In August 2019, the Business Roundtable (BRT) – comprising Chief Executive Officers (CEOs) from some of the largest U.S. companies – vowed to move away from shareholder primacy in favor of stakeholder capitalism by redefining the purpose of a corporation to promote “an economy that serves all Americans.” The statement was originally signed by 181 CEOs, and as of August 2021 has increased to 243 who have committed to lead their companies for the benefit of all stakeholders.
Two years after the Business Roundtable’s announcement, Just Capital, in collaboration with The Harris Poll, has checked in with Americans on how well they think large U.S. companies have been upholding these principles. Read the full report below for an in-depth exploration of attitudes towards capitalism and the impact of large corporations on stakeholders, and check out some of our key findings here.
(Koron/Getty Images)
Yesterday was the two-year anniversary of the Business Roundtable’s embrace of a stakeholder approach in its revised Statement on the Purpose of a Corporation. The anniversary sparked considerable debate this week over whether companies who signed it are actually doing anything about it. A high profile Harvard Law School study concluded the answer was a clear “no,” and said the statement was “mostly for show.”
It’s coinciding with a wave of attacks on the stakeholder capitalism and ESG investing space more broadly, including from those who believe it’s all greenwashing and corporate hypocrisy; those who think the whole thing is a front for liberal political activism by unelected corporate leaders; those who believe the stakeholder approach is defined by governance reform and new regulation (such as the Harvard researchers); and those who fear it’s detrimental to investors and free market enterprise in general.
Some of this criticism is certainly justified. We’d be the first to agree, for example, that better and more reliable data on what companies are actually doing on stakeholder performance is much needed. But as I wrote with JUST director Peter Georgescu in Fortune this week, real stakeholder capitalism is not about political activism or greenwashing. It doesn’t need corporate governance reform in order to be pursued. And done right, it certainly doesn’t harm investors.
Our polling shows the public wants a more evolved form of capitalism that works better for them. What does that mean? Simple. It means running businesses that create good jobs; empower workers; provide for upward economic mobility and equality of opportunity; treat customers with dignity and respect; build healthy, prosperous communities; safeguard our planet; lead with integrity; and generate profits and returns for investors.
If you want to see how well the public thinks America’s biggest companies are doing on upholding their promises, I’d urge you to take a closer look at our polling this week. The results are surprisingly positive.
When it comes to actual performance, I can tell you that the vast majority of BRT signatories land in the top half of our overall rankings. We’ve found BRT signatories also pay their typical worker 5.3% more, have 22.3% less greenhouse gas emissions, give 370% more in charitable contributions, are over 3x more likely to report having diversity and inclusion targets; and 2x more likely to include ESG performance into executive compensation. As we describe in the Fortune piece, they’re also doing way better for their shareholders. Year to date, JUST’s indexes of the top companies on stakeholder performance – the JUST 100, and the JULCD – have outperformed the Russell 1000 by 300 basis points and 37 basis points, respectively.
As the University of Virginia’s Ed Freeman (a pioneer of stakeholder theory) told us this week, shareholder primacy is an insufficient guide because, “What causes a company to be profitable is how it manages its other stakeholder relationships. And I think we’ve come to understand that.” Thanks Ed, we couldn’t put it any better ourselves.
Be well,
Martin Whittaker
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Martin and JUST board member Peter Georgescu penned an op-ed for Fortune explaining why, despite rising criticism, stakeholder capitalism is what America needs. Alan Murray featured the piece, along with our most recent BRT-related polling insights, in Wednesday’s edition of CEO Daily, and Marguerite Ward at Insider explores what might be driving some of the shifts in the survey data.
Our editorial director, Rich Feloni, spoke with UVA Darden School of Business professor Ed Freeman on how stakeholder capitalism has evolved as a theory over the past 50 years, and what he thinks of recent attacks on it. “Companies have to make money,” he said. “It’s a lie to say, well, they’re only stakeholder capitalists if they put making money second. No, what they might do is see them as connected.”
Vox featured last week’s survey insights showing an uptick of support for corporate vaccine mandates in this deep dive on the challenges companies are having navigating the issue.
Martin was also quoted in FT’s Moral Money defending ESG against recent critiques, saying, “Sure, ESG is by no means perfect…but to write off the entire ESG space as misrepresenting what they’re doing and having no impact at all is just plain wrong.” Dive deeper in his post on LinkedIn.
Virgin Unite features an editorial by JUST’s Yusuf George, PolicyLink’s Mahlet Getachew, and FSG’s Kendra Berenson unpacking what’s driving the actions in our CEO Blueprint for Racial Equity and how corporate leaders can get involved by sharing how our standards development can help support their work.
We’re heading to SXSW! Or … almost! Our panel “Building Tools to Advance Inclusive Capitalism” – featuring our own Alison Omens, Jean Case of the Case Foundation, Charisse Conanan Johnson of Next Street, and Otis Rolley of the Rockefeller Foundation – is live on the panel picker platform. But to make SXSW happen, we need your support! Simply follow this link to register and vote up our panel!
