On the Purpose of a Corporation by the Business Roundtable, PART 1

In a classic case of big business pandering to their anti-capitalism enemies, the Business Roundtable, a group of big business CEOs, put out a statement titled Purpose of a Corporation. The Roundtable claims to “redefine” the business corporation. It lists five primary objectives:

• 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.

Notice what comes last—“Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate.” That statement comes across like a campaign ad for Elizabeth Warren, who has a fascist-like plan to have government dictate the governance of large private corporations, along the lines of guild socialism.

Yet Franklin J Parker, a “free enterprise analyst” at the Lone Star Policy Institute, lauds the statement, if you can believe it, as “a textbook example of free markets operating as they should.” How so? In an article run on the FEE (Foundation for Economic Education) website, of all places—Should Corporations Consider Any “Stakeholders” Other Than Shareholders?—Parker opens with:

CS Lewis, the famed author of The Chronicles of Narnia, once discussed the distinction between advancing ethics and advancing knowledge of facts. In Lewis’ view, ethics changes remarkably little over the years. What changes, and changes rapidly, is our knowledge of how the world works. This advancement of knowledge informs our application of ethical norms, and it is advancing knowledge of facts, argues Lewis, not ethics, that tends to change through time. 

My emphasis. Parker continues::

With respect to the operation of businesses, it was famed economist Milton Friedman who laid down the foundational ethic: Businesses should seek to maximize shareholder value only. Working toward any other end, asserts Friedman, is an unjustified exercise in “spending other people’s money.” 

So right off the bat, we automatically take established ethics on its face, without question. The established ethics of our time is altruism, the ethic that holds self-sacrificial service to others as the standard of moral behavior. From that premise, Parker goes on to put words in Friedman’s mouth:

But our knowledge of both economics and corporate management has advanced over the years. Through experience, we have learned that a singular focus on quarterly profits makes for unhealthy long-term businesses, which is bad for shareholders. 

My emphasis. Did Friedman really equate shareholder values with dogmatic focus on short-term profit? When did the accepted “knowledge of both economics and corporate management” ever hold that as its standard? From that strawman starting point, Parker claims, we now know differently. Instead of “singular focus on quarterly profits,” Parker agrees that corporations should  prioritize other “stakeholders’” interests over its own shareholders. Why? Because that’s what “society” demands. Such “social responsibility” will be “good” for shareholders. Parker writes:

For those who are unconcerned or unable to make the sacrifice, free markets allow for that, too. We should be careful, then, in our calls for new regulation. After all, if you are unwilling to make the marginal sacrifice required to express your value with your own money, how can we hope to make the required sacrifice at scale? Prices are, in effect, a mirror to society. Though we may find the mirror’s display distasteful, the problem is not solved by breaking the mirror.

The message from Parker: Sacrifice is moral. A healthy long-term business is built on sacrifice. Therefore, business should sacrifice. If it doesn’t sacrifice, the government will force it to sacrifice. Another word for this is, extortion. Is this how free markets actually work?

I'd like to know Parker's definition of "sacrifice". Rationally, a sacrifice is the giving up of a value in exchange for a lesser value or no value at all. It means making one’s situation worse off. If giving up a short-term (or any) value is in and of itself a sacrifice regardless of whether or not it is geared toward advancing one's long-term well-being, then the word "sacrifice" has no use. Sacrifice can’t be both good for you and bad for you. A tradeoff that results in a net gain is not a sacrifice, it is the opposite—rationally selfish. Yet that's how Parker seems to be muddling the term. On the one hand, he claims that "a singular focus on quarterly profits makes for unhealthy long-term businesses." If so, then if accepting a temporary lower quarterly return leads to a healthier business long term—that is, higher profits and thus higher shareholder value later on—then accepting a lower quarterly return is a net gain, not a sacrifice. On the other, he lauds the Business Roundtable for "prioritizing several other corporate commitments ahead of generating long-term value for shareholders." My emphasis. That would be a sacrifice--of the corporation’s shareholders. But, he claims, “The ethic is still the same: corporations should maximize shareholder value. We are simply witnessing a shift in the execution of that ethic.” Really? Then how does one make sense of this statement—“corporate executives have only now realized shareholder value is maximized through more than a focus on their next quarterly bonus is rather embarrassing for them.” How does one maximize shareholder value by "prioritizing several other corporate commitments ahead of generating long-term value for shareholders?" 

So, which is it? Parker is arguing completely contradictory premises, which boils down to, corporations should sacrifice for the “social good” regardless of whether it maximizes shareholder value. 

