How to redeem America’s frayed faith in capitalism
When the Business Roundtable took the bold step of redefining the purpose of the American corporation this past August, 181 CEOs signed a statement pledging that their corporations would commit to benefiting all of their stakeholders—meaning not just shareholders—including customers, employees, suppliers and the communities a company serves.
It was a welcome recognition that American’s faith in the private sector—in capitalism itself— has frayed and needs to be restored.
The gesture of realigning corporate values through a public statement is encouraging. But to get a better gauge of exactly how much more work needs to be done, we first need to understand how far corporate America has strayed from principles that were once the bedrock of a far more stable, prosperous, and egalitarian economy.
It’s going to be especially hard to put this non-egalitarian genie back in the bottle, particularly as it relates to remedying excessive executive compensation and rebalancing wages and benefits.
Back when I was in business school in 1970, the prominent economist Milton Friedman penned a lengthy article in The New York Times Magazine in which he argued that the only obligation corporations have is to increase profits for their owners—i.e., the shareholders. In his words, “the cloak of social responsibility, and the nonsense spoken in its name by influential and prestigious businessmen, does clearly harm the foundations of a free society.”
Notably, Friedman’s view was emphatically rejected by major business leaders of the time, including Edmund Littlefield of Utah International and Reginald Jones of General Electric. As Jones famously said, “What will be expected of managers in the future? Intellectual breadth, strategic capability, social sensitivity, political sophistication, world-mindedness, and above all, a capacity to keep their poise amid the cross-currents of change.”
The Business Roundtable echoed this view with a formal statement in 1981, stipulating that corporations “have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.”
The business leaders who pushed back against Friedman had come up in an age that began in the early 20th century when being the CEO of a large public company was seen as a great privilege with great responsibilities.
On average, a CEO then was compensated only about 15 to 20 times what his average employee was paid.
Reaganomics
But beginning in the 1980s, US president Ronald Reagan’s trickle down economic theory promoted the idea that greater wealth at the top would make everyone more prosperous. Making money was increasingly seen as a social good in and of itself.
In the 1987 film Wall Street, a youthful Michael Douglas plays the character Gordon Gekko, who famously declares that “Greed is good.” Writer and director Oliver Stone intended this as a sharp criticism of the toxic philosophy of corporate raiders. Instead, it was widely embraced as a mantra among corporations and the Wall Street jockeys trading their stocks.
So, Friedman’s theory eventually won out. Even the Business Roundtable acquiesced when it issued a 1997 statement that “the principal objective of a business enterprise is to generate economic returns to its owners.”
A year later, Jones’s successor at GE, Jack Welch, said, “Ideally, you’d have every plant you own on a barge to move with currencies and changes in the economy.”
In other words: Pursue cheaper labor overseas.
And so it is today that the average public company’s CEO earns 271 times what the average employee earns. And far too much of this compensation unfairly comes in the form of low-taxed capital gains.
This approach to business, and the role of business leaders, is undeniably harmful. As the late Cornell Law School professor Lynn Stout showed in her paper “The Shareholder Value Myth” profits should never be the only measure of corporate achievement. Stout wrote that a healthy company is “entitled to keep its profits and to use them as its board of directors sees fit. The board may choose to distribute some profits as dividends to shareholders. But it can also choose instead to raise employee salaries; invest in marketing or research and development; or make charitable contributions.”
Sign here
For our nation to prosper in a balanced way, we need a new type of contract.
If we’re going to change our capitalist structure, we need business schools that imbue students with a sense of fairness and fair play as a metric of success, along with profits. We need institutions that teach future CEOs how to properly balance corporate political activity with fiduciary responsibility, and that show them the imperative of acknowledging multiple constituencies.
America’s executives need to embrace a formal all-encompassing corporate responsibility contract which puts the needs of employees, customers, communities and the nation equally alongside the interests of shareholders.
We need statesman CEOs who are as committed to a prosperous nation as they are committed to their own personal accumulation of wealth. And we need CEOs who live their lives with much more grace than seems to be the norm today.
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