Long-standing shareholder model has been bedrock of capitalism
By Jacqueline Mozrall
BridgeTower Media Newswires
This past August, The Business Roundtable, consisting of nearly 200 top U.S. CEOs, banded together to issue a statement redefining the “purpose of a corporation.” In doing so, they had no idea how much their statement might be put to the test just over six months later.
In essence, their statement stamped a collective commitment to serving all the stakeholders of their businesses, including employees, suppliers, communities, the environment, creditors and investors. This stakeholder model challenges the basic idea of “shareholder primacy,” the notion that the sole purpose of a corporation is to maximize profits to shareholders. The long-standing dominance of a shareholder model, simplistic in its goal to maximize profits for its shareholders, has been the bedrock of capitalism and corporate success relying on business processes, financial structures, and measurements primarily built around this goal.
Critics of the Roundtable were quick to cast shade on their statement, looking for specifics on what actionable measures these companies would take to bring their shared sentiment to life.
Proponents of the shareholder model say it has worked for decades, and in the end, if shareholders are kept happy, that is all that matters. Yet has it? Lynn A. Stout, a professor at Cornell School of Law, wrote about “The Problem of Corporate Purpose” back in 2012 when the number of publicly traded companies dropped from 8,823 in 1997 to 5,401 in 2009. More recently, as of 2018, it dipped further, below 4,400. She shares, “The idea that public corporations are run well when they are run to maximize share price is a myth, and a dangerous myth at that.”
Andrew Winston, with the Harvard Business Review, dives into the concern with a shareholder model when he questions, “Is the Business Roundtable Statement Just Empty Rhetoric?” He expands on this by describing how focusing on quarterly profits for shareholders creates shortsightedness that benefits investors today at the cost of investing to build long-term value and sustainable businesses. In some cases, there are even unethical consequences that too often make the news.
Although The Business Roundtable may not have established much more than a credo, there is clearly a movement within organizations like Certified B Corporations that are focused on stakeholders, and “a more inclusive and sustainable economy.” Apparently, B-Corps still represent an exclusive group. Currently there are only six certified Rochester-based companies, including Butler/Till Media, GreenSpark Energy and Staach, which has been delivering its sustainable furniture to some of Rochester’s favorite eateries. Although another factor, or “stakeholder,” that may further motivate this shift is the ability to recruit the best talent. Our next generation of graduates is placing a high value on the environment and the public good.
We have all seen a growing emphasis on Corporate Social Responsibility with companies like Trader Joe’s. Whole Foods even includes the environment as one of the stakeholders. But the titans of finance are now jumping in as well, including the world’s largest asset company, Blackrock. In January, The New York Times reported that CEO Larry Fink “would make investment decisions with environmental sustainability as a core goal.” Although this perhaps was motivated by growing protests of Blackrock lagging its competitors, this swiftly put Blackrock in the lead on such issues, even if it will be challenging to divest all non-sustainable investments.
Now, with our response to COVID-19, companies have been triggered to give more attention to stakeholder interest. Perhaps instilled in their core values, or as a matter of survival, companies like Hickey Freeman are pivoting to make masks, and local distilleries are making hand sanitizer. In some cases, the response is to sell in order to meet an urgent need, and in others to give away free product. But in either case, it may do little in improving their bottom lines in the short term. Rather, it helps its immediate stakeholders, such as employees and suppliers, while building goodwill with future customers.
There are other examples, such as General Motors being forced to make ventilators under the Defense Production Act. Companies like GM may already have the best intentions to retool their production but need an added push to respond as quickly as the emergency demand requires.
Perhaps the urgency of a pandemic and the opportunities it presents are unique circumstances to focus more on stakeholder needs, even if it’s self-serving. However, without such an occasion, perhaps we need more tools or motivations for companies to choose the promise of sustainable and longer-term outcomes for its stakeholders.
Legally, corporate boards are free to determine whatever goals are important to them, and typically these are dominated by driving earnings for shareholders. This puts more of a burden on corporate citizenship and values-driven leadership, requiring strong values and the leaders behind them to look after stakeholders. But even when companies make a commitment to such goals, how can they report to shareholders in a measurable and definable way?
In its coverage of The Business Roundtable, The Washington Post suggests companies will need to “offer the same level of rigorous data reporting and transparency they do with financial metrics to other figures, such as employee diversity, gender pay data or greenhouse gas reduction targets” in order to be useful and meaningful. The Post goes on to quote Professor Neil Malhorta, from Stanford’s Center for Social Innovation, who envisions, “Imagine if you had regular financial statements for a company’s impact on the environment, for its labor standards, audited by external sources...”
Access to big data along with development in fields such as accounting information, analytics, supply chain management and human resources development may help provide some answers in building such reporting. Perhaps the B Impact Reports, offered through Certified B Corporations’ website, provide a foreshadowing of what this may look like. Their reports provide individual scores for governance, workers, community and environment.
However, as Sandra Rothenberg, director of Saunders’ Institute for Business, Government, and Society, shares, “The metrics for B-Corps are really time consuming and costly to collect,” adding that the United Nations is working to develop metrics to help assess progress towards their stated sustainability goals.
Nevertheless, as these reporting tools develop and emerge, companies should consider developing the means needed to translate these into values that benefit stakeholders and shareholders alike.
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Jacqueline Mozrall is dean of Saunders College of Business at Rochester Institute of Technology.
