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.

The bizarre outcomes are evidence of a more significant problem. For instance, in the Amazon HQ2 fiasco, a community that wants hi-tech jobs finds itself at odds with labor union thugs who sow fear and confusion at town hall meetings. And it works. The unions and their political acolytes turn Amazon into a pariah of elitism when the opposite is the case. The bashing that Warren and Sanders gave Amazon while they traipsed around the campaign trail on private jets finally sunk in. When you consider the benefits that 25,000 Amazon jobs for a city that has everything but hi-tech, this was the dumbest decision since the Lenape Indians sold Manhattan to Peter Minuit for $24.

The BRT chief executives’ fear of political tyrants is no illusion. It is straight out of Saul Alinsky, author of Rules for Radicals, rule #13:

“Pick the target, freeze it, personalize it, and polarize it.

Cut off the support network and isolate the target from sympathy.”

— Saul Alinsky, Rules for Radicals

The chief executives believe that by issuing a jeremiad against shareholders, their bosses, and the actual owners of corporate America, they might catch a break.

A Policy of Appeasement

Malcolm Forbes knew better than to bow to the anti-business left. They are virtue merchants who cry about fairness while, like Bernie Sanders, pay hourly interns half of what Amazon and Walmart do. Or Elizabeth Warren, famous for embellishing a Harvard resume with Native American credentials, but not so well known for joining the Republican Party when she promoted tax avoidance strategies for wealthy estates in Texas. Making policy at the behest of people like this may work for the moment. But over time, they are enemies of business or more accurately, willing to say or do anything that gets them votes and donations from crony activists and social justice warriors.

The BRT isn’t the first to try to use charitable impulses as a way to win political favor. No greater corporate fraudster than Enron was the most charitable Texas company during its heyday of mischief-making. According to Enron documents, Chairman Kenneth L. Lay urged President Clinton and Vice President Gore to back a “market-based” approach to the problem of global warming — a strategy that a later Enron memo makes clear would be “good for Enron stock.” Later, several senior Enron officials spent election night at Vice President Gore’s headquarters in Nashville just months before the company imploded. The company backed Charles E. Schumer (D-N.Y.) in his successful 1998 campaign to oust Republican Sen. Alfonse D’Amato. Schumer’s views on electricity deregulation dovetailed closely with Enron’s.

Shared Values

A better guideline than platitudinous bromides is available to the BRT if they want it.

It will take more than a press release, but it can be the answer to the bigger problem of a decline in business trust. Harvard professor Michael Porter has written eloquently on the subject of “shared values.” It is a very different concept than philanthropy or good deeds, according to Porter: “Strategy theory holds that a firm gains competitive advantage from how it configures the value chain. Companies have failed to grasp they can create economic value by creating societal value.” Porter believes business is the most powerful force to address pressing issues society faces. He recognizes there is a new generation of employees and customers asking business to step up to the plate. But to Porter, shared value is a process that results in an improvement for society and the company’s bottom line. He concludes that creating shared value is the best chance we have to legitimize business again.

Porter shows examples from Walmart lowering carbon emissions to Coca Cola developing waterholes in Uganda where children are not getting enough for sanitation. You may be wondering why you haven’t heard of these achievements? When a business succeeds on a societal basis, it doesn’t make for a catchy headline. It is true, and we have to work harder to tell a good story better. In the background, however, the shareholder is rarely the problem. In fact, the shareholder is cheering the good works. What is appalling about the BRT statement is that it gives the impression that only a CEO can be trusted to do the right thing.

Shareholder Legacy

By the time he died on February 24, 1990, Malcolm Forbes left behind much more than a successful business empire. In doing so, he brought socialism into the workplace, perhaps inadvertently. He created jobs by the bushel. From mechanics that tuned up his cherished motorcycles to editors that still grace the masthead of leading publications, including our own Dan Bigman of Chief Executive.

Malcolm wasn’t satisfied with merely changing the perceptions in America. He took his show on the road from “Red China” to Socialist France to inspire awareness of the power of business to improve lives. He also left millions to charities like Aids research and forgave loans to employees for home mortgages and their children’s college tuition. In a gesture so typical of Malcolm, he left bequests to his favorite maitre d’s and bartenders around town.

Malcolm Forbes understood the real purpose of wealth. At the stage where he had all the trinkets and baubles he needed, he focused his energies and wealth on building a legacy of good works because he had earned the right to do so.

Socialism never had a better ambassador.