Can We Justify More than Just Profit?

I’ll be honest, I hadn’t heard of the ‘Business Roundtable’ until this week. Despite consisting of some of the most preeminent CEOs from around the world, they don’t bask in the limelight all that often.

Then again, how many lobbying groups ever actively seek attention? Few I’d wager, and those that do probably aren’t all that successful. But I digress.

What I can tell you is that the Roundtable has the most stacked board of directors I’ve ever seen. Alex Gorsky, Marillyn Hewson, Doug McMillon, Dennis Muilenburg, Virginia Rometty…these are just some of the names in their ranks. If you don’t recognise them just have a quick google and you’ll get the picture.

My point is that this group is full of powerful people. And on Monday these powerful people offered up their latest solution…

They issued an open letter titled ‘Statement on the Purpose of a Corporation’. So, right from the get go we can tell this isn’t some mundane agenda. After all, defining purpose in any aspect of life is never easy.

Nevertheless, the Roundtable has come to a consensus. One that has and will take some by surprise.

In their infinite wisdom, 181 of these top CEOs have agreed that profit is no longer the be all and end all. The golden era of the ‘shareholder first’ mandate is apparently over.

Friedman must be rolling in his grave.

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You can’t please everyone

Anyone familiar with the Friedman Doctrine will know that it has been crucial to the prosperity we’ve seen in recent decades. In the words of the man behind the theory himself:

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires…the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation…and his primary responsibility is to them.

Basically, Friedman is saying executives are just like any other employee. Their only goal is to make money for the employers they work for, in this case the shareholders who own the business. Any social responsibility to anyone or anything else is a misuse of resources.

Ever since Friedman publicised this view in a 1970 essay, it has been the domineering school of thought. Shareholder primacy or the Friedman Doctrine is now a staple of modern capitalism.

But, suddenly the Business Roundtable has decided it’s not fit for us anymore. Now they believe we need to balance all interests:

…181 CEOs who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.

I’m sorry, but this has to be some kind of joke.

Let’s start with the obvious flaw first shall we?

As I noted earlier, the Roundtable consists of many top CEOs. These are people who are in charge of some of the biggest businesses in the world. A quick search shows that many of them already have corporate social responsibility (CSR) policies.

So, should we interpret this commitment as a concession that these policies have failed thus far? Why is there a need to suddenly reaffirm this CSR agenda?

I can understand why people have grievances with the Friedman Doctrine. On paper it seems greedy and completely selfish. That’s kind of the point though.

Few (if any) corporations ever manage to successfully implement a holistic CSR policy. There is simply no way you’re going to make everyone happy.

That doesn’t mean CSR is useless, just that it often comes at an opportunity cost. And if that cost comes at the expense of shareholder value then those shareholders have a right to question it.

More often than not, when I look at CSR policies all I see is convoluted PR. It looks and feels like a corporate campaign to improve the perception of a brand. And its success is usually measured by how sincere it is received by the public.

In fact, I’m wondering how sincere the Roundtable is with this open letter.

It’s not like they’ve outlined some grand plan or roadmap to see their vision come to life. They’ve ‘committed’ to a token gesture with no actionable obligations.

If I was to embrace my inner cynic I could even argue that this letter is deceptively malicious. Perhaps they’re trying to pressure or coerce other businesses. After all, many of these businesses have reaped plenty of the reward from prioritising profit and now they’re turning the other cheek?

Sounds like a good way to ensure they always stay on top with the lead they’ve amassed. Which seems pretty anti-competitive to me.

As I said, Friedman will be rolling in his grave.

Bigger fish to fry

Perhaps I and Friedman have got it totally wrong though. Maybe these CEOs can and will find a way to keep all stakeholders happy.

If they can manage that I will gladly eat my words.

Until it actually happens though, as far as I’m concerned this is just lip service. At the end of the day, executives can say all they want, unless they actually follow through though it’s just hot air.

Actions speak louder than words.

In fact, what this ‘action’ from the Roundtable tells me is that they’re worried. This seems like a pre-emptive bid to clean up their act before social pressure explodes.

Particularly in the US we’re seeing this clash of ideals between capitalism and socialism coming to a head in the next election.

Trump in his efforts to push boundaries has pushed left-wing proponents to new extremes. If we see a reactionary swing in 2020 it could result in an anti-capitalist presidency. It may be an outlier, but it certainly is possible.

So, perhaps this open letter is actually just capitalists trying to make a case to save their skin in case of a bad election outcome.

Should it come to that though, even if Friedman himself was resurrected he probably couldn’t save us. I imagine the only out would be to reap what they have sown.

And if that happens, then we all may finally learn why profit is what really matters. Whether you already knew it or not…

Regards,

Ryan Clarkson-Ledward,
Editor, Money Weekend

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Ryan Clarkson-Ledward is one of Money Morning’s junior analysts. Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects. Ryan’s primary focus is assisting Sam Volkering with background research and insight for readers by dissecting the latest events affecting the world. Working closely with Sam, they explore the latest in small-cap and technology stocks as well as cryptocurrency opportunities. You can find Ryan’s contributing research, developments, and supporting information across several e-letters, including:


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