Maximising of shareholder value no longer a firm’s main goal

Maximising of shareholder value no longer a firm’s main goal
Mukesh Ambani, chairman of Reliance Industries, with wife Neeta Ambani and mother Kokilaben Ambani, left, at the Reliance AGM in Mumbai, where he made a dramatic speech about the direction of the business. Picture: Rajanish Kakade/AP

The US non-profit the Business Roundtable has stated that the needs of customers, employees, and society matter as much as shareholders, writes Michael Spence

This month, the Business Roundtable, a group comprising the CEOs of America’s largest and most powerful corporations, abandoned the view that maximising shareholder value should be a company’s primary objective.

Shareholders will no longer take precedence over other stakeholders, such as customers, employees, suppliers, and communities.

The Business Roundtable cited the need to pay fair wages, to provide more benefits, and to train employees who are navigating a rapidly changing economy.

Corporate governance has been moving in this direction for some time, aware that private-sector engagement will be necessary to address society’s most difficult challenges. Customers, employees, and investors have increasingly voiced their concerns about social issues. This emerging consensus is crucial for reconciling the multi-stakeholder model with corporate investors’ longer-term financial interests.

A similar evolution has occurred in asset-management. The share of investors embracing “environmental, social, and governance” (ESG) criteria has been growing, with many top asset-management firms leading the way.

Will shareholders with a purely financial interest still have the upper hand? Much will depend on their numbers, the assets they control, and their time horizons. But, clearly, support from long-term investors, such as pension funds and others managing major pools of assets, has tipped the balance toward ESG.

At any rate, the point of the multi-stakeholder model is not to render investors and corporate boards passive or disengaged. We are not returning to the era of ‘managerial capitalism,’ the corporate-governance model that preceded the activist investor and the principle of shareholder primacy.

But nor should one interpret the Business Roundtable’s announcement as merely another small, positive step in a longer trend. It is much more than that.

For starters, the group’s statement, this month, is a signal of American CEOs’ intention to change not just corporate governance, but also the role of business enterprises in society. It establishes new boundaries for the pursuit of returns on capital — boundaries meant to protect constituencies (employees, poorly informed customers, suppliers, future generations) that often lack the market power to protect themselves.

Most important, the move comes at a time when wealth inequality is rising, and when the ownership of financial assets is becoming increasingly concentrated.

But the shift toward socially conscious corporate governance opens the door for new, more creative business models. Already, some of the world’s most impressive companies (in terms of returns to investors) have built business models around solving economic and social challenges.

Consider the Chinese e-commerce giant, Alibaba. Founded with the goal of expanding market access for small- and medium-size companies, it and its financial arm, Ant Financial, remain committed to that mission. A growing body of evidence in China, and in other countries, suggests that vibrant e-commerce and fintech ecosystems, of the type created by Alibaba, can make substantial contributions to inclusive growth.

Earlier this month, before the Business Roundtable announcement, Indian conglomerate Reliance Industries Limited held its annual meeting in Mumbai, where chairman Mukesh Ambani delivered a striking speech. After pointing out that value creation for the company now depends on partnerships with Indian firms, as well as multinationals like Microsoft (for its cloud-computing offerings), Ambani identified Reliance’s stakeholders as the “Indian economy, Indian people, our customers, employees, and shareowners”. There could be no clearer statement of the multi-stakeholder model.

A key component of Reliance’s strategy is its affiliate, Jio, which started selling affordable smartphones in 2016, with the goal of connecting everyone in India. According to Ambani, Jio has 340m subscribers, and is adding ten million each month. In other words, a company founded with a social mission, less than three years ago, is already the largest smartphone operator in India, and the second-largest, single-country operator in the world.

Moreover, with the use of India’s biometric-identification programme (Aadhaar), Jio is contributing to digital connectivity for a wide range of Indians, including poorer people who previously did not have bank accounts or access to credit.

And as it continues to grow, it will develop a host of other valuable services for small businesses and millions of entrepreneurs, reinforcing the positive impact it is already having on inclusive growth.

The Business Roundtable’s declaration represents a major step forward for the multi-stakeholder model. The example set by industry leaders matters.

And it is no accident that some of today’s most successful global companies were explicitly conceived, and built, on the basis of multi-stakeholder values.

But a word of caution. Although the transition to a multi-stakeholder model is necessary to progress toward other social goals, it is not sufficient. Corporations alone cannot solve our most pressing global problems.

They will need the support of governments, which have a responsibility to create the space, and provide the tools, for multi-stakeholder businesses to maximise their positive social impact.

- Michael Spence, a Nobel laureate in economics, is professor of economics at New York University’s Stern School of Business and senior fellow at the Hoover Institution.

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