America's new CEOs are telling the wrong story about capitalism
There's scant evidence that American CEOs are too short-term focused. Well, until now that is. A veritable hotel conference room full of suits — including the bosses at Apple, JPMorgan, and United Airlines — signed a joint letter Monday attempting to clarify their raison d'être. Yes, they care about shareholders — but also much love to other "essential" stakeholders: customers, suppliers, employees, and communities.
But while this clever bit of PR may generate a day or two of positive buzz, it risks muddying the longer-term public perception of what American capitalism is actually all about.
The New York Times said the letter showed business leaders were "breaking with decades of long-held corporate orthodoxy" in the face of "mounting global discontent over income inequality, harmful products, and poor working conditions." And there's some truth in that description. Certainly CEOs don't want to appear oblivious to public concerns that what's good for their corporations — especially multinational ones — is good only for their corporations.
What's more, this post-financial crisis unease has been exploited by populist politicians on the left and right. Democrats complain about fat-cat execs who fail to share their bounty with workers. And Republicans attack companies for undercutting their employees and communities by supporting mass immigration and free trade. This is why the Business Roundtable's "Statement on the Purpose of a Corporation" has abandoned the idea that corporations exist principally to serve their shareholders, the document's core principle for more than two decades. Now the main goal is "to deliver value" to all stakeholders.
All of which has progressives and maybe even some Trumpublicans pretty excited. They see the letter as an important admission by the capitalists themselves that profit-driven capitalism is badly broken. No longer is American business effectively operating under the ideological sway of libertarian economist Milton Friedman, who famously argued that increasing profits is "the one and only one social responsibility of business." Or as corporate raider Gordon Gekko spun it in the 1987 film Wall Street, "Greed is good."
But rather than mere clarification, American CEOs should supply education about how capitalism really works, at least when done properly. For starters, the rest of the Friedman Doctrine — is often forgotten. Yes, it says that the social responsibility of business is to increase profits as much as possible — but only while "conforming" to the "basic rules of the society, both those embodied in law and those embodied in ethical custom." So it isn't a case of anything for a buck — generally, running a business like that doesn't work over the long run. Cheating suppliers, disappointing customers, and underpaying workers is the path to a weak stock price at best and bankruptcy at worst.
Indeed, good corporate behavior is generally rewarded by the market. Yes, companies sometimes have to lay-off workers or close plants — and nothing in that letter will alter that economic reality. Yet it really does seem to be the case that treating customers well and compensating employees fairly is a great way to maximize returns for shareholders. For instance: Fortune magazine annually compiles a list of the "best companies to work for" that takes into account worker and customer satisfaction. And that group of companies has handily beaten the broader stock market for nearly two decades. Companies, more often than not, already do best for shareholders by doing good by stakeholders.
Which shouldn't be surprising. Successful capitalists are those who pay extraordinarily close attention to the needs and desires of their customers. And they do indeed think about the future and not just the present quarter. Turns out the populist critique of shareholder capitalism as hopelessly afflicted by short-termism is pretty sketchy. If shareholder pressure forced public companies — like the ones that signed that letter — to forgo profitable, long-term investment opportunities, then they should invest less than similar private firms. But a 2018 Federal Reserve study found that public stock markets actually "facilitate greater investment" overall. Likewise, a 2017 paper by University of Chicago economist Steven Kaplan found "little long-term evidence that is consistent with the predictions of the short-term critics" of public companies.
Despite the distrust that many feel towards shareholders, we have good reason to believe that their influence serves the economy well. And American capitalists still have a great story to tell if they want to tell it.