By Dr. Michael Busler
Recently the Business Roundtable, which is an organization meant “to help build a strong and sustainable economic future in the United States,” changed their mission. Historically shareholder value was the only goal. Now they say that’s not the case. They are wrong.
Last Monday almost 200 CEO’s from the largest US corporations attempted to re-define the role of business in society. They wanted to address the public’s apparent skeptical perception of business. The new statement reflects the welfare of more than just the shareholders who own the corporation.
Historically and in virtually every discussion about the goal of business, maximization of profit in the short term and maximization of shareholder wealth in the long term were essentially the only forces driving business decisions. The new statement redefines the purpose of a corporation. Now CEO’s should “commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.”
It is interesting to note that shareholders are listed last.
This statement is terribly misguided. The sole purpose of any business should be profit and wealth maximization. In other words shareholders welfare should be the only concern of the management of a business. When that happens, all stakeholders benefit.
Decisions considering customers, employees, suppliers and communities should only be made if those decisions will ultimately benefit the owners of the corporation who have invested their capital in that corporation. The owners invested capital to earn the best possible return.
Adding the social goals will reduce the profit. That is a bad thing, simply because it not only spends shareholders money on things the shareholders may not want and because it will distort markets. The marketplace makes decision regarding what products to produce, what price to set for the products, what quantity should be made and if any changes are needed, based almost entirely on the size of the profit.
Actually the Business Roundtable recognizes this. Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. and Chairman of Business Roundtable said. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.
In other words, corporations invest in their employees and communities because those investments will add to their success in the long term, meaning their profitability in the long term.
Dimon also said, “These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.” Business is not necessarily concerned with serving all Americans. Each business should only be concerned with serving their customers and providing wealth to the owners. Let government policy serve all Americans.
The way business maximizes profit is to give consumers exactly what they want at exactly the price they are willing to pay. If consumers will only buy products from companies known to treat their employees well, the corporations will treat they employees the way the customers expect.
If consumers will only buy from companies that consider communities and suppliers welfare, then that consideration will lead to the largest profit. Corporations will take actions that consumers demand.
The reality is that the majority of consumers rarely consider a corporation’s profile when purchasing a product, although there are some consumers who do consider social issues. Most consumers buy most of the products because they believe the product gives them the most benefit for the amount of money spent.
If investing a dollar in an employee results in the worker producing more than a dollar’s worth of profit, then the investment is made, although sometimes the investment is made just to maintain profitability. This applies to training workers to use new, more efficient equipment.
The corporation invests in the community when that investment will pay off for the corporation. For instance, a business sponsors an event mostly because they are hoping the publicity yields new business for them. If that’s not the case, they shouldn’t invest.
There are some investors who are willing to accept lower returns if they are concerned about social issues. But even in that instance, the investors still want maximum value but they consider a social goal to have value.
An example might be a person invests is a company that makes wind mills. The investment may not return large monetary returns but the investor sees value in the product. The combination of dollar returns and perceived social benefit, still maximizes that shareholders value. In 1970, Milton Friedman wrote that “The social responsibility of business is to increase its profits.” This article clearly explains why, in his opinion, business should only be concerned solely with profit. Friedman was right then, and he is still right today.
For the last decade, social policy has crept into the business world. We have politicians who can determine social policy. Let business just satisfy the needs of consumers. Where the consumers’ needs are the greatest, the profits will be the greatest. That should be the only concern of business.
Concentrating on profit will build a strong and sustainable future for the US economy.
Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics.