The Past Speaks

The Business Roundtable, which represents the chief executive officers of the major U.S. corporations, has issued a statement that explicitly denounces the doctrine of shareholder primacy, the view that executives should run companies with the sole goal of maximizing shareholder value (see here, here, and here). This view as famously articulated by the Michigan Supreme Court in the case of Dodge Brothers vs Ford (1919) and much later by Milton Friedman. The Business Roundtable’s statement calls for a new understanding of the “purpose of a corporation” for managers to balance the interests of shareholders with stakeholders who have competing claims on the firm’s resources, e.g., the workers and perhaps the nation-state.  The Business Roundtable seems to want to turn the clock back to the immediate postwar period, when U.S. business culture was such that many U.S. managers explicitly rejected the notion that their job was simply to maximize profits for shareholders.

If the ideas in the Business Roundtable’s statement are implemented in all or many of the member organizations (that’s a big if), the implications for U.S. business, society, and investors would be massive. Not surprisingly, the Business Roundtable’s announcement has received extensive press coverage. I’ve done research on the history of the doctrine of shareholder primacy in US business. My research, and that of other scholars such as Brian Cheffins, has shown how the pendulum swung from shareholder primacy to the “managerialist” philosophy that dominated U.S. business-decision in the middle of the twentieth century and then back again to shareholder primacy in the 1980s and 1990s. I’m therefore struck by how little awareness of this complex history is demonstrated in much of the press coverage of the Business Roundtable’s statement. There is basically zero historical perspective in the media discussion of the Business Roundtable statement.

Consider the otherwise fine report about the  Business Roundtable event on CNBC by journalist Maggie Fitzgerald. Her story referred to the “age-old” doctrine of shareholder primacy, which implies that ever since the advent of the joint-stock company, firms everywhere and always have been run according to the dictates of shareholder value ideology. That’s not remotely true in Germany or even in other common-law jurisdictions such as the UK and Canada, where the law requires manages firms in the interest of an imagined “enlightened” and socially conscious shareholder (for information on the Englightened Shareholder Value principle in the Commonwealth countries, see here, here, and here). Moreover, historical research by the late Lynn Stout, Rakesh Khurana, Roger Martin, and other academic has demonstrated that shareholder value ideology was explicitly rejected by US managers from the 1930s to the late 1970s. This literature is discussed on page 536 of a paper I wrote with Jason Russell and Kevin Tennent. Ms. Fitzgerald, like most US journalists, appears to be unaware of how recently shareholder value doctrine came to dominate the thinking and action of top US CEOs.