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Three Questions

Three Questions: Prof. Jeffrey Sonnenfeld on Looking Beyond Shareholder Value

For two decades, the Business Roundtable, an organization of top corporate leaders, has endorsed the principle that corporations exist principally to serve shareholders. This week, the group reversed itself, declaring a commitment to other stakeholders, including customers, employees, and local communities, as well as shareholders. Yale SOM’s Jeffrey Sonnenfeld says that the new position is a return to the founding principles of the organization—and that it reflects an understanding among many business leaders that doing good is not antithetical to doing well.

Jamie Dimon of JPMorgan Chase, the chair of the Business Roundtable,  with Randall Stephenson of AT&T and Dennis Muilenburg of Boeing at a 2018 event hosted by the group. Photo: Mark Wilson/Getty Images.

Jamie Dimon of JPMorgan Chase, the chair of the Business Roundtable, with Randall Stephenson of AT&T and Dennis Muilenburg of Boeing at a 2018 event hosted by the group. Photo: Mark Wilson/Getty Images.

  • Jeffrey A. Sonnenfeld
    Senior Associate Dean for Leadership Studies & Lester Crown Professor in the Practice of Management

What’s the historical background of the idea of shareholder primacy?

Historically, the unitary worship of the shareholder as the only constituent of consequence has not been the dominant mantra of the U.S. business community, despite mythology to the contrary. From colonial village life, the Grange Movement, immigrant ethnic urban neighborhoods, and utopian socialist industrialists, to progressive reformist scientific management followers, to the human relations movement and the quality of work life movement, the Dickensian industrialist was not the prevailing model for U.S. business leaders.

In looking for the origins of shareholder primacy, many like to cite Chicago economist Milton Friedman’s 1970 assertion that “the only responsibility of business leaders is to increase its profits,” which was an admonition of the do-gooder mindset of corporate leaders prevalent at that time. In reality, even Friedman’s article was more nuanced, as he acknowledged, “It may well be in the long-run interest of a corporation … [to] devote resources to providing amenities to the community.”

The philosophical roots of this point of view, of course, begin long before Friedman, with philosopher Robert Nozick, novelist Ayn Rand, or economist Friedrich Hayek, or social Darwinist Herbert Spencer—or even John Locke’s social contract, in which the only right people give up in order to enter into civil society and its benefits is the right to punish other people for violating rights. In short, the belief was, you have no responsibility for the misfortune of others if you are not directly responsible for such suffering.

This viewpoint, of course was challenged by countless Talmudic scholars, theologian Walter Rauschenbusch, philosopher John Rawls, and authentic progressive voices over the decades who argued that if you have benefited from a society which entitled you to privilege and resources randomly, you have a responsibility to share those resources with those less fortunate, who are also subject to the randomness of human fate.

The Business Roundtable had endorsed the idea of shareholder primacy for two decades before reversing itself this week. What do you think motivated the group to change its position now?

This is not a novel position for the Business Roundtable but a rediscovery of its original position. The founding generation of the Business Roundtable, the “Great Generation” or the “soldier generation” of World War II, possessed sweeping noble visions, but was succeeded by the narrower “Bobbysoxer Generation,” which came of age in the 1950s. Now finally, the Woodstock Generation is expressing itself in its last chance in the saddle.

GE’s Jack Welch told me that when he first went to the Business Roundtable meetings, introduced by his predecessor Reginald Jones, he felt that the group was too consumed by a do-gooder mentality. Jones was one of the first chief executives to champion the term “corporate social responsibility.” Welch believed that their lofty missions of his elders had led them to take their eyes off the ball of their firms’ positioning against global competitors, preferring to work on social issues instead of parochial commercial concerns. It is interesting to note that GE’s current CEO, Lawrence Kulp, is one of a handful of BRT members who declined to sign this new statement.

I knew many of the founders of the Business Roundtable, who formed the organization in 1972 after years of watching the business community’s public image decline in the wake of ferocious battles over environmental disasters (e.g. the infamous Tennessee Valley of Drums, the raging fire on Ohio’s Cuyahoga River, and the nightmare of contamination for home owners at Love Canal New York by Hooker Chemical), race riots in cities across the nation, and a nation torn over the Vietnam War.

Working sometimes with Washington but often on its own, the Roundtable tackled problems like improving global workplace conditions, retraining, diversity and environmental sustainability. They understood that their jobs went beyond their office walls.

“The BRT’s pronouncement this week is important if it does not fall victim to the common PR spin of ‘greenwashing’ and mindless metrics which avoid genuine courageous voice and bold action.”

As the industrialist George Weyerhaeuser told me in 1978,“We have a license to operate from society, and if we violate its terms, it can be withdrawn. Citizenship is part of that contract.” Having researched this field for over 40 years, I can attest to the fact that Weyerhauser was far from being an outlier in practicing such noble values. In 1985, Johnson & Johnson’s CEO James Burke told me, “Our most powerful tool is institutional trust, which is real, palpable, and bankable. Every act that builds that trust enhances the value long term of the business.”

