Group of top CEOs says maximizing shareholder profits no longer can be the primary goal of corporations

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steross

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https://www.washingtonpost.com/busi...t-defines-corporations-purpose/?noredirect=on

A group representing the nation’s most powerful chief executives on Monday abandoned the idea that companies must maximize profits for shareholders above all else, a long-held belief that advocates said boosted the returns of capitalism but detractors blamed for rising inequality and other social ills.

In a new statement about the purpose of the corporation, the Business Roundtable, which represents the chief executives of 192 large companies, said business leaders should commit to balancing the needs of shareholders with customers, employees, suppliers and local communities.

“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity,” said the statement from the organization, which is chaired by JPMorgan Chase CEO Jamie Dimon. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”


The statement comes amid a growing national debate about the responsibilities of corporations at a time of stark economic inequality. President Trump and the candidates vying for the Democratic presidential nomination have taken aim at companies for putting profits before the needs of workers and customers on issues as varied as drug pricing, outsourcing and data privacy. And for decades, wages have climbed only moderately as the pay of top executives at public companies has soared.

A range of lawmakers have been trying to force companies to consider society’s larger goals when they do business or be penalized. Democratic presidential candidate Sen. Elizabeth Warren (Mass.) has proposed a plan that would require U.S. corporations to turn over part of their board of directors to members chosen by employees. Sen. Bernie Sanders (Vt.), also vying for the Democratic nomination, would prohibit corporations from buying back their own stock — a move that drives up share prices — unless they offer a certain level of pay and benefits for workers.

Trump, even as he has taken many pro-corporate actions including a big tax cut in 2017 and deregulation, has publicly shamed companies for moving jobs overseas and threatened to take more aggressive action against pharmaceutical companies.


By making the statement, said Judith Samuelson, executive director of the Aspen Institute’s Business and Society Program, “the voice of corporate America — the Business Roundtable — has now signaled how much things have already changed.”

The organization “is really playing catch-up with any number of members of their organization that have been working to dampen short-term pressures and make investments” in employees, communities and broader society. She believes the new statement will “stiffen [CEOs'] resolve to make the kind of long-term investments that benefits the long-term health of the enterprise.”

Rep. Joe Kennedy (D-Mass.) called it “a welcome step toward a more moral capitalism” while the U.S. Chamber of Commerce said it “agreed wholeheartedly with the renewed focus.”

But the firms also opened themselves up to a range of criticisms, raising questions about how much the new statement would lead to real change. Some prominent politicians said the statement may be too vague to correct for corporate failures.


“I’m glad they now seem to recognize that the American people are sick and tired of their corporate greed that is destroying the social fabric of America,” said Sanders. “But we need more than a public relations stunt. We need a concrete plan on how they will bring back American jobs overseas, pay all workers a living wage with good benefits, stop attacking unions and start paying their fair share of taxes.”

A Roundtable spokeswoman said the group welcomed a conversation on the issues.

Meanwhile, shareholder groups raised concerns that their interests would no longer be the core concern of corporations, underscoring the argument that it is the job of government — not companies — to make decisions that are in the best interests of society.

The Council of Institutional Investors, an association of pension funds, endowments and foundations, said it “respectfully disagree with the statement, adding that it “undercuts notions of managerial accountability to shareholders.”


But CEOs who favored the move said it would benefit shareholders in the long run as well.

“CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value,” said Tricia Griffith, president and CEO of Progressive Corp.

The new statement includes 181 signatures of the 192 current members of the Business Roundtable. Some companies that did not sign were not eligible to do so because an interim chief executive is in place or the company is transitioning between leaders.

There were seven other CEOs who did not sign for various reasons: Roy Harvey at Alcoa, Stephen Schwarzman at Blackstone, Larry Culp at General Electric, Bernard Tyson at Kaiser Permanente, James Robo at NextEra Energy, Thomas Williams at Parker Hannifin and Michael Tipsord at State Farm. In emailed comments, Kaiser Permanente and State Farm said they agreed with the statement but did not sign because they do not have shareholders; Kaiser is a not-for-profit hospital and health plan, while State Farm is a mutual company that “serves the interests of our policyholders.” A Business Roundtable spokesperson noted that a non-signature does not necessarily mean the CEO does not support the statement.



