This fall, The Business Roundtable, a group of chief executive officers from major US corporations, reimagined the “purpose of a corporation” in a statement they issued on August 19th. The new statement abandons the traditional idea that corporations are primarily responsible for maximizing shareholder value, stating that corporations now should try to meet the needs of a broader range of stakeholders by “investing in employees, delivering value to customers, dealing ethically with suppliers, and supporting outside communities.”
When I first read this statement, I thought this was a great idea. But, now thinking about the principle-agent problem, I feel differently. When corporations are tasked only with maximizing shareholder value, it makes it clear to managers and employees that their goal should be to deliver a return for the owners of the company of which they are only the caretakers. This creates a simple scorecard that can be used to make sure managers, the agents, are making decisions to meet the needs of the business’s owners, the principles, and not their own. Extending the role of corporations to include more stakeholders distracts managers from this scorecard and gives them more room to act in their own interests, increasing the potential for the principle-agent problem. For big and complex corporations like those who signed the Business Roundtable’s new statement, asymmetric information means that the principle-agent problem is an even bigger issue than it would be for a smaller firm. In the context of the principle-agent problem, I’m not so sure I think the new statement on the “purpose of a corporation” is a good idea.
1 comment:
Hannah, I think this is a really interesting contemplation of the Roundtable’s reconsideration of purpose in business. While I do agree that maximizing shareholder value may be a more clear-cut objective than those embedded in the newly defined mission statement, I disagree slightly in your analysis of the consequences of the August shift. Corporate governance is dependent upon the communication of a set of rules followed and objectives pursued by a company in order to align the incentives of the leadership, the employee, and the shareholder. This in turn decreases the asymmetric information that arises in principal-agent problems. The importance of these CEO discussions is that the organization has a mission to its principals, the stakeholders, and this mission goes above and beyond profitability. In order to align incentives, as an increasing number of Americans (around 65%) say that a company’s primary purpose should be making the world better, this redefinition is intended to give business leaders less room to act in their “own” interest, not more. To note, huge U.S. corporations are complicated by the fact that the agents, particularly CEOs, are also principals, as high-ranking employees likely have considerable personal and reputational stake in the company’s performance.
The goal of companies in this sense should never be a “simple” scorecard, but a comprehensive and insightful one, so it seems like a jump to assume that an adjusted scorecard would result in harmful distractions that would hinder company growth in the long-run. Investing in workers and communities has been proven to increase long-term success, as has the development of a happier workforce. Through this August agenda we can see that the shareholders, which again, includes these CEOs, desire this shift. Therefore, this process is first and foremost attempting a realignment of interests. Though it has been a critique that social accountability goals struggle in their measurability, there are plenty of metrics that inform shareholders of a company’s environmental footprint, diversity employment statistics, community involvement and philanthropy, etc. It is crucial to acknowledge that the preeminent goal of these companies is still long term value for shareholders, but as a result of this expansion of definition, as many CEOs have come to the conclusion that the former cannot persist without the latter. I am confident that the goal is not to halt comprehensive earnings reportings and previous metrics of employee success and replace them with wishy-washy analyses as an excuse for not meeting financial goals, but instead is to push for the interests of shareholders in a more comprehensive and just way.
Post a Comment