The Daily - What American C.E.O.s Are Worried About

Episode Date: August 21, 2019

For decades, American corporations have prized profits for shareholders above all else. Now, the country’s most powerful chief executives say it’s time to do things differently. What’s driving that change? Guest: Andrew Ross Sorkin, a financial columnist for The New York Times. For more information on today’s episode, visit nytimes.com/thedaily. Background reading: Almost 200 chief executives, including the leaders of Apple, Pepsi and Walmart, argued that companies must invest in employees, protect the environment and deliver value to customers.Shareholder democracy seemed like a good idea at the time, but it hasn’t worked, Andrew Ross Sorkin writes in his latest column.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today. For five decades, American corporations have prized profits for shareholders above all else. Now, America's most powerful chief executives say it's time to do things differently. Andrew Ross Sorkin, on what's driving that change.

It's Wednesday, August 21st. Wednesday, August 21st. Andrew, tell me what happened in your world on Monday morning. On Monday morning, 5 a.m. in the morning, the Business Roundtable, which is probably the most powerful and influential lobbying organization for the nation's biggest companies, think Apple, think Amazon, Walmart, JP Morgan, all of them, came out and said that shareholders were going to be just one piece of a larger puzzle. From the business roundtable, 181 of the top CEOs in the country have agreed now that maximizing profits in all situations cannot necessarily be the main goal of corporations. Statements signed by almost 200 CEOs, including J.P. Morgan's Jamie Dimon, says companies should focus on all stakeholders.

For as long as I covered the world of business, every CEO in America said they had a fiduciary duty to shareholders. Everything was in the name of profits. So after decades of explicitly saying that shareholders were the highest end of a corporation, they point out the corporation's duties to their customers, to their suppliers, to their communities, and then they get to their shareholders. A massive change. And so the idea that any of these other stakeholders are even being acknowledged as part of the equation

is a major shift. as part of the equation is a major shift. But in many ways, it's a return to an earlier era, an era almost a century ago, when these other stakeholders mattered in a way that they haven't for so many years. And what is that era? If you go back to the 1930s, possibly even earlier, the biggest corporations in America

genuinely thought about the full plethora of constituents. Employees mattered. Customers mattered. Suppliers mattered. The profits mattered. But there was clearly a larger social compact that had been reached between companies and the rest of society. And what did that look like? And what's an example of a company that reflected that?

You could even go back to the early 1900s and look at Henry Ford and the Ford company and his decision to raise the average pay from $2.25 to $5. Back in 1914, Ford had revolutionized assembly line production. And to keep his workers from quitting, he announced he would raise their pay to a generous $5 a day. Twice what they earned before and twice what they could earn at any other auto company. He believed that it was important for his employees not only to have a fair wage, but to have a wage that might give them an opportunity to actually buy the car that he was selling. It was a simple American bargain. Security and high wages in exchange for hard work. employees that gave huge amounts of corporate charity to their communities that became

connected in a way that made the companies intertwined with the community that they lived in. And what exactly is the motivation for these companies to conduct themselves in this way, as kind of community-minded corporations investing in their employees and in their communities. It was ultimately good for business. It was the idea that if you could attract great employees and you could keep those employees, often for life, that you would have a better product, that you would have a better company, and that they were all inextricably tied. and that they were all inextricably tied. The backdrop of all of this is a post-World War II world in which the United States, in truth, is a monopoly power.

Factories were churning out products to satisfy the growing consumer appetite in America and to meet the needs of a post-war Europe. The defense industry kept military supplies flowing in reaction to the Cold War. And the nation was building straight up in the cities and far out into the country. America's economy was the biggest in the world. There really is no international competition. We are it. And that meant that there was a limited workforce. And that meant that you had to be good to your people. Because they could go shop around for a different workforce. And that meant that you had to be good to your people. Because they could go shop around for a different job.

Exactly. Among the world of academics, this period was really defined as managerialism. The idea that you were managing the company for the people that were in it. And when does that start to change? In the 1970s, the idea of managerialism went from being a good thing to being a very bad thing. Why? Because investors, the shareholders, started to raise their hand and say, ah, over here, we're actually the people who own you. And we think that you're mismanaging the company,

that you're spending too much money on your own people, that you're fat and happy. There was a view that managerialism had been perverted and abused. And at the same time, you had the rise of Milton Friedman. First of all, tell me, is there some society you know that doesn't run on greed? You think Russia doesn't run on greed? You think Russia doesn't run on greed? You think China doesn't run on greed? What is greed? Of course, none of us are greedy. It's only the other fellow who's greedy.

