Statistic: Only seven of the 188 members of the Business Roundtable refused to sign the “Statement on the Purpose of a Corporation” issued on August 19, 2019.
To put it simply, the members of the Business Roundtable, which are the CEOs of many of this country’s largest and most important companies, signed the above-mentioned statement saying that the duty of a corporation is no longer to shareholders alone, but to all stakeholders. On the surface this acknowledgement seems correct and fair, but further examination has led me to believe that this statement is wrong and will fail to accomplish its objective of allowing the free-market system to benefit all participants, including communities and the environment.
“Show me the incentives and I will show you the outcome.” This quote by Charlie Munger emphasizes the influence incentives have on human actions. Many of the negative outcomes created by the U.S. and global economy over the last 50 years, income inequality, environmental destruction, and corporate fraud are the result of the short-term thinking and the incentive structures of investors and corporate management. Investors have increasingly shortened their investment time horizon[1] and CEO compensation has become increasingly based on stock performance rather than operational performance[2]. The average tenure of a S&P 500 CEO continues to decline. In a Duke University study from 2006, 78% of executives of public companies said that they would sacrifice long-term economic value for a short-term lift in share price[3]. 78% OF EXECUTIVES! THAT’S INSANE! Both investors and corporate managers are not only making decisions that may be beneficial in the short-term and harmful in the long-term, but they prefer these actions!
An orientation towards longer-term thinking will solve many of the issues that the Business Roundtable statement is trying to solve for. Costco has been a tremendously successful company that focuses on fair compensation for employees[4] because the company knows that happy employees lead to higher customer satisfaction and better corporate performance. Tesla is on a mission to improve the environment by proving to customers that electric vehicles provide a superior driving experience to combustion engine vehicles, and at the same time are better for the environment. Consumer tastes are changing and now want products that are healthier, organic, and are produced in a sustainable manner. The companies that can meet consumer needs, Whole Foods, All Birds, and Sir Kensington for example, have all be wildly successful.
The trouble with the new Business Roundtable statement of purpose is that it is impossible to measure whether a corporate executive made the right decision. Take for instance the decision by Charles Schwab to move its headquarters from San Francisco to the Dallas-Forth Worth metroplex. The decision is better for its customers and shareholders because of the tax incentives and lower expenses. But the decision to leave San Francisco is harmful to the community and possibly its employees that don’t want to move. The move could also be seen as beneficial to employees because it would allow them to live in an area that has more affordable housing and a cheaper cost of living.
When looking at the issues of corporate America today, people tend to see Milton Friedman’s essay “The Social Responsibility of Business is to Increase its Profits” as the genesis of these issues. Critics of capitalism focus in on the sentence
“That responsibility is to conduct the business in accordance with their [corporate executives] desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.”
The phrase “as much money as possible” conjures up the “Greed is Good” scene from the movie Wall Street. I think that sentence is misinterpreted by some as make as much money as possible as quickly as possible, by any legal means necessary. But I think that the sentence is meant to be read as make as much money as possible over the long-term. The best way to do that is to develop business practices that are sustainable and create value for all stakeholders.
Long-term value generation is not evil but rather the only means we have to improve life for all stakeholders. Its is a feature, not a bug, of capitalism that some participants are hurt and end up worse off. But it is because of capitalism and that the standard of living has increased and people are better off today than they were a generation ago.
Making decision that benefit the shareholder for the
long-term can solve the issues the Business Roundtable is trying to address.
But it will take focus and realigning incentives to solve these issues.
[1] https://topforeignstocks.com/2017/10/01/average-stock-holding-period-on-nyse-1929-to-2016/
[2] https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-quick-guide-17-ceo-compensation-data.pdf
[3] https://www.nytimes.com/2019/12/21/opinion/sunday/capitalism-sanders-warren.html
[4] http://mastersinvest.com/newblog/2019/7/5/learning-from-costcos-jim-sinegal
The views expressed are my own. They have not been reviewed or approved by my employer. Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. Please read my disclosure page.
