On the surface, there really is nothing problematic about the Statement on the Purpose of a Corporation, released to much virtue-signaling fanfare last week by the Business Roundtable. The document, signed by 180 American CEOs (including those of Walmart, JP Morgan, and AT&T), touts the role of free markets in allowing “each person to succeed through hard work and creativity and to lead a life of meaning and dignity.” It lauds the “market system as the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.”
Who among us could disagree?
Where it differs from past proclamations of the Business Roundtable, though, is in how it purports to “re-define the role of a corporation.” Where the goal of a corporation was once to “principally serve its shareholders,” the Roundtable has put a stake in the ground, offering a new statement to reflect the fact that “CEOs endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable.”
The elaboration of this “new” concept is that henceforth, American companies shall:
- “Deliver value to our customers”
- “Invest in our employees”
- “Deal fairly and ethically with our suppliers”
- “Support the communities in which we work”
- “Generate long-term value for shareholders”
These are the five bullet points offered. I am not withholding any other revolutionary ideas offered in the “new definition of a corporation.” This is the agenda. No longer can a company focus on profits by not delivering value to customers; they must actually have customers who receive value. No wonder the press has been abuzz with this corporate Damascus Road moment.
One can forgive the signatories of this silly press release for participation in such a rank capitulatory act of defense. Elizabeth Warren, Bernie Sanders, every American university campus, AOC, and nearly all the mainstream press have worked hard to demonize the concept of business, the existence of corporations, and the motive of profits. Their work has reaped rich dividends, with 51 percent of Millennials allegedly rejecting the tenets of capitalism in recent surveys. If a little public relations is in order to save the system, so be it. But a few “first things” need to be reiterated lest the implicit message of this press release contaminate the beauty of free markets.
One of my least favorite expressions in the public square is a successful businessperson or successful athlete referring to their desire to “give back” to their community, usually in publicly and loudly announcing a charitable donation they are making (perhaps a new statement on Matthew 6:4 is in order, but I digress). I am quite a big fan of philanthropy and view it as a vital component of civil society. But one cannot “give back” unless he first received something, and the implication in that well-meaning vocabulary is that one is returning something he took. The language matters. Sharing the fruits of your hard work is laudable and noble, for the very reason that you are voluntarily and sacrificially releasing what is yours, not returning what is not yours.
The language of the Business Roundtable’s release is problematic in the same way. The delivery of value to customers is, at its core, the source of profit-making activities in a business. Big bad shareholders do not benefit without profits, and profits do not exist without customers, and customers do not exist without, voilà — value! This axiomatic truth is the textbook definition of free markets — the alignment of interests embedded in the profit motive, where service of others paradoxically drives a better result for oneself.
Likewise, service to one’s employees is all at once “the right thing to do” and “in the shareholder’s self-interest.” We use periods of time where laborers were exposed to horrid working conditions as an argument that the default position of capitalism was mistreatment of employees. Greater consideration needs to be given to the fact that not only was such mistreatment of employees always immoral, but it was always bad for business as well. There has never been a time, least of all in the highly competitive and dynamic economy of today, where one’s business culture, productivity, and potential have been optimized by treating employees poorly. A simultaneously moral and opportunistic agenda is at play in fostering a great environment for employees. But is it the duty of a company to provide all that an employee wants, to the detriment of the shareholders? Would not unlimited time off, unlimited wage accommodation, and unlimited employee benefits be a truly amazing statement of employee care and respect? Alas, it seems that such would eliminate the job for the employees themselves as the company inevitably folded. We know there is a cost/benefits analysis in embedded in providing maximum comfort for employees while remaining competitive and profitable. Are we really supposed to think this tension is new? Such has been the nature of markets since the beginning of the invisible hand.
Just as it is in a business’s best interests to care well for employees and customers, so it is with suppliers and vendors. Good businessmen and -women do not need be told to deal fairly with those they buy and sell from; the intricacies of the marketplace and the realities of reputation, credit, service, and such all provide ample and intrinsic motivation.
Dynamic markets presuppose times when business operators have to make decisions for the existential good of the company that may harm one stakeholder more than another. The long-term objectives of innovation and social good are enhanced, not suppressed, by the ability of a talented executive to make hard decisions, maneuver through periods of change and challenge, and be held accountable by the provider of capital to the business (i.e. the shareholders). Social campaigners should not set the long-term agenda of a successful company, as they cannot do so better than its own executives, accountable to those with financial skin in the game, can. The reality of competition in a free marketplace is a constant check on “runaway profits,” as the need to continually innovate, compete, and produce forces an equilibrium of accountability and profit-seeking activities, all the while incentivizing optimal treatment of all company stakeholders.
The fact of the matter is that there is nothing wrong with reiterating one’s commitment to one’s customers, employees, suppliers, and communities. The Roundtable’s statement itself, dripping in self-satisfaction as it may have been, is reasonably benign. But the implication that these assertions are new to the philosophy of free markets is dangerous. Creation of shareholder value is not something to apologize for, even by soft inference.
Markets are not intrinsically oppressive. History is clear enough on this score. Rather, markets provide the optimal framework for the proper treatment of all stakeholders. Sustainable shareholder value creation follows a company ethos that cultivates service to all.
If today’s corporate-responsibility police truly want a free and virtuous society, they are better off focusing their efforts on eliminating the crony-capitalist abuses that seek to squash competition. For it is competition that creates accountability, and accountability that drives results — yes, results for all stakeholders.