Joseph Stiglitz, Can We Trust CEOs’ Shock Conversion to Corporate Benevolence?

Joseph Stiglitz

An apparent move by big business to maximise stakeholder value sounds too good to be true

[Editor’s note: As I observed in “Are Corporations Inherently Immoral?” (9 October 2015), the modes of operation that tend to maximize profits include (a) decreasing the cost of natural resources by, for example, (i) exploiting the environment, (ii) converting public land to private use, and (iii) evading the expenses of pollution cleanup or costs of environmental restoration; (b) decreasing the cost of human labor by, for example, (i) paying minimal wages, (ii) offering minimal benefits (health coverage, dental plans, and such), and (iii) opposing the organization or diminishing the influence of labor unions that engage in collective bargaining.]

or four decades, the prevailing doctrine in the US has been that corporations should maximise shareholder value – meaning profits and share prices – here and now, come what may, regardless of the consequences to workers, customers, suppliers and communities. So the statement endorsing stakeholder capitalism, signed earlier this month by virtually all the members of the US Business Roundtable, has caused quite a stir. After all, these are the CEOs of the US’s most powerful corporations, telling Americans and the world that business is about more than the bottom line. That is quite an about-face. Or is it?

The free-market ideologue and Nobel laureate economist Milton Friedman was influential not only in spreading the doctrine of shareholder primacy, but also in getting it written into US legislation. He went so far as to say: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.”

The irony was that shortly after Friedman promulgated these ideas, and around the time they were popularised and then enshrined in corporate governance laws – as if they were based on sound economic theory – Sandy Grossman and I, in a series of papers in the late 1970s, showed that shareholder capitalism did not maximize societal welfare.

This is obviously true when there are important externalities such as climate change or when corporations poison the air we breathe or the water we drink. And it is obviously true when they push unhealthy products such as sugary drinks that contribute to childhood obesity or painkillers that unleash an opioid crisis, or when they exploit the unwary and vulnerable, like Trump University and so many other American for-profit higher education institutions. And it is true when they profit by exercising market power, as many banks and technology companies do.

It is even true more generally. The market can drive firms to be shortsighted and make insufficient investments in their workers and communities. So it is a relief that corporate leaders, who are supposed to have penetrating insight into the functioning of the economy, have finally seen the light and caught up with modern economics, even if it took them some 40 years to do so.

But do these corporate leaders really mean what they say or is their statement just a rhetorical gesture in the face of a popular backlash against widespread misbehaviour? There are reasons to believe that they are being more than a little disingenuous.

Joseph Stiglitz. (photo: Virginia Mayo/AP)
Joseph Stiglitz. (photo: Virginia Mayo/AP)

The first responsibility of corporations is to pay their taxes, yet among the signatories of the new corporate vision are the country’s leading tax avoiders, including Apple, which, according to all accounts, continues to use tax havens such as Jersey. Others supported the US president Donald Trump’s 2017 tax bill, which slashes taxes for corporations and billionaires, but, when fully implemented, will raise taxes on most middle-class households and lead to millions more losing their health insurance. This in a country with the highest level of inequality, the worst healthcare outcomes and the lowest life expectancy among major developed economies. And while these business leaders championed the claim that the tax cuts would lead to more investment and higher wages, workers have received only a pittance. Most of the money has been used not for investment but for share buybacks, which served merely to line the pockets of shareholders and the CEOs with stock-incentive schemes.

A genuine sense of broader responsibility would lead corporate leaders to welcome stronger regulations to protect the environment and enhance the health and safety of their employees. And a few car companies – Honda, Ford, BMW and Volkswagen – have done so, endorsing stronger regulations than those the Trump administration wants, as the president works to undo the former president Barack Obama’s environmental legacy. There are even soft-drink company executives who appear to feel bad about their role in childhood obesity, which they know often leads to diabetes.

But while many CEOs may want to do the right thing – or have family and friends who do – they know they have competitors who don’t. There must be a level playing field, ensuring that firms with a conscience aren’t undermined by those that don’t. That’s why many corporations want regulations against bribery as well as rules protecting the environment and workplace health and safety.

Unfortunately, many of the mega-banks, whose irresponsible behaviour brought on the 2008 global financial crisis, are not among them. No sooner was the ink dry on the 2010 Dodd-Frank financial reform legislation, which tightened regulations to make a recurrence of the crisis less likely, than the banks set to work to repeal key provisions. Among them was JPMorgan Chase, whose CEO is Jamie Dimon, the current president of the Business Roundtable. Not surprisingly, given America’s money-driven politics, banks have had considerable success. A decade after the crisis, some are still fighting lawsuits brought by those who were harmed by their irresponsible and fraudulent behaviour. Their deep pockets, they hope, will enable them to outlast the claimants.

