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CEOs Are the Problem

The latest wave of corporate virtue signaling should not be taken as a sign that a new era of stakeholder capitalism is upon us. On the contrary, corporate leaders are feeling public pressure and seeking to position themselves as part of the solution to problems that they caused.

CAMBRIDGE – ExxonMobil recently announced a five-year plan to reduce greenhouse-gas emissions and is pumping out ads proclaiming its commitment to a green future. Tobacco giant Philip Morris is touting its plans to help smokers quit. Facebook is calling for new internet regulations. And these moves come less than two years after the Business Roundtable, representing the CEOs of America’s largest corporations, issued a statement calling for business to serve all stakeholders.

Are today’s corporate executives ushering in a new era of corporate responsibility? Or are they merely protecting their own power?

For decades, business leaders and prominent academics believed that corporations’ sole commitment was to their shareholders. Previously a fringe view, the publication of a New York Times op-ed by Milton Friedman in 1970 – “The Social Responsibility of Business Is to Increase Its Profits” – moved this perspective toward the mainstream. It gained further momentum within academia following a number of articles by Harvard Business School’s Michael Jensen, who offered theoretical and empirical support for Friedman’s doctrine. For example, in one influential paper, Jensen and Kevin Murphy of the University of Southern California estimated that the average CEO’s pay increased by only $3.25 for every $1,000 of value he created, pointing to the need for an even tighter link between executive compensation and shareholder value.

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