Does the CEO Pledge Change Everything? Perception Versus Reality!
Does the CEO Pledge Change Everything? Perception Versus Reality!?
By: Lloyd Bryan Molander. J.D, M.A.
Adjunct Professor of Business and Law
Published Monday, May 4, 2020, 8 AM
It goes without saying that the topmost priority of a CEO and the Board of Directors of a corporation is to increase shareholder value, correct? What does Corporate Social responsibility have to do with profits? It is all in the actions, not words.
This long-standing and unquestioned practice professed by Milton Friedman in 1970 is now being challenged. Recently, 180 of the most powerful CEOs under the Business Roundtable have been aligned with the “Coalition” and their "Action for Diversity & Inclusion” known as?the CEO Pledge. Within this Pledge, they are spouting that the purpose of a corporation and its leadership is expanded to be committed to working for the benefit of all stakeholders, including customers, employees, suppliers, and the communities in which they operate.
A recent New York Times article by the author David Gelles states that “the Pledge’s motivation was breaking?with decades of long-held corporate orthodoxy…” This seems to be a huge shift in the established doctrine and CEO practices. To date, the doctrine has been best defined by the revered economist of the University of Chicago, Milton Friedman, who famously wrote?in a 1970 New York Times story that “the social responsibility of business is to increase its profits.” He says in the pertinent part,“…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, which is to say, engages in open and free competition without deception or fraud (emphasis added).” Gelles goes on to say of the Pledge,?“It was an explicit rebuke of the notion that the role of the corporation is to maximize profits at all costs — the philosophy that has held sway on Wall Street and in the boardroom for 50 years”.?
So, this is a lofty change, right? Does it overturn Freidman’s assertion? Perhaps these CEOs are not as greedy as we thought or, is it an effective stunt by public relations, and does the subsequent part of Freidman’s quote still stand? He did say “…it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (emphasis added). But possibly, CEOs have finally realized that the two corporate philosophies aren’t mutually exclusive, rather they are intrinsically linked.
The reality is that we live in a free-market economy, where we can control our direct investments as opposed to those that cannot be controlled. Examples of what we’re unable to control include pension funds and Social Security contributions. We have control over the rest. We have the opportunity to analyze companies and decide if their corporate actions and practices help or hinder our investment(s).?
Adam Smith’s work cannot be ignored when looking at corporate duty. “Adam Smith (1723-1790) was a Scottish philosopher and economist who is best known as the author of An Inquiry into the Nature and Causes of the Wealth Of Nations (1776), one of the most influential books ever written”. My interpretation of Adam Smith’s thoughts in his book Wealth of Nations is that the “Invisible Hand” works, and in “free markets” with the exchange of goods and services, the “Invisible Hand” has, and will dictate our socially diverse order. Equilibrium exists because of it and, as a result, it will certainly guide more positive corporate actions without the need for heavy-handed, social-economic, or democratic socialism theories and practices. I believe that limited government intervention is more productive and ultimately accomplishes more, whilst allowing for maximum liberty, free markets and reductions in economic, sociological and psychological costs.??Changing company’s practices does not always have to come from the government.
Is the Pledge attempting the same proactive principles that are long-established? ???
Government regulations should be minimal; however, I agree some should exist, e.g. laws promoting civil and criminal rights violations, harmful cronyism and nepotistic practices utilizing our taxes.
We, as free-market consumers, can vote with our wallets and effectuate the majority of change without the government. We can choose to not invest in, or buy products and services from bad corporate actors. We drive sales and services. If we have a poor experience at a restaurant, we won't go there again, and we will inform others of our bad experience. With a few exceptions, the restaurant will have to change, or it will be in risk going out of business. In most cases, we have consumer choice. When we don’t, we are stuck with a legal monopolistic choice. The blame then falls on government practices for eliminating our choices. I know that this is overly simplistic, and some corporations are granted monopolies for good reason, e.g., extreme investment and infrastructure change that brings a service to a consumer in need, e.g. early railroads, power companies, cable companies (early days), etc. I don’t demonize them, and the practice was not perfect; however, I do demonize modern monopolies and crony capitalism, which is exactly what Freidman mentions in his statement, “…it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud (emphasis added)”. He also stated, “ You affect change with your spending.”