(JP Yim/Getty Images)
“The Statement on the Purpose of a Corporation reflected the view of our members that to succeed and profit over the long term, they needed to consider the interests of all their stakeholders – invest in their employees, keep the trust of their customers, partner with their suppliers and be a good member of their communities – to ensure all their enterprises flourish far into the future. The best modern CEOs have been running their companies in this way for a long time, they signed the Statement as a better public articulation of their long-term focused approach and as a way of challenging themselves to do more.”
“We’ve never approached clean energy or climate solutions as charity work. This is a business investment like all the other investments that Apple makes. … [Ignoring climate is] not just bad business, it’s almost dangerous to operate your business in a way that isn’t mindful of the impact on our planet and what it’s doing to people, to real lives.”
“Five years into Etsy’s program, we find that our overall employee retention is significantly higher than the industry average, and is higher among parents than non-parents. Women get promoted at the same rate (or slightly higher) than men. Half of our executive team are women, along with 43.7% of senior leaders and nearly a third of our engineers (about double industry benchmarks)…and women and men take parental leave at the same rate.”
CNN Business highlights why tying CEO pay to environmental metrics is one of the most effective ways to combat climate change.
Axios reports that climate change – and a company’s plans to address it – became a main theme in many Q2 quarterly calls.
More on the “Great Resignation”: The Washington Post reports that nearly a third of all American workers under 40 have considered changing jobs during the pandemic.
Bloomberg reveals that women’s board gains pushed a majority of the S&P 500 into the 30% club, with at least 30% of their boards comprised of women.
The World Economic Forum releases a study on how behavioral differences affect the gender pay gap. One interesting finding? Men graduating college typically held out longer for higher-paying offers, with women on average accepting a job a month before their male colleagues.
This week’s chart comes from our updated polling on the second anniversary of the Business Roundtable’s redefined Purpose of a Corporation. Currently, 65% of American workers believe that companies are doing well in promoting an economy that serves all Americans, a 20% increase since 2019, yet we see a different story when we explore perceptions around how companies are impacting individual stakeholders. Explore the insights here.
UVA Darden School of Business
That there is even a mainstream debate about stakeholder capitalism is good news to R. Edward Freeman, professor at the University of Virginia’s Darden School of Business. “I’ve been at this since 1977,” he said, laughing, referring to his first paper on the subject. “Eventually, some people start to pay attention. I don’t mean to me, but to the idea.”
Freeman has been quick to point out from the beginning that he did not coin the term “stakeholder” in a business context – he points to the work of the Stanford Research Institute and others in the 1960s – but his work in the ’80s developed an idea of business with responsibilities to more than shareholders into a practical management theory. It’s why we spoke to him ahead of the second anniversary of the Business Roundtable’s stakeholder-centric Statement on the Purpose of a Corporation. It was a statement that surprised him when it was released in 2019, but one that also made him happy.
We discussed some of the accompanying critiques of stakeholder capitalism that have been frequent over the past couple weeks, whether alleging the approach is misguided, impossible to truly achieve, or nothing more than “woke” nonsense. To him, these are variations of the same arguments that have existed for decades, from critics who are unwilling or unable to see shareholder and stakeholder value as linked. He also believes that the stakeholder movement has momentum beyond a tipping point. “There’s no going back,” he said.
By the time Freeman arrived at the Wharton School of the University of Pennsylvania as a postdoctoral researcher in 1976, he had spent years studying mathematics and philosophy, both economic and otherwise. His next challenge was management theory, and his boss at the time wanted him to see what was behind the stakeholder ideas being tossed around. That led to 1984’s “Strategic Management: A Stakeholder Approach.” The text is now regularly referred to in management research as foundational to an increasingly popular approach, but at the time failed to make an impact.
It wasn’t until the ‘90s, when shareholder primacy was the norm, even for the BRT, that he saw a renewed interest in his work. That accelerated with the financial crisis and then with what he calls “a perfect storm” of social movements, rising inequality, and political instability that followed. Freeman joined the board of Whole Foods founder John Mackey’s Conscious Capitalism organization, and has spent years consulting corporate leaders.
Early in our discussion, Freeman alluded to the way many Business Roundtable CEOs said their latest statement was less reactionary to these forces than a proclamation of how they had long been approaching business. Critics have latched onto that point as proof that the statement was a marketing gimmick, but Freeman explained his interpretation before jumping to one of of stakeholder capitalism’s prominent critics, Vivek Ramaswamy, whose book “Woke, Inc.” was released the day Freeman spoke with us.
The following interview has been edited for length and clarity.
Prof. R. Edward Freeman: Now that we realized this, we can get better at it. We can improve it. We can look for how creating value for customers affects communities or suppliers, etc. And there are lots of companies out doing that. So I’m extremely optimistic about that.
And no, I haven’t read “Woke, Inc.,” because a review I read pissed me off so much. “Woke” [used by critics to mean disingenuously or suffocatingly progressive] is one of those phrases like “political correctness” – it stops arguments. “Oh, you’re woke, so therefore I’m going to discount you.” I’m a philosopher by training and phrases that stop arguments like that are formal fallacies.
On the other hand, over the years, I’ve managed to piss off the left and the right. Left, they think I’ve sold out to business, and they don’t think business can do anything good.People on the right, on the other hand, think I’m a socialist. But I actually think what stakeholder capitalism is, it’s about the business model. It’s about how business actually works in the real world.
But there are a lot of people who are in the grip of this old story. They just can’t imagine business as anything but a duality between stakeholders and shareholders. I’ve never thought that was interesting.
