On August 19, the Business Roundtable made headlines by “redefining” the principles and purpose of corporate governance. Headlines across the world proclaimed a new era of “responsible” capitalism. An op-ed in the Los Angeles Times called the statement a “shocking reversal” of the idea of a corporation. The Toronto Star declared that Big Business is no longer interested in making money (even though the Business Roundtable didn’t really mean it). And Nonprofit Quarterly declared that corporate America was finally apologizing for business as usual.
But did anything really change? Was their statement merely cynicism wrapped up in false rhetoric? Was the apology insincere? Or was the Business Roundtable (BRT) merely rediscovering what proponents of a free market system have known for a long time?
With football season upon us, perhaps it is time for an instant replay of what actually was said in the brief document issued by the BRT.
First off, the BRT reaffirmed their embrace of free markets. “We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.” So far, so good. If all the signatories of this document would now follow through with solid action by ending lobbying efforts for corporate subsidies, tariffs, and other rent-seeking regulations that alter the free market playing field to their advantage, we would be in good shape. But while actions may fall short, the rhetorical commitment to free market capitalism is still there.
Following their re-commitment to the free market, the BRT seems to have shunted “shareholder value” down the list of corporate priorities in favor of four other important principles.
First on the list or priorities is “delivering value to our customers.” Nothing should surprise anybody here. Capitalism is about free exchange, and exchange best realizes gains from trade when a producer of a good or service provides something that consumers want at a price they are willing to pay. Businesses that fail to deliver value to their customers won’t be in the business of delivering anything for long. Eight-track tapes are a bad way to deliver music to consumers, and they have been replaced by the more valuable service of streaming digital music. Mission accomplished, capitalism!
Next up, the BRT recommended “investing in our employees.” Well, yeah. Hiring somebody for your corporation is as much of a market exchange as somebody buying a cup of coffee. An employee offers a set of skills to an employer in exchange for something else (usually money or other benefits such as health insurance or a gym membership). Just like the customer wants to get a good cup of coffee at a reasonable price, so too does the employer want to increase the benefits he receives from the employee at a good price. If that means spending some costs on training or making the workplace more enjoyable, that is good for both the worker and the boss. This has always been true.
Third, the BRT expressed interest in “dealing fairly and ethically with our suppliers.” This is all about long-term trust. If you want to be in business for the long run, you need to cultivate a reputation for being a reliable partner with others. Cheaters may win in the short term, but a business that repeatedly fails to live up to contractual obligations will eventually find itself out of business. As corporations are institutions designed to continue contractual obligations beyond the lifespan of the initial founders, it makes perfect sense for them to be sensitive to how they treat everyone they exchange with, from customers to employees to suppliers. Both Adam Smith and Deirdre McCloskey have pointed out that fairness and honesty are essential bourgeois virtues that grease the wheels of free commerce.
(As a side note here, I would like to mention that the difference between a customer, employee, and supplier is really only semantic. Each of these individuals is engaged in an exchange with the corporation. A consumer exchanges money with a corporation for goods/services. An employee exchanges time and effort to a corporation for money. A supplier exchanges inputs with a corporation for money. It is all about two parties trading, and trade is reciprocal. The only reason we categorize individuals as consumers, employers, employees, or independent suppliers/contractors is for some government to impose differential rules upon those individuals. Wouldn’t the world be a better place if they were all treated the same?!)
The fourth item on the BRT list of priorities might seem the most novel to contemporary ears: “supporting the communities in which we work.” This is all part of the “give back” rhetoric that has been sweeping ad agencies as of late. But what does “supporting a community” really mean? From a market perspective, it means finding needs and wants in society and fulfilling them. The better you can fulfill needs and wants in an efficient manner, the more you will be supporting the community. This includes providing consumer value and opportunities for exchange (that further includes the ability for an employee to provide their skills to the corporation).
Too often we think of “giving back” as a one-sided charitable contribution. Charity is nice, but one of the limits of charity is that you may often give things to people that they don’t necessarily want or need. Christopher Coyne has pointed out that “doing good” often leads to bad, unintended outcomes. The best thing a corporation can do for a community is to seek out new, innovative, and efficient ways to meet the various needs and wants of people in that community — and to expand that “community” as far and as wide as possible. Adam Smith noted famously that the “wealth of nations” was a function of the extent of the market (or the community of buyers and sellers). When people engage in bilateral free trade, they signal their needs and wants and allow entrepreneurs to better understand how a community is best served.
Finally, the BRT notes that it is still important to generate “long-term value for shareholders.” Yes, that point may come last on the list of priorities for corporate governance, but it actually follows from all four other points above. It is not that “shareholder value” is separate from treating consumers, employees, suppliers, and the community well. Shareholder value follows automatically from those other four priorities; none of them is inherently more important than the other.
Free exchange, broad markets, and entrepreneurial capitalism have long been recognized as a win-win system for everyone — consumers, employers, employees, wholesalers, and shareholders. Indeed, each and every one of us occupies these different roles throughout our lives. When we understand ourselves as free agents who seek out our own betterment by making others around us better, capitalism makes perfect sense. We’ve known this for at least 250 years now, and the BRT is only rediscovering this historical wisdom. Everything old is new again.
At the end of the day, the BRT statement of corporate governance could have avoided all the shock and awe it has been greeted with by simply writing their statement on governance with fewer words: Allow all of us the freedom to exchange.