The Business Roundtable, an association of CEOs of America’s top companies, recently issued a statement that redefines the purpose of a corporation. Signed by nearly 200 top CEOs, including those of J.P. Morgan, Apple, Walmart and Amazon, it essentially says that America should move from shareholder to stakeholder capitalism. That is, corporations should not just focus on maximizing shareholder value, but also include the well-being of employees, environment, suppliers and communities at large. While share value maximization is a clearly defined metric, the statement does not clarify what metrics will be used for maximizing the welfare of other stakeholders. This statement is dramatically different from one made by the Roundtable just two decades ago, when it had articulated a doctrine that the duty of a company’s management and board was only towards its shareholders. Indeed, this has been the underlying principle of all reforms in corporate governance laws, both in America and abroad, including in India. To now say that the board and management are accountable to employees, suppliers and others as well, is a major shift. It also contradicts the philosophy articulated by Milton Friedman 50 years ago, who pithily said, “The social responsibility of business is to increase its profits." It had weight and logic which explains its longevity. Many people still believe in it. For, if companies focus on obeying laws and maximizing profits, then governments can collect healthy tax revenues from which generous social spending and provision of public goods can be done. Friedman’s exhortation was to refrain from distracting a profit-maximizing company.
The Roundtable’s revision has come at a time when there is considerable debate on India’s Corporate Social Responsibility (CSR) legislation. India is possibly the only country which mandates that 2% of after-tax profits of companies be compulsorily spent on CSR. While harsh penalties have been held back, is the CSR insistence not a de facto tax on profits? Why create a new bureaucracy that will determine what is and is not admissible as CSR spending? Will it not lead to arbitrage kind of behaviour? And given that possibility, will we not have a plethora of rules, clauses and sub-clauses with attendant disputes and litigation? Why not just leave social spending to the exchequer or generosity of individuals? India has had a rich tradition of philanthropy by industrialists. But why coerce it through company law? This question is now moot, since Parliament has passed the original law and its amendment, and this position gets a shot in the arm thanks to the Roundtable’s latest statement. Look, America is also veering towards our vision of CSR, they will say.
An important question is whether this is just a cosmetic statement without much substance? Is it an eyewash, couched in a motherhood statement, or, as some call it, “greenwashing"? Are not commitments to labour, suppliers and the environment already enforced through appropriate legislation? We do have fair wages and workplace safety laws, and penalties for non-payment to suppliers, and increasingly onerous environment related requirements. Why redefine the purpose of the corporation itself?
Presumably it is because of a much larger societal wave of attitudes becoming hostile towards businesses. There is resentment about increasing inequality of income and wealth in the Western world, manifested in movements like “Occupy Wall Street", and outcomes like the election of President Donald Trump and Brexit. There is a feeling that fat cats at the top corner most of the prosperity cake, while the earnings of middle- and lower-income workers stagnate. This is supported by data. The ratio of the top CEO pay to that of the median worker across all companies in the US was a whopping 254 in 2018. Elon Musk’s pay is 40,668 times the median Tesla worker’s. Often, the top management’s pay is also linked to stock performance. And companies have been buying back their own stock to shore up share prices. For the past five years, buybacks have been close to $1 trillion every year, which also explains zooming stock markets to a large extent. There is, of course, no clawback from a manager’s salary in case a company’s stock price crashes, or if it suffers huge losses. Heads I win, tails you lose.
Concepts like fairness, justice and morality are beyond the domain of economic analysis. But if the Roundtable’s statement on the purpose of a corporation has to have any teeth, companies will need specific metrics for the performance of top management. For instance, even if there is one fatality in the factory, or even among contract workers, all variable pay of the top boss should be cut off. Or an environmental breach would result in loss of bonus. Are we ready for such drastic incentive measures for CEOs? Will we accept a cap on the ratio of the salary of the CEO to the lowest paid worker?
Finally, it must be said that both corporate brand value and the sustained rise in shareholder value is correlated over the long term with the company being a responsible corporate citizen, which invests in creating goodwill among its stakeholders. These companies have strong human resource practices and reduce pay disparity. They are also supportive of suppliers and the environment. So, do we then need to change the purpose of a corporation from “creating long term shareholder value"? Yes, because the current times require companies to do much more to earn their right to operate in society.
Ajit Ranade is economist and senior fellow, Takshashila Institution