JUST Capital: When you see recent pushback, are they the same arguments that you’ve been seeing for decades at this point?
Freeman: Oh, God, yes. I mean, none of this stuff is new. It’s a little bit like Wall Street and the academic world, finance and accounting people, have discovered ESG. Well, wait a minute. That’s been around since Abt Associates [a research institution that began using “social audits” in 1971 as a way of measuring benefits and costs of its research on its stakeholders]. Let’s get out of the grip that it’s only economics that counts. Let’s look at business as a societal institution.
JUST: There is another form of pushback that can start with, “We agree with these theories, but the companies that say they are following them are lying.” Harvard’s Lucian Bebchuk and Roberto Tallarita have argued that there is no evidence BRT companies are following their statement of purpose.
Freeman: Arguments like, “Everybody’s lying, here’s what’s really going on,” are problematic. Even if all you care about is making money for shareholders, how are you going to do it? You’re going to have great products and services for customers, suppliers who want to make you better, employees who want to be engaged in the company, and communities who want you or at least allow you to operate. I’ve only looked very briefly at the Bebchuk paper, but I’ve heard for a lot of years he’s very much caught up in the sort of standard way to think about governance. I read the law, even, differently. I read it as saying directors have a duty of care to the corporation. And what’s the duty of care to the corporation? Well, I’d pay attention to how they create value for their stakeholders.
Again, I think seeing it as a duality between stakeholders on the one hand and shareholders on the other is a mistake. That’s not to say that there aren’t some people acting in bad faith. But for the most part, I don’t believe businesspeople are like that.
JUST: Do you reject the premise of the argument, then, that for stakeholder capitalism to be real, that governance and bylaws within a company would have to be changed?
Freeman: I don’t think that at all. There’s this idea that you have to eschew shareholder value, but that that’s ridiculous. Companies have to make money. It’s a lie to say, well, they’re only stakeholder capitalists if they put making money second. No, what they might do is see them as connected.
JUST: Arguments do exist that a full rethink of how companies make money and function is needed – like Sen. Elizabeth Warren’s “Accountable Capitalism” message bill – but I’ve never seen that as the primary stakeholder capitalism take. Critics often do, however, and I wonder if they’re conflating those positions by mistake or in bad faith, because it’s easier to turn down for a broader audience.
Freeman: I think there’s some of both.
There are at least four ways you can understand stakeholder capitalism. The first way is this is just PR – greenwashing and virtue signaling. The second way is well, people mean it, but this is really just CSR [corporate social responsibility], just dealing with social issues. The third way is around top-down elites and government policy shaping business.
The fourth way is about the business model, and this is about understanding how business actually works. And that’s been my view for 40-plus years.
There’s a great back and forth with Milton Friedman and John Mackey a number of years ago, before Friedman died. [Freeman considers Friedman a “hero” for his research on markets, but believes he misunderstood how corporations operate.]
And it was clear that Mackey understood this the same way I did. We might need some top-down stuff, we might need to change how we think about capital markets, we certainly need better PR, and we need to worry about social issues – but fundamentally we need to change the story about business.
JUST: To me, the rise of stakeholder capitalism is linked to the rise of ESG investing. SEC chair Gary Gensler has said there’s going to be standardized ways of reporting climate impact from companies and then it’s highly likely that there will be some human capital metrics standards after that. Do you think companies should be run in the way where you’re looking at potential value creation and risks in things like climate and the composition of your workforce, or should ESG analysis be relegated to a form of investment? How do you see it?
Freeman: I would look at it slightly differently. The perfect storm here is a function of what happened in the global financial crisis. Add global warming, Black Lives Matter, Me Too, inequality on a global level, and political instability. What you get is a recognition that we need to change the way we think about this.
If you think the right way to think about a business, evaluating it from the outside, looking at the risks to the future cash flows, then you’re going to see risk in all of those things. And there’s nothing wrong with that – that’s right. If you’re on the inside, you’ve got to probably start from a different perspective.
Some people will look at that just in terms of the risks of the future cash flows, but some people will look at it in terms of what they stand for while they’re here. Purpose matters to most human beings. And I think, [BlackRock CEO] Larry Fink would say purpose might drive profitability. Again, we’re realizing how those things are intertwined.
There’ll be some standardized versions of ESG, but I’m a little skeptical of having that too standardized. When you do that you lose opportunities for people to do it differently. And one of the things we know about businesses is they’re not all the same. And so their ability to deal with things like global warming or inequality are different. From the company perspective, we need companies innovating.
ESG is great. I’m all for it. I’m a little amused by it, because it’s a new toy that people think they have just invented. But I’m also like, “Great, welcome to the big tent of stakeholder capitalism.”
JUST: I’ve seen the same arguments around management repeated in articles and research over the past century of American business. And in the ’70s, you can find almost identical arguments to today around CEOs getting too bold in taking political stances. But we’ve also seen in our polling research that the public, across demographics, does want CEOs to take stands. Yes, they tend to want them to take stands that they agree with, but they are looking for them to step up, which I think is fascinating. How do you believe this has evolved?
