Traditionally, the role of a company was clear-cut; companies existed to maximize profits which would be returned to shareholders. Economist Milton Friedman was the face of this theory of shareholder primacy, which tended to reflect the consensus academic and corporate beliefs in the 1970s. This principle was also applied by courts across numerous jurisdictions, enshrining the corporate goal of profit maximization over other considerations into company law.
In 1970, Friedman famously declared: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”
However, by the 1980s this view was being called into question. The idea that a company’s economic and social aspirations should not be viewed as separate aims started to gain traction, and there were growing calls for the social impacts of a company to be considered. This sentiment was reflected in a court finding that shareholder interests in a company can be non-financial.
In 1983, Canadian academic Henry Mintzberg summed up this view, stating: “There is no such thing as a purely economic strategic decision in big business… Only a conceptual ostrich, with his head deeply buried in economic theory, could possibly use the distinction between economic and social goals to dismiss social responsibility.”
In the UK, new legislation introduced since 2006 has significantly expanded the duties of a company, from purely profit maximization to considering employees, relationships with customers and suppliers, and the impact a company has on the community and environment. This is far more closely aligned with modern-day expectations that companies consider a broad array of stakeholders. In this context, a stakeholder can be anyone or anything affected by, or with the ability to affect, a company, including people such as employees, creditors and consumers, but also governments, local communities and the natural environment.
A Greater Purpose?
From a broader societal viewpoint, consumers increasingly expect companies to stand for something, and are placing pressure on companies to consider their greater purpose. Quite often, we expect that our own values are shared by the companies that we chose to buy from. On the flip side, we are also observing the significant reputational damage that companies are suffering when profit maximization is placed above other interests such as labor conditions, the healthiness of products or environmental impacts, to name just a few examples.
Most recently, we have seen this broader purpose of a company accepted by the US Business Roundtable, which last month published a statement on corporate purpose that no longer focuses on shareholder primacy, but instead considers all stakeholders. This may well be very significant – 181 CEOs have signed this statement on behalf of some of America’s largest companies, which employ over 15 million people.
The statement makes a public commitment to all stakeholders, and specifically includes:
- Offering value to customers and meeting expectations
- Paying employees fairly, and creating a workplace of diversity, inclusion and respect
- Transacting fairly with suppliers
- Supporting local communities.
Or Just Greenwashing?
While this statement doesn’t contain ideologically new concepts, it is undoubtedly significant that a market the size of the US is appearing to embrace the consideration of all stakeholders, rather than just investors, as part of corporate purpose.
However, there remains much to be nailed down about this new system of stakeholder-first capitalism, and the announcement has led to criticism from some groups.
Some have described the statement as pure ‘greenwash’, simply intended to placate a consumer that increasingly cares about environmental and social topics, with no real detail on how this might work in practice. Meanwhile, advocates of shareholder rights fear that the CEOs of the biggest US companies are not advocating for stakeholder primacy, but instead director primacy by another name: as one group has said “accountability to everyone means accountability to no one”. Another key question is how company performance should be measured if the objective of the company is not to maximize returns for shareholders.
Nevertheless, at Newton, where we have long believed ESG factors can have a material impact on a company’s share price, we see this announcement as a positive step. We’re pleased to see the leaders of these large, global, well-known companies publicly recognizing the myriad factors that go into a company’s performance.
What we hope to see now is concrete action and commitments from companies.
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2006 The Bank of New York Company, Inc. All rights reserved.