Friday, October 18, 2019

On the Purpose of a Corporation by the Business Roundtable, PART 2


As to the Business Roundtable statement, Purpose of a Corporation, it’s a stab in the back to the people who invested their money, entrusting the corporate managers to fulfill their fiduciary responsibility to the shareholders, the owners. And it’s wholly unnecessary. The headline: “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’.” The subtitle: “Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders.” Here is the core of the statement:

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

·         Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
·         Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
·         Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
·         Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
·         Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

None of these goals is objectionable. What is objectionable—I would say immoral—is the order; more to the point, the appearance of the first four on a list of purposes, which in effect subordinates the shareholders to fifth class status. This is akin to a defense attorney placing others’ interests above those of his own client. 

In his FEE column lauding the Roundtable, Should Corporations Consider Any “Stakeholders” Other Than Shareholders?, Franklin J, Parker asserts:

Through experience, we have learned that a singular focus on quarterly profits makes for unhealthy long-term businesses, which is bad for shareholders.

Who ever said that maximizing shareholder value necessarily correlates to a "singular focus on their next quarterly bonus" anyway? That sounds like a straw man. If Parker's description of the Business Roundtable's statement is accurate—that the statement actually does prioritize "several other corporate commitments ahead of generating long-term value for shareholders," it is definitely a call for corporations to violate their fiduciary responsibilities. A primary focus on “generating long-term value for shareholders” is precisely what a corporation’s moral obligation is. Those “other commitments” are fine, and pursuing them should not and need not come at the expense of stabbing shareholders in the back. They shouldn’t be at the expense of shareholders. Nor should they be the purpose of a business corporation.

A proper approach to the purpose of a business corporation is described in the 1963 policy statement of Indian Head Mills textile company under its then-president James E. Robison:

The objective of this company is to increase the intrinsic value of the common stock. [This company is in business not] to grow bigger for the sake of size, nor to become more diversified, nor to make the most or best of everything, nor to provide jobs, have the most modern plants, the happiest customers, lead in new product development, or to achieve status which has no relationship to the economic use of capital.

Any or all of these may be, from time to time, a means to our objective, but means and ends must never be confused. Indian Mills is in business solely to improve the inherent value of the common shareholder’s equity in the company.* [my emphasis]

“[M]eans and ends must never be confused!” The Business Roundtable lists five key objectives that it claims to “Redefine the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’”; “Delivering value to our customers, Investing in our employees, Dealing fairly and ethically with our suppliers, Supporting the communities in which we work, Generating long-term value for shareholders.” In one of the worst cases of businesspersons pandering to their enemies, the Roundtable lists shareholders last. This is immoral. Let’s paraphrase Robison:

The objective of a business corporation is to increase the intrinsic value of the common stock. Corporations are in business not to deliver value to our customers, invest in our employees, deal fairly and ethically with our suppliers, support the communities in which we work, or to achieve status which has no relationship to the economic use of capital.

Any or all of these may be, from time to time, a means to our objective, but means and ends must never be confused. Corporations are in business solely to improve the inherent value of the common shareholder’s equity in the company. 

The Business Roundtable is reversing cause and effect, and in the process selling out America’s consumers, productive workers, and communities. The first four are not primaries. They are means The last is the end. If we forget this hierarchy, we do indeed end up with “An Economy That Serves All Americans,” a mushy phrase that really means a state-controlled economy whereby productive people serve the state. A free market economy leaves people free to work and trade in service to their own lives and flourishing: It does not work for people who believe the economy owes them a living. 

Again, “means and ends must never be confused!” Nor must ends and effects. Good jobs, a strong and sustainable economy, innovation, a healthy environment, and economic opportunity are all effects of the primacy of the corporation’s purpose, which is “solely to improve the inherent value of the common shareholder’s equity in the company.”

I found two more good examples of the proper hierarchical approach to running a business corporation. 

Jonathan Townley, writing for The Objective Standard, explains How John H. Patterson Modernized Industry. Patterson started National Cash Register company (now NCR) in 1884. Patterson learned that “a singular focus on quarterly profits makes for unhealthy long-term business.” As Townley explains:

In 1894, however, NCR experienced a major setback: An order of cash registers worth $50,000 was returned because the machines were defective.17 To investigate the cause of the poor workmanship, Patterson moved his desk to the factory floor, where he could interact directly with his workers.

Like many factories of the day, his was dark, dirty, and poorly ventilated. Injuries were common. Water for drinking and washing was unsanitary. Unhappy with the working conditions and pay, many skilled workers were quitting. Patterson realized that he had not given his workers a reason to care about the quality of their work.18

He quickly had the factory cleaned and ventilation systems installed. He was among the first industrialists to introduce safety measures for using dangerous equipment. And he built subsequent factories with massive windows, allowing adequate lighting for his workers. These became known as the first ever “daylight” factories.19

These changes improved working conditions enormously. Morale increased, turnover decreased, and poor workmanship all but ceased.

In March of 1913, a disastrous flood struck Dayton, Ohio, where many of NCR’s employees worked. Patterson quickly organized a massive rescue and relief effort, rescuing thousands of people and giving food and shelter to the suddenly homeless people. Townley concludes:

Patterson’s devotion to quality, his complete disregard for convention, and his quest to improve all aspects of his business did more than lead NCR to success. He molded an entire generation of entrepreneurial minds, training many directly and setting the standards by which countless others judged success. He demonstrated to business owners the benefits of investing in one’s employees. And he showed the world what so many “greedy industrialists” are made of: an enduring will to remake the world as it could and should be—and on their own terms.