Freeman: Well, I’ve recently had conversations with a number of CEOs who have said things like, “I know I have to do stuff here. I just don’t know how.” That’s been an issue – I’ve started a new course called “Societal Issues in Business,” trying to help students figure out how to do it. Look, not taking a position is taking a position. So the idea that you can escape from this by saying, “Well, I only deal with economic issues,” that’s a political position – it’s a position that says economics and politics are completely separate, which we know certainly from Adam Smith on is a foolish idea.
Now, Friedman said we elect officials to do this. He was worried for the most part about corporate philanthropy, about executives supposedly giving away owners’ money. But setting that aside for a minute, he was also worried about companies doing stuff that they didn’t know anything about – and I agree that’s worrisome. I much rather see companies trying to figure out, for instance, how they can offer up opportunities with their business model to people who’ve been shut out of the system, or how they can encourage their employees to be community builders in the communities where they live. One of the other vectors that we have going on here is the multi-sector, multi-stakeholder partnerships where you have NGOs, governments, and companies sharing their expertise to deal with societal problems. I think that’s an equally important thing that’s going on.
And around polling – of course, you’re right. The public is firmly behind stakeholder capitalism. There’s not much ambiguity about that.
JUST: Do you see this moment as a turning point, similar to the way that shareholder primacy gradually went from fringe to mainstream ideologically, and then became ingrained through corporate leadership, judgments, and deregulation? Is the pendulum swinging back?
Freeman: Yeah, I think it is. I actually think we’ve gone past the tipping point. Nobody’s arguing that what we really need to fix everything is to double down on shareholder value. And for good reason – it doesn’t work. The best you can say about it is it’s incomplete.
What causes a company to be profitable is how it manages its other stakeholder relationships. We’ve come to understand that. One of the other things that goes on, at least here in the U.S., is of course younger people are demanding this of where they work, and that’s a good thing. The forces are such that I don’t think there’s any going back.
(Business Roundtable)
On Tuesday, a study from the new Test of Corporate Purpose (TCP) initiative shone a welcome light on how the largest American and European companies responded earlier this year to the COVID-19 pandemic and mass protests against racial injustice. The report underscored the importance of shifting to a stakeholder-led approach and holding companies to account for their commitments. After six years of polling, we know this is precisely what the American people want.
Yet the report also provides a vivid illustration of just how hard it is to definitively evaluate stakeholder capitalism as a movement. Declarative statements like the headline the New York Times used for writing it up – “Stakeholder Capitalism Gets a Report Card. It’s Not Good” – are not only premature, they deflect away from the real task of determining what exactly stakeholder capitalism is and how we can better measure it.
Take as an example one of the key conclusions of the TCP analysis. As it was framed in the Times piece: “‘Since the pandemic’s inception,’ the study concludes, the Business Roundtable statement ‘has failed to deliver fundamental shifts in corporate purpose in a moment of grave crisis when enlightened purpose should be paramount.'”
The story is much more nuanced than that.
On the one year anniversary of the BRT purpose statement this past August, we released new polling in partnership with The Harris Poll and ran an analysis of several key COVID-19 and racial equity data points to test how BRT companies were doing on serving their stakeholders against their Russell 1000 peers. (Stay tuned, as we’ll be releasing additional analysis after our annual Rankings release on October 14.)
Overall, we found that BRT companies actually out-performed their peers, even if they didn’t fully match the expectations of the public. Specifically:
We also looked at how the BRT companies responded to four critical issues regarding advancing racial equity in the workplace. Once again, their performance was, on a relative basis, superior to peers:
Different approaches to measurement naturally produce different results and help drive progress overall. For example, the sentiment analysis on which TCP’s study partly depends – supplied by TruValue Labs, a pioneer in the ESG space – can be an important piece of the overall picture in our view and is a welcome innovation in an ESG data industry not renowned for creativity.
Our approach takes a different tack, and looks at what companies are disclosing as well as myriad other sources of public information on their relative performance. It’s a painstaking process. This year we’re tracking 928 companies across 19 issues, five stakeholders, and 336 unique data points, and we have been closely tracking corporate responses to COVID-19 and racial equity issues throughout the spring and summer. We estimate our team has spent over 15,000 hours gathering and analyzing granular data; combing through proxy statements, CSR reports, internal communications, and press releases; reaching out to and engaging corporations; and factoring in publicly-reported controversies.
Our COVID-specific analysis, recorded in the JUST COVID-19 Corporate Response Tracker, covers over 80 types of corporate action including paid sick leave policies (with details about policy type, eligibility, weeks of leave, and barriers to access); health and safety precautions for workers and customers, including provision of free PPE to workers; and whether companies had expanded emergency grants for workers, offered bonuses, offered temporary or permanent wage increases (and how much), or increased the pay rate for overtime work, among other details about the financial assistance provided.
The point is that measuring corporate stakeholder performance is complicated, and without standardized and disclosed metrics, along with a common understanding of what precisely is being measured and why it’s being measured, real progress will remain elusive.
Operating from a common framework is one way we get there. We celebrate the World Economic Forum’s International Business Council report on ESG metrics, also released Tuesday, as an important milestone on the journey towards shared measurement standards.
And we vow to continue our own efforts to bring greater overall transparency and accountability to the corporate stakeholder performance world in order to put stakeholder capitalism itself onto a practical, solid foundation.
