Greed isn’t good
Many CEOs will prioritize building value for workers, customers — not just shareholders.
It may take years to know whether Business Roundtable’s new mission statement for America’s corporations made a difference. Nevertheless, it was encouraging that many of the nation’s most powerful CEOs want to put less emphasis on maximizing shareholder returns and pay more attention to customers, employees and other stakeholders.
That may not sound radical, but it is a distinct departure from the organization’s 1997 statement, which said, “The Business Roundtable wishes to emphasize that the principal objective of a business enterprise is to generate economic returns to its owners.”
That may sound like Gordon Gekko, the fictional character in the 1987 movie “Wall Street” who famously said, “Greed is good.” But even more so, the statement pays homage to Nobel Prizewinning economist Milton Friedman, whose 1970 essay for The New York Times Magazine, “The Social Responsibility of Business is to Increase its Profits,” said it would be “suicidal” for “businessmen” to agree with “the already too prevalent view that the pursuit of profits is wicked and immoral.”
Friedman feared socially conscious corporations would inadvertently open the door to intrusive price and wage controls by government. That view was rejected Monday by the Roundtable, whose 192 members are CEOs of some of America’s most powerful firms, and include its chairman, JPMorgan Chase Chairman Jamie Dimon, Amazon founder Jeff Bezos, Apple CEO Tim Cook and Hearst president Steven R. Swartz.
“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity,” the CEOs said in the new statement, which urged companies to look beyond profits. They focused on five objectives:
• Delivering value to our customers.
• Investing in our employees.
• Dealing fairly and ethically with our suppliers.
• Supporting the communities in which we work.
• Generating long-term value for shareholders.
Setting those goals doesn’t remove the temptation for bosses to put shareholder returns at the top of their lists. Keep in mind, compensation for many CEOs includes shares of stock, which already gives them a personal incentive to make profit margins the priority.
Generous stock options have helped boost CEO pay by a whopping 940 percent since 1978, according to the Economic Policy Institute, while wages for a typical worker grew only 12 percent during the same period.
That discrepancy should motivate conscientious CEOs to pay more than lip service to changing their approach to business. If not, maybe they will pay heed to economic signals indicating this nation may be headed for a recession. Among them the infamous “inverted yield curve,” which occurred on Aug. 14 and again Wednesday when interest rates paid on two-year Treasury bonds were briefly higher than the rates for 10-year bonds.
When investors expect the economy to grow, they usually demand higher returns on long-term investments. When long-term investments begin to pay as little as or less than short-term bets, economists see warning signs about the economy. The yield curve has inverted in each of the past seven recessions
Other troubling signs for the economy include a volatile, if robust, stock market, which dropped 800 points on Aug. 14; a 10-year low in factory orders, which may lead manufacturers to cut production and workers; and no end in sight for the trade war with China, which has kicked America’s oil industry and farmers in the butt, with consumers next in line.
Even some of what had looked like great news from last year has turned out to be less than advertised. The Labor Department announced Wednesday that the U.S. economy added about half-a-million fewer non-farm jobs last year and in the first quarter of 2019.
Even as President Trump discounts the possibility of a recession, he has been dangling the possibility of paycheck tax cut to keep the economy growing. That’s unlikely, given how little the nation’s economy has to show for the massive 2017 tax cuts and that we’re headed into an election year with the Democratic majority in the House in no mood to help him out of a jam.
The poor state of politics today makes it even more important that Business Roundtable is encouraging CEOs to look beyond shareholder earnings and consider what their companies can do for employees, for consumers and for communities.
Boosting wages would certainly qualify as investing in employees, one of the Roundtable’s stated goals. Lowering prices would achieve another goal: delivering value to customers. Their subsequent loyalty might increase sales and produce the long-term value for shareholders that the CEOs also seek.
And all without government intervention, which ought to be enough to please even Milt Friedman.