What’s Good For Shareholders

Gillette tried to sell Woke. It failed miserably, giving birth to a new saying, “Get Woke, Go Broke.” Pivoting a bit, the more than 180 CEOs at the Business Roundtable tried a less direct method of marketing.

Breaking with decades of long-held corporate orthodoxy, the Business Roundtable issued a statement on “the purpose of a corporation,” arguing that companies should no longer advance only the interests of shareholders. Instead, the group said, they must also invest in their employees, protect the environment and deal fairly and ethically with their suppliers.

“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders,” the group, a lobbying organization that represents many of America’s largest companies, said in a statement. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

Some people applauded this corporate epiphany. Others saw it as a sham to appeal to the useful idiots who read headlines and believed. Still others pointed out that words and deed weren’t entirely aligned.

So, allow me to dream. Soda companies will recognize that they are a leading contributor to the epidemic of obesity in America and its associated diseases. Tobacco companies will take responsibility for the cancers they cause. Energy companies will admit that global warming is real and that they are major contributors. Gun manufacturers will stop producing and selling assault weapons. Chemical companies will stop producing pollutants that are poisoning our lands and waters.

Much as one’s notion of social responsibility varies based on personal values, he’s got a point. If gun manufacturers don’t make guns, what exactly do they plan to do all day long? Then again, is the theoretical responsibility to “stakeholders,” the silly but adorably inclusive word that tries to cover everyone despite their inherently conflicting interests under a warm and fuzzy name, the same as pleasing the social desires of every interested activist?

Former GM CEO Charles Erwin Wilson is attributed with a quote during his Senate confirmation hearing as Eisenhower’s Defense Secretary: “What’s good for General Motors is good for the country,” although that’s not quite what he said. The quote arose from a question about whether he could put the nation’s interest ahead of GM’s, in which he held a great deal of stock. He was a shareholder. He was also a stakeholder, like the person on the assembly line.

The Business Roundtable spiel was that corporations should no longer accept the premise that their duty was to deliver shareholder value, but that corporations had a duty to serve employees and the public as well.

“They’re responding to something in the zeitgeist,” said Nancy Koehn, a historian at Harvard Business School. “They perceive that business as usual is no longer acceptable. It’s an open question whether any of these companies will change the way they do business.”

Harvard again disappoints. Maximizing shareholder value isn’t merely a business practice, but a duty. Shareholders own the corporation, even if their ownership is so diffused as to make the concept too squishy for most to be meaningful. The CEO is an employee of the corporation, and like any employee, his primary obligation is to serve the owner. This, too, is suspect, since CEO salaries, approved by a Board of Directors, bears little connection to shareholder interests. The only indicia of shareholder value is the stock price, judged on a daily to quarterly basis, with long term health too existential to enter into the equation.

So if the duty to the owners of the corporation are already rendered mostly theoretical, what of the pseudo-duties to the “stakeholders,” the employees and customers, and the public at large? There is an answer that largely produces the outcomes that would warm the cockles of most social justice warriors’ heart.*

Treat employees like dirt, pay them poorly, and you can’t find competent employees. Discriminate against employees and you reduce the universe of good employees from which to hire. Make crappy products and people stop buying and find an alternative source. Fail to offer value and someone will undercut your price point and you’ll lose your customers.

The argument that corporations need not concern themselves with such trivialities is that it takes massive capital to compete, and there is no longer opportunity to challenge the “big boys” as they do everything possible to prevent new enterprises from interfering with their dominance, thus allowing them to run roughshod over their “stakeholders” while saying, “whatcha gonna do about it?” Not everybody has a garage like Jeff Bezos.

The Business Roundtable did not provide specifics on how it would carry out its newly stated ideals, offering more of a mission statement than a plan of action. But the companies pledged to compensate employees fairly and provide “important benefits,” as well as training and education. They also vowed to “protect the environment by embracing sustainable practices across our businesses” and “foster diversity and inclusion, dignity and respect.”

Each of these ideals can be justified under the duty to maximize shareholder values if one’s perspective on corporate success is longer than the next earning’s report. But even the short term myopic corporate abusive attitude will eventually destroy a business by engendering customer resentment and opportunity for someone to steal their thunder.

There’s also the very real problem of beating consumers into the state of inability to be customers. There’s no point in building lots of Model T’s if no one can afford to buy them. Economic health means everybody has to get something out of it, and that’s good for shareholders.