The new stance of the most powerful CEOs in the US is, of course, welcome. But we will have to wait and see whether it’s another publicity stunt, or whether they really mean what they say. In the meantime, we need legislative reform. Friedman’s thinking not only handed greedy CEOs a perfect excuse for doing what they wanted to do all along but also led to corporate-governance laws that embedded shareholder capitalism in the US legal framework and that of many other countries. That must change, so that corporations are not just allowed but actually required to consider the effects of their behaviour on other stakeholders.

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7 thoughts on “Joseph Stiglitz, Can We Trust CEOs’ Shock Conversion to Corporate Benevolence?”

  1. Hey Jim…. Can we get a post on the latest Colorado school shooting at Stem School? This state is sliding so fast to the collectivist mind set, I fear nothing can stem the tide. John Hickelooper, our previous Governor bowed out of the Presidential race for the Collectivists (radically liberal) and his his sights on defeating (R) Cory Gardner for Colorado US Senate race. The Colorado Collectivists already passed the national popular vote law that gives our electoral votes automatically, effectively gelding the Electoral College. Every single radical collectivist idea is automatically accepted by the unthinking doped up younger population that is exploding here. So politically “correct” you can’t even mention the Mexican invasion here. I predict our population Eagle County will be 75% Mexican in 20 years. Every couple has 3 or 4 children, you don’t any local white women with babies in strollers. The Causcasion race is on the brink of becoming a minority. It’s just an easily seen fact with a trip to the Bank, Grocery store or Gym. I guarantee less than 10% are here legally.

    1. Here’s my feedback….screw Paypal (a misnomer if ever there was one), screw Google, screw Facecrap and screw Amazon. I’m done with them all…and the WEB will be next.
      Pre 2005, when I got caught in this WEB, my life was much simpler….and I intend to return to that PEACE.
      God speed to everyone!

      1. Before the Internet my life was simple and somewhat simple minded. My research and discernment via the Internet has really made me see things VERY differently. I can see why many nations are now closing down their public Internet access….its too dangerous to them, as it can expose the lies they tell their citizens. Oh my, we can’t have that.

        With the Internet and all of its flaws, billions of people can know their media and government have been telling their citizens lies up the wazoo.

        The sad part is that only a few people take the time to find these new and deeper revelations. See the two sides to this coin? Its like water….one can take a bath or it’ll drown you, same for fire.

      2. I never felt simple minded prior to the Internet (WEB). I’ve always known something was not right with this world….Post WEB, my mind is literally saturated with information that serves its own purpose……one might call it data…….with which I have little use other than to frustrate myself. Information not put to use to to some positive end just sits there.
        Not enough of us care and or are DOING anything. In essence, the system is beyond fixing. It’s too late. And if Trump was legitimate to start, he sure as hell found THAT out the hard way. It’s like a fruit that is rotten to the core. It cannot be fixed….it can only be trashed.
        Therein is the problem.
        And that is something NO ONE wishes to hear.

      3. I agree completely Don. Especially the part about only a small percentage actively seeking the truth. I am putting Sandy Hoax at 1% or less of the population digging into the story beyond the headlines, like most game changing events. One fellow I know is about 25, and said “you mean you don’t believe in gun control of any kind?” baffled by my stance. “what about Sandy hook?” I told him it was staged to promote his exact opinion, collectivist brain washing… just like Eric Holder spelled out. He just could not even consider it. I asked how much time he spent digging into the Sandy Hook story? Dan admitted “none”. So I hit him with a fact he could look up easily, the FBI crime index showing zero murders for 2012. This was one thing he could not dispute, should he ever try to search. The small town they chose for this event allowed for it to be exposed for the fraud it was. Had they chosen Hartford, CT for example, the zero total murders would be swallowed by actual homicide statistics and not smack you right in the eye.

      4. Thank you Dave, very few people have ever done any research into Sandy Hoax….yes, its much less than 1%. China, Russia, Cuba, North Korea, etc. were all taken over by a lawless few who controlled the media. The USA is in the same position.

        If the Red Chinese Army strolled into the USA, 45 million Libs and Dems would applaud and do nothing.

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