Has our first (and really only) answer to the question, “What is a corporation’s purpose?” been wrong for the last, oh, 40 or 50 years? The answer, pace Milton Friedman [see note at end], has of course been “shareholder value!” And now it’s being assailed from all sides, most notably in last week’s announcement by The Business Roundtable renouncing the notion that “corporations exist principally to serve their shareholders” and replacing it with “a fundamental commitment to all of our stakeholders,” including (closely paraphrased):
- delivering value to our customers
- investing in our employees
- dealing fairly and ethically with our suppliers
- supporting the communities in which we work, and only last
- generating long-term value for shareholders.
As they put it, “Each of our stakeholders is essential. We commit to deliver value to all of them.”
This made the front pages of The New York Times, The Wall Street Journal, The Financial Times, and more. Andrew Ross Sorkin devoted an installment of his marquee Dealbook column to the announcement, and astutely characterized it as a return to the 1930’s Berle & Means concept of businesses’ being run for all stakeholders–unions, pensioners, community non-profits and charities, and R&D (The Modern Corporation and Private Property). It may have a quaint whiff, or more, of paternalism, but it delivered decade upon decade of overall economic growth and steadily rising median household income and real worker hourly pay and benefits.
Less widely noted, but for all purposes simultaneous with the Business Roundtable’s announcement, was publication of retired Simpson Thacher corporate partner James Gamble’s essay, “The most important problem in the world,” characterizing the fiduciary obligation of management and boards of corporations to maximize the firm’s economic value as a “legal[] obligation to act like sociopaths.” Gamble, writing just before the Roundtable announcement and presumably resigned to corporate law remaining as it is, suggested that while the “maximize rule [stays] in place,” companies also adopt a “binding set of ethical rules” laying our their obligations to employees, their communities, customers, the environment, and their “effects on future generations,” which shareholders could sue to enforce.
We can wonder, as Sorkin explicitly does, whether the business leaders are being “sincere” and whether companies “will be held accountable–and by whom, [but this may signal] the start of a new era.” Yet corporate leaders including Larry Fink, chairman of BlackRock, Howard Schultz of Starbucks, and even Prof. Klaus Schwab (Davos founder) have been talking about a broader array of “stakeholders” being front and center, not the almighty stock price, for years. [In the case of Schwab, the “Davis Manifesto of 1973” reads in part: “The purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonize the different interests of the stakeholders.”]
So our question today is: To what extent does or should this brewing shift in mindset and focus extend to law firms?
Let me anticipate the first objection, so you in the back there can lower your hand: If we don’t put profits per partner first, talent will become restless and eventually leave, representing (potentially, at least, but it doesn’t even bear thinking about) the beginning of the end.
Well, as lawyers like to say, “That depends.” Of course compensation matters. But.
Other aspects of the overall firm/partner relationship package more, including:
- Personal recognition;
- Feeling part of a winning, high-performing team;
- Knowing that what you’re doing is contributing to the firm’s success;
- Believing in the firm’s vision, culture, and raison d’etre;
- And being intellectually and professionally challenged.
No question there are mercenaries abroad in the profession, but (a) do you really want them in your firm; and (b) are you willing to twist the primary purpose of the firm into raising PPP in order to cater to them? Whatever your answers to (a) and (b), they represent a distinct, and unlovely, minority. We often advise clients not to twist their management structures and principles to respond to the outliers, and this would be an occasion for invoking that exact counsel.
Second, what is your firm “for,” again?
When you think about how to respond to that question–which you should take as probing, and to which you should respond without cynicism–where would you place your firm on spectra like these:
- carnivorous vs. collaborative
- short-term vs. long-term
- consumption vs. investment
- over-rewarding juniors or over-rewarding seniors
And do you ever use the word “stewardship” in your management and leadership discussions?
Finally (and one detects a strong aroma of this motivating the Business Roundtable’s arguably belated move), permit me to note the obvious: There’s a widespread feeling of disenchantment with capitalism out there. This is new in my lifetime, and one can argue, as some cultural commentators have, that if you’re 20- or 30-something, capitalism has scarcely delivered a stellar or particularly convincing performance during your lifetime. To the extent shareholder-value-maximization supremacy has had anything to do with that, we’re overdue for a rethink.
On a more human and simpler level, by what principles do you live your own life? I’d wager you care about family and friends, personal reputation for probity and integrity, being seen as (or better yet simply being) charitable, “giving back” on general principles, actively participating in and contributing to your community, treating merchants you deal with fairly and generously, donating to institutions and causes you hold in high esteem, and not trying to squeeze the last nickel out of every interaction. You operate, in short, in a web of relationships and not one long staccato burst of transactions.
To me that sounds like the foundations for a life being well lived. And which deserves a long, prosperous, and healthy run.
*Note re Milton Friedman’s intellectual championing of shareholder value:
The opening, or at least most noteworthy, salvo was surely his 1970 publication of The Social Responsibility of Business is to Increase its Profits, in The New York Times. Exercising his characteristic derision, he wrote:
“What does it mean to say that ‘business’ has responsibilities? 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.”
As preacher of the “profits as purpose” gospel, no one else did half as much to advance the intellectual bona fides of shareholder value maximization as Friedman.
It’s worth noting that of the author’s proffered six reasons for law firms to exist, exactly zero had anything to do with helping people or making the world a better, more just place. Classic!
Color me rueful (or perplexed), but when a column is devoted to the primacy of serving clients, employees, suppliers, the community, exercising true stewardship towards the long run–and providing lawyers and professional staff career satisfaction beyond the almighty $$–I would have guessed it has to do with “helping people” and taking a stab at being more fair, if not perfectly “just.”
Perhaps we all, your faithful author included, need to try harder at this?
In any event, Jay, thanks for contributing to the dialogue! I mean that sincerely.
If you haven’t already, Bruce, you should have a talk with Pinsent Masons on the work they have done in this area
Great and thanks! I know just the fellow to talk to there.
Leaving aside the legitimate skepticism of a few high-profile outlets (like Sorkin), this Roundtable list does look like the same idea in a different package. Doing the first four things in the list (all concrete actions) should lead to generation of long-term shareholder value, no? Like profits at law firms, the generation of shareholder value is always a product of a corporation’s course of actions, not an action in and of itself.
In contrast, your first five points are little more nuanced. And I would also throw in things like how well do you like your colleagues and how much of a voice do you really have? There are some non-monetary things there that actually do keep some people at firms even when higher comp is available “across the street” as it were. An interesting question is how long are the respective shelf lives of things like friendships, say in management, personal recognition, intellectual rigor of the practice and the attraction to vision/culture? In other words, how strong is that glue? My instinct (based on some limited anecdotal evidence) is that for true high performers on the escalator going up in their prime earning years, those things ultimately don’t outweigh comp. Not at the highest levels of the profession anyway. Am I being too cynical here?
An alternative reading of the Roundtable’s statement is that faced with political opposition to the enrichment of executives and stockholders, these masters of the universe are offering superficially attractive slogans that can be used to further entrench executives. If the corporation is ostensibly obligated to balance the interests of multiple stakeholders, few of which are organized, management effectively can justify almost anything (other than outright looting) by claiming it’s responding to some combination of stakeholder interests.
Apply this to the law firm milieu, and you’ll get an even more entrenched cabal of top rainmakers and aspiring statesmen/women of the profession running the firm.