09 Jul SOCIAL PERSPECTIVE

We began this course by asking the question, “What is the purpose of the firm?” and juxtaposing two opposing answers to the question:  Shareholder Theory and Stakeholder Theory.

We conclude the course with the recognition that after fifty years of adherence to shareholder theory, the pendulum is swinging toward the stakeholder view of the firm.  Many leaders, like those encountered last week, not only embrace it as a politically correct approach to the conduct of business today, but as a smart, ethical and sustainable one that contrasts sharply with practices of the past.

A lot has happened in the last two years to speed the adoption of the stakeholder view. This week well consider some of them.

Mentioned on the first day of our class and several times throughout (including in the course summary above) was stakeholder capitalism advocate, Larry Fink, the CEO of Blackrock, one of the worlds largest institutional investment firms.

A couple of years ago, Fink wrote a letter to the CEOs of the corporations Blackrock invests in, challenging them to rethink the purpose of the firm and embrace the stakeholder view. Not doing so, he warned, would “disappoint” one of the world’s largest investment managers (him!).

Here is an excerpt from that letter:

“… the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.

Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.”

Read this “decoding” of Fink’s letter published by Forbes:

1.  

You may recognize from the letter many of the ideas expressed by Paul Polman in the videos last week and in Indra Nooyi’s World Economic Forum interview — as well as in the efforts made by each of those CEO’s to transform the firms they led. 

About a year after Fink sent his letter, 180 of the CEOs who received it — all members of the prestigious “Business Roundtable” (BRT), an association of about 200 CEOs of the largest and most powerful US corporations — issued a statement of their own.

The BRT, a historic supporter of shareholder capitalism, surprised Wall Street by reversing its half-century-old endorsement of shareholder primacy in favor of the stakeholder view! The statement addressed many of Fink’s points and agreed companies should now serve a wider array of stakeholders. Among the stakeholders mentioned, shareholders appeared last on the list. Here is the short BRT statement:

    2. 

The BRT statement caused quite a stir. It was widely criticized interestingly, from both sides: shareholder theory supporters and stakeholder theory proponents.

The stakeholder theory enthusiasts expressed skepticism about the BRT Statement, calling it Empty Rhetoric, and All Talk and No Action.

 An Oxford University professor, for example, said it “does not really mean anything. Other critics reminded readers how staunchly the Roundtable has defended shareholder primacy over the years by vigorously lobbying government on a variety of issues that support it.  Columbia professor and sustainability expert, Jeffrey Sachs, said many of the CEOs who signed the Statement are the very people who have caused grave damage to the American economy and society. Judith Samuelson at the Aspen Institute warned words are not enough companies need to “demonstrate commitment” to stakeholder primacy.  Most of the critics commented on its brevity (just 300 words) and on the lack of specificity in the statement, noting that the signatories need to take action — not just talk about” — their commitment to stakeholders.

The short articles below exemplify the skepticism of BRT critics:

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But criticism came from the other side, too! Disappointed advocates of shareholder primacy criticized the BRT for turning its back on it. Read an example of this (and an argument for the restoration of shareholder theory)  by former U.S. Secretary of State and business leader, George Shultz and colleagues:

Take the time to read this article very carefully. It’s a  thorough argument in favor of shareholder theory. The points made in it are essential to the debate about corporate purpose.

     7. 

A few months after the BRT statement was published, something happened that no one expected.  Debate about it was interrupted by two dramatic crises — the COVID19 Pandemic and national protests about social injustice — both drawing attention to social and economic inequality in the US.

Some critics of shareholder theory were quick to associate these as outcomes of “unconscious capitalism”  — while at the same time, sensing that the two crises might be opportunities to propel stakeholder capitalism forward — or at least to test corporate commitment to it.

 Within a week after the Black Lives Matter protests began, US corporations donated (collectively) nearly $2 billion ($1 billion from Bank of America alone) to non-profits, foundations and other entities that support social justice.

Dozens of other companies raced to produce TV and radio statements and print ads and to schedule press conferences to proclaim their support for racial equality. 

In Detroit, Mayor Duggan invited nine CEOs of the citys largest employers (GM, Ford, DTE, Henry Ford Health Systems, Blue Cross, Quicken Loans and Ilitch Holdings among them) to publically pledge their support for diversity and inclusion in their companies and in the community.