When the New York Times Magazine published Milton Friedman’s essay, “The Social Responsibility of Business Is to Increase Its Profits,” 50 years ago, Friedman was six years shy of his Nobel Prize win and not quite yet on the path to becoming one of the world’s most influential economists of the 20th century. And while his various ideas had growing clout in libertarian circles, his “Friedman Doctrine,” as the Times dubbed his theory about the role of corporations, still had an air of being radical for its time.
Friedman had been an advisor to Republican presidential candidate Barry Goldwater, whose conservative ideology resulted in massive defeat in 1964 but two terms for Ronald Reagan in the ’80s; Friedman’s book “Capitalism and Freedom” (one of its chapters is the basis for the Times essay) was a flop when it was first published in ’62, but was a bestseller by the time he was advising Reagan here in the US and Prime Minister Margaret Thatcher in the UK.
There are many reasons for this transition, but as for the idea of shareholder primacy laid out plainly in the Friedman Doctrine, it grew in appeal in the ’70s as corporate profits declined and America’s trade deficit grew. Put simply, the role of a corporation that Friedman had been pushing for years was about to have its time. It’s a time that we’ve been living in for the past four decades, and one that we at JUST Capital think has lasted long enough.
Average wages have stagnated, and the level of wealth and income inequality has persisted at pre-Great Depression levels. The financial crisis of ’07-’08 awakened the majority of the country to this destabilization of our economy and society, and the pandemic has been another cruel reminder. Six years of polling the American public, including COVID-era surveys done in partnership with The Harris Poll, have shown that Americans want business leaders to play a role in tying their corporate purpose to society rather than profits at all costs, and an increasing chorus of executives, academics, and politicians are agreeing.
As we look back at the capitalism of the past 50 years, we’re considering where it needs to head to make stakeholder capitalism, the alternative, a reality. We’ve collected insights from prominent supporters for an idea of what that can look like.
In her book “Reimagining Capitalism in a World on Fire,” Harvard Business School professor Rebecca Henderson argued that the reign of shareholder primacy led corporations to treat social capital, like workers’ livelihoods, and natural capital, like the health of the environment, as “free.” Now, she wrote, as executives consider the risks posed by a climate crisis and inequality-fueled populism, they’re starting to realize that these resources are, in fact, expensive.
Both are leading more companies to recognize that they have a responsibility to the health of a society, and can’t have the extent of that be lobbying for policies that will benefit their industries.
Henderson sent JUST the following:
The most critical action we can take to “fix the system” is to change the rules. I’m a huge fan of capitalism at its best, and I think that free markets are one of the great inventions of the human race – but they only work their magic when markets are genuinely free and genuinely fair. For that to happen, prices have to reflect real costs, and at the moment, our failure to price in the harm from greenhouse gas emissions is causing immense distortions. We also know that vast disparities in education and healthcare – often in combination with continued discrimination against people of color – has meant that many people don’t have the opportunity to participate in the free market in a way that could reach their full potential.
We need to rebalance capitalism. We must remember that free markets must be balanced by democratically accountable, transparent governments and strong civil societies, if we are to build a just and sustainable future. Business must step up to make this possible. Our economies, and with it our firms, will suffer enormously if we don’t address the problems that we face. Working them is already opening up billion dollar opportunities across the economy.
The purpose of business is not maximizing shareholder value – that was only ever a means to an end. The purpose of business is to build a thriving and prosperous society. And right now, that requires taking a wider view.
Perhaps the economist most directly opposed to Friedman’s ideas on markets is fellow Nobel laureate Joe Stiglitz, of Columbia. Before I joined JUST, I interviewed Stiglitz in depth on the topic. The two knew each other, and had long debates.
Friedman believed that the “invisible hand” of market forces, as applied to competitive industries, would allow companies fixated on maximizing profit to in turn benefit all stakeholders. That is, prioritizing short-term gains leads to optimized management and capital allocation, which in turn allows the company to grow and make higher returns, when then in turn leads to more jobs, better products, and other benefits to society.
Stiglitz told me at the time that it was a rejection of the Keynesian system that had become the norm by the time Friedman was writing – and John Maynard Keynes himself noted in 1936 that the American stock market encouraged the pursuit of short-term gains benefitting investors at the expense of long-term ones benefitting society. The debate going on today is not a new one, the world has just drastically changed around it.
Stiglitz argued that Friedman’s belief “was not based on any economic theory.” Stiglitz and the economist Sandy Grossman published a paper in 1980 that stated that while market equilibrium that the invisible hand was always guiding us toward could exist in theory, it could not in reality – meaning Friedman’s theory would fall apart.
Stiglitz wrote in his 2015 book “Rewriting the Rules of the American Economy” that the Friedman Doctrine became entrenched in American business through deregulation, lower taxes, and relaxed antitrust laws, which created a climate fostering activist investors.
He wrote: “If all of this had led to more efficient and innovative corporations, that would have been one thing. But in fact, the new ‘activist’ investors pushed for seats on boards and pressured management into policies that were viewed as more ‘shareholder-friendly’ — meaning friendlier to short-term investors — including increasing dividends and buyouts.”
