the Business Roundtable statement goes in the right direction

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The 2019 Business Roundtable statement was a welcome departure from the stance taken by the nation’s top business CEOs in 1997, when the BRT pledged to prioritize achieving the highest returns for their shareholders. This in itself will not induce companies to behave in the public interest, but it does help eliminate an excuse they have had over the past decades for behaving badly.


Two tumultuous years have passed since the CEOs of 184 of America’s largest companies signed the last declaration of the Business Roundtable on the object of the company. The new statement grabbed the headlines at the time, as BRT executives committed to running their companies in a way that served the interests of all of their stakeholders. This was a sharp departure from the position taken by BRT in 1997, when the country’s most prominent CEOs is committed to prioritizing to obtain the best returns for their shareholders.

The contrast between these two BRT statements highlights a debate over the appropriate role of business that has taken various forms and has upset CEOs and corporate directors for at least seven or eight decades. Broadly speaking, the public view towards corporations in the post-WWII period until at least the 1970s was that large corporations have responsibilities to the public as well as to their shareholders. . Large American corporations were expected to lead the world in developing new technologies, providing safe and useful products and services to consumers, good, stable jobs and benefits for their workers, and reliable tax revenues for consumers. communities where they operate, while keeping skies and waterways pollution-free.

Not all companies have succeeded in doing this, but the idea that they should enjoyed strong public support. CEOs of that time also generally supported the idea that a broad social agenda was the appropriate goal of publicly traded companies – after all, they wanted to be seen as civic leaders, as well as successful businessmen. American industrial might had been essential in winning the war and was seen as equally essential in fueling the long period of post-war economic growth, both in the country and in the developed and developing world.

This attitude began to change in the 1970s, when economic growth slowed, Japanese and German companies began to make better products at lower prices, inflation became a problem and the stock market suffered a long and slow slump. In the 1980s, interest rates skyrocketed, so lower risk bonds provided investors with higher returns than corporate stocks. Financial markets rushed for higher returns and grabbed a new tool, the hostile takeover bid, to try to extract higher returns from companies. For the new generation of financial buccaneers (CEOs quickly called them “looters”), financial returns mattered most, and they didn’t hesitate to shut down factories, outsource production, cut expenses. of R&D and to divert assets from employee pension funds to earn higher profits and drive up company stock prices.

The hostile takeovers and the hyper-emphasis on shareholder returns have been supported by two parallel academic schools of thought: Financial theorists proclaimed in the 1970s that financial markets were “efficient” and that, therefore, the trading price of a stock was the best estimate of its true underlying value. And corporate law scholars have embraced the idea that corporate executives should be viewed as “agents” of shareholders, with shareholders being viewed as the “agents” of shareholders. real “owners” companies. Thus, according to legal experts, company directors have a duty of loyalty to shareholders, and this duty should not be diluted by concern for other stakeholders. In addition, this obligation required officers and directors to try to maximize the value of the stock at all times. Economist Milton Friedman paved the way for this set of ideas in his 1970 book New York Times trial “The social responsibility of the company is to increase its profits. “In the 1980s, business theorists and academics in corporate law began to actively defend this philosophy of corporate management, which has been referred to as ‘shareholder primacy’.

Initially, the Business Roundtable did not subscribe to this corporate vision. But during the 1980s and in the early 1990s, its various statements on the purpose of corporations shifted towards shareholder primacy, and in 1997, the BRT’s position was unequivocal: its official statement on the purpose of corporations issued that year – It said: management and boards of directors is up to the shareholders of the company. The interests of other stakeholders are relevant as derivatives of the duty to shareholders.

BRT’s new statement in 2019 was the culmination of years of behind-the-scenes business meetings and negotiations at high-level venues like Davos, Switzerland, as well as increasing public pressure for business leaders are mobilizing and taking action. their part to respond to a series of worsening social problems. It is important to note that large institutional investors, who had become the major shareholders of companies, began to worry about the global consequences of major social and climate issues, in particular global warming, and the growing gap between income and wealth of developed countries.

“The rhetoric is important because it exposes the signatories of the BRT declaration to shame if they do not follow through.”

BRT’s new statement couldn’t have come at a better time: the Covid-19 pandemic in 2020 highlighted the huge inequalities between the wealthy and working classes, with the former actually getting richer in 2020, while front line workers in hospitals, clinics, meat packing plants, warehouses, grocery stores and delivery trucks struggled to pay their rent and often had no health insurance or even paid sick leave, when they fell with Covid – which they did, in large numbers. Lean supply chain models that increased profits in the corporate sector failed as factories, trains and freighters were shut down around the world. Large parts of the corporate sector, it became clear, had operated on fumes. After removing the slack in previous years to increase profitability, many companies found themselves lacking resilience.

The damage caused by the pandemic has been extremely unevenly distributed. The travel, entertainment and hospitality and department store sectors – the main employers of low-skilled workers – have been wiped out, for example, while a few tech companies, such as Zoom, Netflix, Apple and Microsoft, which typically does not hire large numbers of low-skilled workers, have seen their businesses take off. Executives of tech companies, most of whom were successful, were more likely to be paid in stocks and stock options (this approach to executive compensation was preferred by advocates of shareholder primacy because it is self-binding. – saying top pay for shareholder returns.) So the pandemic has made these executives and investors much richer.

The huge social and economic inequalities in the economy laid bare by the pandemic are, of course, compounded by systemic racism, and this dimension of the problem exploded into the nation’s consciousness when the 9-minute video of the murder of George Floyd at the knee of a Minneapolis cop has gone viral on the internet.

Meanwhile, massive heat waves, forest fires and flooding around the world are making global warming a woefully urgent problem.

Big business, of course, is not the only one responsible for all of these problems, but they are hardly innocent. And, no matter who is at fault, these social problems cannot be fixed without meaningful corporate engagement. Pharmaceutical companies (with some financial backing and guidance from government agencies), for example, have almost miraculously succeeded in mobilizing resources to develop, test, manufacture and distribute entirely new vaccines in 2020 to fight the coronavirus. State agencies in China and Russia also developed vaccines, but when those vaccines ran into problems, there was no alternative. In the United States and Europe, meanwhile, competition between pharmaceutical companies helped ensure the vaccine’s success, and private sector manufacturing and distribution know-how was essential to overcome 5 billion hits in arms around the world within 20 months of the start of the pandemic.

Other businesses must also be part of the solutions to other social problems. Oil companies, for example, need to move away from carbon intensive activities. Utilities need to restructure to use renewable energy sources. Real estate developers need to do better to provide low-rental housing. Food companies need to rethink their models to reduce dependence on animal protein. And businesses of all types, and at all levels, must pay their workers decent wages and end racial, ethnic and gender discrimination in their hiring, promotion, and the way they market their products.

Shareholder primacy may have contributed to the high returns that corporate equity investors have enjoyed over the past decades. But thirteen years ago, a jumble of financial firms in the United States and Europe to maximize shareholder value by negotiating subprime mortgages nearly plunged the world economy into a deep depression. While businesses must find ways to generate profit, they cannot continue to do so at the expense of society as a whole. BRT’s latest statement on corporate purpose alone will not encourage companies to behave in the public interest. But I believe the rhetoric is important because it exposes the signatories of the BRT declaration to shame if they don’t follow through. At the very least, it helps eliminate an excuse they’ve had over the past few decades for behaving badly.


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