Friedman is not ignorant of social responsibility. His quote "There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits," ultimately embodies the responsibility to self and society at a large scale to practice what he professed.
Adam Smith’s views are still coveted business principals?
The following is taken directly from the Adam Smith Institute:?
“He realized that social harmony would emerge naturally as human beings struggled to find ways to live and work with each other. Freedom and self-interest need not produce chaos, but, as if guided by an ‘invisible hand,’ order and concord. And as people struck bargains with each other, the nation’s resources would be drawn automatically to the ends and purposes that people valued most highly, so, a prospering social order didn’t need to be controlled by kings and ministers. It would grow, organically, as a product of human nature. It would grow best in an open, competitive marketplace, with free exchange and without coercion. The Wealth of Nations was therefore not just a study of economics but a survey of human social psychology; about life, welfare, political institutions, the law and morality.”
Don’t Shoot the messenger?
In many ways, I am happy that it’s the CEO’s and not the government mandating this change of heart. I am happy with what they are trying to do. However, where I take issue with them is about “why”. It begs the question of the messages’ authentic honesty which I feel is aimed at lulling the public into a paradigm shift that is not exactly true.
Is doing good also good for business?
As an adjunct professor of business, I have identified and differentiated two principles for my students and how those two principles relate to profit:
1. Philanthropy
How can the sole dedication to being profitable and cause-related activities work together? I profess that CEOs can be “for-cause” and “for-profit” if that cause helps them in marketing to their consumers and leads them to increase the value of their company. Value has many meanings, so let’s define value as “increasing shareholder’s revenue in a meaningful timeframe for the shareholder.”?
Does “cause” have a place in business? If a CEO is only about “cause,” then they should probably be a philanthropist running a not-for-profit entity. Personally, as a shareholder in many companies, I do not necessarily want the companies I invest in to be charitable first and profitable second; especially if that will negatively impact my returns and the value of my investment. This perspective could be construed as outright rude and uncharitable. I would argue that both of those accusations are false. I can give to charities on my own and better direct my personal investment to more closely align with my philanthropic ideologies, specifically to my tax consequences. That said, if a company’s philanthropy, cause, culture, mission, kindness to employees, and customer-focused behaviors are pronounced in its kind-natured practices, and its practices will increase the value of that company in a timeframe that fits my investment strategy, then I view that as a win-win situation!
Being good does make economic sense?
Why treat people well? Beyond the right thing to do, there is fiscal merit in treating employees positively and making them feel like a top priority. I have worked with CEOs that insist a paycheck should be the only motivating factor to perform; however, contrary to that bad practice, being good has many favorable results.?Positive motivation and encouragement in many forms have been well documented to add value to a company. Unless mercury goes into permanent retrograde, there will always be a correlation between positive motivation, employee performance, and the resulting fiscal merits.?
Employee turnover, including retraining and onboarding, is expensive and time-consuming. It pays to increase an employee’s morale. Companies with a healthy work environment begin to be recognized as a brand in their own right (best places to work). A company’s reputation, longevity, and trajectory excel and are beneficial proven HR practices. Positive, well-defined, and consistent HR policies that start from the top (CEO) down and proliferate within the rank can ultimately increase the value of a company.?However, without a solid business plan and revenue growth, these practices are nothing but academic! Without revenues, the company’s value will decrease, and the investors will quickly exit the slide to nowhere. Profit matters in business.
Creating a positive work environment is not limited but to allowing and encouraging flex time, remote working options, issuing employees shares, a phenomenal medical plan, education and training, and generally sweetening their employment situation both financially and emotionally. Adding stability and consistency goes a long way in maximizing an employee’s longevity and loyalty.?Countless books and numerous studies back up these assertions. But this is what we call a commentary/opinion piece. Let it simmer for a while and we can open a dialogue at another time regarding the merits of research specific to my assertions. I would love to hear opinions and read your learned research too.