Proponents of Friedman’s approach will say that the way CEO pay increasingly became tied to stock performance during this time keeps CEOs accountable to their shareholders. As Stiglitz argued, it instead is “an incentive to manipulate stock prices by using company money to buy back shares in order to drive prices higher.” Stepping back, the average ratio of CEO-to-median-level-employee pay from 20-to-1 in 1965 to 295-to-1 in 2018.
BlackRock CEO Larry Fink, head of the world’s largest asset manager, helped take the pushback against the prevailing system into the business mainstream when he wrote in his annual letter to CEOs a couple years ago that his firm would only do business with companies that clearly defined their long-term business strategy and connected it to social benefits.
Fink wrote: “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.”
It’s critical to note that when we talk about stakeholder capitalism, we’re not talking about merely a change in rhetoric. We will need to rethink how we measure value creation if proclamations like the Business Roundtable’s revised purpose of a corporation are to mean anything substantial.
Columbia Journalism professor Nicholas Lemann (disclosure: he was dean when I attended) tracked the evolution of American capitalism over the past century in his book “Transaction Man,” which provides valuable context for today’s debate. In a comment shared with JUST, Lemann wrote that while shifts in public opinion can create an environment for change to our economic system, reforms to capitalism have always come from structural change. He wrote:
Milton Friedman may have stated the basic premise of the shareholder revolution first, but in many ways the revolution’s most important founding father was Friedman’s younger colleague Michael C. Jensen. “Theory of the Firm,” an academic paper that Jensen, as a young professor at the University of Rochester’s business school, coauthored in 1976, began to suggest a number of techniques that could be used to instantiate Friedman’s idea. Most of these tried to get managers to act like owners, by, for example, making then the actual owners (as in leveraged buyouts and private equity), or by paying them mainly in the form of stock options. Ideas become reality when there are structures to make them do so.
In thinking about the nearly century-old back and forth between stakeholder and shareholder capitalism, we tend to pay too much attention to fuzzy factors like the national ethos and the intentions of managers and shareholders, and too little to structures. The conventional wisdom about stakeholder capitalism in its post-second World War form is that it was produced by the economically secure position of American industrial corporations, and by the benign impulses of the corporate executives of the day. But this was actually a world created by government policies, beginning during the New Deal — policies that made organized labor more powerful, that put corporations under heavy government regulation, and that restrained the power of Wall Street firms. And in the 1970s, a new generation of government policies, most of them deregulating finance in a variety of ways, undergirded the shareholder revolution.
I am skeptical that the new stakeholder revolution, proclaimed last summer in a statement produced by the Business Roundtable, will not amount to much unless government is once again in the picture. It’s unlikely that the statement would have been written if there weren’t already rising and impossible to miss global political animus against big corporations. And corporations can’t practice true stakeholder capitalism unless they are legally freed of their primary fiduciary obligations to their shareholders. Look at politics in 2020, at least in the Democratic Party: you can sense the next wave of policy approaching.
Changes that would be secured in public policy can begin in the private sector. Before COVID became a global pandemic in March, one of the hottest topics in business was the future of ESG (environmental, social, governance) investing and the consolidation of ESG metrics, as “sustainability” can currently be defined at the whim of investment firms or companies themselves.
There has been progress on that front. JUST CEO Martin Whittaker, however, said in a new editorial for Business Insider that this logic must also be applied to business operations. Speaking for the Business Roundtable, GM CEO Mary Barra told Fortune that last year’s statement on purpose “was catching up with reality,” and that the CEOs who signed it had already been balancing the needs of their investors with the needs of their other stakeholders. Whittaker said that while that may be true, if the stakeholder capitalism that an increasing number of corporate leaders are endorsing is ever going to replace shareholder primacy, then total shareholder return as a guiding light is going to have to be replaced with “Total Stakeholder Return.”
Friedman wrote in his Times essay that if CEOs allocated money in ways that did anything aside from maximize profit, they were imposing a tax of sorts on their shareholders and customers. This operates on the assumption that if a CEO were, for example, to decide to take somewhat of a hit in a quarter during a pandemic to provide robust worker benefits, they were cheating their investors and the people who buy their products and services. But it does not take into account the future value of these investments – a healthy, financially secure workforce is a more productive and stable one for the duration of that pandemic – or, as JUST has shown for the past six years, what the public actually wants.
As Whittaker wrote in the editorial mentioned above:
Our polling, done in tandem with The Harris Poll, suggests that a substantial majority of the public — regardless of background, age, location, or political ideology — supports the idea of companies creating value for all their stakeholders. Last year, our survey respondents prioritized key stakeholder issues with the following order of importance: workers (35%), customers (24%), communities (18%), environment (11%), and then shareholders (11%). (Percentages reflect relative prioritization of these stakeholder categories based on representative survey populations.)
To be clear, this does not mean that the stakeholder necessitates sacrificing your company’s financial performance for a perceived moral good, or otherwise cloaking profit maximization beneath a soft, PR-friendly mask; on the contrary, our research suggests companies that lead in meeting the needs of all their stakeholders have outperformed the laggards by almost 30% over the past four years — and by double-digit margins throughout the pandemic. They also have lower risk profiles, decreased market volatility, shallower drawdowns, and greater profitability.
Companies are recognizing this. It was remarkable to see, for example, how many corporations responded to the George Floyd protests against police brutality and racial inequity this summer with significant investments in diversity and inclusion efforts within their own organizations, as well as through sizable charitable donations.