Some governance experts were critical of the announcement, pointing out that a focus on shareholders helped lead to governance reforms and companies could use the wider array of interests as a dodge.

“It limits accountability for these people to anyone,” said Charles Elson, who directs the John L. Weinberg Center for Corporate Governance at the University of Delaware. “You can always make an argument that no matter what you’ve done, some stake[holder] will benefit.”



The new statement puts an official stamp on a more stakeholder-driven approach to governance that some CEOs have individually advocated for in recent years. It comes more than two decades after the lobbying group, in a 1997 document about corporate governance principles that it has periodically updated, took an explicitly shareholder-first stance. “The Business Roundtable wishes to emphasize that the principal objective of a business enterprise is to generate economic returns to its owners,” it wrote.

That concept — often known as “shareholder primacy,” or a corporation’s duty to maximize shareholder value — grew to prominence in the mid-1980s and has since become a widely accepted governance norm, one that critics say has driven a fixation on short-term results and helped balloon the size of CEO pay packages, fueled by outsized stock awards.


An analysis released Aug. 14 by the Economic Policy Institute, a left-leaning think tank, found that chief executive compensation had grown 940 percent since 1978, by one measure, while typical worker compensation had risen just 12 percent over the same period.


Elson, the corporate governance professor, noted that the statement was problematic coming from high-earning CEOs.

“They talk about their great concern for the workers — well they’re the ones who’ve paid themselves so astronomically and created these pay gaps that are so dramatic,” Elson said. “I’d like each of them to volunteer to cut their own salaries by two-thirds and give it back to employees if that’s the way they feel.”

Even in more recent guidelines, the idea that maximizing shareholder value should be the primary goal of a corporation has been backed by the Business Roundtable, albeit less explicitly. In its 2016 document, the group says management’s goal is “producing sustainable long-term value creation” and calls for compensation committees to “incentivize the creation of long-term value.” While it also suggests the board “may consider the interests of all of the company’s constituencies,” it advocated doing so when it “contributes in a direct and meaningful way to building long-term value creation.”


One CEO of a Business Roundtable company, who spoke on the condition of anonymity to speak freely, said the new statement was not intended to suggest companies should weigh the concerns of all stakeholders equally with each decision, but recognizes that CEOs know they must do all of these things well to maintain long-term value and brings the group’s view more in line with how CEOs are running their companies.

Corporations are also facing increasing pressure — whether from customers, employees or public groups — to take stands on issues that affect society at large. Tech companies have had employees push back against contracts with immigration and border control agencies. Walmart has faced calls to stop selling guns after a recent mass shooting in its El Paso store, and senior corporate leaders have been increasingly vocal on social issues ranging from racism to LGBTQ rights as consumers increasingly look to spend money with companies that share their views.

Indeed, the new statement is, in a sense, a return to the past for the powerful lobbying group. In its 1981 statement about corporate responsibility, the organization said that “corporations operate within a web of complex, often competing relationships which demand the attention of corporate managers.”


It went on to list the same stakeholders as the new statement does, saying that “balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholder must receive a good return but the legitimate concerns of other constituencies also must have the appropriate attention.”




Jena McGregor Jena McGregor writes on leadership issues in the headlines – corporate management and governance, workplace trends and the personalities who run Washington and business. Prior to writing for the Washington Post, she was an associate editor for BusinessWeek and Fast Company magazines and began her journalism career as a reporter at Smart Money.



















 
Oct 30, 2007
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Most owners and CEO's are significant shareholders in their comanies. Jamie Dimon owns nearly $1B in JP Morgan's stock. That's approximately 75% of his net worth. Are we really supposed to believe that he would take any actions that would result in his company missing wallstreet estimates? I'll believe it when I see it.

This is just grandstanding. It's like the list of billionaires that said they would gladly pay a higher tax rate, but none of them actually write a check to the government.
 

