The mighty Business Roundtable has kicked Milton Friedman aside.
Not the late Nobel laureate economist Friedman (who along with Anna Schwartz illuminated mistakes by the Federal Reserve during the Great Depression, thus helping ensure the central bank made the right moves in the crisis of 2008).
But Friedman in his better-known guise as conservative polemicist, free-market fundamentalist, author of the bestseller “Free to Choose” and star of the PBS series by the same name. The Friedman who preached that corporations had no responsibility except to raise profits for shareholders.
Now the powerful Roundtable has done an about-face. It issued a statement that corporations also have responsibilities to customers, employees, communities and suppliers.
The Statement on the Purpose of a Corporation was signed by 181 of the group’s 188 chief executive members. They include heavyweights of Northwest-headquartered or locally important companies: Jeff Bezos of Amazon, Dennis Muilenburg of Boeing, Sanjay Mehrotra of Micron Technology and Tamara Lundgren of Schnitzer Steel.
Microsoft is not a member, but President Brad Smith tweeted, “We agree with the @BizRoundtable. Companies need to serve multiple stakeholders, not shareholders alone. That’s how we’ve been running @Microsoft for years — and our return to shareholders hasn’t done too badly following this approach.”
If the statement is actually implemented and becomes influential, it would mark a revolutionary and healthy change in how companies are operated. But the aspirations face numerous obstacles.
Friedman helped seed a revolution himself with a 1970 article titled “The Social Responsibility of Business is to Increase its Profits.”
He wrote, “The businessmen believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends …” such as providing jobs, ending discrimination and cutting pollution.
“In fact,” Friedman continued, “they are — or would be if they or anyone else took them seriously — preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”
Never mind that “pure and unadulterated socialism” would have meant that government owned the “commanding heights” of the economy, hence the corporations that these alleged puppets ran — which was not the case. Friedman preached a powerful and elegant opposition to American liberalism at high tide.
He wasn’t alone in paving the freeway to the Reagan Revolution. For example, in 1971 the U.S. Chamber of Commerce commissioned future Supreme Court Justice Lewis Powell to write a memorandum that warned “the American economic system is under attack” and served as a road map for conservative business interests to not only fend off communism but roll back the New Deal.
Wealthy conservatives, through foundations and directly, funded think tanks, academics, lawyers and politicians to “take back America” from the perceived wrong turn of the 1930s through the 1970s. And they found a willing base of voters tired of what they saw as liberal overreach.
But Friedman was especially influential in kicking off the “shareholder value” movement. This manic pursuit of profits and ever-rising stock prices gave us the model of public companies that we have today. It also was a cause of the merger mania that strip-mined hundreds of independent companies from cities and towns that depended on them, as well as holding down wages and sending jobs and entire industries offshore.
Is the worm on the verge of turning?
Jamie Dimon, CEO of JPMorgan Chase (and a Democrat) and head of the Business Roundtable, has long fretted about rising inequality and the focus on short-term gains. So perhaps it’s not surprising that he spearheaded this new set of principles.
A boost for change also comes from criticism of unfettered capitalism by Democratic presidential candidates, especially Elizabeth Warren. And we see a rising embrace of socialism or social democracy by young adults.
Alas, it will take more than words, even by the influential Business Roundtable.
Earlier in my career, I spent some time at the headquarters of a large and respected newspaper chain (no names, please). It had a chance to buy a tech outfit that might have helped it soften the collapse of the old business model and innovate a future. When I asked the chief executive why he passed, he said, “Because Wall Street would kill us.”
This was in the late 1990s, when newspapers were still money machines, and public chains were expected to deliver the unsustainable profit margins of Gannett — even though Gannett was a very different kind of company (and now faces its comeuppance in a merger). That tech acquisition wouldn’t have shown an immediate return, hence investors would punish the shares.
That CEO was dancing to Milton Friedman’s tune.
To alter that dynamic, it will take not declarations but deeds that change quick-buck incentives on Wall Street to favor a longer view with more R&D and investments in workers.
This would require a return to progressive taxation, taxes on transactions to slow Wall Street gambling, aggressive antitrust enforcement and repealing Citizens United to get big money out of politics. It would require changes to the mad-money ethos taught in business schools.
Such outcomes would be even more difficult given the rise of “vulture capitalism” private equity as a major player in reinforcing the short-term pressure on companies.
Not surprising then that the Council of Institutional Investors, which represents endowments, pension funds and foundations, immediately pushed back against the Business Roundtable’s apostasy. It wrote, “Accountability to everyone means accountability to no one. BRT has articulated its new commitment to stakeholder governance (which actually resurrects an older policy view) while (1) working to diminish shareholder rights; and (2) proposing no new mechanisms to create board and management accountability to any other stakeholder group.”
Maybe the Business Roundtable can lead by example.
One constructive start would be rolling back the astronomical rise in executive compensation. For example, Dimon, already worth $1.3 billion, made $30 million last year.
Words are easy. A long look in the mirror is much harder.