If this was one of the most hated, most cynical movie speeches ever, consider replacing the word “greed” with “woke” and the same speech can work. It makes no more sense to buy Gillette razors because of their “toxic masculinity” marking than their macho marketing. You buy a razor because it’s a good product at a fair price. It’s just a product, not a statement by a socially conscious company that makes a lousy razor and charges too much.

What’s good for business is good for this country, and vice versa, not because of capitalist greed or some flavor of social justice morality, but if left to pure business incentives, it’s in everyone’s best interests to serve the shareholders rather than the stakeholders, because it’s in shareholders’ best interests that employees, customers and the public be treated well and honorably.

*Most, not all, as the demands of “morality” invariably conflict, so that there will always be someone complaining and condemning.

28 thoughts on “What’s Good For Shareholders

  1. wilbur

    “What’s good for business is good for this country, and vice versa, not because of capitalist greed or some flavor of social justice morality, but if left to pure business incentives, it’s in everyone’s best interests to serve the shareholders rather than the stakeholders, because it’s in shareholders’ best interests that employees, customers and the public be treated well and honorably.”

    I’d love to ask each and every candidate for President (or public office) if they agree with this. How many would even address it directly? Or even indirectly? Could we request a yes or a no response?

    It’s good to know what any candidate’s first principles are. Or those at the Business Roundtable.

    1. SHG Post author

      How could they, even if they understood? It would require that voters understood, and they grasp no more than simplistic platitudes because thinking is hard.

  2. Oskar

    I’m with you until the last paragraph; “it’s in everyone’s best interests to serve the shareholders rather than the stakeholders, because it’s in shareholder’s best interests that employees, customers and the public be treated well and honorably”.

    With large enough pool of potential employees, that is continually filled with new people, a corporation doesn’t have to treat it’s employees well and/or honorably, no? Profit maximization might even demand that they don’t.

    1. SHG Post author

      There is a necessary dependency between the economic health of employees and corporations, as the former are also the consumers of the latter. Kill the synergy and both die, maybe not immediately but eventually.

      1. Oskar

        Sure. I just don’t believe that corporations are capable making decisions based on the risk of that kind of collapse, when the time horizon of like 10+ years. Shareholders demands quarterly results. Or that the decisions made by a single corporation about their employees/customers will make that much of a difference in the employee/customer Eco-system.

        And I don’t have a problem with that.

        The stakeholders can advocate for their own interests. Unionize or start a consumer organization.

    2. Anonymous Coward

      High employee turnover because poorly treated workers keep leaving has its own costs in recruiting, training, and reduced productivity as new hires learn their job. This is the basis of frequent comparisons between Wal-Mart and Costco, where Costco’s higher pay and lower turnover produces higher productivity and lower total costs. The same applies to customers, repeat business costs less than new business, there are studies showing how much cell phone companys have to pay to replace a lost customer with a new one. Smart business leaders understand that it is ultimately more profitable to not screw employees and customers out of every last cent because that has costs of its own.

      1. SHG Post author

        Exactly. The cost for both employee turnover and customer acquisition is the economic incentive to treat them well. There’s an actual dollar price involved.

      2. JorgXMcKie

        Most comparisons of Costco/Walmart are flawed because they aren’t comparing apples to apples. Walmart has about 10 times as many stores (of 3 basic sizes — Sam’s Club [most like Costco], SuperWalmart, and Walmart) as does Costco.
        A few years ago I had a grad student get interested from a research point of view. Long story short, if you compare Costco to the nearest Sams Club, or SuperWalmart if there is no Sams Club within 10 miles, in Michigan you find Walmart pays as well or better than Costco and has similar employee turnover. Same with benefits. Plus greater opportunity to move up in management from a Sams Club.
        In Michigan there are now 15 Costcos, all of which are 1) close to an Interstate, and 2) in an upper middle class suburban setting. They have no stores north of a Grand Rapids or East Lansing location.
        Walmart has about 114 stores, including several in the U.P. Oddly enough, Walmarts in those very rural areas pay lower wages on average than do Sams Club or Costco located in the suburbs.
        I have anecdotal evidence that when a Sams Club was built in 2006 or so in Canton, MI at least half of the Costco employees from a 5-mile-away Costco applied for jobs there. Can’t prove that, but I trust the source to be reasonably accurate.
        Bottom line, Walmart responds to market pressures in labor just as in other areas.

