WHY THIS MATTERS IN BRIEF
Today’s shareholder first philosophy was fashioned in the 1990’s, but now Fortune 100 CEO’s are proposing a radical overhaul of the system to favour communities, individuals, and the future.
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The world is changing, as you’ll no doubt have noticed if you read my blog. On the one hand we’re now eyeing building hotels in space and colonies on Mars, at the same time that many people are starting to join virtual nations, and an increasing number of people now believe that some organisations are already at the point where they are more powerful and impactful than governments – something that even Apple CEO Tim Cook called out recently. But now in another sign that the world might be changing and that thinking within public companies is changing from short term thinking to long term thinking, Jamie Dimon, CEO of JPMorgan, and other leaders of the world’s largest companies have announced they plan to abandon the long-held view that shareholders’ interests should come first amid growing public discontent over income inequality and the burgeoning cost of health care and higher education.
“The purpose of a corporation is to serve all of its constituents, including employees, customers, investors and society at large,” said Dimon at a Business Roundtable in New York.
“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders,” the group said in the statement. “Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity.”
The 181 signatories include BlackRock’s Laurence Fink, Bank of New York Mellon’s Charlie Scharf and the CEOs of several Wall Street banks, including Goldman Sachs, Morgan Stanley and Moelis & Co. It also includes Amazon founder Jeff Bezos, the world’s richest person.
The shift in corporate priorities comes as some politicians and critics question whether the fundamental premise of American capitalism is broken and should be revamped. Some executives also have complained that an outsize focus on share prices and quarterly results hamper their ability to innovate and build businesses for the long term.
The group’s statement offers scant detail on how the commitments will be converted into action and presents no road map for getting there. Many companies vow to do good things but often resist releasing data to let others independently verify such promises. And it will fall on CEOs, who on average last no longer than six years, to convince fickle investors, including powerful activists, that shifting resources will pay off in the long term.
The idea that businesses exist primarily to benefit shareholders – also known as shareholder primacy – took hold in corporate America in the 1980s. And then in 1997, the Business Roundtable embraced the idea in a document outlining governance principles.
Since then the concept has been criticised for leading to a fixation on short-term results at the expense of long term innovation and investments, and helping fuel the rapid increase in executive pay. Last year, public companies in the US began disclosing the difference between their CEOs’ compensation and that of their median workers. At S&P 500 firms, the average ratio is about 280-to-1, according to data compiled by Bloomberg.
Both Dimon and Fink have written open letters saying that chief executives should take on a larger responsibility for tackling societal matters and, at times, take stances on politically controversial topics.
“Stakeholders are pushing companies to wade into sensitive social and political issues – especially as they see governments failing to do so effectively,” Fink wrote this year. The message echoed a position he took in 2018 urging CEOs to make a more positive contribution to society. BlackRock alone oversees almost $7 trillion in assets.
In April, Dimon challenged fellow chief executives to get more involved in social causes and public-policy matters.
“In the past, boards and advisers to boards advised company CEOs to keep their head down and stay out of the line of fire,” Dimon said in a letter to shareholders. “Now the opposite may be true. If companies and CEOs do not get involved in public-policy issues, making progress on all these problems may be more difficult.”
[…] the keynote, which I titled The Remarkable Future, I discussed the end of Shareholder Primacy, the 1990’s premise that puts shareholders interests above all else, after Jamie Dimon and his […]