Shareholder Value Uber Alles

On Monday, the Business Roundtable announced that nearly 200 of its leaders had signed onto a statement that appears to reverse 30 years of evolution in corporate governance. No longer is the purpose of corporations “principally to serve their shareholders,” as the BRT has held since 1997. Now the purpose is to serve both investors and other stakeholders: employees, suppliers, community and environment.

The announcement from the BRT, which is chaired by JPMorgan Chase CEO Jamie Dimon, got the headlines it wanted. But what apparently none of the reporters covering the press release thought to ask was whether any executive compensation measures would change following the announcement.

It is hard to imagine that the 200 executives who signed onto the pledge did so with the expectation that their stock-based compensation and performance bonuses would disappear, or that they would soon have performance incentives relating to employee wellbeing or environmental goals. 

The era of shareholder primacy might be dated to Milton Friedman’s 1970 essay, “The Social Responsibility of Business is to Increase its Profits.” As Friedman argued more pungently elsewhere:

Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine.

Friedman’s argument was largely rhetorical. The real economic justification for putting shareholders first came from economist Michael Jensen, who outlined the agency problems that exist between shareholder and manager and argued that corporate executives be increasingly compensated with stock awards, stock options, and bonuses based on financial performance. 

The sine non qua of the shareholder primacy movement was equity-based compensation. In the 1970s, equity-based compensation was relatively rare, as were stock options. Their use accelerated from the 1980s through the 2000s. Though the composition of executive pay has continued to evolve, the equity component has remained paramount and in some measures increased. Between 2009 and 2018, the share of average executive pay taking the form of performance-based equity rose from 17 percent to 40 percent. 

There is no indication in the BRT statement that these trends are set to reverse. The appearance, then, is of a business community becoming increasingly aware of the mounting public ire against its central operating principle and opting to head off the criticism via PR rather than actually changing how it operates. 

In this the BRT seems to be following the lead of Larry Fink, head of BlackRock, who has in recent years devoted many words to changing corporate governance, though comparatively few actions (as one of the world’s largest shareholders, BlackRock actually has some leverage in these matters). 

It is important and telling that the BRT saw fit to change its stated mandate. Public attitudes have evolved, as has the role of the corporation in society. But until there’s a corresponding shift in the incentives facing executives, it’s mostly PR.

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