OSU79

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I have argued for years that "maximizing shareholder value" was a false flag specifically designed to make executives more money. And not just through increasing the value of their own stock, though that is probably their greater benefit. They also profit greatly from performance bonuses tied to stock price improvement, based on guidelines established by in-house compensation committees, which they naturally control. Early in my career my company went through several very large layoffs and forced early retirements. About 99.5% of all employees were also stockholders, so my argument was how were layoffs increasing value for those stockholders being laid off? Sure, those of us not laid off some some value increase, but nothing compared to the execs who received huge bonuses (we're talking about some in the $7-8 million range, as reported in public financial statements). It's why I said company employment stability was a far greater benefit to the communities in which we operated and society as a whole than increased shareholder value.

Note: That said, those things should not be mandated by the government. Poorly managed companies will become self-defeating. I was lucky enough to work for one that also did a lot of things right, even if I didn't agree with all of them.
 

RxCowboy

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Check these two sentences from the article:

A group representing the nation’s most powerful chief executives on Monday abandoned the idea that companies must maximize profits for shareholders above all else​
“CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value,” said Tricia Griffith, president and CEO of Progressive Corp.​
The latter does not mean the former, it doesn't mean that at all.
 

steross

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Check these two sentences from the article:

A group representing the nation’s most powerful chief executives on Monday abandoned the idea that companies must maximize profits for shareholders above all else​
“CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value,” said Tricia Griffith, president and CEO of Progressive Corp.​
The latter does not mean the former, it doesn't mean that at all.
I get what you are trying to say, but in reality, there is no way that every company can maximize shareholder value while at the same time balancing those other issues. Who knows if it is just lip service as suggested but it is a clear philosophical change. My cynical side says it isn’t lip service it is change they feel forced to do or else the government will do it for them, in the club-over-the-head manner the the government usually fixes issues.
 

CocoCincinnati

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Check these two sentences from the article:

A group representing the nation’s most powerful chief executives on Monday abandoned the idea that companies must maximize profits for shareholders above all else​
“CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value,” said Tricia Griffith, president and CEO of Progressive Corp.​
The latter does not mean the former, it doesn't mean that at all.
Exactly, some might argue that having good happy employees and loyal happy customers IS maximizing profits for the shareholders. That's how it's SUPPOSED to work, but the crony capitalism we are stuck with does not always work right. To me this sounds like big talk to improve public perception of these companies which leads to *gasp* increasing profits for their shareholders. I bet not a one of these CEO's is willing to give up the politician(s) they have in their pocket....if they want to convince me of their noble intentions, that's the first step.
 

RxCowboy

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I get what you are trying to say, but in reality, there is no way that every company can maximize shareholder value while at the same time balancing those other issues. Who knows if it is just lip service as suggested but it is a clear philosophical change. My cynical side says it isn’t lip service it is change they feel forced to do or else the government will do it for them, in the club-over-the-head manner the the government usually fixes issues.
I'd also be willing to bet that losing shareholder's money and minimizing profits is still a ticket out the door.
 
Oct 30, 2007
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It's really sort of an interesting conundrum. When a company is private, they have the ability to make whatever decisions they think are best. When a company becomes public, they have a responsibility to their shareholders. The people pulling the strings don't necessarily have a legal mandate to maximize profits, but shareholders have the ability to remove them if they don't. You can make a strong argument that companies should stay private if they want the autonomy to make decisions that aren't geared towards maximizing profits.

I would just be happy with companies using more of their corporate tax cuts to invest in their companies & employees instead of just dumping billions into stock buybacks.
 

steross

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I'd also be willing to bet that losing shareholder's money and minimizing profits is still a ticket out the door.
Obviously. It says balancing these things not driving it into the ground while handing out money to the community and employees.

College coaches are supposed to work at keeping the grades of their players up. But, a 3.8 team GPA and a 1-10 seasons are still going to get you replaced. As are string of 1.9 GPAs and a 10-2 seasons. Gone are the days of that.
 

