Capitalism vs Free Enterprise: The Business Roundtable on Corporate Purpose
While chillaxin’ on the sunny morning of August 19, 2019, drinking my daily infusion of Café Bustelo coffee after light exercise and meditation, I leafed through the Wall Street Journal. Turning from page A5 to A6 I came across a two-page declaration on the “Purpose of A Corporation” by The Business Roundtable, a group comprised of the CEOs of 181 of the largest and most influential public corporations in the United States. JPMorgan’s head honcho Jamie Dimon is the Chairman of the Business Roundtable.
I froze. After reading the opening “Our Commitment” section, I called Jewel. Immediately, I sensed that this declaration, expanding the stated purpose of the corporation to serving “all our stakeholders”—customers, employees, suppliers, communities as well as shareholders—from one in which shareholder value is primary, was a big deal. Huge.
Click image for full statement and signatories
I thought: It’s about time. Over the last decade, there have been several intersecting movements to expand the purpose and impact of corporations beyond quarterly profits. Corporate citizenship aka Corporate Social Responsibility is an example. Benefit corporations and the B Corporation certificate (which 3,000 firms have earned) reflect this direction, as do books such as Conscious Capitalism: Liberating the Heroic Spirit of Business and Conscious Business: How to Build Value through Values.
In a recent podcast, performance and leadership expert Alan Watkins pointed to books such as When the Money Runs Out and Caring Capitalism: The Meaning and Measure of Social Value as indicative of this trend. Watkins mentioned a few additional representative anecdotes:
In early 2018, the CEO of trillion-dollar investment giant BlackRock sent a letter to CEOs saying if you want our money, become more socially responsible.
The retiring CEO of accounting giant Ernst & Young saying that soon “purpose audits” will be as important as financial audits.
A Stunt or Political Ploy?
But some consider the Business Roundtable’s declaration a PR stunt, a virtue-signal to preempt critiques of corporate malfeasance and incredibly high CEO pay (relative to the other workers in the corporation), or, even worse (to crony capitalists), a slippery slide to socialism. Banking reporter David Benoit penned a piece for the online edition of the Journal the very same day which ended with a quote by economist Milton Friedman. Friedman is often cited as the originator of the “maximize profits” ideology as the prime purpose of corporations.
Benoit quotes Friedman, who claimed that “reformers” who wanted to use business not just for profits but for “desirable ‘social’ ends” were actually “preaching pure and unadulterated socialism.”
With all due respect to Mr. Friedman, patron saint of anti-Keynesian libertarian economists, that statement strikes me as hyperbole.
The Wall Street Journal editorial page derided The Roundtable’s declaration. In our estimation, their initial editorial response, “The ‘Stakeholder’ CEO,” missed the mark. They accused the CEOs of toadying to lefties and socialists aligned with Democratic Presidential candidate Elizabeth Warren, ending the editorial with: “Platitudes about stakeholders won’t stop President Warren from lining them up first for the gallows.”
Fearmongering anyone? Collectivist ideologies have indeed led to mass exterminations and the intentional starving of populations, the Gulag of the Communist Soviet Union, the so-called “Cultural” Revolution in China. I’m a free market and free enterprise advocate; I’d rather live and work here, where I have more choices and freedom than in Communist or authoritarian regimes. But the idea that Warren (or even “social Democrat” Bernie Sanders) would be a totalitarian tyrant seems ridiculous on its face. Our system is stronger, more anti-fragile than that.
Our surviving, thus far, the victor of the 2016 Presidential election proves that.
The Free Market vs. Crony Capitalism
But all is far from quiet on the western neoliberal capitalist front. Regarding executive compensation, the father of modern management Peter Drucker said in 1985 that there should be a 20:1 ratio between the chief executive and the average worker. The chasm is 300:1. The overall wealth gap is a colossal socio-economic and moral issue too. According to a 2018 Oxfam report, 82% of the growth in global wealth the previous year went to the top 1% ranked by riches. The revolution in AI wiping out whole job categories within a decade adds more uncertainty to the severing of our social fabric.
You can see why futurist Duane Elgin has for decades been saying that by the 2020s we humans will experience a breakdown or a breakthrough.
Seth Godin
Furthermore, the free enterprise system has an enemy, according to the author, entrepreneur, and ruckus-maker Seth Godin. If you think the free enterprise system is synonymous with capitalism, think again. “The enemy of the free market,” Godin argued in a recent podcast, “might be capitalism.” In basic terms, the free enterprise system is like a large-scale, self-organizing, improvisational polyphony, with people buying what they need and want from sellers providing products and services at a profit to stay in business and grow.
Godin continued riffing a ruckus, contending that though capitalism can “fuel the free market” it is better defined as “the idea that capital, money, can be used to get machinery to build systems to make things more productive, which leads to a ratchet called progress.”
Three Defects of Capitalism
One doesn’t have to be a neo-Marxist to honestly critique crony capitalism, whereby risk in a free market is superseded by the return on the relationship between business and government. Seth points to three major defects of capitalism:
1. Monopolies and Oligopolies—where effectively people have no or very little choice and therefore pay more than if there were true competition. Facebook is a social network monopoly. Google is a monopoly for online advertising. (Seth turned us on to DuckDuckGo, a search engine that doesn’t track you. But does it compete against Google? Heck no. Most reading this post likely never heard of them.)
2. Short-term thinking—of shareholders and even consumers, in which so few consider long-term effects and quality.
3. Corruption—bad actors, cheats, crooks, criminals who buy or bully their way through the free market to corner the market with ruthless lack of scruples. Rapacious greed reigns supreme among oligarchs and kleptocrats.
So, no, the announcement by the Business Roundtable of a broadened reach and wider intention, is not a panacea. Yet it’s a good enough step in the right direction, following decades of a narrow focus on shareholder value as the be-all and end-all. In some quarters, shareholder value supremacy is like a religion.
Eating at Danny Meyer’s Table
Danny Meyer
The truism that big companies aren’t as nimble as smaller ones may explain why it took these captains of industry so long to come to a table already set by visionary entrepreneur Danny Meyer of the Union Square Hospitality Group (USHG). USHG owns the Jazz Standard club in New York City. In his modern-day business classic published in 2006, Setting the Table: The Transforming Power of Hospitality in Business, Meyer explains “the virtuous cycle of enlightened hospitality” that is “the single greatest contribution to the ongoing success of our company.” Meyer’s restaurant group prioritizes people in the following order, with no worries to their bottom line:
Our employees
Our Guests
Our community
Our suppliers
Our investors
Who knows? If the CEOs of the Business Roundtable enact their “all stakeholders” pledge as skillfully as has Meyer’s USHG, perhaps the free market might be strengthened over crony capitalism. We at the JAZZ LEADERSHIP PROJECT℠ believe that this new definition of the purpose of the corporation is a sign of cultural evolution to a higher octave of shared meaning and values for America and the world.
We’ll periodically revisit this topic. This post is our opening statement, a maiden voyage into the debate over the future of business and leadership in the 21st century.