It was enough to make Milton Friedman, the patron saint of laissez-faire capitalism, roll over in his grave.
Breaking with decades of American business dogma, nearly 200 of the nation’s top chief executives recently declared that maximizing shareholder profits is NOT the sole or primary purpose of a corporation.
In a statement whose signers included Tim Cook of Apple and Jamie Dimon of JPMorgan Chase, the Business Roundtable said a company’s purpose is to benefit “all stakeholders” — customers, employees, communities, and the environment.
As bland as it sounded, the statement made nationwide headlines. It was the first time that the Business Roundtable, an association made up of CEOs of the nation’s biggest corporations, had departed from its credo that businesses exist primarily to serve shareholders.
But did it reflect a real shift, or was it merely lip service meant to placate critics?
A new survey of chief executives and chief financial officers at large publicly held companies may shed some light. Conducted by the Stanford Corporate Governance Research Initiative and completed just weeks before the new declaration, the survey focused specifically on environmental, social, and governance, or ESG, issues.
In the survey, the overwhelming majority of CEOs and CFOs supported a corporate commitment to social and environmental concerns. Of more than 200 who took part, 89% said it was important to incorporate them into business planning. Some 77% said they did not believe that shareholder interests were significantly more important than stakeholder interests.
At the same time, the survey suggests that top executives don’t see much upside in doing more than they are already.
Almost all of the executives said they were either “satisfied” or “very satisfied” with what their companies were already doing. Only 43% thought their investor base cared about stakeholder interests. Some 37% thought addressing those issues would raise both short-term and long-term costs. Only 12% thought the short-term costs would eventually generate increases in long-term value.
David F. Larcker, the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business and director of the Corporate Governance Research Initiative, is skeptical that a new era is at hand.
“The U.S. has focused on shareholder primacy, and much of the law has been structured around that,” he notes. “I take these CEOs at face value that they want to do the right thing. But a lot of these efforts require long-term investments, and they can be expensive. Let’s say you do these things, but it costs shareholders and you get sued for violating your fiduciary responsibility. It’s easy to talk about, but are you willing to put money behind it? We’ll see.”
Larcker agrees that American companies are under growing pressure to demonstrate social responsibility. Investors now pour billions of dollars into mutual funds that focus on ESG investing, and a growing number of independent watchdog groups evaluate companies on issues ranging from carbon footprints to the use of sweatshop labor. At some tech companies, employees have publicly protested contracts with military or immigration enforcement agencies.
But Larcker says companies will continue to struggle with these conflicting goals — serving shareholders vs. serving stakeholders — until there’s a broader social and political consensus.
European companies have long been much more focused on stakeholder issues, mainly because public attitudes in Europe are less fixated on the primacy of profits. The question now, Larcker says, is whether the U.S. consensus is shifting.
“This is something that society needs to decide, a choice that the country and shareholders need to make collectively,” he says. “The rest of the world is very stakeholder-oriented, and the U.S. is kind of an outlier. We’re in a transitional phase. People are evolving, saying maybe we have to rethink some of our ideas.”