Is the Era of Shareholder Primacy Over?

For decades, the Business Roundtable, a professional association and lobbying organization formed by CEOs from many of the largest companies in the United States, asserted that companies exist to create value for shareholders. So, it was noteworthy when, in 2019, the leaders of 181 companies signed onto the organization’s revised “Statement on the Purpose of a Corporation” that committed to creating value for all stakeholders.

Recently, leaders of the Yale Program on Stakeholder Innovation and Management (Y-SIM) gathered to discuss the impact of the Business Roundtable statement, five years later. “It got a lot of attention and is still referred to today,” said Jon Iwata, practice leader at Y-SIM and former IBM senior vice president and chief brand officer. In retrospect, he asked, “What was the significance of what the Business Roundtable did?”

Alan Murray, Y-SIM executive fellow and the former CEO of Fortune Media, said that the statement was significant because it emerged from CEOs themselves.

“They were talking very differently about their jobs than their predecessors did, particularly about their responsibilities to society,” he said. “Something was going on that was dramatically different from what I had observed, having done this for four decades.”

He added, “You have an organization that works by consensus…and suddenly they're able to come together and say we all agree this is the right way to run a company—that you should pay attention not just to shareholders, but to all your stakeholders, including your employees, your customers, the communities they operate in, and the natural environment.”

The statement was an acknowledgment that a business isn’t simply selling a widget anymore; it’s judged on whether it’s making the complex and interconnected problems facing society better or worse. Are workers earning a living wage? Are factories safe and non-polluting? Do suppliers and customers view the company positively? And are shareholders getting sufficient return on investment?

One approach to that challenge is to juggle endless tradeoffs, trying to satisfy everyone. But, said Iwata, business leaders are realizing that there’s a better way. He explained, “I'll never forget a comment made by a Mars executive: ‘You don't want to assign one part of Mars to grow our chocolate business by getting more cacao beans in our supply chain and a different part of Mars solving for our carbon footprint. You want to give both of those jobs to the same team. Why? Because they’ll have to think differently. It will lead to, in a word, innovation.’”

The Business Environment Changed

In 1970, Milton Friedman ushered in the era of shareholder primacy with a much-quoted essay in the New York Times, titled “A Friedman Doctrine—The Social Responsibility of Business Is to Increase Its Profits.” Ted Snyder, a faculty co-leader of Y-SIM, William S. Beinecke Professor of Economics and Management, and former Yale SOM dean, studied with Friedman while getting his PhD at the University of Chicago. These days, Snyder said many students consider Friedman to be a boogeyman.

“In fact, there's not that much daylight between his view and stakeholder capitalism,” Snyder said. “He would not object to a recognition that the world has changed. Labor is differentiated, consumers are differentiated. Investors have preferences. You have to think about the government differently. As long as all of that was built into a framework for long-term value creation, I think he’d say, ‘Fine.’”

Murray offered an explanation for why shareholder primacy made sense in an earlier time, and why it no longer does. In the 1970s, more than 80% of the value of Fortune 500 companies came from capital-intensive, physical stuff—factories, equipment, inventory, etc. Murray said, “In that world, you definitely are going to put a higher priority on the shareholders who are giving you the capital you need.”

Today, over 85% of the value of Fortune 500 companies is intangibles. “It's intellectual property or brand value,” Murray said. Reducing turnover in the employees who create intellectual property and ensuring that customers value the brand become priorities. “The way I think about what's happened is that companies are just having to become much more human because that's where the value comes from.”

Ravi Dhar, faculty co-leader of Y-SIM and George Rogers Clark Professor of Management and Marketing, added, “Long-term financial returns are not incidental or orthogonal to how we manage stakeholders. They’re a consequence of making the right stakeholder choices,” However, Dhar also noted that shareholder and stakeholder interests tend to align in the long term. “In the short run, there’s some disconnect. And I think that's an important part of the debate.”

Has Focusing on Stakeholders Helped Stakeholders?

