Extra. Extra. Read all about it. America’s top CEOs recently issued a statement that says making money for shareholders isn’t the only responsibility of management.
This, of course, isn’t news to people who support the Ivey Business School’s Ian O. Ihnatowycz Institute for Leadership, which has been promoting better governance for all corporate stakeholders since being founded amid the aftermath of the 2008 global financial crisis.
That said, the idea that CEOs and corporate directors should strive to serve all stakeholders of an enterprise without placing financial rewards for investors far above other obligations has now been officially endorsed by America’s Business Roundtable (BRT). And that is a big deal indeed, since the corporate knights sitting around this table represent the Camelot of capitalism. In fact, it is such a big deal that business educators must now also reassess their responsibilities.
Some background. The BRT is a prestigious association of American business leaders—currently comprised of nearly 200 CEOs, ranging from General Motors’s Mary Barra and Accenture’s Julie Sweet to Apple’s Tim Cook and Amazon’s Jeff Bezos. The association exists to promote public policy aimed at keeping the U.S. economy thriving, and years ago, it argued that the purpose of a corporation wasn’t limited to legally generating financial returns for investors. Back in the 1980s, for example, the association acknowledged the need for companies to invest in workers, communities, and other stakeholders. But that mindset shifted under pressure from corporate raiders in the 1990s, when the BRT made a point of stating that the interests of other business stakeholders are relevant only “as a derivative of the duty to stockholders.”
For decades, this shareholders-first model was widely considered corporate orthodoxy, especially in the United States, where boardroom focus has long been heavily influenced by University of Chicago economist Milton Friedman’s famous 1970 essay “The Social Responsibility of Business is to Increase its Profits.” And that’s why a media frenzy recently erupted over news that the BRT’s definition of corporate purpose had shifted again.
On August 19, 2019, the group of CEOs updated its thinking on the matter in a 300-word statement that doesn’t mention shareholders until the end of a list of commitments that starts with “delivering value to our customers” and “investing in our employees,” then moves on to “dealing fairly and ethically with our suppliers” and “supporting the communities in which we work,” before finishing with “generating long-term value for shareholders.”
According to the BRT’s website, the move should not be seen as an abandonment of the free-market system, or a repudiation of shareholder interests in favour of political and social goals. It is simply meant to help ensure “the benefits of capitalism are shared more broadly.” Nevertheless, more than a few observers around the world have reacted as if America’s highest-profile corporate leaders had tossed Friedman’s shareholders-first model into the dustbin. Skeptics, meanwhile, see a self-serving public relations program in play.
Arguing that the BRT statement lacked substance, the editorial board of The Wall Street Journal insisted that it is more notable for indicating that America’s biggest companies appear to be run by political CEOs seeking “to distance themselves from their owners.” (The paper’s brain trust also pointed out that Friedman’s take on corporate purpose wasn’t amoral. He just argued that profitable businesses serve the common good better than stakeholder-focused failures.)
As The New York Times reported, the BRT’s shift in thinking comes at a time when corporate America is feeling distress due to mounting global discontent over income inequality, harmful products, and poor working conditions. “They’re responding to something in the zeitgeist,” Harvard Business School historian Nancy Koehn told the paper. “They perceive that business as usual is no longer acceptable. It’s an open question whether any of these companies will change the way they do business.”
Time will tell. But a close reading of the BRT statement can find some meat on the bone. Indeed, as noted by Andrew S. Winston—author of The Big Pivot: Radically Practical Strategies for a Hotter, Scarcer, and More Open World—the significance of the group’s new thinking can be found in its stated list of commitments. In a Harvard Business Review article entitled “Is the Business Roundtable Statement Just Empty Rhetoric?” Winston writes:
Economist Alfred Rappaport is one of the fathers of the idea of shareholder value. But in his book Saving Capitalism from Short-Termism, he makes a compelling case that our real issue is short-termism and how we think about “value.” Basically, if you manage for long-term value, of course you need to account for customers, employees, communities, and more. When we define value as this quarter’s profits, we don’t invest (and we certainly don’t prioritize long emergencies like climate change). I believe that the current economic model incentivizes the liquidation of natural capital for profit. But how much of that is due to concern about investors per se, or focus on short-term profit only? For this reason, the final commitment in the BRT statement—where they commit to long-term value—is possibly the critical element.
In other words, you can argue that the BRT has diplomatically signaled that corporations should be far more careful than they have been in the past when the short-term financial interests of shareholders conflict with the interests of other stakeholders—which could have significant implications for dividend and share-buyback programs designed to reward short-term investors with earnings that could be reinvested in operations or R&D or employee benefits or stakeholder communities, etc.
While critics of capitalism may find it hard to believe, corporate boards take calls for greater social responsibility seriously. As Rahul Bhardwaj, head of Canada’s Institute of Corporate Directors (ICD), noted in his speech at the ICD National Conference this past summer, today is not a time to “celebrate the status quo…. it’s about re-booting what it means to be a director.”
The Age of Disruption, of course, will have a major say in the tug of war between die-hard believers in shareholder primacy and calls for elevated corporate social responsibility. After all, not all investors are interested in the long term. And as corporations are forced to restructure and shift gears more frequently, there won’t just be pressure on corporate leaders to ensure the benefits of capitalism are shared more broadly. There will also be pressure from shareholders who have a say in appointing directors to focus on stock-market valuations. As a result, if capitalism hopes to survive the significant social and economic challenges ahead, we need more than a new definition of corporate purpose.