OSU79

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I'd also be willing to bet that losing shareholder's money and minimizing profits is still a ticket out the door.
True, but I've seen some execs make incredible amounts of money before their ticket gets punched.

It's really sort of an interesting conundrum. When a company is private, they have the ability to make whatever decisions they think are best. When a company becomes public, they have a responsibility to their shareholders. The people pulling the strings don't necessarily have a legal mandate to maximize profits, but shareholders have the ability to remove them if they don't. You can make a strong argument that companies should stay private if they want the autonomy to make decisions that aren't geared towards maximizing profits.

I would just be happy with companies using more of their corporate tax cuts to invest in their companies & employees instead of just dumping billions into stock buybacks.
In my company shareholders did theoretically have "the right to remove them," the flip side was that the Board controls about 60% of the votes due to stock buybacks (which you mention).
 
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Just a bunch of spin by the CEOs. In today’s political (everything is political) environment, it would be a PR nightmare for any CEO to simply say the number one goal of the Corp is to maximize shareholder value by maximizing profits. The reality is every CEOs number one goal is to maximize LONGTERM shareholder value - even if they won’t admit it. LONGTERM means you have to keep your customers, suppliers, communities and employees happy in order to sustain success. Thus the need for plans and actions to achieve such ends.
I can assure you, every meaningful action taken by a Corp at minimum does not violate the number one goal - maximize LONGTERM shareholder value. In most cases such actions are designed to specifically maximize LONGTERM shareholder value.

As another poster alluded, I would never invest in a company that didn’t place maximizing LONGTERM shareholder value as their number one goal.

And as a test, consider this. Would any person here start a business that was designed to first place customers, employees or the community ahead of making money over a long period of time?




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jakeman

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Once a company sells out to share price, the employees come in dead last, with the customers slightly ahead of the employees. If you're a long time employee and you own of bunch of shares purchased really cheap, you can make out on the back end, but going to work every day is like getting a tooth pulled. The customers are just screwed.

I believe a day of reckoning is coming for those CEO's, but I've been saying that for 6-7 years.


edit to add - once they've done it, I don't know how you get back from that. It appears to me from my perspective that reversing course isn't possible.
 
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Once a company sells out to share price, the employees come in dead last, with the customers slightly ahead of the employees. If you're a long time employee and you own of bunch of shares purchased really cheap, you can make out on the back end, but going to work every day is like getting a tooth pulled. The customers are just screwed.

I believe a day of reckoning is coming for those CEO's, but I've been saying that for 6-7 years.


edit to add - once they've done it, I don't know how you get back from that. It appears to me from my perspective that reversing course isn't possible.
Absurdity Hall of Fame


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edit to add - once they've done it, I don't know how you get back from that. It appears to me from my perspective that reversing course isn't possible.
Public companies can go back to being private companies if they purchase the public float of their stock. Elon Musk has talked about taking Tesla private for a couple years. It doesn't happen very often though.
 

Rack

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If a company doesn't maximize shareholder and their own profits they are doing a disservice to their shareholders and ultimately will go out of business...thus not helping any one of the causes the social justice warriors want them to help...Certainly it's good for companies to do things for their communities, but IF they honestly don't maximize shareholder profits they are NOT doing good things for their community. It's a bunch of socialist/leftist pandering gobbledygook and the time wasted on it SHOULD be spent maximizing shareholder profits.
 
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Deere Poke

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#20
Check these two sentences from the article:

A group representing the nation’s most powerful chief executives on Monday abandoned the idea that companies must maximize profits for shareholders above all else​
“CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value,” said Tricia Griffith, president and CEO of Progressive Corp.​
The latter does not mean the former, it doesn't mean that at all.
Chasing short term gains can kill ya in the long term. Lot of CEO's are out there chasing short term gains they fly the coop take their golden parachute and it takes the corporation years to recover. There has been a lot of it going on lately. Growth is expensive as heck but it drives up stock prices while driving up debt and creating a negative cash flow. It can get tough convincing the bank your making a profit when your loans keep getting bigger.