Since when did business leaders become our rulers and masters?
Is Western politics so broken that boards have decided they needed to step in and fix it?
These are questions at the front of my mind after this week’s communiqué from Business Roundtable – a group of US industry titans including Greg Case, Evan Greenberg and Alan Schnitzer – declaring that making money for shareholders was not the only mission that companies should pursue.
The group said that there are other stakeholders worthy of companies’ attention. Customers, suppliers, employees and the environment should also be given attention so that firms can include making the world a better place as part of their mission.
This sounds a nice idea, but it is both nonsensical and dangerous.
Let’s deal with the nonsense part first.
Limited liability companies lie at the heart of modern capitalism. When capitalism works properly companies that don’t look after their customers fail. No one is a repeat customer after poor service, instead they go to a competitor.
Ditto employees. Crummy companies that treat talented staff badly or fail to give them the opportunity to progress in their careers lose those employees to competitors. They then find it really hard to recruit new ones.
And the same goes for suppliers. Firms that consistently play hardball are always at the back of the queue when services are required urgently. When peak demand arrives supply gets prioritised to the most loyal customers, not to unreliable partners.
It also goes without saying that companies that do harm get punished and customers boycott them in their millions.
Being a good corporate citizen is good for business – and what is good for business is good for shareholders. To say otherwise is nonsense. Firms that do good and useful things prosper and so do their shareholders.
To state the obvious, good companies look after their customers, employees and their suppliers and by doing this they make more money for their shareholders than other firms that don’t!
Now to the danger part. Western companies and the people they serve live in organised, democratic societies. In these societies it is the elected legislature and executive that make the rules and appoint the regulators to enforce those rules. There is also an independent judiciary to interpret the rules when they are ambiguous.
So if companies start deciding for themselves what is good for society and what is not they are going to bypass democratic systems that have built up over hundreds of years. This is none of their business. They have no moral authority to decide what is right and what is wrong – they should just follow the rules.
For example, what if a company decided that it would like to take a stand on climate change because this was for the good of society?
For one, not all of society agrees on this – and this is a problem. But let’s say for the sake of argument that the company in question knows its customers are largely environmentally conscious types – should that firm therefore be allowed to refuse to insure the houses of known climate change deniers?
It might be a popular move with core customers, but it would rightly be the judiciary and the law that would decide whether such discrimination were right and proper, not the board of the insurer.
Similar moral choices are being made all the time around such emotive issues as gun control or the coal industry. As businesses these are not choices we should be making – society already has an apparatus that takes care of this for us.
The high ideals of big business such as those espoused in Monday’s declaration come from a good place. Perhaps business leaders believe that trust in political institutions is so low that commerce needs to step in and fill the void?
But the trouble with this strategy from an insurance perspective is that the only entities with lower trust and approval ratings than politicians are financial institutions!
For financial business leaders to bail out the politicos would be like asking an arsonist round to put out a blaze because you don’t trust the fire department!
If you want to change society you need to get out and vote for a different one, not take moral choices on behalf of your customers.
The key caveat prefacing my defence of greed is ‘when capitalism works’.
Surely the problem has been that capitalism hasn’t been working well enough since the financial crisis?
Socialised losses have hit public budgets and squeezed consumers just as loose money has kept bad companies alive that should have gone bust years ago. These failed entities can keep being second rate to all their stakeholders because zero interest rates keep bailing them out.
They can keep refinancing to fund buybacks and dividends that may make them look healthy from the outside. But their subsidised incumbency makes it hard for challengers to emerge and force them to compete.
The result is not pleasing anyone. People rightly feel that on the whole, big business is lazy, uncompetitive, complacent and engages in rent-seeking behaviour rather than innovating.
Capitalism is also stuttering because shareholders haven’t been doing a good enough job of holding directors to account. They have allowed executives to fund short-term stock-boosting manoeuvres and financial engineering instead of innovating and investing for longer-term success.
If and when a reckoning comes and we allow failing businesses to fall away, this will leave space for the true innovators to emerge and grow.
Only then people might be better served and happier and start to give better approval ratings to big business, and maybe politicians too.
All industries are political in that they lobby legislators and government.
Regulated industries are more political because they are more regulated. But lobbying is merely the explaining of needs, wants, likes and dislikes to lawmakers – it has nothing to do with taking autonomous action.
Put simply, business people should stay out of politics.
Good businesses work within the law and the spirit of the law – if they don’t the law sorts them out. But they don’t make the law – the people make the law through their elected representatives.
Let’s remember that and stick to what it says in our company articles of association.
If activist shareholders don’t get there first, the law will eventually come and remind us of our fiduciary duties.
If the law does come, we will only have ourselves to blame for our hubris.