Prior to the 1980s (Specifically the post world war two era), there was a belief that business had a higher purpose than generating profits. This somewhat cyclical debate about the role of business is back again. Business in the post-war era served a broad set of stakeholders, not just the shareholder. Early business corporations formed in the late eighteenth and early nineteenth centuries were created specifically to create roads, canals, railroads, and banks. There was a focus on service, not maximizing investment returns. In these periods, business focused on stakeholder capitalism. Investopedia defines it this way:
Stakeholder capitalism is a system in which corporations are oriented to serve the interests of all their stakeholders. Among the key stakeholders are customers, suppliers, employees, shareholders and local communities. Under this system, a company’s purpose is to create long-term value and not to maximize profits and enhance shareholder value at the cost of other stakeholder groups.
While it is hard to argue with this noble goal, this Article describes the problem with stakeholder capitalism: “while balancing the interests of all stakeholders sounds nice in theory, in practice, someone has to do the balancing.” Two specific problems emerged. The first was an inability to focus and determine priorities; serving multiple masters is challenging. Without the market to hold them accountable, managers end up enriching themselves at the expense of everyone else. Per the article, stakeholder capitalism failed, and shareholder capitalism made a strong comeback. So everything changed. The economic climate at the end of the 1970s and early 1980s led to a crisis in prevailing management beliefs, leading to alternative business strategies and the dominance of shareholder value. The first modern articulation that shareholder wealth creation is paramount for the management of a company was published in Fortune magazine in 1962 in an article by the management of a US textile company. The article stated:
The objective of our company is to increase the intrinsic value of our common stock. We are not in business to grow bigger for the sake of size, not to become more diversified, not to make the most or best of anything, not to provide jobs, have the most modern plants, the happiest customers, lead in new product development, or to achieve any other status which has no relation to the economic use of capital. Any or all of thee may be, from time to time, a means to our objective, but means and ends must never be confused. We are in business solely to improve the inherent value of the common stockholders’ equity in the company.
Milton Friedman then introduced the Friedman doctrine in a 1970 essay for The New York Times. In it, he argued that a company has no social responsibility to the public or society; its only responsibility is to its shareholders. The value equation then shifted again from stakeholder to shareholder. We have now come full circle, with the stakeholder capitalism discussion amplifying. In a recent Interview with CNBC, Delta CEO Ed Bastian spoke of how the job of the CEO has changed radically in recent years. This specific point has come up multiple times in my various discussions the last six months. As stated in the interview, “the role of the CEO has dramatically shifted as companies learn to walk a fine line between stakeholder capitalism versus meeting the needs of their company’s balance sheet.” Here is a perspective from Bastian from the interview:
Delta Air Lines CEO Ed Bastian told CNBC’s David Faber that he never expected he would be addressing the pace of change we are seeing in the world. “I think it’s a new normal,” Bastian said. “Once you are committed to bringing everyone forward in an equitable manner, I don’t think there’s another path. Delta has remained focused on its efforts regarding diversity and environmental, social and corporate governance, with Bastian pushing for continued growth at the company.
The interview above is a good look into the latest shift in the cycle. Purpose-Driven will be a popular phrase.