While the falsehood that fiduciary duty means solely making money for shareholders is being chipped away, many business leaders still cling on to this behaviour.
The world of business appears to be so powerful and robust from the outside but look up close and it is brittle and full of fear.
While the concept and practice of sustainability has been slowly chipping away at the falsehood that fiduciary duty is solely to make money for shareholders by bringing business back into relationship with the real world, it is extraordinary how many executives still cling to behaviour that may well in the future be considered criminal.
I was reminded of this listening to John Kay, one of the UK’s leading economists, give a strongly worded condemnation of shareholder primacy, arguing profit maximization is a “crass description” of the purpose of a company.
it is extraordinary how many executives still cling to behaviour that may well in the future be considered criminal.
“Making a profit is no more the purpose of business as breathing is the purpose of living,” said Kay, who chaired the government review of UK equity markets and long-term decision making (pdf). “Why should I allow organizations that believe in profits above all else to exist in modern society? There is no good answer to that question.”
Kay says the constant repetition of the slogan of profits maximization “undermines the legitimacy of business, which will destroy the ability even to achieve this particular objective.”
He insists there is nothing in the law to suggest business should put its shareholders ahead of all other stakeholders. Rather, the law says the duty of directors is to promote the success of the company and Kay says that this can be achieved only by seeing the multi-dimensional nature of business.
“One day the scales fell from my eyes when I realized that companies don’t maximize anything,” he said.
Kay insists it is a legal fiction that companies can be seen purely in the economists’ sense of a nexus of contracts to be used to make agreements, full of people who find it convenient to come together every day. Instead, he says companies have a corporate personality and express “the kind of personal characteristics we attribute to individuals. A corporation only adds value because it is more than the sum of its parts.
“A firm is a construct that has purposes not to maximize but of having a balance of objectives and goals and has obligations to customers, suppliers, society as a whole, and the environment.”
there continues to be a “queasiness” in the corporate sector about NOT putting shareholder value at the centre of all they do
James Macpherson, co-head of UK equities at the world’s largest asset manager Blackrock, admits there continues to be a “queasiness” in the corporate sector about not putting shareholder value at the centre of all they do and says this is partly because such a single-minded approach unifies business culture.
But he says analysis demonstrates this approach destroys shareholder value over the longer term: “There is an enormous noise around short term financial metrics,” he say, “but taking a longer term view we can make a lot more money for our clients.”
Despite this view, Macpherson is himself a cog in the system that drives short-termism and admits his pay and bonus package is based on beating the stockmarket. Kay says this makes him part of the problem as the deeper truth is that what his clients should really want is to secure good pensions for its members.
“We have set up a dysfunctional system where you have a goal short term that is not consistent with the long term purpose of the investors,” he said.
Paul Polman, CEO of Unilever, is one business leader prepared to call out that the emperor has no clothes. He gives the example of a recent college graduate who was interviewing with an established law firm and was shocked when they told him that while they were not doing anything illegal, their activities might be seen as immoral. The firm’s justification for its behaviour – it’s “worth it as it made a lot of money” – would ring true in the corridors of finance institutions as well as many other companies.
Polman says: “Clearly we are not getting it right if we only focus on financial returns and don’t include broader factors that value environmental and social progress… When people in companies are disconnected from serving citizens and accountability and transparency is lacking we seem to revert too often to self service as Libor and mortgage manipulation issues have shown, amongst others.”
Many academics such as Lynn Stout of Cornell Law School have persuasively debunked any legal or fiduciary duty to maximize shareholder value but then wonder why these intellectual arguments don’t make much impression.
The reason is simple. Executives have no choice but to cut themselves off from their own humanity when they choose to pay the lowest wages possible, destroy ecosystems and damage community cohesion.
The only reason this ruinous idea of running a business is allowed to continue is because enough executives still collude with each other to justify it and society has not yet called their bluff.
This article was originally published on the Guardian website
Jo Confino is an executive editor of the Guardian and chairman and editorial director of Guardian Sustainable Business. He also advises Guardian News & Media and Guardian Media Group on their sustainability strategies.