Should shareholders have less power?

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08/28/2019 | 04:36 pm
Is focusing on yields to shareholders the ultimate objective of a company? For the most powerful organization of American CEOs, the answer was yes, until August 2019. But since last week, the Business Roundtable has decided to put "customers, employees, suppliers, communities and shareholders" on the same level. For the time being, this declaration is symbolic, but it signals a change in the entrepreneurial culture of major American groups.
Last week, the highly conservative Business Roundtable, an organization of more than 200 leaders of major U.S. companies, issued a statement signed by 181 of its members in support of a new approach to the company's objectives. Specifically, the text is entitled "The Business Roundtable redefines a company's objective to promote an economy that serves all Americans". Has American capitalism decided to sit on its dividends and bury its share buyback programs? Unless the politically correct has struck again? In any case, the announcement caused a lot of ink to flow last week in the United States and even in Europe. It must be said that top American CEOs signed the document and that a major promotional campaign was deployed.

What is the message from these 181 CEOs, including Jeff Bezos of Amazon.com, Tim Cook of Apple or David Solomon of Goldman Sachs? They are now committed to "running their business for the benefit of all stakeholders: customers, employees, suppliers, communities and shareholders". In doing so, the powerful lobby departs from a principle that has been constantly reiterated by the organization since 1997: the primacy of the shareholder. "The new statement replaces previous statements and sets a modern standard for corporate responsibility", the document states, thus departing from the previous doctrine that "companies exist primarily to serve their shareholders".
 
Guess who signed? (extract from the signatories of the declaration)

No one should be fooled. It is hard to see an American multinational corporation excessively favoring its employees at the expense of its shareholders. In fact, most of these companies are already calibrated to move towards an optimized wealth distribution grid between the various players. Will the end of shareholder primacy, on paper, change anything? Probably not in the immediate future. But the new course adopted by the Business Roundtable remains a small event.

This upheaval is not to everyone's taste. One thinks, for example, of the CEOs who are members of the Business Roundtable and who have not signed the text (Blackstone, Boston Consulting or General Electric, for example, depending on our findings). Or to some economists who have already expressed their misunderstanding. "This is a categorical rejection of what is now called the Friedman doctrine," says First Trust Chief Economist Brian Wesbury. For Milton Friedman, the company's sole objective is to act in the interests of shareholders. When an executive takes the risk of taking into account a "social responsibility" that strikes the remuneration of shareholders, it is their money that he spends. "If shareholders want to use their wealth to pursue personal or social causes, they are free to do so themselves thanks to the profits they make from the company's profits," Wesbury adds.

The First Trust economist believes that the lobby's announcement is "partly due to political correctness" but also to the fact that top business leaders are looking for an excuse to use their leadership positions to achieve their personal goals. "In any case, this change in mentality is not good for the long-term value of companies' shares," says Brian Wesbury. A position that is not shared by the members of the B Corporation network. These companies that are not part of the Business Roundtable bought a full page from the New York Times to urge the signatories to go even further in their approach. Their message? "We are successful companies that meet the highest positive standards for our employees, customers, suppliers, communities and the environment", do as we do and you will move away from short-term goals to ensure your long-term sustainability. Among companiesí members of the B Corporation, Patagonia, Natura network or subsidiaries of major groups such as Danone and Unilever.

Let us leave aside the theoretical debate on the objective that a company should pursue. Common sense suggests that it should be able to remunerate its shareholders while taking care of the rest of its ecosystem, including the environment with a large "E". In this sense, there is nothing to prevent us from being more "Business Roundtable" than "Friedman".
Anthony Bondain
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