A few weeks ago, the Business Roundtable—a group of CEOs who lead many of the largest and most influential U.S. companies—released a statement on “the purpose of a corporation.” To many observers, the statement represented a dramatic break with longstanding corporate orthodoxy, and an explicit rebuke of the idea that a corporation’s sole purpose is to serve shareholders by maximizing profits.
“We share a fundamental commitment to all of our stakeholders,” the Roundtable CEOs declared.
Specifically, they committed to delivering value to their customers, investing in their employees, dealing fairly and ethically with their suppliers, supporting the communities in which they work, and generating long-term value for shareholders.
“Each of our stakeholders is essential,” the statement concludes. “We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.”
New York Times columnist Andrew Ross Sorkin wrote that “for nearly a half-century, corporate America has prioritized, almost maniacally, profits for its shareholders.” The statement,” he added, “is a significant shift and a welcome one.” His voice was echoed by many in the media.
In the political realm, there was more skepticism. Democratic presidential hopeful Elizabeth Warren, a sharp corporate critic, greeted the Roundtable statement with distinctly faint praise.
“A year ago, I called out CEOs and the Business Roundtable for their single-minded focus on maximizing shareholder value at the expense of workers,” the senator from Massachusetts wrote on Twitter. “Looks like they finally got the memo. But without real action, their announcement is meaningless.”
So, what exactly is the Roundtable statement—a real change of heart for corporate America or hollow PR? Or might there be yet another way to view it?
The rise of ‘shareholder primacy’
A timeline of the debate over the purpose of a corporation probably should start in 1932, when the Harvard Business Review published opposing viewpoints from two leading corporate scholars: Adolph Berle and Merrick Dodd. Berle made the case for what came to be known as “shareholder primacy,” the idea that a corporation exists solely to make a profit for its shareholders. Not so, Dodd countered. He maintained that corporations are economic institutions that have “a social service as well as a profit-making function.”
The clear ascendance of shareholder primary began nearly 40 years later, when University of Chicago economist Milton Friedman wrote in a New York Times op-ed: “There is one and only one social responsibility of business: (to) engage in activities designed to increase its profits.”
Rochester has a role in this story too. Michael Jensen, who taught finance and business administration at the University of Rochester’s Simon School from 1967 to 1988, became an influential theorist who advanced the concepts of shareholder value and the efficient market—basically arguing, as Justin Fox puts it in his book, ‘The Myth of the Rational Market,” that “companies whose executives failed to act in shareholders’ interest would be punished with lower stock prices. The job of monitoring executives’ behavior was thus left to Wall Street.”
In 1997, Roundtable adopted shareholder primacy, writing that “the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders.”
In popular culture, these shareholder-first ideas were symbolized by Gordon Gekko in the 1987 movie “Wall Street,” who declared, “Greed is good.”
Balance of stakeholders
No question, American business since the 1970s has produced its share of villains, from corporate raiders to top executives whose primary goal was to fatten their own bank accounts. But in 30 years as editor of the Rochester Business Journal, I seldom encountered CEOs or other top executives who seemed bent on pursuing profit at all costs.
Among the chief executives I got to know was Martin Mucci, who has been president and CEO of Paychex—the remarkably successful company founded by Tom Golisano—for nearly a decade. After the Business Roundtable released its statement, I asked what he thought of it. In his view, the statement reflects how Paychex—now a nearly $4 billion company whose stock price has increased nearly 200 percent over the last 10 years—and many other companies are run.
“As the board of directors, the CEO and the executive team, we have a fiduciary responsibility to invest well and earn a return as best we can and perform for our shareholders,” he said. “However, you can’t do that without everybody else that’s mentioned in that stakeholder list.
“If the employees aren’t happy and they’re not serving the customers well, and we’re (not) getting support from our vendors and then serving our communities, you know, you’re not going to have a good return. The company’s performance doesn’t just happen by itself; it happens because the employees are satisfying our clients who are coming to us new, staying with us, spending money with us and feeling like they’re getting great value. And they employees are not going to come to Paychex if they’re not treated well, and frankly, if the communities (in which they work) are not strong.”
Mucci said this philosophy has guided Paychex since Golisano started the company.
