Is Stakeholder Capitalism Really Back?
We will have to wait and see whether the US Business Roundtable's recent statement renouncing corporate governance based on shareholder primacy is merely a publicity stunt. If America's most powerful CEOs really mean what they say, they will support sweeping legislative reforms.
NEW YORK – For four decades, the prevailing doctrine in the United States has been that corporations should maximize shareholder value – meaning profits and share prices – here and now, come what may, regardless of the consequences to workers, customers, suppliers, and communities. So the statement endorsing stakeholder capitalism, signed earlier this month by virtually all the members of the US Business Roundtable, has caused quite a stir. After all, these are the CEOs of America’s most powerful corporations, telling Americans and the world that business is about more than the bottom line. That is quite an about-face. Or is it?
The free-market ideologue and Nobel laureate economist Milton Friedman was influential not only in spreading the doctrine of shareholder primacy, but also in getting it written into US legislation. He went so far as to say, “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.”
The irony was that shortly after Friedman promulgated these ideas, and around the time they were popularized and then enshrined in corporate governance laws – as if they were based on sound economic theory – Sandy Grossman and I, in a series of papers in the late 1970s, showed that shareholder capitalism did not maximize societal welfare.