“The Business Roundtable today made a small, symbolic but significant move: 181 of the nation’s top CEOs agreed that driving shareholder value is no longer their sole business objective.” See also here.
Nearly all of The Business Roundtable’s companies signed on to a new “Statement of the Purpose of a [business] Corporation”. The document lists 5 areas of corporate purpose, more or less to be treated equivalently, a patent impossibility.
The purposes listed are familiar items to students of business like delivering customer value, investing in employees, dealing fairly with suppliers, supporting communities including the environment, and creating shareholder value. (They forgot to mention honoring their debt commitments.)
However, the document irrationally turns these items into ENDS when they can only rationally be handled as MEANS to a single end, which is the creation of shareholder value.
Businesses can maximize only one end at a time. It’s impossible to maximize shareholder wealth and employee satisfaction at the same time. Employees will be happier with higher pay for less work, but that reduces shareholder wealth. Higher pay for less work also causes lower consumer satisfaction because the product will be more costly. It’s impossible to maximize shareholder wealth and customer value at the same time. Customers will be happier with better products at lower prices, but they cost the company more to make. That reduces profits and shareholder wealth.
The traditional way to handle all of this is to maximize one objective: shareholder value. The shareholders own the company and they can agree on this objective. To achieve it, attention to a variety of means is essential. These means include training employees and paying them competitively using market data; dealing fairly with suppliers by paying them competitively and honoring commitments to them; satisfying customers by delivering products they want and can pay for, again relying on market data; paying (via taxes) local communities for the services they provide and not despoiling the environment of these communities.
The company has many means that it must engage in order to achieve maximization of its sole overriding end, creating shareholder value. It can trade off the use of many of its means by using market prices; others it has to internalize within the company and use non-market means.
The Business Roundtable document is ignoring the very thing which it pays lip service to. It leads off by saying “We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.” There is truth in this, if one recognizes that these items are not direct aims, ends, purposes or objectives of a company. They occur as indirect results of applying the price system to all those markets that must be accessed in order to create wealth. The creation of shareholder wealth is the sole purpose that can rationally be chosen that fully uses all the prices in all markets in order to make trade-offs that by any other methods or multiple aims would be subject to endless and impossible conflicts. Any other criterion turns the business into a debating society that inevitably turns to power or other irrational methods to make its decisions.
How shall we understand this document? It fails to understand the free-market system. It fails to grasp the importance of all the markets in which a company deals. It’s a retreat toward socialism. It appeases socialists. It moves toward the anti-corporate position of Elizabeth Warren. It attempts the impossible, which is to list multiple goals to be maximized all at the same time. It ignores trade-offs, but they are necessary when there are competing purposes. It confuses ends and means. It creates confusion that’s fatal to running a business. It ignores competition from other companies. It opens up the corporation for more radical measures that undermine its role in a free-market system by turning it into a political forum for competing interests who have no rational way to reconcile their conflicts. It opens the door wider for political interference in business.
This document possibly attempts to forestall legislation. But there is another interpretation. Those who pushed for this document and who presided over its production may have used the forestalling argument as a sop. Their true objective may well be to install a system by which competition is reduced and big corporations survive to control the economy through political means and powers.
“This shift, spearheaded by BRT Chairman and JPMorgan Chase CEO Jamie Dimon…” It is not an accident that the leader of this giant bank led the Business Roundtable to produce this document. It accords with his philosophy (see below).
Elizabeth Warren is no doubt chortling. Given this concession, the next step is for her to ask for it to be implemented by concrete means. She has already suggested such means, and they include downgrading shareholder ownership and replacing it with a combination of employee and public ownership. Her ideal is a socialist-fascist one. Socialism and fascism converge in her system.
Warren favors keeping the form of a free-market system while undermining it. The business would no longer be using the prices of labor, capital, goods, and land as the primary and sole means of determining their contributions (at their margins) to the value (wealth) creation of shares. So-called “social” goals would supposedly reign supreme. Of course, they wouldn’t. A free-market system is the only one that can truly achieve social goals in any rational sense of maximizing value in accord with the pricing of all the competing means. In any socialist system, the suppression of freedom has to entail the dominance of power and the destruction of value.
The Business Roundtable has discredited the free-market system and introduced socialist-fascist confusion. This is the work of Jamie Dimon. However, he has found 181 CEOs of major companies to sign on to his idea.
“Dimon donates primarily to the Democratic Party. In May 2012, he described himself as ‘barely a Democrat’ stating,
‘I’ve gotten disturbed at some of the Democrats’ anti-business behavior, the attacks on work ethic and successful people. I think it’s very counterproductive. … It doesn’t mean I don’t have their values. I want jobs. I want a more equitable society. I don’t mind paying higher taxes. … I do think we’re our brother’s keeper but I think that attacking that which creates all things, is not the right way to go about it.’
Taking this statement at face value in conjunction with the document produced by the Business Roundtable, I think we’re looking at a socialist philosophy that lacks understanding of how a free-market system works. Daimon thinks that the free-market system is unfair. He does not acknowledge that his system of overriding the pricing in all the many markets for means of production and for prices of consumers’ goods is at once socialist, fascist, unworkable, irrational, and ineffective at producing greater fairness.
We do not know what good he thinks will come out of this new statement of purpose of the organization he’s leading, but it appears that in reality no good and only harm can come from it.8:47 am on August 19, 2019 Email Michael S. Rozeff