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August 20 2019

Enlightened CEOs to Shareholders: We're Just Not That Into You Anymore

by Charlotte Hays

Have you scrimped and saved to put money into your modest portfolio for retirement?

Well, then this week you got some bad news.

No, not that recession so ardently desired by the left.

The bad news is that CEOs of a lot of major companies on which millions of American are depending for retirement had a new message for shareholders.

These CEOs in effect said to shareholders, “We’re just not that into you.”

I refer to Monday’s statement from the Business Roundtable.

“Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,’” according to a press release from the organization. It adds: “Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders.”

Moving away from shareholder primacy? What about your retirement, right?

We want corporations to be good citizens but we thought that helping people prepare financially for retirement was doing just that.  

The Editorial Board of the Wall Street Journal notes:

And sure enough, the 300-word “Statement on the Purpose of a Corporation” doesn’t get around to mentioning “shareholders” until the second-to-last paragraph. The statement instead stresses “a fundamental commitment to all of our stakeholders,” which it defines in listed order as customers, employees, suppliers and “the communities in which we work.”

Shareholders ride the caboose in this new code of corporate purpose.

At a practical level this is largely symbolic, at least for now. To be successful, any company must serve its customers, adequately reward its employees, cultivate the loyalty of suppliers, and maintain good relations with the communities where it operates. At the Business Roundtable’s level of high-toned generality, who could disagree?

The Editorial Board also sees “a whiff of pre-emption” in the statement. The Journal thinks the CEOs are fooling themselves if they think this will work:

They see socialism on the rise, with Senator Elizabeth Warren proposing to redefine corporate governance in law with explicit direction to serve “stakeholders.” Her goal is to redirect corporate capital to serve political goals favored by unions, environmentalists and trial lawyers. The CEOs no doubt want to get out in front of this by showing what splendid corporate citizens they are.

Yet these CEOs are fooling themselves if they think this new rhetoric will buy off Ms. Warren and the socialist left. It may even embolden them by implying that corporate rules that require a focus on achieving value for shareholders are somehow morally insufficient. The Roundtable CEOs may be selling Ms. Warren the political rope to hang them.

Politics aside, the moral and practical superiority of the stakeholder model is hardly clear. CEOs are themselves employees hired by directors who are supposed to be stewards of the capital that shareholders have invested. One virtue of the shareholder model is that it focuses the corporate mission on measurable financial results.

An ill-defined stakeholder model can quickly become a license for CEOs to waste capital on projects that might make them local or political heroes but ill-serve those same stakeholders if the business falters. Students of corporate governance have devoted years to analyzing the “agency problem” of holding CEOs accountable to the business owners. So-called activist investors who challenge underperforming managers are one market response.

Virtue signaling is not going to help the secretary who has put her money and faith in a company whose stock she has bought over years.

 





Independent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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