That may sound nice in theory, but as long as government sees its role as catering to the private business sector[sup]*[/sup] then I have no problem with private businesses trying to be socially responsible.
I’ve always thought that “maximizing shareholder value” is just a pretense that could justify almost any reasonable corporate action. Cut wages/lay off people? Reducing costs and returning value to the shareholders. Increase wages/hire more people? Attracting higher quality workforce/expanding productivity to grow the business. Doing the bare minimum to meet regulations? Being cost efficient to maximize shareholder value. Investing in non-essential efforts to improve environmental sustainability of the business? Improve the corporation’s social standing and reputation to ensure that it can continue to do business (also avoid lawsuits, boycotts, and other costly problems).
Agreed, and I hope more companies take the stance that maximizing worker wellbeing and being socially/environmentally responsible IS one way to maximize shareholder value. Ultimately, though, investors decide whether they agree with that approach.
The problem with this is that it isn’t sustainable. Private businesses compete against each other, and the socially conscious one is going to be at a disadvantage to the one that is free to act.
If they aren’t… that really means that WE, the customers, are the socially responsible ones. We are buying the higher priced recyclable or organic product over the cheaper non-recyclable type. We are buying the higher priced “fair trade” goods over the lower priced “unfair trade” goods.
If they are at a disadvantage, then their shareholder loving competitors will use that disadvantage to drive them out of business. Or at least take many of their customers.
The plus about having the government take action is that it impacts all companies in the market equally.
The Business Roundtable is a highly-respected lobbying organization that basically advocates for the interests of big business to all levels of government and in the court of public opinion. There members are a who’s who of high-profile corporate CEOs. Here is a link to some of the Business Roundtable’s contacts with the government on regulatory issues.
https://www.google.com/search?q=site%3Agovinfo.gov%20"the%20business%20roundtable"&cad=h
The first link for me is a transcript to President Obama’s speech before them. The Business Roundtable is pretty influential if they can bring a U.S. President in for a chat.
As blindboyard notes, the simple reading of Dodge v. Ford is that companies have to be run in their shareholders’ interests, not as charities or exclusively in their employees’ interests. However, there are decades of cases retrenching from the absolutist view that that the “shareholders’ best interests” are exclusively in maximizing profits or dividends over any particular time period. Generally, a corporation’s decisions will be evaluated based on the business judgment rule. As long as the corporation can articulate a good business reason for making a decision, it will generally be defensible under the business judgment rule. Higher salaries pay benefits like reducing employee turnover and increasing loyalty, which might do things like cut down on sick days, shirking, and theft. It might reduce the chance that competitors can hire your talent away and compete with you. It might reduce incentives to unionize, which could complicate management. Hiring more employees gives you greater lobbying clout in the employees’ districts. Paying your suppliers more might reduce the chance that they will go bankrupt and disrupt your production. Incurring costs to protect the environment reduces future environmental damage liabilities. Charitable donations improve public perception of the business. The list of things that are permissible under the business judgment rule, Dodge v. Ford notwithstanding, is nearly limitless.
Today’s Business Roundtable position is suprisingly liberal compared to its historical positions. The executives signing on probably each have their own reasons for supporting the statement. Some corporate insiders talk a progressive game without actually being progressive (Jamie Dimon). Some are the heads of companies whose customers are probably more liberal, who need good public perception, and whose companies won’t themselves be much harmed by these types of policies (Apple’s Tim Cook). Some are companies with dreadful reputations who could not publicly stand against a statement like this supported by so many other CEOs (Walmart). Some are just sincerely progressive leaders who truly believe that this is in the best interests of their country (Larry Fink of BlackRock).
I doubt it will change business practices dramatically in the near future but it could, perhaps, be an early sign that business leaders are reconsidering the long-term political viability of take-no-prisoners capitalism that fails to create widespread economic benefits for most voters.
