Should Shareholders Share the Wealth?

As the 2020 campaign heats up, you can expect to hear a lot of talk about the role of corporations in American society. Among the Democratic presidential candidates, Bernie Sanders has proposed requiring publicly traded companies—and large private companies—to give their employees at least 45% of the seats on their boards. Democratic candidates also want to raise the tax rates corporations pay and require them to play a greater role in addressing climate change.

But as the rhetoric intensifies, it’s worth noting that one of the salvos in this debate came from a surprising source: big businesses themselves. In August, the Business Roundtable, an organization made up of the chief executives of the largest U.S. companies, said that the purpose of a corporation is no longer limited to advancing the best interests of its shareholders. Instead, the chief executives said, corporations should take into account the interests of multiple stakeholders, including employees, customers, and the communities in which they do business.

The statement represents a sharp turnaround from 1997, when the Business Roundtable held that the principal objective of a business should be “to generate economic returns to its owners.” Under pressure from corporate raiders to increase investment returns, companies laid off thousands of employees, merged with competitors, and took other steps to juice their stock prices. Critics said the pressure to perform led chief executives to focus on hitting short-term quarterly earnings targets, often at the expense of other stakeholders as well as long-term returns.

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But some worry that the Business Roundtable’s new philosophical tilt will make chief executives less accountable to their shareholders, who include millions of 401(k) plan holders who are counting on investment returns to provide retirement income. The Council of Institutional Investors, which represents pension funds, says asking corporations to be accountable to everyone means “accountability to no one.” Other critics argue that the Business Roundtable statement lacks specifics, isn’t legally binding and is basically just good public relations. Ben and Jerry’s, Patagonia and 30 other “B Corporations”—companies that have received a social responsibility “seal of approval” from a nonprofit group—took out an ad in the New York Times calling on the Business Roundtable members to, well, put up or shut up.

The Business Roundtable has affirmed its commitment to capitalism and the long-term interests of shareholders. But it also offered some specific proposals that could give free-market purists pause. For example, the executives said they believe the federal minimum wage of $7.25 is too low, adding that Congress “can raise the federal minimum wage in a way that protects our strong job market.”

Values investing. Some of the critiques of the Business Roundtable’s position are similar to those levied against socially responsible mutual funds and exchange-traded funds. Companies—and fund managers—should make as much money as possible for shareholders and investors, who can make their own decisions about the causes they want to support, the argument goes. But supporters of funds that specialize in sustainable investing point to a growing body of evidence that suggests you don’t have to sacrifice returns to invest in companies that align with your values. In its October “Global Fin­ancial Stability Report,” the International Monetary Fund said its staff analysis found that the performance of socially respon­sible funds was comparable to that of traditional stock funds.