Roundtable’s epiphany is wrong-headed
Jamie Dimon says he intends to move beyond the staid maxim that corporations should act to maximise shareholder value. He has persuaded 180 of his fellow CEOs to join him. They propose a new ethos in which corporations will be accountable to all stakeholders — not only employees, customers and shareholders, but also society at large.
If the JPMorgan Chase CEO’s goal is to improve JPMorgan’s image, his move is a smart one. If, however, he means what he says, his proposal is misguided.
The new approach issued by the Business Roundtable comes across as a rejection of Milton Friedman’s dictum that the social responsibility of business is to increase profits. So it’s useful to check what the Nobel laureate in economics said. In his essay, published in 1970, Friedman did not mention shareholder value. His lodestar was profits. Corporate managers can and have boosted share prices by engaging in accounting chicanery and making decisions that look good in the short term but mask longer-term problems.
These, Friedman wrote, are violations of management’s social responsibility because they involve deceit by someone entrusted with the savings and livelihood of others.
As an example, consider General Electric under the leadership of CEO Jack Welch. For almost 20 years, Welch massaged the company’s earnings by adjusting transfers from its highly profitable GE Capital division to the parent corporation. This made it appear as if GE was steadily increasing profits at a moderate pace, when in fact profits were swinging wildly from quarter to
quarter. Shareholders, who liked the predictability of GE’s earnings, made the company the most valuable in the US.
The press ate it up too, turning Welch into a mini-celebrity. Employers and customers benefited as stability meant GE could avoid rash layoffs and price increases. It was society that suffered. Welch created the impression that US heavy industry still offered solid, predictable returns if only managers had the foresight to adopt the investments in technology and leadership philosophy he promulgated. This encouraged false hope and complacency as competition from China was challenging US manufacturing.
Friedman understood that the competitive market was a better aggregator of knowledge about ideal investments, management strategies and the overall future of the economy than any single CEO could ever be.
To his credit, Dimon has pushed back against the excessive focus on share prices at the expense of long-term profits. But he seems to have something a bit more expansive in mind. In the annual shareholder letter published in April, he lists several chronic social ills. His diagnosis is plausible but there is no reason to believe he (or most other CEOs) has special insight into matters outside his business.
Asking managers to focus more on improving society and less on making profits may sound like a good strategy. But it’s a blueprint for ineffective and counterproductive public policy on the one hand, and blame-shifting and lack of accountability on the other.
This is a truth Friedman recognised nearly five decades ago — and one that all corporate stakeholders ignore today at their peril. — Bloomberg
As Milton Friedman said, the social responsibility of business is to increase profits