The world runs on individuals pursuing their separate interests. He's an economist at the University of Chicago who really becomes one of the most popular figures of this time, not just in the world of corporate America, but throughout the country. And it's in large part because he has a provocative view about the way we do business. And he pens this famous piece actually in the New York Times Magazine with the headline, the social responsibility of business

is to increase its profits. Let me read you what he wrote. He wrote, what does it mean to say that business has responsibilities? He almost asked it rhetorically. And then he writes, businessmen who talk this way are unwitting puppets of the

intellectual forces that have been undermining the basis of a free society these past decades. It's effectively a rebuke of the way business has been managed. It's a rebuke of managerialism. And what does Friedman believe will happen if corporations don't see social responsibility as part of their job, if they just focus on what he says they should, which is profits and shareholders? He fundamentally believes that if you focus on profits, everything else will come with. That a company that is not as profitable as it humanly can be, will ultimately lose out to other companies that are. And you need a strong company to employ people who will pay taxes to the community, who will give charitable giving to others down the line.

So all those functions of the traditional corporation that came before, they get served through a healthy company that profitably serves its shareholders. I don't think they called a trickle down then, but they would now. What are you going to do for the people who are out of work when the public at large

decides it's not going to go in big cars, it's going to go in little cars? I don't want to do a thing. I want to let the private market work. The private market system is a system of profit and loss. And the loss part is just as essential as the profit part. It is a disgrace. He was a free marketeer. This was all part of a larger free market theory that profits above everything else would ultimately win the day and make the country stronger. So you have this confluence of these two

ideas, Milton Friedman on one side and shareholders that are starting to look at companies and saying, maybe they're a little too fat and happy. And that really brings about a new era in corporate America where the shareholder becomes the top priority. We'll be right back. Andrew, once the idea of the shareholder takes hold in the U.S., how does that actually play out? How does corporate behavior change? It manifests itself first in the form of what became known as corporate raiders. Investors who basically started knocking on the door of companies saying, you need to make more profits, and if you don't, we're going to take you over. And what period is this, roughly?

This is the 1980s. It takes a certain breed of stock market investor, the kind with lots of money and lots of guts, to thrive in queasy times like these. This is greed is good. This is the midst of this sort of rush around Wall Street, around capitalism. Carl Icahn is one of that breed. He has a knack for turning someone else's loss

into profit for himself. And you had some very early investors like Carl Icahn. I was always good at making money. I always was good. Go to some of the biggest companies in the world, the TWAs of the world, one of the biggest airlines in the country. Go to companies like U.S. Steel and say,

I'm going to buy you. Got some breaking news for you. This time, Carl Icahn is at it again. He has offered to buy commercial metals for $15 a share. He already owns about 10%. I'm going to take you over. I'm going to throw your CEO out.

I'm going to lay off scores of employees. I'm going to undo all the benefit programs. And I'm going to lay off scores of employees. I'm going to undo all the benefit programs. And I'm going to manage this company in a much leaner way. That was the euphemism, leaner. Because leaner was, in their minds, stronger. Leaner was more profitable. So these corporate raiders were emboldened by this new guiding philosophy that it was good and right to cut the fat, cut the excess, and increase profits. And that that was actually the socially responsible thing to do, no matter how ruthless it might have seemed.

Absolutely. And Milton Friedman had almost turned it into a moral argument. So that these investors had a moral underpinning for what they were doing. And how does that era of corporate raids affect the larger American business world? These CEOs start to really internalize what they're seeing in the headlines with these corporate raiders. They don't want to be the next target of these guys. what they're seeing in the headlines with these corporators. They don't want to be the next target of these guys.

All of a sudden, CEOs that historically might have been a little bit looser with the purse say to themselves, you know what? We should maybe cut back on some of these employees. We don't need all of these people. We need higher profits. Maybe instead of investing in research and development, we should start buying back our stock or dividending out money to our shareholders. Maybe we should rethink our defined pension contributions

and move towards 401k plans, which will cost us less. Maybe that charitable budget that we had for the community, maybe we should scale that back. Over the next 20 and 30 years, you saw a massive restructuring of corporate America that put the shareholder first, the shareholder over the stakeholder. You saw scores of layoffs. Millions of people were laid off over this period. You saw charitable contributions by companies fall in half during this period. You saw pension funds and retirement funds diminish materially. All of this leads to a mindset in the corner office among the CEO world of being very short-term oriented.

They all want to hit their quarterly numbers. Their bonuses become tied to the quarterly numbers. Everything is now around the stock price. How high is the stock price? Everybody's getting compensated in stock. And in some ways, that's supposed to incentivize managers to do the right thing, to align their interests with the shareholders. But at the same time, it often pitted them against their own colleagues. Andrew, is there a sense that this Miltonian shareholder-first system, that it works in this period? You know, some people loved Milton Friedman. Some people thought he was absolutely wrong.

But within the world of corporate America, it became a mantra. This had permeated the brains of the CEO community so much so that by 1997, the Business Roundtable actually changed their mission statement then and said, quote, the paramount duty of management and of boards of directors is to the corporation's stockholders. So, Andrew, how do we get to this week, this statement from this group of America's most

powerful CEOs rejecting this philosophy that you've just described as basically accepted wisdom in American business that shareholders should be first? Why would they suddenly reject that? I'd point back 10 years ago to the financial crisis. For Wall Street, it was another case of whiplash. The markets haven't been this volatile in almost 80 years. To a moment where so much of this

crystallized in a national conversation. The market is not functioning properly. There has been a widespread loss of confidence. Around the role of businesses, around the role of banks, which had taken on these short-term interests at the expense of the entire country, where questions about capitalism were raised.