Back to the adage that the number one priority of a company is to increase shareholder value. Well, it still is!?Friedman’s perspective will never change in the world of for-profit companies. No matter how it’s spun or what pretty package or pledge it is wrapped up in, the underlying goal is to increase the value of a company. However, empirical evidence derived from a Fast Company poll suggests a negative public perception of most companies. The Fast Company”s Author, Ben Schiller, says “Americans are down on corporations. Almost two-thirds (62%) distrust the Fortune 500, and?nearly half (47%) say business behavior is headed in the wrong direction…”?The reality is that the public sees larger companies as vessels steered by deplorable CEO’s who look at profits over people and mankind. I understand the CEO’s logic, but it is more important than ever in the seemingly “transparent” exposé culture that we live in today to be perceived as fair and just, diverse and equal.?
?A NY Post business article entitled “Critics cast doubt on CEO pledge to downgrade shareholders,”?it calls-out the motivations behind this so-called weakness, making the point that it is purely public-facing posture on behalf of companies that feel that they need to get in front of negative corporate perceptions. More to the point, it is not changing any laws. There is no recourse or legal accountability tied to this grandstanding.
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The bottom line is, I don’t think much is going to change, Dick Bove, a Wall Street analyst, who covers banks, told the post, “One reason is that corporate boards don’t want to lose their jobs. And if a board diverts too much money from shareholders — say in the form of pay — they risk corporate raiders like Carl Icahn booting them from the board”. That is the harsh reality of corporate America!
Instead of “the Pledge” focusing on reducing the importance and priority of increasing shareholder value, all signatories of “The Pledge” could have just stated that their promise is to treat people better, increase fairness, cultivate employees, be more customer forward and kinder to the environment and vendors too. CEOs could have just had a promise to be kinder and not included the seeming attack on profits. However, I presume they collectively felt that it would not have curved the current perception that they are as greedy and evil as are their corporations.
This blown-up PR stunt fashioned by the CEOs, cloaked in the manner of a kind catharsis and public “Pledge,” is a bit transparent, at least to me and NY Post’s Dick Bove. I am all for compensating true and successful leaders. However, these highly paid CEO’s have a real PR problem. If the marketing message of the “Coalition” can be united to overcome the greedy perception and then be accepted by the public and government regulators, everyone may back off on increased regulations in efforts to make them really play fair. But, let’s get back to me. I am an Adam Smith loving, free-market kind of guy. For me, the parsed words, coalitions, and pledges mean very little, which brings us back to Perception vs. Reality.??
What is the perception of versus reality here???
We, the shareholders, have a choice in what we invest in. We, as business owners, have a choice regarding how we act, and if those actions increase profits, we all like making a return on our investments, personally and in business, and we can choose to direct our funds towards causes and companies that do not waste our money. We must be aware and consciously choose to invest in companies that use our money in positive ways while increasing our shareholder value. Let’s just be sure that we all see the coalition for what it is, which is a bright and shiny PR stunt to make the public believe that they care – they really care this time - and they’ll prove it (we’ll see).?This, folks, is just marketing. Congratulations on the “marketing pledge.”?
In the meantime, CEOs, please ethically grow our companies and our returns, and please cultivate a positive corporate culture. Government, please use as little regulation and mandates as possible and allow the free markets to dictate winners and losers in the corporate world. We will be watching the numbers and looking for great investments. One thing we can count on is that it’s not all altruism behind the narrative. It is still all about the fundamentals of business.
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Assistant Professor, Montclair State University, Adjunct at Southern New Hampshire University, Former Adjunct Professor of Business and Law, William Patterson University, and Sierra Nevada College (University of Reno at Tahoe)
UPDATE: Since this article was written, Dr. Molander has joined the Faculty of Montclair State University as an Assistant Professor in Management
Founder and CEO Tenacity Entertainment, LLC?
Acknowledgments :
Kevin Dugan, for your article and inspiration
Twitter @KevinTDugan
Adam Smith Institute
David Gelles of the New York Times and his great Corner-Office
The New York Times
Mark Perry, Scholar of The American Enterprise Institute
Lee Sammartino, Founder of Ikonic Tonic, https://ikonictonic.com
Photo Credit: Mathilda Khoo - instagram.com/mcthilda
updated Aug 22, 2022 (minor edit)
updated September 11, 2024 (minor edit on Dr. Molander's Bio)