The Finance 202: Corporate critics cautiously optimistic about new CEO mission statement

The Washington Post, by Tory Newmyer
20.08.19

Corporate chiefs are getting credit from some typically skeptical sources for their decision to abandon decades of a shareholder-first approach to running the biggest American companies.

In a new mission statement organized by the Business Roundtable, leading CEOs on Monday committed to a much wider set of goals, including investing in employees, supporting their communities, and dealing fairly with suppliers.

It marked the first time the CEO forum updated its governing principles since 1997, when it codified a singular dedication to maximizing shareholder value that has come under increasing heat amid rising inequality. And while the new statement, clocking in at a brief 300 words, leaves plenty of room for interpretation, even some harsher critics of multinational corporations’ behavior said it marked a potential sea change for American capitalism.

“It’s almost astonishing,” Robert Hockett, a professor at Cornell Law School who is advising the Democratic presidential campaigns of Sens. Bernie Sanders (Vt.) and Elizabeth Warren (Mass.), told me. “They’re in effect coming right out and saying, ‘We’ve been wrong for the last 20 years.’”

Hockett — who helped the Warren team develop her Accountable Capitalism Act, designed to push CEOs away from a focus on quarterly profits — said there is some reason to be skeptical of the new direction as corporations, increasingly treated like political punching bags, look to improve their image.

But he also thinks at least “some folks in the BRT are recognizing there’s something unsustainable about an economy that’s all about shareholder primacy. It’s a collective action problem, and unless everybody agrees, no one or two firms can profit by doing it. … So it’s probably good politics on their part in addition to good economics.”

According to an account of the backstory by Fortune’s Alan Murray, the Roundtable’s statement came after a column by my colleague Steven Pearlstein in June 2018 caught the eye of BRT Chairman and JPMorgan Chase CEO Jamie Dimon, who launched an internal debate over it. In the column, Pearlstein argued the group’s 1997 statement is “now the source of most of what has gone wrong with American capitalism — from the accounting fraud to the shabby treatment of workers and customers, from the orgy of share buybacks to the never-ending string of unproductive mergers and acquisitions.”

Pearlstein, who has been criticizing the shareholder-first approach for two decades, wrote Mondaythat the Roundtable’s leadership “deserve lots of credit for initiating this rethink of corporate purpose.”

In a conversation with me on Monday, Pearlstein indicated he’s giving the CEOs the benefit of the doubt. “They all live in dire fear of activist investors. It causes them a great deal of heartburn, and they hate those guys,” he said. “So they need help in saying ‘No.’ Rather than thinking of them of as bad people with bad motives, it’s probably more correct to think of them as reasonably good people in a bad system. They have the power to change the system, but only if they act together.”

Roger Martin — a professor emeritus and former dean of the Rotman School of Management at University of Toronto and another longtime critic of shareholder primacy — said he finds the Roundtable statement “promising.”

“Though these kinds of things can be hollow and insignificant, sometimes a simple and clear statement like this can have an outsize impact – which I think of as being the case with Friedman’s famous 1970 NYT magazine article stating that ‘the business of business is business.’ That became a focal point and rallying cry for business leaders. This statement could have a similar positive effort. I like it because it isn’t some long, ponderous essay. Rather, it is simple, clear and to the point.”

But the key, of course, will be taking action, Martin told me in an email, and that won’t be easy. CEOs, he said, “have little practice in following the principles of the new statement.” He recommended the Roundtable “develop a playbook to help their CEO members to take the first steps in making decisions in accordance with the new statement.”

CEOs have offered skeptics plenty of grist in recent years for the argument that big public companies are dodging opportunities to invest in their own workforces rather than cater to the demands of Wall Street. The most obvious example is how corporate chiefs treated the windfall from President Trump’s 2017 tax cut. Companies in the S&P 500 last year boosted their stock buybacks by more than a third, shattering a record. The moves pumped up their own share prices at the expense of raising worker pay or plowing money into the sort of investments in their own businesses that could translate into sustained, longer-term growth.

Lowe’s, the big-box home improvement chain, roughly doubled its buybacks last year, to $10 billion, even as it fired thousands of workers and offered them no severance, CBS News’s Kate Gibson reported last week.

And Roundtable members have shown a capacity for making splashy public commitments to social responsibility without necessarily matching them in action. BlackRock CEO Larry Fink, a signatory to Monday’s statement, last year used his annual letter to shareholders to call for better corporate stewardship. Months later, as other Wall Street titans were backing away from dealings with Saudi Arabia in the wake of Post contributing columnist Jamal Khashoggi’s murder, Fink said his asset management giant would continue to do business with the kingdom. The firm went ahead with opening an office there even after the U.S. intelligence community concluded Saudi leadership was behind the killing.

Others have taken steps to get ahead of the political debate. Walmart, Target and Amazon over the last year have all announced plans to raise their minimum pay (Amazon CEO Jeff Bezos owns The Washington Post). McDonald’s announced in March it would stop lobbying at all levels of government against minimum-wage increases.

“This sort of stuff builds on itself, and it’s the way norms change,” Pearlstein says.