Clearly, Patterson demonstrated that the well-being of his workers and their community were necessary contributions to his company’s success, not a substitute for that success. John A. Allison grew BB&T into one of the biggest financial firms in America. As I wrote in my post "It's a Wonderful Life" - in Real Life, as the 2008-09 mortgage meltdown was occuring:

BB&T’s philosophy (the company is now run by Kelly King) is laid out in a special section on its website. The introduction stresses that although “Change is necessary for progress, … the context, our vision, mission and values, are unchanging because these principles are based on basic truths.” 

Its core principles are led by its Values (reality, reason, independent thinking, productivity, honesty, integrity, justice, pride, self-esteem, and teamwork, with a final word on the role of emotions). Values are defined as “practical habits that enable individuals to live, be successful, and achieve happiness.”

These values define the Concepts That Describe BB&T, its Vision, Mission, and Purpose, and its Strategic Objectives. These set the tone for its relationship with its clients, employees, and the community at large, and define BB&T’s long-term goals:

Our ultimate purpose is to create superior long-term economic rewards for our shareholders. This purpose is defined by the free market and is as it should be. They take the risk if the business is unsuccessful. They have the right to receive economic rewards for the risk which they have undertaken.

However, our purpose, to create superior long-term economic rewards for our shareholders, can only be accomplished by providing excellent service to our clients, as our Clients are our source of revenues.

To have excellent client relations, we must have outstanding Employees to serve our clients. To attract and retain outstanding employees, we must reward them financially and create an environment where they can learn and grow.

Our economic results are significantly impacted by the success of our Communities. The community's "quality of life" impacts its ability to attract industry for growth.

Therefore, we manage our business in a long-term context, as an integrated whole, with the ultimate objective of rewarding the Shareholders for their investment, while realizing that the cause of this result is quality client service. Excellent service will be delivered by motivated employees working as an integrated team. These results will be impacted by our capacity to contribute to the growth and well-being of the communities we serve. ** [my emphasis]

Clearly, a successful business can grow without sacrificing its shareholders, or anyone else. Indeed, the well-being of consumers, employees, and communities in general is aligned with the shareholders. So for whom do the current leaders of the great American companies sacrifice their shareholders?—apparently, in order to pander to the most despicable "stakeholders" of all, the free enterprise-hating, greedy, power-lusting “socialist justice” warriors. The Roundtable’s  Purpose of a Corporation is immoral, contrary to the ethic of capitalism, and ultimately destructive of the "good" of the "social fabric" of America, which is built around the individual's inalienable right to pursue personal happiness. 

A singular focus on maximizing the long-term value for shareholders does not mean a narrow focus only on short-term profit at the expense of other considerations, or stakeholders. It means shareholders as the ultimate purpose of a business corporation. We live in an interconnected world economy, where plenty of interests coincide. There can be plenty of contributing factors to a purpose that can and should be taken into consideration. But they should never be prioritized over the primary purpose of an organization. There are plenty of other ways to prioritize those other interests. You wouldn’t prioritize monetary profit as the purpose of a charity, although a profitable enterprise may contribute to the charity’s giving purpose. And you shouldn’t prioritize jobs as the purpose of a business, even though good jobs contribute to the advancement of the business’s shareholder purpose. 

Robison, Patterson, and Allison get it right. A corporation is an association of private individual investors, and thus has a right to exist for its own sake, like any other private assembly such as a church, a charity, or a chess club. The Business Roundtable’s disgraceful pandering to collectivism—”An Economy That Serves All Americans”—“redefines” the corporation as a servant of society. But an economy does not “serve” anyone. What we call “the economy” is the sum of the trade associations of productive individuals. Those who frame the issue as “An Economy That Serves All Americans” are speaking of masters and slaves, with the most productives individuals (or their associations) as the slaves. The Business Roundtable should go back to the drawing board, and redefine its redefinition of the business corporation as a properly shareholder value-maximizer derived from its shareholders’ self-interested right to earn a living, like every other productive occupation. 

To earn a living, whether through direct work or investment of one’s savings, does imply serving others’ wants and needs. But such service to others is the means to the only proper purpose of one’s work, which is to maximize one’s own personal material (and spiritual) flourishing. A reversal of those means and ends only advances the collectivistic statist designs of the likes of anti-capitalists and socialists like Elizabeth Warren and Bernie Sanders. Businessmen need to get some philosophical backbone, because with “friends” like the Business Roundtable, capitalism doesn’t need enemies.

* [As quoted by Ayn Rand in her April 1963 Cosmopolitan magazine article, which was reprinted in The Objectivist Forum.]

** [NOTE: Allison retired a number of years ago. I do not know if the new leadership adhered to the philosophy under which Allison built the company. But it seems to have, at least in part.] 

Related Reading:



In Defense of the Corporation—Robert Hessen: This book was first published in 1979 to defend “the right of the corporation to exist and function freely.” Hessen’s goal was to counter Ralph Nader’s argument that corporations are “creatures of the state.” The book is relevant today because Nader’s call for federal chartering of corporations is the precursor to Elizabeth Warren’s neo-fascist "Accountable Capitalism Act."

The Capitalist Manifesto--Andrew Bernstein


Elizabeth Warren Plans To Destroy Capitalism By Pretending To 'Save' It--SCOTT SHACKFORD: Warren's plan would overrule corporate leaders' control over their own businesses. This is also known as "socialism."

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