“Tom has always talked about a three- or four-legged stool, being the shareholders, clients, employees and community, and add vendors in there too certainly,” Mucci noted. “I’ve always talked about C, E and O, and C: clients, employees and owners, and community, because you have to balance all of those stakeholders to be successful.”
On the employee side, Paychex invests in its employees—with competitive pay and benefits (it picks up 75 to 80 percent of health care premiums) and an emphasis on training (in 2018, it provided more than 1 million hours of training). With clients, the focus is on building long-term relationships; the company’s retention rate is 82 percent, near its all-time high. And it is a big supporter of the United Way in the communities where it operates. In addition to financial metrics, executives and managers are evaluated on measures of employee engagement and customer satisfaction.
But is Paychex the exception to the rule? Are most companies more narrowly driven by profit maximization and delivering that return to shareholders?
“I don’t think it’s unique to Paychex,” Mucci said. “I don’t know of any company that could have a great financial performance for shareholders without having employees that are happy to be there and working hard and building value for them with their clients, and the clients being happy. You know, it doesn’t just happen. So, I don’t think it should be that big of a dramatic surprise to anyone.
“I think it’s just most people maybe who don’t typically follow businesses see it always as shareholders are the only ones that get the returns. But there’s only one way that you perform well financially, and that’s because you have great employees who you take care of, and attract and retain, and that they take care of great clients. And then also support your communities.”
A question of accountability
Corporate skeptics aren’t the only ones who were dubious about the Roundtable statement, however. The Council of Institutional Investors said abandoning shareholder primacy would be a mistake.
“Accountability to everyone means accountability to no one,” the council said in a statement. “It is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value.”
The Business Roundtable in fact did not say how the at-times conflicting interests of corporate stakeholders should be resolved. Ronald Schmidt, a longtime professor at the Simon School, thinks the Roundtable statement is “either incomplete and irrelevant or it’s wrong.”
Like Mucci, he thinks building shareholder value requires talented, loyal employees, satisfied customers and healthy communities. But, he told me, “you are at risk of being confused unless you have some rule for deciding how you will order all of these objectives.”
“Shareholder value is nothing more than a way to resolve conflicts between legitimate objectives,” he said. “You run a business by choosing things to do. What shareholder value does is govern your choices.”
Added Schmidt: “The problem I have with the Roundtable is, if they’re throwing out shareholder value, what is it that they’re putting in its place? … Unless you have some basis for resolving the conflicts between these various pursuits, you have nothing; you have a blank statement that doesn’t suggest how an executive is supposed to behave.”
To Warren, the bottom line is “we need to see real action.” The Business Roundtable members, she tweeted, “can start by empowering workers and supporting my Accountable Capitalism plan.”
Her proposed Accountable Capitalism Act would require American corporations with more than $1 billion in annual revenue to obtain a federal charter as a “United States corporation,” which would obligate company directors to consider the interests of all corporate stakeholders: employees, customers, shareholders, and the communities in which the company operates. It also would require U.S. corporations to allow workers to elect at least 40 percent of board members.
Currently, the business judgment rule that courts have followed presumes, absent evidence to the contrary, that a corporation’s directors make good-faith decisions that they believe are in the best interests of the company.
Schmidt believes Warren is well-intentioned, but said her plan—in particular, the requirement of 40 percent worker-elected directors—will either have no impact (because they’d be in the minority) or reduce the value of companies.
“(The employee-elected directors) will resist any kind of layoffs, but they will also resist changes … that threaten some portion of employees,” he said. “They will make companies more resistant to change and that cannot be beneficial to the company or to the economy. The reason the American economy has performed well is, relative to most other economies, it’s easier to change here.”
Could Mucci support Warren’s bill?
“I don’t think I would, to be honest with you, because … I’m not sure what that would do to Paychex as an investment,” he told me. “Who are you really taking care of? A little bit of everybody.
“One thing I know is I have to produce a return on the invested dollars, because people invest voluntarily in Paychex, and I have to produce a return that they’re happy with to keep investing in us. The only way I’m going to do that (is) through the clients, through the employees, and through the communities we’re in, and that’s very clear to me. I have a pretty clear boss; it’s the board of directors, that has a fiduciary responsibility to shareholders. They expect me to perform, and the only way I’m going to perform is through all those constituencies.”
Paul Ericson is Rochester Beacon executive editor.