The Business Roundtable is a non-profit lobbying organisation in the US. It brings together 181 of America’s leading Chief Executives and it is representative of the considerable power possessed by US companies. Jamie Dimon, CEO of J.P. Morgan, is the most prominent member of the roundtable organisation and he recently threw the proverbial cat amongst the pigeons by attempting to redefine the parameters of a corporation’s purpose.
Since the early 1970’s the view of capitalism has been associated with the notion that shareholders have pre-eminence i.e. corporations exist principally to serve their shareholders. This idea, pioneered in the 1970’s by the world-renowned academic Milton Friedman, has arguably produced significant economic benefits. However, the idea that profit maximisation is all that matters has come under increased scrutiny, not least because of increased concentration of wealth. This has been exacerbated by a feeling that wage growth since the financial crisis of 2009 has been lacklustre. We have written recently about how this certain tide seems to be turning, but it has become a highly contentious politicised topic in recent years.
Seemingly in response, US business leaders are attempting to broaden their governing principles. They seek to remove primacy of profit maximisation, acknowledging that the purpose of a corporation is to serve all its constituents; employees, customers, shareholders and society at large, with no hierarchy. This is radical, bordering on revolutionary, in the US. In the UK a similar debate has been underway for some time led by investors. Proponents of this new purpose argue there is less largesse associated with a broader-based assessment of a company’s purpose. Additionally, it is argued the focus on maximising shareholder value in the short-term impedes managers’ abilities to construct a sustainable business model. Likewise, investment in people is argued to be stymied and makes allocating the appropriate amount of resource difficult to justify.
In the Roundtable press release Jamie Dimon said he wanted to encourage business leaders to take greater responsibility for societal matters, and even politics; a subject they are often encouraged to keep away from. The group say they want to close inequality gaps and provide opportunity for all. If some of this sounds familiar to you it isn’t surprising to us. At True Potential we are actively engaged in tackling inequality through programmes with the Open University, improving investor education, closing the savings gap and championing Social Mobility, to name a few initiatives.
The fact US executives are openly talking about inequality means this is a concern which should be heeded. US executives are the traditional targets of activist ire when income inequality is raised, with their remuneration packages deemed by some to be overly generous. One recurring criticism levelled at executive remuneration is that high rewards seem to align with short-term objectives, thus incentivising executives to utilise business practices that increase higher corporate valuations without adding tangible value. The chart below may speak to those for whom executive pay is a major concern. What is shown is the ratio of CEO pay to average worker compensation in the US. The ratio is 312x the average worker pay level.
Graph: US CEO to Worker Compensation Ratio
Source: Statista, September 2019
The question we ask is, what does a reduced focus on shareholder interests mean for US investors? According to roundtable participants, by shifting toward a broader focus on stakeholders, companies are championing investments in people, communities and sustainability projects. This should over time lead to improvement in terms of trade, which is something corporate America has been working on for some time now. Indeed, US corporations collectively increased the value of their philanthropic donations by 8% last year.
It seems to us that the debate does not represent a shift to an anti-profit model; this would certainly keep President Trump awake at night! Rather, it is reflective of a new approach where business leaders are reiterating and utilising the power of enterprise to shape wider society and meet new challenges. This seems prudent, given the demands of investors and consumers alike.
Companies will always attempt to be profitable, but these new sentiments represent an appreciation of the importance of how companies produce profit sustainably and with a long-term horizon.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.