CEOs spurned the shareholders-first model. Now critics ask, ‘What’s next?’

Amazon CEO Jeff Bezos
While the federal minimum wage hasn’t changed in years, costs for things like healthcare and higher education have soared, prompting some companies, including Inc. led by CEO Jeff Bezos, to raise its compensation baseline and encourage others to follow.
(Emmanuel Dunand / AFP/Getty Images)

It seemed, at least on paper, like a tectonic shift of American capitalism: The deviation from the long-held conviction that shareholder returns must always reign supreme.

In a 300-word statement released Monday, 181 leaders of some of the world’s largest companies endorsed a philosophical redrawing of the purpose of a corporation. The goal, according to JPMorgan Chase & Co.’s Jamie Dimon, chairman of the Business Roundtable, must be to promote an economy that serves all Americans, not just investors.

Critics quickly seized on the unknowns. Would activist investors overlook stock price dips if the cause could be traced to higher wages and better benefits for workers? Can chief executive officers, who last about six years on average and mainly get paid in company stock, reasonably be expected to run businesses with a decades-long mind-set?


The group “should be willing to be held accountable in their efforts to transition this statement into reality,” said Catherine Jackson, a former senior advisor for responsible investments at Dutch pension fund PGGM. “Stakeholders, including investors, need a line of sight into how these commitments are going to be actioned.”

Those who signed the Business Roundtable statement vowed to serve five distinct constituencies: customers, employees, suppliers, communities and shareholders. The revision came more than 20 years after the group said its members’ primary goal was to increase shareholder value.

The Business Roundtable suddenly declares that not only shareholders count.

Aug. 19, 2019

The CEOs that signed, including those of 3M Co., Johnson & Johnson and Goldman Sachs Group Inc., agreed to provide workers with fair pay, benefits and training opportunities, and to promote diversity, among other things. The pledge also called for respecting residents in communities where their businesses operate and caring for the environment by embracing sustainable practices.

What constitutes fair compensation is unclear. The federal minimum wage has remained unchanged for a decade, while costs for things like healthcare and higher education have soared, prompting some companies, including Inc., to raise its baseline and encourage others to follow.

To some critics, that’s not enough. This year, Walt Disney Co., which isn’t a member of the Business Roundtable, faced repeated criticism from Abigail Disney, the granddaughter of co-founder Roy Disney, who said a $15 hourly wage doesn’t go far for workers in expensive areas of the country like Anaheim, home of Disneyland and other Disney attractions. The company has rejected the criticism.

It’s also unclear whether the changing priorities will be reflected in firms’ compensation plans. Roughly two-thirds of CEO pay for those in the S&P 500 comes in the form of stock awards. Share performance is among the most common metrics to determine payouts, appearing in about half of pay plans for the CEOs of the 181 companies that signed the pledge, according to data compiled by Bloomberg.


At S&P 500 firms, the average ratio of the CEO’s compensation compared to that of the median worker is about 280 to 1, the data shows.

“The rising income inequality between executives and employees won’t be meaningfully eradicated by compensating employees fairly unless executives are willing to be paid less,” Jackson said.

The Business Roundtable is a powerful lobbying group in its own right. Led by Josh Bolten, a former chief of staff to President George W. Bush, the group’s members and their affiliates have largely supported Republicans with campaign contributions, but did donate to Hillary Clinton in 2016. Its policy goals span from supporting stock buybacks to increasing the federal minimum wage.

Absent from the 181 signatories were the leaders of Roundtable members Wells Fargo & Co., State Farm, Parker-Hannifin Corp., NextEra Energy Inc., Kaiser Permanente, General Electric Co., Blackstone Group Inc. and Alcoa Inc.

Representatives for Kaiser and State Farm both said their firms support the pledge but elected not to sign it because they don’t have shareholders. A GE spokeswoman said that CEO Larry Culp consistently makes public statements about focusing on creating value for stakeholders such as customers, employees and investors, but declined to comment further. Wells Fargo wasn’t invited to sign the pledge because its current chief executive serves on an interim basis, a spokeswoman said.

The other companies either declined to comment or didn’t respond to requests.

Adherence to the shareholder-first model is widely traced back to a New York Times column written by Nobel laureate Milton Friedman in 1970, in which he spurned corporate leaders who “declaim that business is not concerned ‘merely’ with profit,” but also things like avoiding pollution or “whatever else may be the catchwords of the contemporary crop of reformers.”


The idea of maximizing shareholder returns took hold in executive suites and academic circles over the following decades, with some even claiming that companies have a legal duty to do so.

There’s no U.S. law that explicitly backs that up. Several court cases have broached the matter, including in Delaware, where many companies are incorporated. Some legal scholars and governance experts interpret the court opinions as prohibiting actions that promote environmental or social goals at the expense of profits, but there’s no consensus.

“The most frustrating thing I ever hear is when someone says that a board of directors can’t do things that are attuned to sustainability under the current legal system,” said Larry Hamermesh, executive director of the Institute for Law and Economics at the University of Pennsylvania Law School. “They can. There is nothing in the law that precludes this.”

One researcher called a pledge from nearly 200 CEOs to be more sensitive to others “a clear and pretty heavy-handed attempt” to obscure reality.

Aug. 21, 2019

Many companies vow to do good things but often resist releasing data to let others independently verify such promises, or cherry-pick the data they do disclose. Many refuse to release the gender and racial figures they provide to the U.S. government.

It’s also unclear to what extent the pledge will weaken the role of the stock price as a CEO’s official scorecard. A shifting of resources could affect a company’s policy on measures often seen as taken to give short-term share price boosts, such as corporate buybacks.

Activist investors have for years grown in size and shown willingness to take on also the biggest global companies with lagging stock prices, including Procter & Gamble Co. and GE. Still, the breadth of signatories may empower CEOs to dial down their adherence to short-term results.


“People treat it as a trade off — as a zero-sum game,” said Martin Whittaker, CEO of Just Capital, a nonprofit that studies how companies perform on a variety of metrics such as worker well-being and environmental impact. “In the short term, raising wages may suppress the stock price, but if you look over time, you see these companies do better.”