can’t help but wonder if Mr. Fink, after a profitable
life in business, is auditioning to be Treasury Secretary.
In
an article
for the Foundation for Economic Education, Professor T. Norman Van Cott
makes the all-important point that successful companies automatically
generate benefits for people other than shareholders.
The marketplace is an arena where buyers and sellers both win. Do buyers and sellers really
care about each other? …I sure am grateful that I don’t have to depend
on the good-heartedness of Florida orange producers to send oranges to
Indiana.
It’s not that the orange producers and I aren’t well-meaning, just
that oranges would not find their way to Indiana if good-heartedness
were the motivation for commerce.
…Microsoft provides a wonderful
example…the shareholder value of Microsoft, as large as it is, surely
pales in comparison to what its customers around the world gain.
…Microsoft has achieved its immense shareholder value not because its
customers, workers, suppliers, and communities are poorer. Indeed,
nothing could be further from the truth. Its stakeholders have been
enriched immeasurably by its pursuit of maximum shareholder value.
Writing for
USA Today, Professor Steve Hanke is
very critical of the Business Roundtable.
…the Business Roundtable launched a major attack
on property rights, the bedrock of capitalism. …the Roundtable, which
represents nearly 200 of America’s blue-chip companies, downgraded
shareholders.
According to the Roundtable, the purpose of a corporation
will no longer be to conduct business with the sole objective of
generating profits for shareholders.
Owners of corporations (read: shareholders) will now just be one of
five “stakeholders”… The Roundtable’s new anti-capitalist mission
statement promises to dilute and muffle shareholders’ voices and further
politicize corporate governance. …
The great Austrian economist Joseph
Schumpeter concluded in his 1942 classic “Capitalism, Socialism and
Democracy” that businessmen would “never put up a fight under the flag
of their own ideals and interest.” …Schumpeter concluded that
businessmen, through their ignorance and cowardice, would assist those
who wished to destroy capitalism.
Megan McArdle also is skeptical. Here’s some of what
she wrote for the
Washington Post.
…business
leaders have no right to do charity on someone else’s dime. You might
admire plumbers who donate fixtures to needy families, but not if they
donated the fixtures you’d purchased for your own bathroom. That is
essentially what stakeholder capitalists are demanding of chief
executives: Take the money and power that shareholders have entrusted to
you and divert those resources to benefit someone else.
…if “stakeholder capitalism” means anything, it must mean companies
doing things that make shareholders at least somewhat worse off.
…Corporate social responsibility…can be even less accountable than good
old-fashioned shareholder capitalism. Money is relatively easy to
measure: Shareholders have more of it at the end of the quarter, or they
don’t, and either way you know how the boss is doing.
But if the chief
executive pours that cash into better-upholstered offices, more-generous
fringe benefits and a slew of charitable causes, who’s to say whether
the company’s goals are being met? …As Harvard health-care economist
Amitabh Chandra noted on Twitter after the Business Roundtable’s
announcement, “appealing to an amorphous ‘social mission’ ” has allowed
nonprofit hospitals “to foil regulators, acquire their competition, and
increase market power.” Beware of any proposal that might make the rest
of the economy look more like the health-care sector.
Robert Samuelson’s
column in the
Washington Post points out that previous episodes of “corporate social responsibility” did not yield good outcomes.
…we’ve already
been here. In the first decades after World War II, large U.S.
corporations adopted a social and political model very much like the
model recommended by the Roundtable.
There was much talk of
“stakeholders,” not shareholders. Companies were supposed to attend to
their social responsibilities.
“Capitalism” as a term went out of style… The corporate responsibility
fad of the 1950s and 1960s was premised on the belief that…companies
could achieve both their traditional financial goals as well as the less
traditional agenda of providing higher living standards and employment
security. …
What we know with hindsight is that this confidence was a
conceit of a moment in time. …These lessons of history have been either
forgotten or ignored. But they have not gone away. Rather than heap
endless new responsibilities on companies, we’d be better off having
them tend to their traditional tasks — including maximizing profits.
By the way, the problem of big business rejecting capitalism isn’t limited to the CEOs of the Business Roundtable. Writing for
Project Syndicate, Klaus Schwab of the World Economic Forum (the folks who put on the Davos conference for the establishment’s high flyers)
argues for a middle ground between free markets and Chinese-style cronyism.
What kind of capitalism do we want? …we have three models
to choose from. The first is “shareholder capitalism,” embraced by most
Western corporations, which holds that a corporation’s primary goal
should be to maximize its profits.
The second model is “state
capitalism,” which entrusts the government with setting the direction of
the economy, and has risen to prominence in many emerging markets, not
least China.
…the third has the most to recommend it. “Stakeholder capitalism,” a
model I first proposed a half-century ago, positions private
corporations as trustees of society… We should seize this moment…
To
that end, the World Economic Forum is releasing a new “Davos Manifesto,”
which states that companies should pay their fair share of taxes, show
zero tolerance for corruption, uphold human rights throughout their
global supply chains, and advocate for a competitive level playing
field…a new measure of “shared value creation” should include
“environmental, social, and governance” (ESG) goals as a complement to
standard financial metrics. …
Business leaders now have an incredible
opportunity. By giving stakeholder capitalism concrete meaning, they can
move beyond their legal obligations and uphold their duty to society.
Given that per-capita living standards are
much lower in China
than they are in the United States, I’m baffled that Schwab thinks it’s
a good idea to move halfway toward the decrepit Chinese model of
cronyism and
industrial policy. Does he think that people in North America and Western Europe should only be twice as rich as people in China
instead of four-to-six times richer? Let’s wrap up. The president of the Business Roundtable just wrote
a one-year anniversary review of his group’s campaign for so-called stakeholder capitalism.
It’s been a year since 181 CEOs of America’s largest
companies overturned a 22-year-old policy statement that defined a
corporation’s principal purpose as maximizing shareholder return.
…
Companies have held to their commitments. …many Roundtable companies
were making substantial investments in worker training, better wages and
benefits,
and support for struggling communities. They called for increases in
the federal minimum wage and paid family medical leave. …
In recent
weeks, CEOs have made new commitments to promote racial equality and
diversity in their own companies. …Far from undermining shareholders or
capitalism, the many actions major corporations are taking to support
all stakeholders will pay dividends… Business Roundtable CEOs
reject…quick-hit, short-term capitalism. They agree with many of the
nation’s largest investors that the health of both companies and
capitalism depends on investments in all stakeholders.
Sounds very noble and caring, at least for the folks who don’t understand economics. Which is why I almost laughed out loud when I saw
this tweet, which is based on
this article published by the
Atlantic.
The Roundtable is trying to curry favor with statists, but some folks
on the left are smart enough to see that it’s all empty posturing.
So what’s my contribution to this debate? Most of what I would say is captured in the excerpts above. Simply stated, it’s
not a good idea to mix big business with big government. But I will take this opportunity to unveil another one of my theorems.
P.S. Back in 2012,
I criticized the Business Roundtable for embracing tax increases on small businesses, so you can see that the Eleventh Theorem of Government is way overdue.
P.P.S. You can peruse the other ten theorems of government by
clicking here.
