Podcast Summary: "Is Business Broken?"
Episode: Shareholder Primacy vs. Stakeholderism: 5 Years Later (Pt 1)
Release Date: October 17, 2024
Introduction
In the inaugural episode of the series exploring the evolution of corporate purpose, Is Business Broken? delves into the pivotal shift from shareholder primacy to stakeholderism initiated by the Business Roundtable five years prior. Hosted by Kurt Nickish from the Ravi K. Mehrotra Institute for Business, Markets & Society at Boston University Questrom School of Business, the episode features an insightful panel comprising:
- Lynn Payne – Professor at Harvard Business School
- Om Prakash Bhatt – Former Chair and CEO of the State Bank of India
- Anthony Allitt – Former Chair and CEO of Silgan Holdings
- James Orlikoff – President of Orlikoff and Associates Inc.
- Jamie – Expert on corporate boards and governance
Business Roundtable's 2019 Pledge
Five years ago, the Business Roundtable, a collective of 181 American CEOs, revolutionized corporate America's foundational ethos by signing a pledge to prioritize all stakeholders over merely shareholders. This declaration marked a departure from the long-standing doctrine of maximizing shareholder value, signaling a commitment to fostering value for employees, communities, suppliers, and shareholders alike.
Initial Reactions to the Pledge
Anthony Allitt initiated the conversation by noting that Silgan Holdings wasn’t among the signatories. Om Prakash Bhatt expressed his surprise and disappointment regarding the Business Roundtable's shift. He remarked:
“They talk about the power of free markets... the issue seems to be more about short termism versus long termism.”
[01:29]
Bhatt emphasized that the shareholder capitalist system naturally cycles out executives who focus solely on short-term gains, as success ultimately hinges on addressing the needs of customers and employees.
Boardroom Receptions and Practical Impacts
James Orlikoff raised concerns about the vagueness of the pledge, questioning its practical implications and motivations behind the late declaration. He highlighted several criticisms that had been mounting against the shareholder value model, including:
- Short-Termism – An overemphasis on quarterly returns at the expense of long-term sustainability.
- Externalities – Negative impacts on the environment and societal inequality due to profit-focused strategies.
- Democratic Undermining – Shareholder-driven resistance to beneficial legislation, such as environmental regulations, to protect returns.
Orlikoff summarized:
“...we could have had a conversation about short term, long term, which still covers a lot of what we're talking about.”
[10:25]
Jamie pointed out that regulatory changes and press influences overshadowed the Business Roundtable's statement, reinforcing existing short-term financial pressures within boardrooms.
International Perspectives: The Indian Context
Lynn Payne provided a contrasting viewpoint from India, where stakeholder-oriented practices were deeply ingrained due to cultural and legal frameworks. She cited the Tata Group as a prime example:
“62% of its equity has been put into a trust... the trust funds a lot of education, a lot of medical research.”
[05:47]
Payne attributed this to India's historical and religious emphasis on selflessness and public good, as well as legal requirements mandating corporate social responsibility (CSR) activities.
Corporate Governance and Board Dynamics
Jamie emphasized that the shift towards stakeholderism in the U.S. was often superficial, lacking concrete governance changes. He critiqued the absence of standardized definitions and prioritization strategies for stakeholders, referencing Peter Drucker's notion:
“The only way you can serve multiple customers is if you serve them all equally badly.”
[03:20]
James Orlikoff highlighted structural failures in corporate governance, using Boeing as a case study. He explained how a shift in board composition from engineering to finance expertise led to deteriorating product quality and stakeholder relationships:
“They had a very interesting balance of kind of a preponderance of engineering expertise on the board... which precipitated all of the difficulties that they're experiencing now.”
[17:33]
Challenges of Implementing Stakeholderism
Om Prakash Bhatt argued that stakeholderism introduced unmanageable complexities into business operations:
“...we're going to try to bring in all of the division in our society into the businesses. And so what are we going to get? Businesses that are about as efficient as our governments...”
[20:17]
He expressed concerns that incorporating diverse and sometimes conflicting stakeholder interests could hinder corporate efficiency and effectiveness.
Conversely, Jamie countered by advocating for diversity in boards, suggesting that:
“...diversity injects tension, if not conflict, into deliberation... and then you can harness that force.”
[22:43]
He posited that with proper governance structures, diverse boards could enhance decision-making rather than causing dysfunction.
The Role and Composition of Boards
Lynn Payne stressed the critical role of boards in navigating corporate purpose amidst societal changes:
“...this was a time call for leadership, call for action.”
[12:43]
She lamented the lack of bold leadership from independent directors, attributing it to broader societal failures in addressing pressing global issues.
James Orlikoff further discussed the inherent obligations of boards beyond shareholder interests, citing environmental and social responsibilities:
“You have to have some sense of obligation.”
[27:25]
He highlighted that while shareholder value is important, it alone cannot resolve all societal challenges, emphasizing the need for a balanced approach.
Future Directions and Concluding Thoughts
The panel acknowledged the complexity of balancing shareholder and stakeholder interests. Om Prakash Bhatt maintained that:
“Shareholders are caring about this... our customers care about it, right? Our shareholders care about it.”
[23:09]
He advocated for leveraging existing shareholder-driven motivations to address social and environmental concerns without overcomplicating corporate structures.
Jamie and Lynn Payne underscored the importance of effective governance, diversity, and leadership in steering corporations towards a more inclusive and sustainable future.
Kurt Nickish concluded the episode by teasing the next installment, which will further assess the five-year impact of the Business Roundtable's declaration and explore future operational strategies for corporate boards.
Key Takeaways
- Business Roundtable's Shift: A significant, albeit controversial, move from shareholder primacy to stakeholderism within American corporations.
- Cultural Variances: Countries like India had already embedded stakeholder-oriented practices, making the U.S. shift appear delayed and somewhat performative.
- Governance Challenges: The vague nature of stakeholder commitments has led to minimal tangible changes, with many boards remaining entrenched in short-term financial goals.
- Board Composition: Diversity, both in expertise and demographics, is crucial for effective governance but requires robust structures to harness its benefits.
- Future Outlook: The ongoing debate highlights the need for a balanced approach that incorporates stakeholder interests without compromising corporate efficiency and leadership.
Notable Quotes
- Om Prakash Bhatt [01:29]: “They talk about the power of free markets... the issue seems to be more about short termism versus long termism.”
- James Orlikoff [06:24]: “Why are they so late to the party?”
- Lynn Payne [05:47]: “Imagine, 62% of everything from one of the largest conglomerates in the world goes into a trust.”
- Jamie [03:20]: “The only way you can serve multiple customers is if you serve them all equally badly.”
- Lynn Payne [12:43]: “This was a time call for leadership, call for action.”
- James Orlikoff [27:25]: “You have to have some sense of obligation.”
For those interested in the intricate dynamics of corporate purpose and governance, this episode offers a thought-provoking examination of the evolving landscape five years post the Business Roundtable's landmark pledge.