The stakeholder focus hasn’t been a panacea. “I would say collectively, the needle has moved very little in the past five years,” according to John Seifert, chairman of Y-SIM’s Board of Advisors and former CEO of Ogilvy Group. “Just go through the list: customers, employees, suppliers, communities, and shareholders. I mean, you have a whole bunch of dissatisfied customers across industries who don't think they’re getting the value. It seems to me employees are at a historical low in terms of confidence and trust in leadership in the workplace. Some of the companies are thriving; some of them are in distress; many of the CEOs are gone.”

Murray pointed out that some firms treated the stakeholder approach as “the latest flavor” and when superficial efforts didn’t pay off, they dropped it. He also acknowledged that political attacks on commitments to the environment and diversity, equity, and inclusion have meant CEOs are talking about those areas less. Yet, he said, many are quietly sticking with the stakeholder focus, “I ask, ‘Do you still believe this? Are you still doing this?’ And the vast majority of the people I talk to say, ‘Yes, this is the way you have to run a company to create value today.’”

That said, a real change in focus may require not just different stances but real organizational changes. “Obviously taxes are an important part of the way that companies contribute to society,” Murray said, “And yet there seemed to be a complete disconnect between the way CEOs were thinking about their responsibilities to society and the way their tax departments and tax lobbyists were dealing with Washington.”

Seifert gave the collective progress to date a grade of C. He said, “The question to me then is, okay, does that make the agenda, the ambition, less relevant, or is it that they're really struggling in execution?”

Dhar argued that many companies misunderstand the agenda. They turn to stakeholders only when thinking about how to distribute profits—an extension of corporate social responsibility. “I think this notion of moving from value redistribution to value creation when thinking of stakeholders is sometimes not understood well enough,” he said. “If you see it as reconfiguring how value is created in the first place, that's a different way of thinking about it. It really changes how you do innovation. I think good companies get that. This is why sustainability is failing in many companies. It's not tied to value creation.”

And Murray pointed to Walmart as a company that truly understands the stakeholder approach. “You have a CEO who says, ‘I want to make this company the first regenerative company, and I want to make sure that we give our associates a fair shake, and I want to make sure that we get our thousands of suppliers to join with us in reducing emissions, and I want to make sure we have a positive impact on the communities we operate in.’”

Lessons for Leaders

Moving from theoretical support for a stakeholder approach to actually doing it takes leadership. “There's a lot of plumbing that has to be done. And that's hard stuff to do,” Dhar said. “You have to integrate this holistic approach into the operations of the business: how strategies are planned, how annual operating plans are done, how employees and the senior leaders are incentivized.”

He offered the example of Mars, which embedded a stakeholder focus into the operating plans and metrics of every business unit and the incentives of the top 200 business leaders. And, noting that the exact focus will differ across firms and sectors, Dhar added that the new CEO of the mining company Rio Tinto has prioritized earning a social license to operate in the communities where they work. Taking on complex, sometimes fraught engagement with civil society and traditional owners of the land isn’t legally required, but it’s seen as an investment that allows them to create long-term value.

Iwata pointed out that it’s often companies in “re-founding moments” that take on this work. “They deeply examine the fundamentals of the firm, its thesis. Why are we in business? What value do we create? Why would customers buy from us? Why would investors invest in us? Why would people work here?” He added, “Those answers are often informed by the company’s history. They’re not looking back in nostalgia. They're looking for clues for what made the company great. What they find almost always has to be contemporized, and then the hard work, as Ravi said, is putting in place a holistic operating platform, a management system, that aligns the company’s purpose, culture, strategy, and incentives.”

Businesses are realizing that leaders need different skills for this different approach. “In executive education, the big demand often is not for finance or marketing or strategy,” Dhar said. “It’s for a form of leadership—holistic thinking, integrative thinking, how to get people out of the silos.”

Iwata has been impressed with the results when leaders break down existing structures to create cross-disciplinary, cross-functional teams to tackle a multi-stakeholder problem: “You need to solve simultaneously for margins and carbon and customer need.” When that happens, he said, “Many CEOs say, sometimes with genuine astonishment, ‘They always figure it out!’”