“If the financial crisis taught us anything, it is that the sustainability of capitalism requires an increase in the number of managers and directors who recognize leadership is a privilege, not a right.”
There is no question that today’s marketplace is stocked full of talented executives with good intentions who routinely exercise good judgement. But good judgement doesn’t stem from good intentions alone. And if the financial crisis taught us anything, it is that the sustainability of capitalism requires an increase in the number of managers and directors who recognize that leadership is a privilege, not a right.
The hard job of leadership is supposed to be about selflessly serving others. And yet, a decade after the fall of Lehman Brothers threatened to collapse the global financial system, we still all too often wake up to news of shocking corporate misconduct. Take, for example, the latest pay scandal to rock Nissan. In September, Hiroto Saikawa was forced to resign his CEO post at the Japanese automaker after refusing to do so voluntarily despite admitting he had received payments from the company totaling US$438,000 that he didn’t deserve. According to media reports, he appeared defiant after being told his departure would be best for all concerned. Instead of being apologetic, he expressed bitterness over his predicament while listing his accomplishments, which he claimed included setting up a corporate governance system worthy of today’s marketplace.
That any executive in this day and age can imagine not being held accountable for receiving overpayments in renumeration should be hard to fathom. And the executive in this case ran an automaker still reeling from the fall from grace of its former chairman, Carlos Ghosn.
Ghosn, of course, was once widely seen as a hero for breathing life into Nissan years ago. He was even portrayed as a superhero in a local comic book. Today, he sits under house arrest in Tokyo—where he faces as yet unproven allegations that he understated his income for years and transferred personal investment losses to Nissan.
Our point? When corporate leaders are blinded by ego, self-righteousness, ambition, hubris, or feelings of entitlement, bad outcomes tend to happen regardless of how we define the purpose of a business. Look no further than the leadership fiasco at WeWork, the high-profile coworking venture that recently went from stock-market darling to the brink of bankruptcy in a matter of weeks.
Not long ago, WeWork was considered the most valuable pre-IPO tech start-up in the United States. Flush with cash, the company—which has 12,500 employees—spent the summer preparing to go public at a market valuation of US$47 billion. This took place under the extremely confident stewardship of cofounder Adam Neumann, a self-proclaimed visionary CEO who justified having the company buy a US$60-million Gulfstream jet before profitability was even in sight. On the surface, the future could not have looked brighter, but then WeWork filed its registration papers with the U.S. Securities and Exchange Commission.
“Almost immediately,” as Business Insider reported, “all hell broke loose. A steady stream of rapid-fire headlines detailed Neumann’s self-dealing, mismanagement, and bizarre behavior. Within 33 days the offering was scuttled, WeWork’s valuation plummeted 70% or more, and Neumann, who believed he would become the world’s first trillionaire, was ousted as CEO. What was supposed to be Neumann’s coronation as a visionary became one of the most catastrophically bungled attempted debuts in business history.”
The foundation of good leadership is character. But prior to the financial crisis, leader character routinely took a back seat to competencies when the people trusted with managing capitalism’s engines of prosperity were hired, not to mentioned educated. Recognizing this as a crisis, the Ian O. Ihnatowycz Institute for Leadership has been studying how virtues and character strengths impact judgement in the C-suite and corporate boardrooms and has been using the findings to develop character assessment and development tools. And judging from the support the Institute’s work in this area has received from the business and public-sector communities, progress is being made raising awareness of the critical role that character plays in good leadership. (For example, the ICD has been instrumental in helping gather critical quantitative and qualitative information and feedback on this burning issue from the Canadian governance community.)
But much more needs to be done. Keep in mind that the BRT’s updated statement of corporate purpose comes at a time when directors are at risk of being overwhelmed by today’s unprecedented pace of change—which has expanded expectations placed on boards well beyond traditional management oversight. As Bhardwaj told ICD conference attendees in June, “the days of strict allegiance to ‘nose-in, fingers-out’ seem to be waning. You may bring a special expertise to your board. But unless you’re scanning the skies as well as the cafeteria, unless you have the courage to act with fingers in as well when required, your usefulness as a director will be hobbled and your company’s future put at risk.”
Bhardwaj also noted that it was no coincidence that BlackRock CEO Larry Fink—one of the most influential members of the BRT—had been invited to address the conference of Canadian directors about growing demands for companies to serve a social purpose. “Talk about a volcanic change in the boardroom,” Bhardwaj noted. “It doesn’t get more existential than that.”
Strength of character enables executives to avoid hubris and remain humble. It opens the door to reflection, accountability, and collaboration. Strength of character also improves governance, empowering boards to reject conformity and ask tough questions about operations and strategy. That’s why, as the traditional roles of CEOs and directors are disrupted by economic, social, and political forces, it has never been more important to make leader character assessment and development routine in both the C-suite and corporate boardrooms. And that means the purpose of business schools must also evolve.
As noted in a recent Globe and Mail commentary on the future of management education by Ivey Professor Gerard Seijts—head of the Ian O. Ihnatowycz Institute for Leadership and one of the authors of this article—opportunities for character development hang in the background of most business school programs. It is time to bring them to the forefront to enable future corporate leaders to reflect on their personal values and develop the character required to positively deploy the competencies they acquire in the service of others.