The Council of Institutional Investors is right, and the Business Roundtable is wrong: Businesses must be run primarily in the interests of their shareholders.
Last month, the Business Roundtable issued a new statement on the purpose of a corporation signed by 181 CEOs who pledged to serve all stakeholders but seemed to place the interests of shareholders last, behind other stakeholders. In fact, as the Council of Institutional Investors notes, the Roundtable's statement refers to shareholders only as providers of capital, not as owners of the businesses.
This is unacceptable and foolish, and the CII has rightly objected to it. The council notes "accountability to everyone means accountability to no one."
The CII statement said boards and managers need to sustain a focus on long-term shareholder value. "To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners," the CII said.
The Business Roundtable executives seem to have forgotten, or be ignorant of, the great economist Adam Smith's dictum that by pursuing his own interest, an individual frequently promotes that of the society more effectually than when he really intends to promote it. In fact, Mr. Smith warned: "I have never known much good done by those who affected to trade for the public good."
This applies also in the world of corporations pursuing the long-term interests of their shareholders. Corporations seeking to optimize profits for the long run benefit of the shareholders, the owners, will make products that serve their customers well or risk losing them, will pay their employees fairly or risk losing them, will treat their suppliers fairly or lose them, will obey governmental regulations and pay their taxes.
The shareholders, the owners of the company, are paid last. Employees are paid first. Suppliers generally are paid within 30 or 60 days of delivery. The various levels of government receive their tax payments when they are due.
Shareholders receive dividend payments, if at all, only after all of the above have been paid, and they receive their money back and any gain only after they sell their shares. They take the most risk of any stakeholder, and since they provide the capital that makes all else possible, they deserve special consideration.
The CII rightly recognizes that in trying to serve all "stakeholders" equally, as implied by the Business Roundtable statement, boards of directors will be distracted from their primary responsibility of serving the long-term interests of the owners of the companies, including pension funds, endowments, foundations and participants in 401(k) plans. That responsibility is served by growing the companies profitably.
Failing to grow the companies could, in turn, harm the long-term interests of the other stakeholders, because companies that are not growing cannot increase wages, employment or tax payments to the various levels of governments.
The Business Roundtable should withdraw its most recent statement or reword it so that it acknowledges the primacy of the interests of shareholders while still noting responsibilities to other stakeholders.
