Corporate

Business Roundtable has a Damascus moment

In a dramatic change, almost 200 of America’s biggest corporations have signed a pledge to move away from 50 years of 'profit is king' economics. But not everyone is happy - or convinced.

Oliver Hartwich is cross. Livid. The straight-talking, thoughtful, head of right-leaning business think tank the New Zealand Initiative is seething about what he sees as a cynical, self-serving - dishonest even - announcement from his American opposite number organisation, the Business Roundtable.

The Roundtable, the US’s most influential group of corporate leaders, has announced it’s ditching the principle that “the paramount duty of management and of boards of directors is to the corporation’s shareholders”.

Instead the 181 CEOs have committed, on paper at least, to “lead their companies for the benefit of all stakeholders - customers, employees, suppliers, communities, and shareholders".

“This new statement better reflects the way corporations can and should operate today,” Business Roundtable corporate governance committee chair Alex Gorsky says. “It affirms the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.”

It’s a radical departure from the business philosophy promoted by Nobel Prize-winning economist Milton Friedman in 1970, that “the social responsibility of business is to increase its profits”.

Friedman argued, and his view was accepted around the world, that profit-focused companies would deliver economic prosperity down the line - to employees, suppliers and customers, and beyond.

Trouble is it hasn’t worked out like that, says Max Rashbrooke, a New Zealand author and an academic with Victoria University’s Institute for Governance and Policy Studies. 

Max Rashbrooke. Photo: supplied

Rashbrooke, who has examined the impacts of wealth inequality, says over the past 30-40 years the share of corporate revenues going into the pockets of workers as opposed to business owners/shareholders has gone from 58 percent to 48 percent. This leaves the average worker $12,000 a year worse off than they would have been if the scales had remained at 58 percent.

Meanwhile salaries of CEOs have increased at a far higher rate than those of their employees. US federal data released in June showed the average chief executive of a top listed company earned 287 times more than their median employee in 2018. That ratio has increased tenfold since WWII. 

And as business has prospered, there has been untold environmental damage.

Rashbrooke says while the Business Roundtable announcement is words, not action, it is at least a public recognition that the present model is flawed.

“It adds to a gradual sea change away from the Gordon Gekko ‘greed is good’ mantra,” Rashbrooke says, referring to the main character in the 1987 movie Wall Street. “It makes it harder for business to insist that making profits is enough.”

Rashbrooke’s sentiments are echoed across the world. US Democratic presidential nominee Elizabeth Warren has proposed an "Accountable Capitalism ct”, while Britain’s Labour leader Jeremy Corbyn has talked about changing the rules of the game to address a “profoundly unbalanced economy”.

It’s dishonest what they are doing. It’s green, white and red-washing.

So why is NZ Initiative’s Oliver Hartwich so angry? 

There are two reasons, he says. The first is to do with the hypocrisy of some less-then-squeaky-clean companies signing the document.

“It’s dishonest what they are doing. It’s green, white and red-washing.”

He points to the wave-like signature of Dennis Muilenburg, chairman, president and CEO of Boeing, the company whose 737 Max planes were grounded in March after crashes in Indonesia and Ethiopia killed 346 people.

Other companies behind the statement include Lockheed Martin, Walmart, American Airlines, Coca Cola, Goldman Sachs, Exxon Mobil, Citigroup and Amazon.

“It would be fine if they did behave ethically, but you have companies not paying tax properly, not dealing with suppliers properly, certainly not treating staff and customers as top priority,” Hartwich says.

“This is a cynical effort at self-promotion; something they can put in their annual report, where they can wax lyrical about social responsibility. They should be starting by behaving ethically, paying their taxes, not putting out some bullshit statement.”

Competitive pressures

University of Auckland professor Tim Hazledine shares Hartwich’s cynicism, wondering whether companies could simply be trying to pre-empt governments who might be thinking about taking action to force better behaviour.

But even if this isn’t the rationale behind the new principle, Hazledine wonders what signatories can actually do to put their “conscious capitalism” into practice.

He argues individual companies are often stymied by competitive pressures if they stop polluting, or pay higher wages, or source products from more ethical suppliers. 

“Let’s suppose they are sincere, it’s difficult for individual corporations to do anything about it without affecting their business.

“So the next stage is [the Business Roundtable] would need to go to government to ask for help to set standards, so there is a level playing field.” 

Business lobby groups asking governments for regulation? Pigs might fly.

Oliver Hartwich. Photo: Supplied

The self-interest motivation

Meanwhile, Hartwich’s second beef against the Business Roundtable’s new principle is philosophical. He simply doesn’t buy the idea.

“This is deliberately misleading the public about the purpose of business. The purpose is to make a profit. Otherwise it’s a charity.”

He supports the economic case for business ethics. “If a company treats people badly it will backfire.”

But he believes companies do - and should - act out of self-interest. Like Milton Friedman, he believes the primary motive for companies is make profits, and out of that comes any good they might do. He quotes Adam Smith, arguably one of the most influential economists ever and author of An Inquiry into the Nature and Causes of the Wealth Of Nations (1776).  

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.”

Rashbrooke doesn't agree.

"That rigid view of economics has done a lot of harm," he says. That only works if markets work properly and evidence flies in the face of that view.

"Over the last 30-40 years, companies have done a lot of damage to their workers, the environment and consumers, while making enormous profits."

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