Megan McArdle isn’t entirely sure she likes the Business Roundtable vow to put investors not-first: In fact, she’s going to try to defend the investor-first approach:
Or, rather, let me highlight the answer that Milton Friedman, the Nobel Prize-winning economist, offered in the New York Times in 1970, when corporate social responsibility was much in vogue.
“In a free-enterprise, private-property system,” Friedman argued, “a corporate executive is an employe [sic] of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”
This entire question has been bothering me, off and on, since I wrote that last post, because it seemed to be an unresolved question. But I think I’ve resolved the conundrum, at least to my satisfaction.
Friedman’s point implicitly places on the investors the kudos for providing the means for starting a business, and from that he concludes, implicitly, that without the investors, the corporate concern would not exist. He’s right, this is true. And, at least judging from what McArdle quotes, that’s where he stops.
If we’re going to make this a question of enablement, then we, and Friedman, must go the entire way and assign credit where credit is due. That is to say, are the investors the only entity responsible for the existence of the corporation?
No.
A free market corporation, in an ideal world, must have at least two more credible entities, two entities which will be familiar to those who read the Business Roundtable declaration: Customers and employees. If you don’t have someone to purchase your widgets, services, or whatever you’re selling, then, as the buggy whip makers will tell you, your company has no future. If you don’t have employees, those folks who make the widgets or provide the services which are desired by the customers, once again, you have no business.
None of this is new, of course. Now we call them stakeholders. But the simple fact of the matter is that these two other entities are just as important as investors in keeping the corporation alive and productive. It is, metaphorically speaking, a three-legged stool; mistreat one and you imperil the corporation. So when the Council of Institutional Investors becomes alarmed that investors may lose their current primacy, perhaps it should be taken with a grain of salt.
McArdle also suggests that there’s a difference between social responsibility and the Business Roundtable declaration:
I’m not talking about the kind of “corporate social responsibility” that ultimately benefits shareholders. Treating employees decently often means lower turnover and higher profits; investing in community schools might lead to a better-trained workforce; and strategically supporting social causes might be good public relations. But if those steps benefit shareholders, moralistic appeals aren’t necessary to justify them, nor are pledges to ensure that the CEOs follow through.
First, I’m having trouble seeing any difference. Improving the world around oneself, whether or not you’re a corporate entity, will redound to your benefit. But let’s assume I lack imagination and McArdle is correct that there is a difference. She still has a problem in that she’s assuming the recognition of corporate social responsibility is a simple matter. It’s not. The history of the private sector is replete with examples of poor recognition of corporate social responsibility, from strike-breaking to pollution.
I think she commits a sin that I would ordinarily approve: she tries to partition these responsibilities into those for the private sector and those for the public sector:
Unlike corporate social responsibility efforts, the tax code actually targets the affluent, rather than anyone who happens to own shares in a company — which, if you have a pension, or a 401(k), or a life insurance policy, includes you. Also, unlike corporate social responsibility initiatives, redistribution through the tax code is democratically accountable.
This results in sins being committed by those in charge, investors and their representatives, senior management, and having to be cleaned up, rather than being prevented. No, as much as I like to divide responsibilities and assign them to different entities, there is an overwhelming benefit to corporate C-suiters thinking and acting on the realization that investors are not the only group critical to a company’s survival. Think of the Lehmann Bros disaster. I’ll quote myself to save the reader the trouble of digging through that rather large post:
A few years after the Great Recession that started in 2008, I read an article on the demise of Lehman Brothers. For younger readers and those who don’t recall, Lehman Brothers was more than just an obscure name appearing in Despicable Me (2010), it was one of the monster investment banks of Wall Street. One might write, Lehman Brothers (1850-2008), because it was the distressed institution that was not rescued by either the Bush or Obama Administrations during the Great Recession. The article, which might have been written by Morgan Housel of The Motley Fool, but I cannot recall with certainty, purported to recount one of the last meetings Lehman Brothers exec had with investors, and the theme of the meeting was how Lehman Brothers was dedicated to making profits for those investors.
Sounds harmless, even typical, doesn’t it? Yet, a few days later Lehman Brothers was dead, the victim of its own mad financial machinations, ripped to pieces when those knotted messes were ripped apart by the inertia of a falling market and a world wide recession.
I would contend, as did the author of that article, that it was a primary symptom of a foundational illness that ultimately doomed Lehman Brothers. Look, from a societal point of view, companies do not exist to make money. I know the general wisdom of the private sector would differ with me, but if you think it through, it becomes obviously right. The proper formulation is, Companies provide specific services thought to be useful to their consumers, and the best ones are profitable because they have the right combination of efficiency and service content.
They forgot about their customers and their stool fell over. No more Lehman Brothers. It’s a lesson writ large, and one worth learning. No doubt top execs will continue to ignore it and still make their companies work, but I have to wonder how much better their companies would have done if they had been trying to properly balance all three groups, rather than just satisfying their investors.