Watch that hastily organized press conference here:  ***Note: you may need to reset the slide bar to 00 seconds (far left) as it tends to open midway.)

Critics have charged that some US companies that aligned themselves with the social justice movement have long failed Black America, and for the most part have addressed racism only in the face of overwhelming public pressure. (See article #8 below). And mainstream media emphasized the irony of disproportionate representation of minorities at the same firms vowing to fight racism now (#9 below).

Still, ironically, its been suggested that “corporations and the markets could be the next frontier for fixing racial, ethnic and economic inequality (#10 below).

Review those perspectives in the articles below:

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As has been emphasized throughout this course, the expression of a socially beneficial value is one thing  — but “living’ that value is another. If business is to be the next frontier” as suggested in the articles above, it will take more than verbal commitments and big checks. 

Recent research on the behavior of 619 Fortune 500 and FTSE 300 companies (including the 180 whose CEO’s signed the BRT commitment to serve all stakeholders — sought to determine if the corporate sector really can be depended upon to moderate their quest for profits to solve challenges like climate change, racial injustice and economic inequality — or whether a single stakeholder will always retain primacy: the shareholder.

The research asked:

• What are the best practices of corporations in managing the fallout from the pandemic, inequality, and social unrest? 

• Is there any relationship between being a company with aspirations to be ‘purpose driven’ and how a company performs when put to the test?
  

• Which companies are performing well and poorly in regard to employee, community, environmental, and consumer interests, and why?

• What does a companys performance in the time of the pandemic and rapidly rising concerns about racial and income inequality indicate about the seriousness and durability of its commitment to stakeholder interests and its corporate purpose?

• : Did BRT signatories perform better on Covid-19 related topics during the crisis?

The results were reported in a New York Times article titled Stakeholder Capitalism Gets a Report Card. Its Not Good.

Read that article belwo (#11) for an overview of research results.  (For more detail, you can skim the full report (#12).

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12. Full 

 

The “report card” isn’t good….

 

ASSIGNMENT IS TO ANSWER           QUESTIONS 1-6

Differences between shareholder and stakeholder views of the firm are significant and consequential. As future business leaders, you are inheriting the debate about them as alternative purposes of the firm  and will make critical decisions about which predominates in the companies you own or work for.

1. The article, “Some Thoughts on the Business Roundtable Statement,” provides strong arguments in favor of shareholder primacy. The article claims the BRT’s decision to abandon the shareholder for the stakeholder view was “wrong-headed,” “misguided,” “incorrect,” and “erroneous.” 

      a. What are the key arguments used by George Schultz and colleagues to rdefend shareholder primacy (Article #7).

      b. Critique those arguments.

      c. What is your reaction to Schultz’ position?

2. In contrast, defenders of the stakeholder view of the firm, as represented in articles #3, 4, 5 and 6, applaud the BRT for r    revising its stand on the purpose of the firm, but are skeptical.

      a. What are the key concerns about and criticisms of the BRT Statement found in those articles?

      b. What does Jeffrey Sachs mean by describing BRT member’s devotion to shareholder primacy as “destructive” and “self-serving.” What are at least five examples he provides to defend those assertions?

      c. What is your reaction to his position?

3. React to the presentations by Mayor Duggan, Reverent Anthony and the 9 CEOs who participated in the Detroit press conference on social justice in Detroit a year ago. Most, if not all of them are members of the Business Roundtable. Did any of the speakers speak to you? Why or why not? Or was this an exercise motivated by public pressure?  Explain your position.  

4. From your perspective, has the about-face by the BRT ended the decades-old debate about the purpose of the firm?  Are its members sincere converts to stakeholder capitalism? Or, as some critics claim, is the Statement an attempt to obscure reality, while heading off growing public pressure to behave more responsibly? (In other words, is the statement a response to a growing performance-expectation gap?) Explain your position based on takeaways from this course and your personal experience.

5. Informed by the views expressed in the article Corporate America Has Failed Blacks, (#8), articles #9 and 10 and the results of the study reported in the article “Corporate Stakeholder Capitalism Gets a Report Card. It’s not good” (#13), what ideas would you offer the 9 Detroit CEOs about implementing the commitment they made to further diversity and inclusion in their organizations and in the Detroit community?

6. Comment on what you have observed or experienced in your professional life (organizational policies, behaviors, events, culture, etc.) that align with either (or both) shareholder or stakeholder theories and your responses to them.