The bosses of 181 of the US’s biggest companies have changed the official definition of “the purpose of a corporation” from making the most money possible for shareholders to “improving our society” by also looking out for employees, caring for the environment and dealing ethically.
The radical change to the mantra of corporate America comes after decades of following Nobel Prize-winning economist Milton Friedman’s philosophy, which dates from 1970, that “the social responsibility of business is to increase its profits”.
Big business bosses signing up to the change by the influential Business Roundtable (BRT) lobby group include Jeff Bezos, the founder and chief executive of Amazon (and the world’s richest person), the Apple boss, Tim Cook, and Jamie Dimon, chairman and CEO of Wall Street bank JPMorgan.
The change follows mounting public and political anger at the yawning gap between rich and poor in the US and across the world. Many of the leading contenders for the 2020 Democratic party presidential nomination, including Elizabeth Warren and Bernie Sanders, have attacked the rocketing pay of business leaders and called for a rethink about the purpose of business together with better pay and protections for workers.
Dimon, who is also chairman of the BRT group which includes companies that collectively generate $7tn (£5.7tn) in annual revenue, said: “These modernised principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
He said big companies recognised they had to invest in their workers and communities because “it is the only way to be successful over the long-term”.
Instead of focusing solely on “shareholder primacy” (making as much money as possible for investors) the businesspeople have now pledged to “lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders”.
The wording of the BRT’s statement is similar to Senator Warren’s proposedaccountable capitalism act, which would require corporations to be responsible to all “including employees, customers, shareholders and the communities in which the company operates”.
“There’s a fundamental problem with our economy,” Warren said. “For decades, American workers have helped create record corporate profits but have seen their wages hardly budge. To fix this problem we need to end the harmful corporate obsession with maximising shareholder returns at all costs, which has sucked trillions of dollars away from workers and necessary long-term investments.”
In the UK, the Labour leader, Jeremy Corbyn, has also called for a shake-up on boardroom pay and financial regulation to help address inequality and the “profoundly unbalanced economy”.
“It could not be clearer, business as usual is not working,” Corbyn said last year. “And when the rules of the game are not working for the overwhelming majority, the rules of the game need to change.”
Albert Bourla, chief executive of pharmaceutical company Pfizer, said he was proud to be among the signatories to “commit to lead their companies for the benefit of all stakeholders”. Bourla, who recently took over as CEO, is in line to collect total pay of $16.2m.
Several of the world’s richest and most powerful business people have recently warned that capitalism is failing. The hedge fund billionaire Ray Dalio said income inequality poses an “existential threat” to the US as it could lead to conflict, populism and “revolution of one sort or another”. “I believe that all good things taken to an extreme can be self-destructive and that everything must evolve or die. This is now true for capitalism,” he said in a long post on LinkedIn.
The former Starbucks chief executive Howard Schultz said the US faces a “crisis of capitalism” and has called for higher taxes on the wealthy.
In his annual letter to shareholders this year, Dimon, said : “Forty per cent of American workers earn less than $15 an hour, and about 5% of full-time American workers earn the minimum wage or less, which is certainly not a living wage.”
Carys Roberts, chief economist at the Institute for Public Policy Research (IPPR) thinktank, said: “Shareholder primacy is a worn-out theory that does not serve the long-term interests of firms, the economy, and the people an economy should work for.
“This is an important intervention from US business leaders in recognition of the failure of shareholder primacy: but the real test will be in deeds not words.”
She added: “It’s notable that this intervention follows political debate about the state of modern capitalism On both sides of the Atlantic, business leaders are waking up to the fact that the public won’t stand for business as usual.
The BRT’s new statement of purpose reads: “Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. 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.”
The bosses of eight of BRT’s member companies did not sign up to the new principles. The companies that declined are Alcoa, Blackstone, GE, Kaiser Permanente, NextEra, Parker Hannifin and State Farm.
The five new principles at a glance:
- Delivering value to our customers
- Investing in our employees. This starts with compensating them fairly. We foster diversity and inclusion, dignity and respect
- Dealing fairly and ethically with our suppliers
- Protecting the environment by embracing sustainable practices
- Generating long-term value for shareholders