The Revolt Against Shareholder Value

Taking exception to a remark by Leslie Moonves about the Trump phenomenon that “It may not be good for America, but it’s damn good for CBS,” William Galston has written a surprising critique of current American business practices that place the bottom line above all else. Surprising, because it appears in the Wall Street Journal, the business man’s newspaper. Or perhaps not: Is not all America today waking up to the suicidal course into which we are running our country? He even has the nerve to challenge Milton Friedman, the demi-god of Reaganite politics.

 We pick up his discussion about a quarter of the way through his column:

pastedgraphic-1                       Getty Images – Scott J. Ferrell

By WILLIAM A. GALSTON, Oct. 4, 2016

. . . If the leading purveyors of broadcast journalism make no distinction between news and entertainment, then who can blame viewers for seeing no difference between entertainment and politics? You need no information to be entertained, so why should you need any to evaluate a candidate’s speech?

Yes, I know American politicians and parties have used entertainment to draw audiences for the better part of two centuries. But there used to be countervailing forces, including prestigious broadcast news organizations. Not anymore. Once these organizations served as gatekeepers; now they are open-door enablers.

I don’t mean to pick on Mr. Moonves, who simply said out loud what his peers are thinking. They are all in the grip of the same misunderstanding, that their business begins and ends with maximizing shareholder value.

They may believe that this is a statutory requirement or a fiduciary duty. If so, they are mistaken. It is Milton Friedman’s theory. “There is one and only one social responsibility of business,” he wrote in “Capitalism and Freedom,” “to use its resources and engage in activities designed to increase its profits.”

images-16Milton Friedman shakes hands with President Reagan

But as Cornell University law professor Lynn Stout points out, corporate law imposes no enforceable legal duty to maximize either profits or share prices. As a policy argument, Friedman’s thesis flunks key empirical tests. And it is not politically sustainable. This is the clear meaning of the 2016 presidential election.

In the years after World War II, corporations were respected institutions in American society. When GM ’s CEO Charles Wilson famously equated the national interest with the good of his firm, intellectuals snickered, but the majority of Americans agreed with him. Corporations, it seemed, could provide rising wages and security for their workers while generating more than adequate returns for their shareholders and serving as good citizens of the communities in which they were headquartered.

But during the 1970s, inflation, recession, a stagnant stock market and rising competition from abroad created an opening for Friedman’s theory, which soon dominated corporate boardrooms. In the name of maximizing shareholder value, corporations moved plants and jobs around the world, paid the lowest wages they could get away with, and scheduled work assignments to maintain managerial “flexibility,” whatever the consequences for workers’ families. Meanwhile, their lobbyists engineered a myriad of special interest breaks in the corporate tax code.

Now we can see what four decades of pursuing shareholder value at the expense of everything else has yielded. Public confidence in corporations is at rock-bottom, and public anger is sky-high. The revolt against the corporate economic agenda—free trade, a generous immigration policy, lower corporate taxes and the rest—is sweeping the country. As the Republican rank and file has turned against corporations and New Democrats have given ground to left-wing populists, big business has been left politically homeless.

It will take corporate America a long time to climb out of this self-created hole. Its first step should be to back long-overdue proposals for improving workers’ lives and incomes. Paid family leave is an idea whose time has come; so is a catch-up increase in the federal minimum wage; so are stable and predictable schedules for part-time workers. Allowing workers to share in profits and productivity increases would be another good step. Over time, measures such as these will help rebuild public confidence in corporations as responsible members of American society.

Above all, corporate leaders should grasp the distinction between immediate gain and self-interest rightly understood. Pushing for the last increment of profit over the next quarter and the one after that comes at the expense of the strategies that can leave firms best positioned for the future. Instead, America needs a new generation of corporate statesmen.

Bravo, well spoken!


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