Did the Business Roundtable just sound the death knell for shareholder primacy?

The Business Roundtable, one of the most powerful pro-business lobbying groups in the United States, released a new policy statement today that demonstrates just how much business thinking has shifted in the last decade about how to measure the success of a company. In its August 2019 Statement on the Purpose of the Corporation, the Business Roundtable’s membership—more than 180 CEOs of companies that together employ over 10 million people—and its chairman, JPMorgan Chase CEO Jamie Dimon, closed the chapter that puts returns to shareholders at the center of the license to operate. The new statement acknowledges shareholders on a par with the critical contributions of, and responsibilities to, a company’s employees, suppliers, host communities, and the environment.

This is not exactly an earth-shaking idea. The drumbeat of broader stewardship has been building for years now, whether through the actions of beloved, mission-driven B Corps like Ben & Jerry’s or Patagonia, the work of organizations and individuals like the influential law professor Lynn Stout, or through any number of global brands represented in the Business Roundtable that have been “on message,” like PepsiCo, where “performance with purpose” has been the mantra for over a decade.

But the message today is meaningful. The Business Roundtable is the closest we come to the voice of Corporate America. When its member companies take a stand, it’s a close approximation of what an important segment of the entire US business community thinks—specifically the large, complex, globe-hopping, economically powerful businesses with deep supply chains. If the Business Roundtable weighs in on an issue, you can assume it has standing in the wider business community.

Previous purpose-of-company statements from the Business Roundtable have explicitly endorsed the concept of shareholder primacy. The new language represents a much-needed modernization.

A message from Dimon about the new statement takes us to the heart of the change: “The American dream is alive, but fraying,” he said in a press release introducing the policy change. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”

The last time the Business Roundtable made a major pronouncement about business purpose, it was playing catchup with prevailing thinking in governance, just as it is today. Milton Friedman and his acolytes began the campaign for shareholder primacy, to place the shareholder at the center of business decision-making, in the early 1970s. The Business Roundtable waited until 1997 to reframe its own mission statement in tune with that idea.

But today the pendulum has turned back to a more balanced view of the corporation, which the Business Roundtable embraced at its founding in 1972. The 1997 statement has now been deemed out-of-step with contemporary views. This shift has many authors—especially the leadership of big US companies like Costco, Southwest Airlines, and Panera Bread, whose strategies and track record are consistent with employee centric-thinking.

But the work continues. While the rules have changed, the purpose of the corporation will continue to be best understood through actions and operations more than words. Data on how much of the recent tax cuts was paid out to shareholders, versus how much was invested in employees or infrastructure, demonstrates that the stock price still dominates the focus of board rooms and executive suites. And ultimately, pay packages loaded up with stock send a stronger signal to managers than any mission statement can.

The Roosevelt Institute reports that “over the last decade-and-a-half, firms have sent 94% of corporate profits out to shareholders, in the form of buybacks, as well as dividends, leaving companies to argue that there is little available for employee compensation or investment (Lazonick 2014).” There remains much work to do. But this new statement from the Business Roundtable signals progress—it puts real points on the scoreboard for those of us who have long argued for reform in the way companies think about their purpose and their responsibilities to society.

Two parts of the message stick out for me. One is the new statement’s prominent affirmation of the value of capitalism and of companies. “We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all,” the statement notes in its opening paragraphs. “Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services.”

It’s an important reminder that we indeed need business. In our compulsion to understand how an institution like Boeing went off the rails—or in the shock of uncovering the commercial interests behind the opioid crisis—we forget that products and services we take for granted, from air travel to medicines, are the product of business ingenuity and investment. We won’t solve our most complex problems without business at the table. Nitin Nohria, when he was appointed dean of Harvard Business School in 2010, said it best: “None of the major problems confronting the globe today—sustainability, health care, poverty, financial-system repair—can be solved unless business plays a significant role.”

Two, the Business Roundtable statement makes clear that executives’ natural interest in management can reassert its dominion over financial markets. Now finance classrooms need to catch up as well, to acknowledge how much our thinking about the purpose of the corporation has changed this decade. The Business Roundtable’s statement confirms common-sense management: of course the business needs to pay more than a poverty wage to command respect and loyalty and productivity; of course the lines of sight into your supply chain need to consider, as Google’s does, the working conditions and wages of the contract workers who work in your name, if not on your payroll.

Your employees, and the shareholders who have had your back for decades—rather than days, or hours—agree.

Author Judith Samuelson is founder and executive director of the Aspen Institute Business and Society Program. Find her on Twitter at @JudySamuelson or on email at JSamuelson@AspenInst.org.

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