By Daron Acemoglu
ExxonMobil recently announced a five-year plan to reduce greenhouse-gas emissions and is pumping out ads proclaiming its commitment to a green future. Tobacco giant Philip Morris is touting its plans to help smokers quit. Facebook is calling for new internet regulations. And these moves come less than two years after the Business Roundtable, representing the CEOs of America’s largest corporations, issued a statement calling for business to serve all stakeholders.
Are today’s corporate executives ushering in a new era of corporate responsibility? Or are they merely protecting their own power?
For decades, business leaders and prominent academics believed that corporations’ sole commitment was to their shareholders. Previously a fringe view, the publication of a New York Times op-ed by Milton Friedman in 1970 – “The Social Responsibility of Business Is to Increase Its Profits” – moved this perspective toward the mainstream. It gained further momentum within academia following a number of articles by Harvard Business School’s Michael Jensen, who offered theoretical and empirical support for Friedman’s doctrine. For example, in one influential paper, Jensen and Kevin Murphy of the University of Southern California estimated that the average CEO’s pay increased by only $3.25 for every $1,000 of value he created, pointing to the need for an even tighter link between executive compensation and shareholder value.
But this academic research was following more than leading the trend. By the 1980s, CEOs like General Electric’s Jack Welch and scores of management consulting companies had already normalised the preoccupation with shareholder value. Corporations started downsizing their workforces, limiting wage growth, and offshoring tasks – all in the name of delivering better value to shareholders.
Although proponents of shareholder primacy would not have approved of the type of fraud that became associated with Enron, WorldCom, and others, it was easy to see how an obsession with increasing the stock price might lead some executives to go too far. There is now growing agreement that maximising shareholder value should not be a corporation’s sole aim. Less obvious, however, is what model should be adopted instead.
Should we draw up a new charter for executives so that they feel empowered to consider a broader set of interests? The Business Roundtable seems to think so. But I would caution against any solution that gives even more discretion to management. The problem with shareholder primacy wasn’t only that it created an obsession with stock prices and pitted workers against shareholders; it was that it handed a massive amount of power to top managers.
Many CEOs now run their companies according to their own personal vision. There is very little social oversight, and executive compensation has soared. Despite the unprecedented hardship caused by the pandemic, CEOs of hard-hit companies took home tens of millions of dollars last year.
When inordinately empowered CEOs receive a vague mandate to pursue stakeholder interests as they see fit, abuses are sure to follow. Some companies might funnel millions of dollars to their CEOs’ pet project (be it the Metropolitan Museum of Art or a preferred charter school program), or to “philanthropic” causes that are really just veiled forms of influence-peddling.
Under the current incentives structure, there is little stopping corporations from collecting huge amounts of consumer data, disempowering workers and citizens, and establishing tyrannical new forms of surveillance – even as they are advertising their philanthropy and virtue. There is certainly nothing that prevents them from pursuing excessive automation to reduce labor costs, destroying jobs just to eke out a few more bucks for shareholders. The way to…