  3. Frank

    “Get Woke, Go Broke” was coined several years before Gillette stepped in its crank with golf shoes.

    First use is attributed to SF author John Ringo.

  4. Jim Tyre

    You buy a razor because it’s a good product at a fair price.

    I used to use Burma Shave with my razor. I switched when the company was too unwoke to change the name to Myanmar Shave.

  5. John Barleycorn

    If your plan is to get into whether or not labor is a commodity next Sunday you would have been well served thinking a little harder today and overlaying some nursery rhymes within this post today.

    Goody Two-Shoes comes to mind….

  6. Eliot Clingman

    Germany and Sweden, and to a limited extent Massachusetts, have co-determination in their company law. This mandates that the board have worker in addition to shareholder representatives, which likely has changed how companies operate. I don’t think the Business Roundtable want that!

  7. B. McLeod

    Platitudes aside, the current state of our law is that the fiduciary duties of directors lie to shareholders, who are the owners of the corporation.

  8. mb

    I’ll apologize up front for the tangent. As you know, I work for a major corporation. I find the language of this roundtable thing so squishy that I cannot muster a word against it. But this Gillette thing strikes far too close to home for me.

    On my eighteenth birthday, I recieved a package in the mail from Gillette, a starter kit for their mach 5 razor. It said happy birthday on the package. They’re a big company. They have sophisticated market research. They knew a 18 yr old guy from a particularly bad suburb of Little Rock had been shaving with the cheapest single blade bic razors. They knew they had a better product. They knew I would not bet the few extra dollars to find out. So they gave me one. As a birthday present, from a great American company. And for seventeen years I bought their replacement cartridges. And the gel too. I still have that handle they sent me seventeen years ago.

    That video they published was an abomination. It says nothing about their product or their brand. But that isn’t the problem. The problem is the disconnect between what it says and what it shows.

    The voice says you will be shown men being bad. The video fails to show men being bad, at least it fails to unambiguously do so. It is not difficult to represent bad men visually. But that video doesn’t even attempt to do so. While the voice condemns men in general terms, we see men attempting, however poorly, to communicate with attractive women whome they might be interested romantically or sexually. When did romantic or sexual interest in women become something negative? We see a boss (perhaps a mentor) try and pick back up a flubbed idea from a junior female who had failed to present successfully in a meeting. We are expected to assume (not presume, assume) that the woman’s presentation was perfect, and that it flopped due to the inherent evilness of the men in the meeting. Even the old man picking up the idea from the dustbin is only doing so to further humiliate the woman. Because men are all horrible haters who do anything at all to hinder women.

    The level of insane, stupid, vitriolic, irrational hatred Gillette expects its customer to have adopted against all men cannot be overstated. If you can interpret all the visual scenes in that video as a man being bad without question, you are a deranged bigot, full stop.

    Unfortunately, I fear their marketing team is as right on with this one as they were with me. I’m 35. I have maybe 40 years of razor purchases left to make. A 20 year old is 50% more valuable long term than I am. And statistically, today, he has no idea who his dad is. Maybe if Gillette sucks up enough to his mom, she’ll purchase that starter kit for him for his eighteenth birthday. I don’t think they’ll go broke in the long term. I think they’ll come out ok.

    For my part, I got a schick hydro 5. The blades are more widely spaced and rinse out better. I’m not big on boycotting but I been trynna eliminate P&G products from my regular shopping.

    That’s all I have to say about it. Again, I’m sorry for the tangent.

  9. Jake

    The ‘invisible hand’ is a flooded river rushing through a gorge shaped by a growing body of legal fictions, agreed upon, by a cabal of lawyers, politicians, lobbyists, and perhaps most importantly the oligarchs in control of energy and the means of production.

    Before the internet, the average person didn’t know this, and thus, as a stakeholder, they didn’t much care. As a result, they typically wouldn’t revolt until the greedy leeches at the top had pushed conditions to the point where most couldn’t afford bread to feed their families.

    Such asymmetry of information is rapidly receding into the rearview mirror. Well in advance of a crisis, most agree something is very wrong, whether we think it’s the Oligarchs or Hilary’s emails won’t matter when people start smashing things again.

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