JUST and The Harris Poll found that the large majority of Americans either somewhat favored or strongly favored CEOs responding to the protests with a statement about ending police violence (84%), promoting peaceful protest (84%), elevating diversity and inclusion in the workplace (78%), condemning racial inequity (75%), and condemning police killings of unarmed Black people (73%). It’s important to remember that before this year, most corporations would want to steer clear of such hot topics. But Americans, in their roles as workers, customers, and shareholders, are considering businesses in a way that would be anathema to Friedman.
As Ford Foundation president Darren Walker told CNBC in June, “More is going to be demanded of corporations, and more should be demanded, because they have a tremendous influence on how we live our lives.”
Friedman was right to point out that many CEOs couching their actions in moral rhetoric were being deceptive – and anyone who follows ESG investing knows all too well about “greenwashing.” If a company was investing in a community it operated in, Friedman argued, it was doing so because it could strengthen their business, not because of a moral imperative.
What’s interesting is that corporate leaders are not contesting Friedman’s point, but rather countering it. For example, JPMorgan Chase has, over the past decade, made significant investments in communities, but embrace rather than hide the way it is benefitting their business. Peter Scher, JPM’s head of corporate responsibility and chair of its mid-Atlantic region, wrote to JUST:
This year has provided a stark reminder of why business must play a proactive and deliberate role in supporting and rebuilding our communities.
With the COVID-19 pandemic exacerbating longstanding economic and racial disparities around the world, it is critical for business to step up and play a major role in creating opportunity and level playing field for dramatically more people. It’s not only the right thing to do, but it’s an economic imperative and good for the future of business. This is the new definition of capitalism. It is no longer just about a company’s short-term bottom line, it now includes businesses responsibility to society – how we support our employees and how we invest in the communities, especially those who have struggled and been underserved for decades. We, as business leaders, must step up to help solve systemic problems, and use our capital and other resources to do so, because that is in the long-term interests of our companies and our shareholders.
JPMorgan Chase is using our business expertise, policy ideas and philanthropic investments to help create an inclusive recovery and racial equity. We’re doing this in four major areas: skills development and careers, financial health, neighborhood development, and small business. And through our JPMorgan Chase PolicyCenter, we are advancing policies that remove barriers to economic opportunity, including second chance opportunities for those who have been part of our criminal justice system.
Detroit’s continued turnaround provides a good example of how business can collaborate with local government and community organizations to help those who have struggled for decades. JPMorgan Chase, along with other companies, have worked closely with Detroit and Michigan’s leaders to provide capital, jobs, training, technology, and a host of other resources to help Black Detroiters and many of the city’s neighborhoods recover and rebuild. We’ve done business in Detroit for 85 years: a long-term investment in its revitalization is not only good for Detroiters, it also makes very good business sense.
Businesses have a collective responsibility to lift up the communities that we serve and invest in the future – for our shareholders, customers, employees, and communities. When our communities thrive, we all thrive.
It’s easy to see how the same logic applies across the board.
For workers, Zeynep Ton, president of the Good Jobs Institute, has shown in her work how neglecting workforce investments for the sake of cost-cutting and profit-maximization has resulted in “bad jobs” that destabilize a business. Employees that are trusted with “good jobs” and rewarded fairly are more motivated and productive, which results in a better customer experience and, in time, better shareholder returns.
It also makes sense why companies like Microsoft and Apple boldly embracing green energy. Former Vice President Al Gore’s firm, Generation Investment Management, showed this year in its annual Sustainability Trends Report that in two-thirds of the world, wind and solar power are the cheapest forms of energy during the coronavirus crisis. As our ESG team put it, “That means companies here in the United States have an opportunity to cut costs, reduce carbon emissions, and maximize operating efficiency.”
At the World Economic Forum’s annual meeting in Davos in January, Microsoft CEO Satya Nadella said, “The fundamental source of all value in capitalism still comes from the planet and the people who live on the planet, and if the planet is in danger, what happens to capitalism?”
Friedman railed against any implication that businesses should exist as charities. Proponents of stakeholder capitalism agree with him – it’s just that the past 50 years have given us an excellent case study on what a singular focus on profits yields, and the evidence suggests a stronger alternative is possible. Profits enable companies to grow and benefit all of their stakeholders. But when corporate leaders and investors can capture the value, short- and long-term, of investments across workers, customers, communities, and the environment, in addition to shareholders, they can make decisions that strengthen their business for many years.
And that means a stronger economy, and a stronger country.
We’re coming up on the 50th anniversary of the essay in which Milton Friedman argued the only role a corporation had in society was to increase its profits. By the turn of the century, that idea became the accepted way of running a business – but, looking at where it’s led the United States, the majority of Americans are embracing an alternative, stakeholder capitalism.
Since 2015, JUST Capital has surveyed more than 96,000 Americans on what they believe U.S. companies should prioritize when it comes to just business behavior. For the past three years we found that four out of five Americans (79%) agree that employees don’t share enough in their companies’ success, and that a majority believes that companies prioritize their shareholders above both employees and customers. While we agree there is room for improvement, arguments in support of shareholder primacy, or against stakeholder capitalism, in the summer of 2020 are difficult to understand – since they are out of sync with the voice of the American public, institutional investors, shareholders, and corporations themselves.