All across the country, plants are closing and employees are being laid off. For every job opening, there are six people looking to fill it. And when we were living at a time of unemployment of 10 percent, it really changed the narrative about what a company does. And people felt it. They felt it in their bones because there were so many layoffs. We are the 99%. We are the 99%.

We are the 99%. And it became a political story. The ascendancy of Elizabeth Warren. People feel like the system is rigged against them. And here's the painful part. They're right. The ascendancy of Bernie Sanders. Yeah, corporate greed is running this country and corporate greed is destroying the dreams and aspirations of millions of American people. And so much of the country started to ask real questions. And I think that the CEO community has had a realization that if they don't change their ways,

if they don't at least nod to these issues, that capitalism itself, that the system itself that they've been living in, will change. That the political forces in this country will change them for them. So this evolution, this statement, is about shifting public opinion,

not, again, altruism. These CEOs are reading the tea leaves. They're looking at the polls and the politics, and that is telling them that it's good business to change the way that they're doing business. This is straight survival instinct. They're doing this because they think it's good for their business. Okay, so let's talk about this statement and the people who put it out.

I wonder what would actually change about the behavior of corporations if they put into practice what they're saying here, if they actually mean it. documents job change if he puts into practice this change in approach that this document outlines where shareholders are just one of a dozen people he now thinks of his corporation as serving. I'm going to give you my hopefully skeptical but not cynical view. I think there is some element of progress here because it changes the conversation. It provides for an allowance, if you will, for a board of directors or CEO to say, you know what, let's raise the minimum wage. Let's actually spend the money on this plant. Let's increase our research and development budget. You know what, in this community, maybe we should give a little bit more and increase our charitable giving budget.

You know what? We're not going to nail our profit number next quarter because we're going to invest in these other things. And it's okay. And that's okay. Because before there wouldn't have been an allowance for that. There might not have been an allowance for that. In certain boardrooms in America, there was no allowance for not hitting your profit number. Now there may be.

That would be the positive view of this. That's not all that optimistic. Well, the negative view of this is that they're words on a page and that's all they are. Politicians will look at this, maybe give them credit for it, maybe not. And what does it cost them? Their signature on a piece of paper. They got a front page story in the New York Times out of it. They get a daily podcast. There's safety in numbers here. That's probably the best that can be said about this. I don't hear you saying that you think this is representing a fundamental change in how corporations see themselves or function. I still think that ultimately, if these companies are not profitable, that these executives are going to lose their jobs. Full stop.

I still think the investment community is very short term. I think we are over the long term on a journey where social responsibility is going to be a central piece, at least a piece of this larger puzzle. I think it's almost impossible that it's not going to be a central piece, at least a piece of this larger puzzle. I think it's almost impossible that it's not going to be. And I think you're seeing it in the voices of politicians, in the voices of the public, in the voices of regulators. And as a function of that, companies are listening. But only because social responsibility is also good for business and good for profits and good for shareholders.

At the end of the day, CEOs are only going to do things that are ultimately profitable. And in this moment, thinking about all of these other stakeholders may be profitable. Ultimately, if you're looking for a big social change, I don't think you're going to look to corporate leaders for that. I don't think that's where it's going to come from. Companies ultimately have to be profitable entities.

If they're not profitable, they don't exist and they can't serve any of these other purposes, which is to some degree what Milton Friedman was trying to say. Andrew, thank you very much. Thank you very much. We'll be right back. Here's what else you need to know today. On Tuesday, Italian Prime Minister Giuseppe Conte resigned after his government, a 14-month-old coalition of populists and nationalists who are skeptical of the European Union, collapsed. His resignation was triggered by one of Conte's own ministers,

Matteo Salvini, an increasingly popular right-wing figure who called for a vote of no confidence in Conte's government and who has now plunged the country into political uncertainty. And… Yes, any questions? Mr. President, what sort of contingency steps or plans is the White House thinking about to stave off any kind of economic slowdown?

What are you looking at? We're looking at various tax reductions, but I'm looking at that all the time anyway. President Trump said he's weighing a set of tax cuts to stimulate the U.S. economy amid growing fears it may be entering a recession. Payroll tax is something that we think about, and a lot of people would like to see that, and that very much affects the workers of our country. Trump focused on the possibility of cutting the country's payroll taxes, the percentage of a paycheck

withheld by employers to comply with tax laws, which would immediately put money into the hands of consumers. The Times reports that the president is anxious about the possibility of a recession occurring in the middle of his presidential campaign

and is eager to find ways to stave off a downturn. That's it for The Daily. I'm Michael Bavaro. See you tomorrow.