The Corporate "Trolley" Problem

I'm amused by some of the reactions to a front page news story from the corporate world, the announcement a couple days ago by the Business Roundtable (signed by 200 CEOs) to the effect that it was amending its Principles of Corporate Governance to eliminate the statement that the "primary purpose" of a corporation was to serve its shareholders.  The CEOs want to reconcile the statement of principles to what they feel they actually do - namely, balance the interests of a number of corporate stakeholders, including customers, employees, suppliers, and communities.

This has stirred up some strong feeling, from Steve Bainbridge (aghast), the Council of Institutional Investors (also aghast), the Wall Street Journal (it's Elizabeth Warren's fault), and Andrew Ross Sorkin in the New York Times (it's about time).

I've spent a lot of time at the corporate C-level, and my amusement stems from the reality that any statement of principle like this one, like most mission statements, is so broad as to be meaningless when it comes down to the vast majority of real world decisions.  To fight about it, you need a zero-sum hypothetical, like the one Steve is marketing, posing the corporate equivalent of the decision to pull the lever and let either one person die or six people die from the onrushing trolley.  

Those are nice academic problems to ponder in an ethics class or in Corporation Law 101, but the reality is that the zero-sum choice between the shareholders and some other constituency rarely presents itself as in the hypothetical, just as people are rarely asked to choose between diverting the trolley or not.

To propose a metaphor here, a business that creates value is a goose.  If it's a really big capital intensive business, chances are it needed a lot of capital, and investors don't invest without the prospect of a competitive return - i.e. a piece of the goose.  But everybody wants a piece of the goose.  Customers want lower prices, and if the business has a unique value proposition, they won't get them.  Employees want higher wages.  Communities want taxes and support of local institutions.  Suppliers want higher prices.  Managing the business is the process of making the goose as big as you can so that there's something worth fighting over.

And here's the reality: management can rationalize almost any decision to favor any stakeholder in terms of the long-term return to the shareholders.  Nobody (except maybe old Chainsaw Al Dunlap, and he was disgraced) operates in the Bainbridge Hypothetical.  "Let's see here.  The Topeka Art Museum would like a $100,000 corporate contribution, but if we do that we can't use the cash to buy back shares or issue a dividend."

No, management looks at the dashboard with all dials measuring the value going out to customers, employees, communities, suppliers, and shareholders, and adjusts them. For example, we have that request from the museum. To return value to the shareholders, we need good employees.  Hence we might conclude, "It's hard to recruit to Topeka.  It will help if we have first-rate cultural institutions. To whom do we make out the check?"

I agree that the Business Roundtable release was good politics.  But it didn't change anything, except to lay bare the meaninglessness of principles like "primarily serving the shareholders." Anybody who has ever drafted an organizational mission statement knows that dynamic.  By the time you get past the short term tactics, long term strategies, and multiple goals of any dynamic organization, you end with pap like:  "XYZ Corporation will provide stellar returns to investors by focusing on innovative products, incomparable service to customers, and employees who are vested in the success of the organization."  Right.  WTF does that mean?

Since the original Business Roundtable governance principle was close to meaningless anyway (outside of the thought experiments that are the law professor's stock in trade), and this new statement doesn't change what was happening in the board room or the management suite, the CEOs who signed it really did offer up the sleeves from their collective vests.