A sign for Wall Street near the New York Stock Exchange in New York. (Justin Lane/EPA-EFE/Shutterstock)
By Lawrence H. Summers
The Business Roundtable recently announced a major policy change declaring that the purpose of a corporation is not just to serve shareholders (its official position since 1997) but “to create value for all our stakeholders.” At a time of considerable disillusionment with U.S. capitalism, this is a significant statement that could signal meaningful change in the operation of the American economy. Certainly the recognition by leading chief executives that they need to look beyond the narrow metric of their stock price is to be welcomed.
But there are some questions that Business Roundtable members will need to wrestle with going forward. This is crucial, because initiatives of this kind can be not just ineffective but also counterproductive if they weaken the impulse to address problems through government policy.
First, who will watch CEOs going forward? Under what authority do CEOs have the role of declaring the purposes of the corporations as broader than just shareholders, when they were appointed by boards of directors representing shareholders? It’s legendary that whenever you serve multiple masters, you serve none. With shareholders disempowered and no other form of vigilance empowered, how will the risk that stakeholder capitalism becomes an agenda of CEO empowerment be avoided?
Second, will the roundtable act on its professed principles? For example, I have no idea whether recent grievances against General Electric, Boeing or Johnson & Johnson are warranted, but if they are valid, they represent blatant violations of the roundtable’s principles. Will companies or CEOs ever be forced to leave the Business Roundtable? How will this be adjudicated?
Third, while the statement references communities, consumers and customers, what role does the United States have as a stakeholder for roundtable companies? Are roundtable companies that act according to the group’s principles supposed to be indifferent between locating new plants in the United States and other countries? What obligation are roundtable companies now under not to subvert American democracy with campaign contributions or extensive lobbying operations? What is their obligation to speak out against presidential words or deeds that undermine the United States’ standing in the world or offend core values of their employees or customers?
Fourth, is it as clear as the Business Roundtable seems to assume that standing up for stakeholders is the right thing to do in a dynamic economy? Consider, for example, a firm debating whether to relocate some or all of its operations out of super-prosperous, fully employed Silicon Valley to a disadvantaged area to reduce labor costs. On “shareholder” grounds, this would likely be desirable. Its employee stakeholders would likely object. Yet I would argue that broad American egalitarian values would be well-served by the move. We generally celebrate disruptive innovation such as digital photography, but it often comes at the expense of some employees and customers with traditional skills and tastes. How are stakeholder capitalists supposed to decide about pursuing disruptive innovation?
Fifth, what role does the roundtable imagine for public policy? The idea that companies should be run for the benefit of stakeholders is a powerful one. But for it to work, companies that practice stakeholder capitalism must be protected by law from excessively ruthless competition from companies run only in shareholders’ interests.
If the Business Roundtable is serious about stakeholder capitalism, and if responsible firms are to flourish and spread their benefits, it will not just decree principles according to which its firms will operate but will also push for laws and regulations that support firms’ ability to stand up for their stakeholders. These might include minimum-wage and benefits requirements and broader mandates to protect companies that want to do right by their workers from those competing companies that are ruthlessly pursuing shareholder interests. Or they might include rigorous restrictions on advertising and promotion practices, so firms who are honest and transparent are not placed at a competitive disadvantage. Or universally high capital standards on financial institutions, so that imprudent willingness to take on risk cannot be a competitive advantage.
Most CEOs want to do the right thing by all their stakeholders, and most shareholders want to support them in being responsible. But in a world of fierce competition, good intentions are not enough. All companies do right some of the time. Some companies do right all of the time. But even the Business Roundtable should know that all companies do not do right all of the time. That is why a serious Business Roundtable program in support of stakeholder capitalism will include legislation and regulation.
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