In a time where Capitalism (and, if this word and term does not deserve a Capital, then none do) is under attack from several directions and by multifarious forces, it now seems to be undermined by the very individuals and organizations that should be defending it.
The Business Roundtable, a group of chief executive officers of more than one hundred of the largest publicly traded corporations in the United States, recently issued an open ‘Statement on the Purpose of a Corporation’, in which they announced that their companies would no longer put profits and shareholder value ahead of other goals, and will, according to this new credo,
“…share a fundamental commitment to all of our stakeholders. We commit to:
– Delivering value to our customers…
– Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
– Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
– Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
– Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate.”
No doubt the millions of direct and indirect shareholders in these corporations are relieved that they were not totally ignored or omitted in the roster of ‘stakeholders’. No less an august body than the Foundation for Economic Education endorsed this subordination of shareholders to other interests, bodies, groups, or factions.
On the surface, there is not much to argue against having high quality, reliable products, produced in an ethical and environmentally responsible fashion, by employees who are well paid for the nature and demands of their work and deserve clean, safe working conditions, and to operate honestly and benevolently in the communities in which they are located, and not behaving in a mercenary or predatory way with suppliers or anyone else. Any ethical, sanely managed company, would presumably already operate in this way, and not have to be hectored or coerced into doing so.
That is exactly the point. Those stipulations should not be the targets or goals of a corporation, but the necessary way of doing business to get to the actual goal of every private sector enterprise: creating long-term value for shareholders. This is no small thing. It is very challenging for any business to earn more than it spends, and to do so in a way that rewards the providers of capital, the shareholders with a return commensurate with the risk and the opportunity cost of not investing in an alternative; perhaps a safe government bond, or a low-risk mortgage, a precious metal, or even real estate in a safe market (if there are any). However, there are all sorts of investors: small individual investors, speculators and traders; hedge funds, algorithmic or ‘flash’ traders and incorporated speculators; corporate investors; private equity funds and buyout firms; venture capital firms and ‘mezzanine’ financiers; and institutional investors, such as mutual funds, exchange traded fund (ETF) managers; pension funds, endowment funds (for universities and charitable foundations) and sovereign wealth funds (like those of Singapore, Norway, or Saudi Arabia).
All these investors are involved precisely because they want to make a profit; if not immediately, then eventually – over the ‘long term’, as the Roundtable statement put it. Investments do not always make a profit very quickly, and seasoned or ‘sophisticated’ investors know that very well. However, it is not sensible to not want a profit at some point, whether it is in the form of a rising share price, substantial or increasing dividends, or the achievement of operational targets that indicate that profit is foreseeable, such as the development of new products, improved efficiencies, new technology, higher revenues, or improving cash flow.
All investors want to come out ahead; the value they realize in the future must substantially exceed that which they put in. Indeed, all institutional investors, and many of the other kinds, are legally required to make a profit. The general public are indirect beneficiaries of their investing performance; if their investment returns are inadequate, everyone in society will eventually suffer from lower retirement income.
Value creation has to be discernible, if not tangible or even imminent. Those who invest in new businesses in volatile, fast-evolving sectors such as biotech, energy storage, or information technology know this well. If a firm is performing so that it enhances the firm’s competitive stature and commercial viability, then its share price will reflect it by rising, even if the profits are not quite there yet.
That is what happened as Amazon Inc. kept reinvesting its cash flow for years and building its business, even as profits seemed ever elusive – but they finally did, and grew rapidly. However, it did not seem to treat its employees with any sort of pleasant work environment, according to reports, and had a reputation for sharp practices with suppliers and customers which used its platform. That has helped bring it under scrutiny, and outsiders now view it with some wariness. This may have already put the company on investors’ ‘watch list’, and not in a good way. Google, part of Alphabet Inc. is no longer absolutely trusted by the public or governments, owing to possible search biases, and use of client data.
The same thing applies to Facebook, with its well-documented privacy and domain-supervision lapses. Perhaps the best, or worst, recent example is Boeing Corporation, which seemed to let its quality control culture deteriorate to the point where it allowed its products to be rushed to market for competitive and profit-seeking motives, to the detriment of shareholders, ultimately, as it lost billions of dollars for them in its 737 Max-8 software debacle.
Other examples are legion. Loblaw’s, and its parent company George Weston, owners of the Joe Fresh brand, had to take some of the blame for hazardous working conditions at low-wage, low-cost garment factories in Bangladesh, where thousands of people die in collapsed buildings where safety inspections were dilatory, nonexistent, or fraudulent. SNC-Lavalin, a Quebec engineering company, has lost billions of dollars, and billions of dollars in shareholder value as some of its employees bribed domestic and foreign governments to win construction contracts. Management either had neglected to supervise and scrutinize properly, or implicitly allowed misbehaviour to occur. None of these things ultimately advanced shareholder value; they destroyed it. Similarly, there are discounts to shares in mining and oil companies that invest in dangerous, corrupt, or kleptocratic nations or regions, as investors seem to believe that there is a good chance that some or all of their assets could become impaired, damaged, or stolen. That is effectively what happened to Acacia Mining in Tanzania, where the government billed the company for income tax that exceeded the nation’s GDP. In Russia, Yukos, its largest oil company, was confiscated by Moscow when its founder became a critic of Vladimir Putin.
All these examples serve not only to show that it is in the interest of shareholders, for long-term shareholder value, but sometimes even just for survival, that the companies they invest in are operated ethically, legally, humanely, and in honorable and environmentally responsible fashion, in harmony with the places they operate in. This is not just sensible, these things are sometimes required by law already.
Those who are mathematically literate know that a function can only have one variable maximized. If shareholder value is not maximized, it could be that some of the other goals or stipulations the Roundtable listed could be, but it might be the case that none of them would be in a way that would be satisfactory to the various ‘stakeholders’, particularly since many of the metrics by which to judge such success in achieving them, if any, are subjective and cannot be quantified.
Corporations that are successful in terms of maximizing shareholder value already operate in admirable ways in many different dimensions. Social justice activists are unlikely to force them to meet their standards by abandoning or suborning advancing shareholder value in favour of nebulous or ever-advancing social values. Let companies do what they do best, make profits, and let critics find fault in their operations or management if there is fault to be found – and they should do so, for all our sakes. Diluting Capitalism into some sort of harmonizing encounter group will not advance society in the end.