Dodge v. Ford doesn’t say anything about what timescale directors must work on. The general idea of this sort of announcement is that being a good corporate citizen maximizes shareholder value in the long run (as opposed to the corporate-raider policies that maximize short-term share values).
It’s not really theory, it’s how things largely work in practice. Back to, few people really believe the CEO’s see general social welfare as their corporate mission. Basically, the free market system (which includes various necessary govt imposed rules and regulations) creates wealth, more than ever in history, and some of that is taken in taxes to provide societal needs the market would not.
The idea that CEO’s greatly modify this arrangement via their sense of social responsibility is highly questionable as a practical matter not just in theory. But it’s also basically wrong as a system and should not be encouraged. It has a basically fraudulent premise, giving CEO’s personal credit for giving way other people’s money, as well as using that as an excuse not to do their actual job, maximize long run shareholder value, an additional smokescreen they can throw up. As in Jeff Immelt, big time value destroyer for GE shareholders, ‘but look at how socially responsible I [say I] have been’.
In some cases flaws in the political system might be an excuse to adopt suboptimal policies. For example there should not be a corporate income tax. Corporate profit should taxed at the investor level. But some corporate income tax is probably a necessary compromise with pandemic economic illiteracy and populism (though certainly should not be raised again in the US, personal taxes should be raised if more revenue is needed). Adopting the idea that it’s beneficial for CEO’s to give away shareholder money, or that they even really would in a major way once you get past the BS, is a bridge too far IMO. It’s a bad, phony idea that people ought to be able see as such.
The market will always determine that. As long as the CEOs of my retirement funds look out for the best return, I won’t have to worry about the price of cat food, maybe just ribeyes or sea scallops.
Why is it fraudulent if it’s publicly known? People who choose whether to invest in the company have that information; and may actually be choosing to invest in the company specifically because they think it’s socially responsible.
That might be fine if, at the same time, government would operate solely in the interest of individuals and leave corporations alone to succeed or fail with no favors from the government. As long as companies donate to campaigns, and lobby politicians, then they are choosing to take on a role in shaping public policy.
You seem to want a country where the government acts only in the interest of the people, and corporations act only for themselves. Maybe that would work, but you’re focusing on only the second of those two conditions. Without both, I think it would be trouble.
The problem is suggested by the last phrase, ‘they think’. The biggest real world problem with public stock companies is what’s called ‘the agency problem’, how the personal motives of their management might not be fully aligned with that of shareholders, and how it’s difficult for investors to fully see this from the outside, asymmetry of info between them and managers.
Pursuit of long term share holder value as the key goal tends to minimize this problem, though it can’t be entirely be solved in any human system. But achievement or not of that simply defined goal is pretty apparent in the long run. Again say GE stock between the Jack Welch and Jeff Immelt era’s. Although you still can’t tell 100% what impact various external factors had, and you can’t tell from company stock performance whether it followed all applicable laws and regulations: law enforcement and regulatory bodies have to do that*. But it’s a pretty simple metric.
‘Social responsibility’ is in comparison a very complicated and subjective measure, very subject to what ‘they think’ being different than reality. Also it tends to directly exacerbate the agency problem, where ‘socially responsible company’ (whatever that really means*) tends to accrue as personal accolades for managers, by giving away other people’s money. A prime example of a perverse incentive.
It’s fundamentally better IMO to keep the private sector focused on objective measures of wealth creation, within established neutral regulations and laws. Then the political system can specialize in subjective judgments about what is the social good, who needs to be subsidized more, who needs to be taxed more, etc.
*it bears repeating that following all laws and regulations is not by my definition ‘socially responsible’, that’s not being an illegal enterprise. Also, investing in employee training or education, or moving to environmentally sustainable processes isn’t either if it yields long term shareholder value which it very well might (more productive employees/less turnover, lower costs than having to suddenly implement new processes when required by law in the future etc). My definition is things managers would do that decrease shareholder value, even in the long run. Again, if there are no such actions proposed, there’s no reason to say shareholder value isn’t still paramount, except the very moral hazard issue I’m talking about: CEO’s using their positions to try to be public heroes because that feels good. That’s a fraudulent motive, doesn’t need to be secret to be so, I see it well enough and still believe so. 
