Are CEOs the Wrong Leaders for Stakeholder Capitalism? by James Heskett (Harvard Business Review Oct 2020)

 

01 OCT 2020WHAT DO YOU THINK?

Are CEOs the Wrong Leaders for Stakeholder Capitalism?

by James Heskett

A year after 181 CEOs pledged their companies to better serve social goals, critics find they have failed to do so during the pandemic. Is stakeholder capitalism in the wrong hands? asks James Heskett.

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The Business Roundtable, comprising 181 corporate leaders, issued last year its “Statement on the Purpose of a Corporation,” regarded by some as a repudiation of the notion that a business is run primarily for its shareholders.

It was an endorsement of a tenet known as stakeholder capitalism, where the purpose of a business is seen as benefitting all of its stakeholders—customers, employees, and communities as well as shareholders. Some saw it as a tipping point for corporate governance. Others saw it as a public relations move.

Lest proponents of stakeholder capitalism celebrate too soon, a new study of recent corporate behavior in more than 600 organizations in the United States and Europe, financed by the Ford Foundation, concludes that since the inception of the COVID-19 pandemic, the adoption of the Statement “has failed to deliver fundamental shifts in corporate purpose in a moment of grave crisis when enlightened purpose should be paramount.”

While lauding the work of several organizations, its authors cited examples from Amazon, Salesforce.com, and Marriott International to bolster the conclusion that, under stress, leaders still turn to the same old priorities associated with short-term shareholder value.

"UNDER STRESS, LEADERS STILL TURN TO THE SAME OLD PRIORITIES ASSOCIATED WITH SHORT-TERM SHAREHOLDER VALUE."

Critics of the study have suggested that it was conducted too soon after adoption of the Statement. For example, Salesforce CEO Marc Benioff suggested that the Statement was intended to foster long-term change. Other Statement supporters argued that short-term moves such as layoffs, interpreted by some as running counter to the Statement’s ideals, were balanced by concern for the long-term survival of the organization so important to other employees able to keep their jobs.

In the midst of this debate, Harvard economist N. Gregory Mankiw addressed again the question framed so eloquently 70 years ago by Milton Friedman in his famous article, “The Social Responsibility of Business Is to Increase Its Profits.” (Incidentally, Friedman made no reference to either short- or long-term profitability in the article.) Mankiw wrote recently that we may be expecting too much of corporate boards and CEOs if we put primary responsibility for stakeholder capitalism in their hands. Incentives influenced by market-based competition nudge them toward short-term optimums regardless of their good intentions.

Mankiw concludes that it is unrealistic to place responsibility for such things as the rule of law, property rights, the environment, and the more equal distribution of wealth in the hands of those guiding for-profit public corporations. That’s the role of public servants. As he puts it, “the world needs people to look out for the broad well-being of society. But those people are not corporate executives. They are elected leaders who are competent and trustworthy.”

Is Milton Friedman’s philosophy an invitation, ironicaslly, to more active public governance? Is stakeholder capitalism in the wrong hands? What do you think?

References:

Business Roundtable, Purpose of a Corporation: One Year Later , Businessroundtable.org, accessed September 28, 2020.

Peter S. Goodman, Stakeholder Capitalism Falters in Study , The New York Times, September 22, 2020, pp. B1 and B4.

N. Gregory Mankiw, A Balancing Act Many C.E.O.s Can’t Do , The New York Times, July 26, 2020, p. BU.

Bronagh Ward, Vittoria Bufalari, Mark Tulay, Sara E. Murphy, Richa Joshi, Nick Cohn Martin, COVID-19 and Inequality: A Test of Corporate Purpose , KKS Advisors and The Test of Corporate Purpose, September 23, 2020, accessed September 28, 2020.