Pundits Care About CEOs' Virtue-Signaling, but Stocks Won't

If you went anywhere near financial news on Monday, chances are you saw the Business Roundtable—a cabal of nearly 200 CEOs—announced its members no longer viewed maximizing shareholder value as their core purpose. Instead, they believe decisions should consider all “stakeholders”—including employees, suppliers and communities. While Milton Friedman rolled over in his grave, pundits expounded on this “major philosophical shift” and what it could mean to corporate governance and profits in the future. Our guess: not much. Statements like this are mostly marketing fluff—in this case, probably aimed at winning over politicians and socially conscious millennials. If anything, this virtue-signaling may help keep more onerous regulation at bay—a long-term positive.

After getting past the breathless news coverage and actually reading the new “Statement on the Purpose of a Corporation,” I sort of had a hard time seeing what all the fuss was about. Basically, it summed up what any normal person would probably consider good business practices. After leading with a brief ode to free markets and a nice reminder that corporations are not soulless behemoths leeching off society, it offered a five-point commitment to “stakeholders”: providing value to customers; providing good training, pay and benefits for employees; not short-changing suppliers; respecting local communities and protecting the environment; and, of course, “generating long-term value for shareholders.”

Put yourself in a business owner’s shoes, and a lot of this probably sounds intuitive. If you don’t provide good value to customers, they will probably ditch your product or service and flock to your competitors, and you will go out of business. If you don’t pay your employees well, offer benefits and train them, you won’t be able to attract and retain top talent, and your products and services will go downhill as a result. If you don’t treat suppliers ethically, they won’t work with you, and you will have a hard time doing anything. If you put a moat around your factory and pollute your community instead of engaging with people, they will run you out of town or deny all your requests for permits, and your business will die. Lastly, if you don’t deliver good value for the shareholders that have invested the capital you need to keep growing, your business will die.

We rather doubt any of this needed to be codified. Businesses that adhere to these principles thrive. Those that don’t, don’t. Only, America has a presidential election next year, and some people running in it have peddled the myth that profit-focused companies automatically wreck life for everyone. To hear them tell it, every corporation is a soul-sucking sweatshop that exploits employees and dumps toxic waste in the local park right behind the swing set, and the solution is to put employees and community representatives on corporate boards. One presidential candidate tabled legislation to that effect, even saying these entities should join shareholders as “stakeholders” in the business, implying the company has a fiduciary responsibility to all of them, not just investors. Making this change, the logic went, would keep shareholders from “extracting” capital from the business and lead to more investment and higher wages.

Put political biases aside, and this line of logic is fairly easy to debunk. While it claims shareholders “extracted” almost $7 trillion from companies since 1985, this would simply mean companies returned that much to shareholders in the form of dividends or stock buybacks. That money did not sit idle in vaults. It recirculated! People spent it. Or invested it in new companies. Or put it in the bank, which used it to back loans to homebuyers, car buyers and small businesses. Meanwhile, the corporate behemoths continued investing, hiring and paying employees. The oft-cited observation that median real wages stagnated since the 1980s says nothing, because it doesn’t track actual people over their entire careers. Instead, it is skewed downward as highly paid people retire and young folks take their place. But I digress.

One of your friendly MarketMinder editors’ favorite ways to debunk things is with a technique called reductio ad absurdum­—taking an argument to its absurd ends to show its folly. A Wall Street Journal op-ed last September used this tactic on said politician’s stakeholders on corporate boards proposal, pointing out that if the argument that non-shareholder entities were indeed stakeholders was correct, then the reverse would apply: Companies should also be stakeholders in other entities, entitled to city council seats and representation on union boards. Similarly, non-union workers should probably also be on union boards. Going even further: “Public-sector unions have huge effects on local communities. Let a union strike the school-bus company, and families have to scramble to make other arrangements for their children, some of whom are disabled. Local parents and taxpayers belong on union boards, as do their employers and mortgage lenders.” And, delightfully: “Universities could be required to set aside board seats for local residents, alumni, potential applicants, prospective employers of graduates, and of course university employees. Hospitals could have required seats for drug addicts and chronically ill patients. Churches could be required to put apostates and atheists on their boards. Seats in the Massachusetts Legislature could be reserved for people from other states, and in Congress for aliens.”

Absurd, right? And so it is with corporations. Mandating board seats and other regulatory fixes to sociological talking points would likely result in a best-interests tug-of-war that serves no one and makes corporate governance worse, not better. It also doesn’t even guarantee basic things like higher pay—would employee reps vote for measures that cut headcount while raising wages? The incentives here are weird all the way around. CEOs know this. So what better way to head off regulators and politicians than to release a snazzy purpose statement that loosely calls these other entities “stakeholders” without actually changing the way the business is run? Look! We listened! We are doing it! Your influence worked! You don’t need to regulate us!

Even better, it likely makes companies more attractive to younger investors and many in the institutional community, who value environmental, social and governance (ESG) factors when investing. This has gotten a lot of attention lately, and no CEO wants to be left out of the capital party. The Business Roundtable’s new purpose statement is one bright shiny ESG wrapper. It is we care about the same things as you! signaling to social justice-minded folks. I have no doubt there will soon be an ETF consisting solely of companies that signed on to it. (I also have no doubt this ETF will lead the market at some times and lag at others, depending on its style and sector concentrations.)

But overall, if it attracts capital to markets and keeps weird regulation at bay, then, bully. The issues at hand may be sociological—outside the realm of things markets typically care about—but it all amounts to fairly innocuous marketing. Not a sea change in how businesses are run and how profitable they will be. For the market, as always, will decide who lives and who dies, and profits will always be key to that in the end.