It’s inevitable that company shareholders* will try to influence gov policy in their interests as long as the body politic decides that extensive govt involvement in the economy is desirable. Which it might be, anyway a judgement call how much it should be, there is no objective answer. This isn’t a good excuse to encourage worse corporate governance policies. And allowing managers the excuse of ‘but I was being social responsible’ when they fail to create shareholder value is an example of a regression in corporate governance policy IMO.
Again, the govt’s failure to act in the overall public interest (assuming that’s the case, another broad fuzzy subjective topic) is something the public has to address. Nobody else will. CEO’s placing themselves ‘above it all’ certainly won’t. So there’s no good reason to encourage bad corporate governance (again give CEO’s cover to pursue their personal interests when against shareholder interest under the rubric ‘socially responsible’) seeking to improve public governance.
You keep trying to say my approach is ‘too theoretical’ but I think it’s really yours which is. It assumes the existence of some highly motivated above-it-all players in the system, in this case (rather incredibly) corporate CEO’s. The reality is that corporate CEO’s will pursue their own personal interest just like every other player in the system. It’s best to align their personal interest with a relatively simple and objective metric: maximize shareholder value, while following all laws and regulations. Then let the public through the govt deal with the ‘rough edges’ of that outcome, without pretending somebody else will ever really do that, in the real world.
*in general the agency problem doesn’t seem so severe in corporate advocacy. Generally the company managements advocate for what’s in their shareholders’ interest, though also the person interest of CEO/management. Anyway ‘companies’ never advocate for anything, company managers do. They either advocate for what’s in their interest and shareholder interest, or what’s in their interest and against shareholder interest. The system is best if it maximizes the tendency to do the first, then the voting public has to police that by voting out govts which act against voter interest. No way around that. It’s not helped by encouraging managements to advocate in their own interest against shareholder interest, or by imagining that managements would advocate against their own personal interests in any consistent and sustained way.
It’s a complicated world. Trying to run it as if the simplest metric available is the only one that matters doesn’t generally work very well.
If people are buying into the company because they want social responsibility, then acting in that fashion will increase shareholder value, at least in the short run, and quite possibly in the long run.
– it’s in general going to be really difficult to judge, in many cases, whether a particular behavior of a company will decrease its shareholder value in the long run. So that’s not a simple metric, either.
If acting in a socially responsible way increasing shareholder value because of all the good vibes the customers get, then there is no conflict between social responsibility and shareholder value, only maybe a different time horizon. Thus it is only if you believe that shareholder value will not be helped by acting socially responsible that you should reject shareholder value as the best metric.
When these so-called CEOs give up 80% of their wealth and future earnings then I will believe that they believe the disingenuous and, frankly, dangerous sentiment they are expressing.
I’m reminded of a line from an old movie about a football team. One of the players is talking to the team owner and he says “Every time i call it a business, you call it a game! And every time i call it a game, you call it a business!” When a sports team wants their home city to build them a new stadium, they’re all about tradition, fans, and community involvement. But if some other city offers them more luxury boxes or a bigger cut of the name rights, they’ll pack up their gear and not look back.
I’m not arguing for one system over the other, just that we don’t let companies vacillate back and forth between the two as it suits them. If a company wants tax cuts, if it wants its lobbyists cozying up to politicians, or all the other concessions they get from the government, then the people should expect the company to go above and beyond the strict call of shareholder value. Or, if a company says that their job performance is measured in stock price, and nothing else, then the government can tell them to go pound sand when they start asking for favors. But it should be one system or the other, not a mix of both.
If it’s inevitable, as you say, that a company or its shareholders will try to influence the government in their favor, then those companies should give us something that can’t be measured in dollars and cents.