When CEOs Preach, Is It Time To Sell?

With all thy getting, get understanding.”

— Malcolm Forbes

If you worked for a significant corporation back in the 1960s, leftists called you a “capitalist pig.” That inspired Malcolm S. Forbes, the chairman of Forbes Magazine, who also happened to be my boss to come up with a tagline, “the capitalist tool.” It became a status symbol that rose out of the ashes of the Vietnam War and drove the “extreme righteous” into a frenzy. But what stuck in their craw was Malcolm was a better socialist than the peaceniks of Berkeley.

The reason was simple: compassionate talk is free; compassion costs money.

Those Who Pay Have The Say

Forbes was a profound thinker who would disarm people with personal antics like flying hot air balloons or taking a motorcycle trek across the Sierra Nevadas. But the principle that guided him was that no matter how grandiose the dream, the decision to sally forth rested with the person who had to foot the bill. In the business world, this person is called a shareholder.

As Malcolm was the sole shareholder of Forbes Magazine, he liked to quip that “investor meetings are of short duration.” But behind this was a hard fact of life. When a business does good in the name of customers or employees or society, shareholders should have a say because they pay for the luxuries, even compassion. Management’s role in this is to inspire shareholders to accept that they may have a broader responsibility to society than just making sure the dividend checks arrive on time. But it is not to usurp the role of shareholder and make a unilateral decision for the sake of improving management’s popularity.

The principle becomes more evident when we recognize shareholders are a populist phenomenon. Pension funds and institutions own over 80% of all publicly traded firms in the S&P 500, according to Pension and Investors Magazine, these aren’t the fat cats of JP Morgan’s day. They are salaried workers whose pension is the only thing standing between them and poverty during the twilight years. That moves it from the profane to the sacred. The shareholder is no longer Gordon Gekko; it’s Joe the Plumber or Rosie the Riveter.

The Problem According to The BRT

This principle seems lost on the Business Roundtable. The regime currently led by another JP Morgan chief, Jamie Dimon, just issued the new “principles of corporate governance” on the purpose of the corporation. The BRT, as it is known among the Gulfstream cognoscenti, said that contrary to past practice when “corporations existed principally to serve shareholders,” the boardroom brahmins have undergone a spiritual conversion.

So, just what is that modern standard that took 181 chief executives to come together to agree? Was it to improve global healthcare or a call for more reasoned debate about critical issues such as climate change or opioid addiction? The chief executives decided the real problem is we are paying too much attention to shareholders: “Previously, the BRT has endorsed principles of shareholder primacy.” Now the group is modernizing its approach out of concern for “struggling” Americans.” This passage may sound like policy, but it is little more than politics, something Elizabeth Warren might say at a campaign rally.

When Adolf Berle and Gardiner Means wrote their 1932 landmark treatise, The Modern Corporation, they worried the modern chief executive had too little skin in the game. It could lead a company to disintermediate the shareholder or what the governance gurus called an “agency” problem. In plain English, it means forgetting who ‘brung you to the dance.”

The BRT’s announcement could indicate their worst fear has come true.

We cannot be sure whether the BRT is pulling a publicity stunt to win over a cynical public during a dysfunctional election cycle — if so, I admire their moxie. Or is it a sell signal that we have reached a market peak and the income statement is just wallpaper in an environment of easy money and credit? What we do know is that it is bound to fail as a charm offensive.

The Slippery Slope Of Good Intentions

Those of us who spend our time inside the castle walls see capitalism as a four-step process. Steps one to three are to create great products, sell them at a profit, and then return a portion of proceeds to shareholders and future development. The fourth and final step is what the BRT is trying to wiggle into the equation. As shareholders gain confidence, they start to think like those who signed the giving pledge. Their dreams are aimed at a bigger game called humanity. This natural evolution from shareholder to stakeholder to global citizen allowed titans from Rockefeller to Carnegie to leave behind enormous value for generations. Carnegie built most of the community libraries in the United States, a process that he would never experience in his lifetime. Rockefeller money created the University of Chicago, and in the depths of the Depression, paid for the development of thousands of jobs to build Rockefeller Center, which restored the New York economy in the 1930s.

So just how and why did business become the enemy?

After the ’08 financial crisis, President Obama orchestrated a role in which business that took the rap for every misdeed. Opioid addiction is pharma’s fault. Climate change is Exxon’s. If Walmart paid more, we wouldn’t have income inequality. Inner-city blight is because of Amazon online shopping. In a severely dysfunctional election year, this narrative plays out in every rally and campaign stop, and eager followers hoping to join the ‘shame and blame mob’ eat it up.