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Are the CEO’s of the world’s top companies moving to change the shareholder model as we know it?

September 4, 2019

September 4, 2019

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Are the CEO’s of the world’s top companies moving to change the shareholder model as we know it?

The Business Roundtable (BRT) has sparked vociferous debate, releasing a breakthrough statement on the overall purpose of corporations, and why maximising shareholder returns is perhaps no longer the main goal. A statement signed by nearly 200 of America’s biggest CEOs, including JPMorgan’s Jamie Dimon, forecasts the beginning of the end for shareholder primacy and says companies should focus on all stakeholders, including employees, customers, and local communities. 

The Business Roundtable (BRT) has sparked vociferous debate, releasing a breakthrough statement on the overall purpose of corporations, and why maximising shareholder returns is perhaps no longer the main goal. A statement signed by nearly 200 of America’s biggest CEOs, including JPMorgan’s Jamie Dimon, forecasts the beginning of the end for shareholder primacy and says companies should focus on all stakeholders, including employees, customers, and local communities. 

While it may seem to be wildly progressive and perhaps even a response to social pressure, this kind of development is nothing new. Whether we go back to Henry Ford doubling his employees’ rates in 1914, or the Business Roundtable’s declaration that companies need to balance shareholders’ interests with ‘the legitimate concerns of other constituencies’ in 1981; the fact remains that what’s most important about this mission statement isn’t the words on the paper – but what action is taken next.

In January 1914, Henry Ford revolutionised assembly-line production when he upped his employees’ rates from $2.25 a day to $5 in order to keep his workers from quitting – despite no pressure from employees or union strikes. He believed in not only the welfare of his workers but also a form of capitalism that would allow his employees to purchase directly from himself. When asked about the decision, he responded; “If I don’t, how are these people supposed to purchase automobiles from us?”

So why else might CEOs be turning away from maximizing profits? One theory is that happy employees make for happy customers – and American mega-company Walmart is exhibit A. Walmart, a company that was destroyed in the press and received significant public pressure for coaching employees to utilize welfare benefits and underpaying staff, then decided to take concrete steps to create a better quality of life for its employees. 

According to Walmart, in 2015/2016, it spent more than $1 billion raising its employees’ wages and improving their work conditions, as well as opening new training centers to teach them important retail skills. The company believes that investments in high wages and worker training have led to higher sales and improved customer satisfaction. This has been eventually reflected in their share price as well. After an initial reaction from the market, dipping as low as 56.42 USD in November 2015, it now sits at over double that at 114.26 USD (as of 30 Aug 2019). McDonald’s has also followed suit – investing in its employees’ welfare, and happier employees seem to make for happier customers in the process of serving them.

But what does this latest BRT announcement actually mean for the short term future of the economic model as we know it? The first step is watching to see how CEOs can prove they care about more than just shareholder value. These companies may signal this shift initially but could find the tough economic times currently being faced as reasonable concern to not fully address pay and incentives. Positive steps such ownership and governance of shares for employees in the company that they work for, as an example, have use cases whereby employees become additionally motivated in the performance of the company, but also naturally better align with shareholder interests, having become shareholders themselves.

Another way companies are being prompted, both internally and externally into effective action is through examining their product and investment portfolios and assessing the social and environmental consequences. Many of the BRT member companies are bound by business models that affect these areas directly, intentionally or not, and whilst it may be profitable, it can be significantly harmful to the health and wellbeing of key stakeholders. These companies have signalled that changes are on the horizon, with even companies the size and scale of BHP ‘evolving’ their stance on climate change, ‘confronting (the) complexity’ of the numbered environmental problems facing the future, and acknowledging that business, as usual, may not be a sustainable or indeed profitable model

This latest development surely is big news, but the next thing to watch will be what these 181 CEOs decide to do next. Crucially, it will be interesting to see how the market will respond to this shift in overall attitude. Will this have an effect on the model as we know it overall, and will the market themselves begin to ‘confront complexity’ or look to maintain business as usual?


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