The idea that a corporation’s only real responsibility is to its shareholders has dominated American capitalism since the 1980s, when it leapt from the conservative corners of academia to the boardroom. But if some of America’s most powerful CEOs are to be believed, they’ve finally had enough with it.
On Monday, the Business Roundtable, a major corporate lobbying group, released its latest “Statement on the Purpose of a Corporation,” a lofty mission statement of sorts for the country’s C-suites that the group updates every so often. For more than 20 years, every version of the document has claimed that companies exist primarily to serve the interests of their investors—which typically means making money by any means necessary, and preferably lots of it. This time, however, the roundtable dropped that language, claiming it “does not accurately describe” how corporations view their role today. The new version states that businesses are responsible to all of their various “stakeholders,” including their workers, suppliers, and local communities.
The statement was endorsed by almost 200 chief executives from major companies, including such titans as Tim Cook of Apple, Jeff Bezos of Amazon, Jamie Dimon of JPMorgan, and David Solomon of Goldman Sachs. Thanks to those bold faced signatories, it is being greeted as a small but important rebellion against the old orthodoxy of shareholder capitalism, a “rebuke of the notion that the role of the corporation is to maximize profits at all costs,” as the New York Times put it. Johnson & Johnson CEO Alex Gorsky, who drafted the statement’s new verbiage, told the paper that, “There were times when I felt like Thomas Jefferson.” Corporate America, apparently, has just declared its independence.
One could be forgiven for being a bit skeptical. These companies are all still largely driven by a desire to earn a profit, after all. “At the end of the day, do I think this is anything other than a public relations stunt? No,” M. Todd Henderson, a law professor at the University of Chicago who studies corporate governance, told me.
Thankfully, there’s a simple way that corporate CEOs can show their sincerity about throwing off the yoke of Wall Street: If executives really think that investors should have less say over how companies are run today, then they should support legislation that takes away some of that influence.
You can spend many hours reading about the historical and philosophical underpinnings of shareholder supremacy in the United States. But in the end, there are two main reasons why corporate executives have to answer to people who buy their stock.
First, unless you pull a Facebook and strip your investors of voting rights, shareholders get to pick who sits on a company’s board. Those directors then get to choose the CEO and decide how much he or she gets paid. For obvious reasons, this is an important point of leverage when it comes to steering a company’s priorities, such as whether it’s going to spend money building out more factories and distribution centers, or on stock buybacks to boost its share price.
The second reason businesses have to answer to investors is that, in the end, it’s the law. The vast majority of large companies are incorporated in Delaware, where the courts have been extremely clear—for better or worse—that a corporation’s ultimate reason for existing is in fact to generate value for shareholders. That doesn’t mean managers have to squeeze every penny possible out of their workers or dump coal ash into the local river to cut costs. Thanks to what’s known as the business judgment rule, companies are allowed to make decisions that aren’t profitable in the short term, like raising wages or donating to charity, as long as they can make some case for why they think those might be good for the long-term health of their business. But companies have gotten into trouble when they’ve decided to take a stand and explicitly ignore the interests of their shareholders, such as in a famous case involving Craigslist’s efforts to prevent eBaby from exercising any influence over it after the larger company had become an investor. “Having chosen a for-profit corporate form, the Craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The ‘Inc.’ after the company name has to mean at least that,” the court wrote at the time.
Many CEOs, of course, do not love having shareholders breathing down their neck. They are especially scornful of activist investors, like Carl Icahn, who are famous for buying a stake in a company, then waging brutal campaigns aimed at forcing management to take steps to juice their stock price, such as buying back shares, before quickly cashing out. In recent years, some CEOs have argued that the need to keep investors, especially the activist variety, happy has led to an epidemic of short-term thinking that’s prevented companies from investing for the long haul.
Perhaps the highest profile executive to voice that argument has been Larry Fink, the CEO of BlackRock, the world’s largest asset manager. Fink, whose company specializes in buy-and-hold index mutual funds and ETFs, is famous for his annual letters urging executives to resist “short-termism” and “contribute to society.” In many ways, the Business Roundtable letter—which Fink signed—sounds like a summary of his philosophy. It says companies should be committed to generating “long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate.” In other words, it’s not about rejecting the influence of investors. Just those awful, gnatlike activists. (Whether activists are actually bad for a company’s long-term well-being, or just its CEO’s, is a matter of academic controversy.)
Practically speaking, the roundtable statement doesn’t do much. Tim Cook can tell anyone he wants that Apple has lots of different stakeholders and doesn’t just answer to the whims of its shareholders. But the next time investors decide they want the company to start dropping cash on stock buybacks, they can still pressure him to do it. Likewise, just because a lobbying group got together and decided that the purpose of a corporation is to help humanity, that doesn’t make it so. “They don’t get to do that,” Stephen Bainbridge, a law professor at UCLA, told me. “The law gets to do that. And in corporate law, Delaware is the only law that matters.”
About that: Elizabeth Warren has produced a plan that would require corporations with revenues of more than $1 billion to get a corporate charter from the federal government that would instruct them to consider multiple stakeholders in their planning (so no more worrying about Delaware law) and give workers up to 40 percent of the seats on a company’s board of directors. That might be a little high for some CEO tastes. But if the roundtable signatories really think employees are one of the groups they should be answering to, then they shouldn’t have any problem giving those people a seat at the literal conference table. As a matter of fact, they should welcome it, since that would dilute some of the power of the activist investors they’re supposedly so tired of.
Now, you might be tempted to think that, by issuing a feel good PR statement about how corporations really have society’s best interests at heart, and aren’t just cold-blooded profit machines, America’s CEOs are trying to put a warm face on U.S. capitalism and beat back demands for more fundamental reforms, such as Warren’s, that might actually give workers a voice in corporate decision-making. But that would be cynical, wouldn’t it?