In August 2019, The Business Roundtable (BRT). issued a groundbreaking new Statement on the Purpose of a Corporation that has shaped the dialogue around stakeholder capitalism over the past year. Shortly after, JUST Capital released its “Roadmap for Stakeholder Capitalism” and the results of our 2019 Survey, detailing the Issues and stakeholders the American public wants U.S. companies to prioritize most to restore declining trust and create an economy that works for all Americans.
The key takeaway? Across many demographics – liberal, conservative, high- income, low-income, men, women, millennials, and boomers – Americans placed worker-related issues like pay, benefits, and treatment at the heart of just business practices. They also prioritized customer treatment, community support, environmental protection, and shareholder return – aligning them overall with the BRT’s view that companies must serve all their stakeholders.
According to a recent OECD report on the makeup of the owners of global equities, “institutional investors hold 41% of global market capitalization, much of which is in the form of passive indexing.” Larry Fink – CEO of the world’s largest asset manager, BlackRock – has written extensively on the topic of stakeholder capitalism, stating “each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders. … The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society.”
As JUST Capital stated in our response to the DOL’s proposed rule change for ESG in retirement plans, the American people are the ultimate beneficiaries of American companies, through their ownership in ERISA-sponsored plans, other retirement plans and ownership vehicles, and the final taxation and regulatory power of the U.S. Government.
Per the OECD, “14% of global stock market capitalization is held by the public sector. Either through direct government ownership or through sovereign wealth funds, public pension funds and state-owned enterprises. And in almost 10% of the world’s largest listed companies, the public sector holds more than 50% of the shares.” Those public pension fund beneficiaries are the type of average Americans JUST Capital is reaching with our polling efforts. The OECD goes on to say that “with public sector ownership at these levels, it will be important to consider how political priorities directly and indirectly influence corporate decisions as well as their economic effects on ultimate beneficiaries such as tax-payers and pensioners.”
During this summer of protests around racial equity and injustice, JUST Capital hosted a discussion with representatives from two of America’s largest pension funds, the New York City Employees’ Retirement System and the California State Teachers’ Retirement System (CalSTRS). The conversation explored how many CEOs have responded with statements to support racial equality and commitments to improve their company’s efforts, but focused on the fact that investors want to know if companies are going to “put their money where their mouth is.”
“When we talk to companies, they certainly like to tell us all the great stuff they are doing to promote diversity in their companies, but we have no way to evaluate that,” said panelist Michael Garland, assistant comptroller for corporate governance and responsible investment for the New York City Office of the Comptroller, which oversees the city’s pension funds. The comptroller recently sent letters on behalf of the city’s employees’, teachers’, and board of education funds to the CEOs of 67 S&P 100 companies that issued supportive statements on racial equality, calling on them to affirm their commitments with concrete action by publicly disclosing their annual EEO-1 Report data. “We have no way to tell what’s real and what’s not,” Garland said, “so give us the numbers so we can actually assess your performance.” Garland also explained it is in the companies self interest to disclose.
While public companies have adopted stakeholder capitalism to varying degrees, the research shows that it is already the norm. A July 2019 Stanford University study based on a survey of over 200 CEOs and CFOs of companies in the S&P 1500 Index, found that “CEOs and CFOs claim that stakeholder interests already play a considerable role in the management of their companies.” The report went on to show that “89 percent [of the CEOs and CFOs surveyed] believe it is important or very important to incorporate the considerations of these groups in their business planning; only three percent believe it is slightly or not at all important. Furthermore, most (77 percent) do not believe that shareholder interests are significantly more important than stakeholder interests.” The Stanford survey went on to say that only half of the CEOs and CFOs surveyed believe their stakeholders understand what the company does to meet their needs, suggesting they are doing the work but don’t believe they are getting the credit for their efforts.
JUST Capital looked at how the Business Roundtable signatories scored by our methodology.
For the 134 signatories that were included in our 2019 Rankings, we analyzed those companies across five stakeholder groups – including Workers, Customers, Communities, the Environment, and Shareholders. Here’s how these companies stack up:
You can see that the 134 Business Roundtable signatories are performing well above average when it comes to serving their stakeholders, except for Customers, where we are measuring issues like creating quality, safe products that do not harm health, the environment, or society, and protecting privacy.
Specifically, compared to other Russell 1000 peers not in the JUST 100, the Business Roundtable signatories perform:
Timed with the one-year anniversary of the Business Roundtable’s landmark redefinition of corporate purpose, JUST Capital asked the public how they believe companies are performing as they shift from a myopic focus on shareholders to better serving the needs of all stakeholders. Out of the 2,000 Americans surveyed; the majority (63%) believe large companies are doing well in “building an economy that allows each person to succeed through hard work and creativity.” The overwhelming majority (90%) placed the onus on companies to “build an economy that works for all Americans.”
Versus last year, the results were encouraging, and represent progress – 58% believe that large, public companies are doing well walking the talk – by a margin of about 14 percentage points in the past year. As companies continue to invest internally and externally on implementing an approach that values all stakeholders, JUST Capital will continue to shine a light on their progress through our annual rankings in Forbes, investment products which feature top corporate performers by our methodology, and convenings celebrating profiles in leadership.