Sadly, by the 1990s the Business Roundtable had become cynical and distant, with some leaders even ethically impaired. And as public trust in the business community plummeted in the wake of Enron and other scandals of the early 2000s, the group pulled back. Imperfect reforms were hastily passed, while the BRT had a tantrum on the sidelines. Jeff Kindler of Pfizer worked valiantly to try to build a consensus during the creation of Obamacare with little support. Others dug in on the budget wars of the early 2010s.

While we have seen courageous responsible actions by business leaders, individually and in groups, the formal associations have been dormant and defensive on this front. The BRT’s pronouncement this week is important if it does not fall victim to the common PR spin of “greenwashing” and mindless metrics which avoid genuine courageous voice and bold action. The BRT’s founding generation would be thrilled that the BRT has refound its voice.

How do investors see the idea of a broader mandate for corporations? Are we likely to see activist investors pushing back?

Doing good is not antithetical to doing well. Michael Barrett and Robert Salomon’s research in the Strategic Management Journal shows a strong curvilinear relationship between ESG and financial performance. The soaring performance of leaders on this front, such as Disney, PepsiCo, Unilever, UPS, Walmart, AT&T, Starbucks, Apple, Google, JP Morgan, Goldman Sachs, Bank of America, Merck, CVS, Delta, and Dick’s Sporting Goods, show that even when bold moves may have briefly caused a stock hiccup, it was more than made up in increased shareholder value.

Years ago, Paul Polman launched Unilever’s Sustainable Living Plan, which set ambitious goals such as cutting the company’s environmental impact in half by 2030. Unilever’s stock price nearly doubled during his 10 years as CEO.

At PepsiCo, Indra Nooyi championed “Performance with Purpose” for more than 15 years, meeting ambitious internal yardsticks on nutrition such as ending trans fats, reducing sugar and sodium, and environmental sustainability milestones on recyclable packaging and responsible water use. Faced with a hostile campaign from activist investor Nelson Peltz and his firm Trian Partners, Nooyi proved out her vision. She welcomed a Trian representative to the board and became friends with Peltz. Three years later, Trian sold its holdings for a remarkable 67% gain—a result of Nooyi’s vision.

Merck’s Ken Frazier told me, “Businesses exist to deliver value to society. Merck has existed for 126 years; its individual shareholders have turned over countless times. But our salient purpose in the world is to deliver medically important vaccines and medicines that make a huge difference for humanity.” Two years ago, Frazier quit a presidential advisory group following the violent and deadly white power rally in Charlottesville, stating that he had to “take a stand against intolerance and extremism.” Individual CEOs joined him in waves, including with non-BRT members such as Disney’s Bob Iger and Polman of Unilever, but the BRT itself missed the moment.

Ed Stack, the CEO of Dick’s Sporting Goods, didn’t await a shareholder vote before pledging to stop selling assault-style weapons and high-capacity magazines and to require age limits for gun purchases and calling for universal background checks. “The Parkland murders of kids had a profound effect,” he said. “I hadn’t cried so much since my mother passed away. We failed our kids and I am pissed—we sold the shooter his gun.” Ed Bastian of Delta, Doug McMillon of Walmart, and Dave Abney UPS soon followed with supportive policies, in the face of threatened backlashes by pro-gun advocates.

There are more examples. Ginni Rometty of IBM has modeled responsible stewardship of data as a core principle with transparency and ownership of data core principles as well as massive investment in technology education to “new collar” workers who could have been left behind without higher educational credentials. Walmart, the nation’s largest employer has been raising wages, triggering parallel moves by other major retailers. Walgreens created “Balance Rewards for Healthy Choices,” a healthcare innovation disguised as a retail loyalty program. Meanwhile, its competitor, CVS, stopped selling tobacco products. Goldman Sachs’ 10,000 Women initiative has been investing in women entrepreneurs to foster economic growth and stronger communities in 56 countries. Last year, JP Morgan’s Jamie Dimon announced its $500 million Advancing Cities initiative, driving inclusive growth and create greater economic opportunity in cities across the world. Brian Moynihan of Bank of America lends money at below cost, financing 194,500 units of affordable housing.

This entire discussion speaks to Yale SOM’s founding mission and its appreciation of the fact that Adam Smith’s presumed 18th century view of a world of separate public and private economic spheres does not exist—if it ever did. We live in a vast global spectrum of hybridized economies. At SOM, our faculty’s research and teaching embraces the spillover between public policy, private enterprise strategy, corporate character, and personal conduct.

In 1999, Bill Donaldson, Yale SOM’s founding dean, said at our CEO Summit, “The board’s role is to insulate the CEO from short term pressures. The board does have a responsibility that goes beyond next-quarter earnings and even the next year’s earnings. Maybe you can’t shout this from the pages of the Wall Street Journal but there is another duty. It has a responsibility to serve something more than the shareholders.”

Department: Three Questions