Column: In the shocking reversal, Big Business puts the myth of the value of the shareholder in the grave

Among the developments that business ethics enthusiasts may have thought they would never see, the end of the myth of shareholder value must be very important.

Yet one of the major US economic lobby groups
just buried the myth. "We share a fundamental commitment to all of our stakeholders, "reads a statement released Monday by the Business Roundtable and signed by 181 CEOs. (Emphasis
in the original version.)

The statement mentions, in the order,
customers, employees, suppliers, communities and – last shareholders -. Corporate engagement with all these stakeholders may be largely rhetorical at the moment, but it is difficult to overstate the reversal of this statement from the pre-existing view of the world of business. business.

Since the 1970s, the dominant ethos of corporate management has been that the primary responsibility of a company – in fact, its sole responsibility – is to serve its shareholders. The benefits for other stakeholders follow, but this is not the main concern. "According to the Business Roundtable, the overriding duty of management and boards of directors rests with the shareholders of the company; the interests of other stakeholders are relevant as derivatives of the obligation to shareholders, "said the organization in 1997.

The reformulation of the roundtable brought together an impressive firepower, which bears the title of "Declaration on the Purpose of a Society". Among its signatories are Jamie Dimon, President and CEO of JP Morgan Chase and Chair of the Round Table; Jeff Bezos from Amazon; Tim Cook from Apple; Ginni
Rometty from IBM; Mary Barra of General Motors; and leaders of major pharmaceutical companies, banks, retailers, utility companies and insurance companies. It is not necessary to consult one who is who
to determine the royalty of American companies – they are here.

The statement could reflect a radical change in the attitude of CEOs of large companies to the challenges posed to their management principle of social organizations and especially of some candidates for the Democratic nomination for the presidency,
notably Sens.
Elizabeth Warren and Bernie Sanders. It can also be an acknowledgment that the federal government, once a social transformation agent, is not playing this role now. If problems such as income and wealth inequality, climate change and racial discrimination are to be solved, large American companies will have to do their part.

"Stakeholders are pushing companies to address sensitive social and political issues, especially since they see governments failing to do so effectively," said Larry Fink, president and chief executive officer.
of investment firm BlackRock and a signatory of the roundtable letter, wrote this year in its annual letter to CEOs
companies in which BlackRock invests.

"As divisions continue to grow," Fink continued, "companies must demonstrate their commitment to the countries, regions and communities in which they operate, especially on issues critical to the future prosperity of the world."

In his annual letter to shareholders, Dimon said, "In the past, boards and board advisers advised corporate CEOs to keep their heads down and stay off the line." things have changed. … If companies and CEOs do not get involved in public policy issues, it may be more difficult to move forward on all of these issues. "

But the declaration of the round table should be approached with caution. "We are skeptical of what the signatory executives of this statement have in mind," said in a statement Monday released ValueEdge Advisors, a prominent critic of corporate governance practices. "It all depends on the precision and precision with which they describe the goals of their stakeholders, and more specifically how their remuneration will be linked to these goals. If the salary is exclusively or mainly based on the stock price, this statement is only an attempt at distraction. Investors should insist on more details and more clarity. "

The pernicious notion that a company exists solely for "maximizing shareholder wealth" has been codified in the most effective way by conservative economist Milton Friedman in a 1970 essay. Friedman said business leaders who preached the social responsibility of their enterprises "preached a pure and unmixed socialism".

Friedman dismissed from the outset the idea that companies should "take seriously their responsibilities for creating jobs, eliminating discrimination, eliminating the pollution and all that could be the key words of the current generation of reformers ".
those who harbored such unorthodox thoughts were "unintentional puppets of intellectual forces that undermined the foundations of a free society in recent decades," he wrote.

The idea that shareholder profits would be passed on to employees, customers and other stakeholders was always a fantasy. Maximizing shareholder wealth meant directing companies with an eye on stock prices, maximizing dividends and buying stocks. This approach has led to lower wages and led to unionization, layoffs, offshoring, and slender pension and health plans. Companies have abandoned facilities in long-standing host communities for tax rebates and other benefits compared to other cities. The suppliers were pressed. Consumers have rarely reaped all the benefits of these steps.

In recent years, reality has begun to eradicate Friedman's ideological absolutism. As the late Lynn Stout has shown in her important 2012 study, "The myth of shareholder value" Friedman proposed a very narrow definition of "shareholder interest", interpreting it as strictly financial and incorrectly assuming that all shareholders had identical interests.

Stout dispelled the confidence of shareholder value advocates in the 1919 Dodge-Ford affair, in which the Dodge Brothers, minority shareholders of Henry Ford's company, filed for dividend cause. for the benefit of the shareholders. As she reminded readers, it was a decision of the Michigan Supreme Court, not a federal court, let alone the Supreme Court.

In addition, Ford was then a private company and not a public corporation with thousands of shareholders. Although ideologues often refer to Ford and Ford, the Delaware Chancery Court, the leading corporate law court today, has cited the case exactly once in 30 years.

The concept of shareholder value has gained ground for two main reasons. First, he suggested a practical measure to judge the performance of a company – its share price. The other is that it has fostered powerful economic cliques. These include the wealthy who own shares of corporations; in 1983, the richest 10% directly or indirectly held 89.7% of the total shares; in 2016, their holdings were still 84%. Among these were executives from large companies, whose pay was soon tied to shared values ​​and who were more than happy to explain that their interests and those of the shareholders of the company, or "owners" , were well aligned.

The extent to which the 181 companies represented in Monday's letter will adhere to its constituents in practice remains open. At the very least, the signatories indicated that they were aware that the role of society in American life needed to be reconsidered. But will they do more than talk?