James R. Copland is a senior fellow with and director of legal policy for the Manhattan Institute for Policy Research.
The Business Roundtable is one of Washington’s top business lobbies, composed of the chief executives from dozens of the United States’ largest corporations. On Monday, the group released a “statement on the purpose of a corporation,” signed by 181 of its 193 members. Critics and supporters of business alike have characterized the statement as a major shift away from “shareholder” capitalism toward an alternative “stakeholder” model pushed by some progressive academics and policymakers.
It isn’t. The Business Roundtable’s statement unequivocally states that “the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.” To be sure, it proclaims that each of the chief executives signing on shares “a fundamental commitment to all of our stakeholders” — including customers, suppliers, employees and the broader community. But that’s a truism. No business can long survive without meeting such stakeholders’ needs.
What’s significant about the statement is what it does not say. The corporate signatories do not suggest in any way weakening the fiduciary duties of the boards and managers of ordinary for-profit shareholder corporations to manage such companies’ affairs for shareholders’ benefit.
Shareholder primacy is a well-entrenched principle of corporate law. In 1919, in Dodge v. Ford, the Michigan Supreme Court resolved a dispute between auto-industry titans — Henry Ford and the Dodge brothers, Horace and John — over the purpose of a shareholder corporation. Rebuffing the Ford founder’s stated intent to run his company for the “general purpose … to benefit mankind,” the court stated, unequivocally, that “a business corporation is organized and carried on primarily for the profit of the stockholders.”
Sen. Elizabeth Warren (D-Mass.) has sponsored legislation, the Accountable Capitalism Act, that would upend that view. Warren would nationalize the corporate governance of large companies in the United States. (Such law has traditionally resided at the state level.) She would put labor-union appointees on every such board. And she would convert every large company to a “public benefit” corporation, without clear duties to shareholders.
Far from suggesting agreement with the Warren bill, the Business Roundtable’s statement attests to the varied nature of corporate purpose among member companies. In fact, some of the United States’ largest companies are not shareholder-owned. There are large employee-owned firms, such as Publix Super Markets. And large customer-owned firms, such as mutual insurers State Farm and Nationwide. And large supplier-owned firms, such as the agricultural cooperative Land O’Lakes.
But these examples are the exceptions that prove the rule. Among the 500 largest companies in the United States by revenue, 95 percent are stockholder corporations, according to our calculations. There’s a reason for that. Employees, customers and suppliers face conflicting interests. Consider employees: Some may prefer to work extraordinary hours for more pay; others may prefer less money and more time for family and leisure.
By aligning ownership incentives around a single variable — share value — traditional corporate structure avoids these conflicts. That’s why the Council of Institutional Investors responded forcefully to the Business Roundtable statement by clarifying that “accountability to everyone means accountability to no one.”
Courts rarely second-guess the “business judgment” of corporate leaders. Judges aren’t business executives. So shareholder primacy is, in the words of Yale Law professor Jonathan Macey, largely “aspirational.” But that doesn’t mean it doesn’t matter. Without a clearly defined shareholder-primacy rule, there would be little stopping company executives from running off with investors’ money — as often happened in the 19th century.
It’s hard to argue that the shareholder model hasn’t worked well for shareholders. In Warren’s view, it seems, everything went wrong when Ronald Reagan was elected president in 1980. But from shareholders’ perspective, that view is crazy. The S&P 500 returned 127 percent more after inflation, accounting for dividends, in the 35 years beginning with 1981 than it did in the 35 preceding years, based on our estimate. The most valuable companies in the world today — Amazon, Apple, Google and Microsoft — were all in their infancy, or nonexistent, in 1980.
That doesn’t mean that the benefits of economic growth over the past 40 years have been equally shared. But in trying to help citizens left behind, the last thing policymakers should do is radically change the laws that support the engine of economic growth in the first place.
So, yes, as the Business Roundtable suggests, business leaders must be sensitive to a host of stakeholders. Every good corporate leader pays attention to relationships with customers, suppliers, employees and the larger community.
But there is a big difference between saying that a for-profit shareholder corporation should be sensitive to varying constituencies’ concerns and saying that its principal purpose is something different from the traditional view. One needn’t be an expert in public-choice economics or corporate governance to understand that politicizing corporate decision-making would be inefficient. Just take a look at the institution where Warren spends much of her time — the Congress.
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