Do you like your boss?
Photo: Bill Ingalls. Source: Flikr, NASA. Public Domain.
A group of CEOs have decided that they don’t. The top brass at companies like JP Morgan, Apple, Johnson & Johnson, and Walmart have signed a statement moves their primary allegiance from shareholders to “stakeholders.” A stakeholder is someone who has a stake in a business, without necessarily committing capital. Employees, suppliers, communities, and customers are all stakeholders. They are all hurt if a company fails, and they want – in their own ways – to see a company perform well.
This contrasts with what has been the orthodox legal and economic purpose of a corporation: to build long-term shareholder value. These CEOs recently signed a new statement issued by the Business Roundtable, a policy advocacy group. Several news organizations have called this a bold move towards a new corporate polity, placing shareholders on an equal footing with communities and employees. Germany actually enshrines stakeholder primacy in their corporate governance, with Board positions reserved for labor representatives.
To some extent, this is small beer. Good companies have always looked out for their stakeholders. It’s the only way to attract talent, repeat customers, and local support for the business. Walmart may have put lots of mom-and-pop stores out of business, but they did that by optimizing the number of items they sold and the prices at which they sold them. They couldn’t have succeeded if the local communities around their stores hated them.
But this is a serious issue as well. When ownership is diffused, it’s hard to tell who is really in charge. If shareholders have to negotiate with labor leaders and community members – who don’t have their financial capital at risk – it will be that much harder to achieve an improved return on that capital. And if US corporations want to adopt a German governance model, they ought to look at the long-term performance of the German market to see if this is where they want to go. Over the last 20 years, the US market has returned 6.3% per year; the German DAX has returned 4.8%. The difference can be largely attributed to the return of capital to the shareholders through dividends and buybacks.
In some ways, this seems more like a political statement, taken in response to recent proposals to change corporate capitalism by statute, like prohibiting share buybacks an formalizing a stakeholder board structure. That certainly is the way much of the press is coloring the story. But this could also be seen as a consolidation of power by the CEOs. After all, if accountability gets diluted, then management gets more say. When everyone is “in charge,” no one is. And if no one is, the incumbents rule.
Stakeholder proposals like this can be like shooting stars: flashy, and then gone. Shareholder governance has made the US the envy of the investing world. We should see how to expand our approach to business to make the rest of the world more successful – not limit it.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”