Welcome, but Long Overdue
The US Business Roundtable (BRT) is finally catching up to what many have found obvious since at least 2008.
After nearly half a century of predictable advocacy that focused solely on shareholders, last week the BRT issued a statement asserting that businesses should move away from pure profit maximization and consider their impact on a broader array of constituents. Put simply, they finally recognized the importance of shared prosperity to our economy, which is critical to a thriving society that allows a greater number of people to live with dignity.
A Different Kind of Capitalism
At Omidyar Network, thinking about capitalism differently is a longstanding mindset and practice. We have long argued that businesses can and should have a positive social impact on their communities and deliver important services that expand inclusion. To date, we have invested more than $700 million in companies that think simultaneously about both financial returns and social impact, and in groups like the Impact Management Project that measure that contribution.
But we also fully recognize that it’s not enough to just fund businesses with a positive social impact. That’s why we welcomed the BRT’s about-face on the purpose of a business. They rightly updated their long-standing position that the goal of a business is to solely maximize shareholder value with the recommendation that companies should balance a range of considerations from various stakeholders: people who work for them, consumers, suppliers, the communities in which they operate, and so forth.
The Time is Now
And it’s about time. The BRT is lagging a widespread societal consensus that purpose and profit are inextricably linked. We’re not surprised — it took 35 years from when Milton Friedman first published Capitalism and Freedom until 1997 for BRT to officially enshrine “shareholder primacy” as doctrine, after many laws and practices had already changed. And it’s now plainly apparent that this now-discarded doctrine — one of the central features of neoliberal economic theory — just isn’t working. Not only has it failed to deliver broad, shared prosperity, it has actively undermined it by causing the conditions that keep hard work from being fairly rewarded and contributes to growing and destabilizing inequality. CEOs have finally recognized this and now rightly worry about their social license to operate.
Many of the reactions in the past week range from “wait and see,” to deeply skeptical, to cautiously helpful in pointing out what businesses must do next. We share many of these concerns. For instance, for the statement to be more than words on a page, the BRT and its members must take real actions, like addressing how they will invest in workers who are struggling to make ends meet. Even Tom Wilson, the CEO of Allstate and Chairman of the Executive Committee of the US Chamber of Commerce, has pointed out that American workers are struggling and need higher wages.
Our skepticism is reinforced by the recent actions of many of the CEOs on the BRT. In 2017, President Trump announced massive corporate tax cuts. In response to the record high profits, corporations spent over half of it on stock buybacks and only six percent on workers. In dollar terms, that’s over $1 trillion on stock buybacks to investors in 2018. And just last week, at the same time they released this statement, many BRT members were also pushing to weaken the consumer-protecting Volcker Rule that was passed as part of the Dodd-Frank Act in the Great Recession’s aftermath.
But in some ways, we find the more useful critiques to be from those still (inexplicably) upholding the banner of Friedman. They are asking: “who empowered corporate leaders to make this judgment?” and “how will companies now adjudicate among their various stakeholders?”
Many companies (B Corps in particular) work hard voluntarily or as a matter of purpose to answer these questions, and do so well. But many companies simply cannot answer those questions voluntarily, nor should we ask them to. Under current rules, corporations will tend toward maximizing profits for their shareholders and executives, absent other pressures. Companies exist to make a profit, and they follow (for the most part) the rules and incentives built into the system through laws, regulations, cultural norms, and other means. Businesses and markets will never be fully self-regulating, nor should we ask them to be — regulating and bounding them is the clear job of the state, or at least of democratically legitimate states.
Changing the “Rules of the Game”
Given this reality, we believe that society — via our government — must now rewrite what Friedman called the “rules of the game” to better guide these tradeoffs. The ball is in the government’s court, as a political economy question, as it should be. Richard Reeves of Brookings Institution recently wrote:
It’s true that the market does not value environmental resources (any more than Soviet-style socialism); but that is not the fault of the market, but of politicians… The Great Lakes are not protected from pollution because American capitalists read Silent Spring and decided to put planet before profits. If they are relatively clean today, that’s because the government protected them, on behalf of the people. Market forces are always being shaped, for good or ill, by politics.
But this still raises the question of business’ participation in rewriting those rules. Our current neoliberal incarnation of capitalism — not to be confused with capitalism itself — suffers from a set of rules that are both deeply skewed and insufficient. This has happened in large part because of the lobbying muscle of the business community, which has considerable power to shape how the rules themselves are written. And unlike in 1997, BRT updated its 2019 doctrine before the laws and rules changed.
So, we argue that the announcement presents an opportunity, albeit a risky one. To us, the statement represents an open invitation to society to renegotiate. And the fact that this comes from some of society’s biggest winners under the old rules is significant. They have introduced an invitation to write new rules, and to redefine the boundaries and incentives to which businesses must conform and adapt — including a clarification of their responsibilities toward various stakeholders. Although the immediate prompt comes from business about its role, the task and opportunity at hand is in fact a much broader one: to reimagine capitalism itself. We should seize the chance and accept the offer.
We are not naïve. We know that business may have issued the invitation, but that any new rules will be heavily contested by that community. Ultimately, we see two tests. First, how will business groups try to skew the new rules of the game? Will they continue to advocate for shareholder-first laws and regulations, e.g., on monopoly power?
And second, how will the same BRT members who signed the letter follow it up with actions that impact their own companies? People should be able to join a union without fear of retribution and they should be paid wages that allow them to raise a family and live with dignity. Stakeholder voices, aside from shareholders, should be at the table and included into corporate governance (for example, including workers on corporate boards). We should also watch to see who gets the proceeds of windfalls like tax cuts. Is it workers? Research and development? Or predominantly shareholders in the form of buybacks?
It’s critical that we maintain active vigilance and contestation to ensure democratic legitimacy in the process and avoid capture of interests. New rules of the game should ensure that these questions are answered differently in the coming decades than they were in the past. To do that, we need to build a significant coalition and infrastructure to engage the coming rewrite, one which we have only just begun to fund through our support to groups like the Economic Security Project, Open Markets Institute, and Roosevelt Institute.
The Path Forward
As daunting as this may seem, new rules won’t be enough. Real change — a new, more equitable form of capitalism — requires new mindsets, beliefs, and goals that go well beyond GDP growth. We need new ways of understanding and teaching economics. We need to rewrite the narratives we tell ourselves about the economy and who it should be working for. This challenge and opportunity requires a decades-long commitment, not dissimilar to the work that was done to deeply ingrain shareholder primacy years ago. It’s up to us to set better rules for the next half century, ones that prioritize the good of the many over the gain of the few, because profit-seeking businesses will ultimately operate within the rules and incentives they are given.
Thanks to the shift in conversation, businesses are beginning to signal that they know they will lose their social license to operate if they keep narrowly focusing on their shareholders. They may be a decade (or more) late, but we welcome it nonetheless. We look forward to working alongside a broad coalition of stakeholders to seize this opportunity to reimagine capitalism — and hold companies accountable for their role in it.
Read more about Omidyar Network’s work to reimagine capitalism here.