Editor’s Note: This post is part of an ongoing multi-part series covering the Millstein Center’s March 1, 2019 conference, “Corporate Governance ‘Counter-narratives’: On Corporate Purpose and Shareholder Value(s).”
By Brea Hinricks
Last week, the Business Roundtable announced a major shift in their stance on the role of corporations in society. Rather than maximizing profits and prioritizing the interests of shareholders above all others (an idea known as the Friedman Doctrine, which in recent years has prevailed in the business community), the influential group of top CEOs pronounced that their companies share a fundamental commitment to all of their stakeholders, including employees, customers, suppliers, and the communities in which they operate.
There are many theories explaining the cause of this shift in the Business Roundtable’s position, including the somewhat cynical view that business leaders are hoping to provide themselves with a convenient shield against shareholder scrutiny, always able to argue that their actions are serving one group of stakeholders or another. However, it seems likely that there are at least a few other main forces driving us to rethink “corporate purpose,” presciently identified by Jill Fisch of the University of Pennsylvania Law School and Bruce Kogut of Columbia Business School at the Millstein Center’s March 1, 2019 Counter-Narratives Conference. They also warned that focusing on purpose-driven corporations is not likely to produce the results we’re hoping for, and indeed may lead to some unintended consequences.
Both professors underscored that public sentiment toward the business community is shifting. Professor Fisch pointed out that as companies continue to grow larger and larger, extend their reach globally, and amass more and more resources and information, the public’s expectation of what they can and should do are growing alongside them. We wouldn’t shoulder a local mom-and-pop market with the responsibility of “making the world a better place,” but Amazon is a different story. They not only have the economic means to make sweeping societal impact, but also the commensurate political influence (including as a result of the Citizens United court decision in the U.S.). Under this view, it is the responsibility of corporations to wield their outsized influence to serve all of their stakeholders, not just shareholders.
At the same time, as Professor Kogut explained, there is a widespread sentiment that something is terribly wrong with the wealth distribution in the U.S. and abroad, and that the business community is a major contributor to the growing disparity. Business leaders, under this view, have prioritized profits for shareholders and paid themselves high salaries rather than providing for their employees and their communities, and it should now be their responsibility to make it right. Coupled with this is a growing distrust in governmental institutions and a lack of confidence in their ability to meet society’s needs, and a turn toward the business community to fill the void left by the public sector.
According to Fisch and Kogut, these narratives, while appealing, are misguided in their appeal to corporate purpose as a solution. For one thing, said Professor Fisch, there is no singular “social purpose.” Global corporations serve a wide swath of stakeholders with competing interests, different cultures, and different norms. Identifying a broader purpose that serves all of them is impossible, and it is difficult and fraught with risks to attempt to balance between them or determine who speaks on behalf of stakeholders. What’s more, allowing the business elite rather than elected officials to decide what is best for society comes with its own potential pitfalls.
When it comes to asking the business community to fill the gaps left by the public sector, Professor Kogut argues that we’re asking corporations to take on additional responsibility for the social good without a coherent positive theory on the appropriate role of business in society. What we first need, he says, is an understanding of the appropriate “Coasean bargain” between the public sector and the private sector that identifies the most efficient allocation of costs, benefits, and responsibilities between them. Without one, the debate on the role of business in society is necessarily incomplete, and it’s hard to know whether shifting more responsibility onto corporations will actually produce better outcomes in the long term.
Finally, Professor Kogut points out that “corporate purpose” is likely not a solution to wealth disparity, which he views as one of the key causes of the public’s current discontent with the business community and the economy. He argues that a main cause of this inequality is a maldistribution of political power, presumably because the group in power is able to determine the “rules of the game” and maintain their privileged position. While much of the focus when it comes to political influence is given to corporate contributions in the wake of Citizens United, Kogut points out that a large percentage of political contributions come from wealthy individuals (many of whom are CEOs and corporate board members) who are extremely ideological. This small group of individuals has an outsized share of the power in society through two channels: by wielding power in the businesses that they manage and oversee, and by exerting political influence through their individual political contributions. Unfortunately, changes in the corporate governance realm will do little to alter this balance of power and, Kogut argues, wealth disparity is likely to persist despite corporate commitments to serve stakeholders more broadly.
As the conversation surrounding corporate purpose continues, it will be important to keep in mind the gaps and problems which will remain unaddressed even as corporations make bold commitments to serve all of their stakeholders. Considering other avenues of change, including in the political realm, will be equally important. The Millstein Center looks forward to continuing to explore these issues as part of our Counter-Narratives Project.
You can find full recordings of Professor Fisch and Professor Kogut’s remarks (as part of a broader panel discussion) here.