This contradiction points to the fundamental flaw in Parker's viewpoint. The core ethic of capitalism is the individual pursuit of rational self-interest coupled with respect for the rights of others and facilitated by trade; which means, no conflict between the rational interests of other stakeholders and shareholders, since all stakeholders (individuals whose choose the deal with the corporation), including employees, shareholders, consumers, suppliers,, deal with each other by mutual consent to mutual self-advantage. Since rational self-interest is by definition oriented toward one's "awareness of one's long-term well-being," making personal or corporate choices that prioritize long-term well-being over short-term gain is not sacrificial for anyone involved, since a rational perspective places a higher value on long-term well-being over immediate gratification.  

I have always thought of maximizing shareholder value as a long-term proposition that incorporates consideration of all relevant facts as one sees them affecting one's interests, long and short. As with an individual, a corporation foregoing short-term gratification in exchange for long-term shareholder betterment is hardly a sacrifice. So why the focus on sacrifice?

Parker opens with the observation that ethics doesn't change, but the facts do. This has been largely true. But is it right? Sacrifice means altruism, which is the opposite of how capitalism operates. Capitalism operates based on self-interest, not altruism. Yet Parker uncritically accepts the premise that ethics shouldn't change, so he jumbles the term sacrifice to fit capitalism. It can’t be done. Altruism--self-sacrifice for the benefit of others--is the long-accepted standard of ethics. But that contradicts capitalism's moral basis. Parker's got it backwards. Our "knowledge of how the world works" has indeed changed with the rise of capitalism. Parker's error is in not recognizing that these changing facts should lead us to question the established ethics. Instead, he twists the logic of capitalist ethics to fit the established ethics of altruism. 

That’s the problem that is steadily eroding capitalism and liberty. Capitalism is based on universal individual self-interest, not sacrifice. Universal self-interest in turn spawned modern business, which is built on maximizing shareholder value, which in turn led to the betterment of consumers, employees, investors, communities--in essence, all relevant stakeholders. What should be done is to let these facts, this "new knowledge", lead us to question our established ethical norms. Trying to shoehorn capitalism into the 2000 year-old ethics of self-sacrifice will not advance capitalism. It will destroy it, and lead to the actual system of sacrifice, which is socialism. What our advancement of knowledge tells us is that self-interest, not altruistic sacrifice, is the proper goal of morality. The tremendous rise in the general human standard of living since the emergence of capitalism is the proof.

If capitalism is to be successfully defended, we should do exactly the opposite of what CS Lewis suggests, let our knowledge inform our ethics. The rise of capitalism resulted from the Enlightenment, which discovered that the individual can use his reason to accomplish a better life for himself, and the corollary discovery that trade, not conflict, infinitely enhances that individual’s flourishing, and thus broader society’s well-being. That is why capitalism, which is based on self-interest, is the only path to general betterment. Parker sincerely tries to defend cap[italism. But until Parker and his ilk learn that sacrifice is out, trying to fit capitalism into a sacrificial straightjacket will only result in its destruction.

So, do the other corporate commitments listed by the Roundtable’s Purpose of a Corporation—Delivering value to our customers, Investing in our employees, Dealing fairly and ethically with our suppliers, and Supporting the communities in which we work—warrant any concern of the corporation? Of course they do. But proper prioritizing is key. Those commitments are not inimical to shareholder interests, or vice versa. I’ll explain myself in my next post. Here are a couple of FEE articles with a better perspective:

Milton Friedman Was Right on Corporate Guidance, and "Woke" CEOs Ignore Him at Shareholder Peril by Jon L. Pritchett: “It is the fiduciary responsibility of the directors to protect such assets…and maybe even the entire free market system, too. The resources these CEOs propose to spend in the pursuit of social good are not their own. Those resources are capital invested by shareholders; not by the growing category of “stakeholders” these modern CEOs seem so intent on pleasing.”

Shareholder Interests and Stakeholder Interests Are Not Mutually Exclusive by Gary M. Galles: “Trying to create added stakeholder rights, ex nihilo, violates the rightfully owned property of shareholders.”

Related Reading:

Why businesspeople need moral principles--Jaana Woiceshyn

Capitalism: The Unknown Ideal--Ayn Rand

Elizabeth Warren’s Plan — We’ve Seen This Before--Stephen Hicks

The Capitalist Manifesto--Andrew Bernstein

Elizabeth Warren wants to weaponize and federalize corporations for social justice activism--Mary Chastain      

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."