Was Milton Friedman Right about Shareholder Capitalism?

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on an American Enterprise Institute roundtable conversation between Mr. Lipton; R. Glenn Hubbard, Dean Emeritus and Russell L. Carson Professor of Economics and Finance at Columbia Business School and visiting scholar at the American Enterprise Institute; and Clifford Asness, founder and chief investment officer of AQR Capital Management. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

Michael Strain: Good afternoon, I’m Michael Strain, Director of Economic Policy Studies at the American Enterprise Institute, and I want to start by thanking you all for joining this discussion of shareholder capitalism. Fifty years ago last month, economist and Nobel laureate Milton Friedman published his famous essay in The New York Times Magazine arguing that the social responsibility of businesses is to increase their own profits. This view has been controversial ever since. While campaigning back in July, Joe Biden said that the idea that a corporation’s sole or primary responsibility is to its shareholders is not only wrong, but “an absolute farce.”

Adding fuel to the debate, the U.S. Business Roundtable appears to have retreated from its earlier shareholder capitalism stance by issuing a statement about a year ago that embraced the idea that corporations and their managements have a responsibility to a broader group of stakeholders, including customers, suppliers, and workers. And that’s the question that we want our distinguished panel to take up in the next 45 minutes or so: Should executives manage their companies for the benefit of all stakeholders or should they simply focus on maximizing shareholder value? But before jumping into our subject, let me tell you a little about each of our three panelists:

Cliff Asness is the founder and chief investment officer of AQR Capital Management. Besides running a highly successful investment company, Cliff has long been an active researcher who’s published peer-reviewed articles on a variety of financial topics in many publications. He is also a trustee of the American Enterprise Institute.

Marty Lipton is a founding partner of the law firm Wachtell, Lipton, Rosen & Katz, which specializes in advising major corporations on mergers and acquisitions and matters affecting corporate policy and strategy. Widely credited with having invented the poison pill as a way of protecting corporations from market shortsightedness, Marty has been a major public intellectual on the social role of corporations in serving not only their shareholders, but other corporate constituencies.

Glenn Hubbard is Dean Emeritus and Russell L. Carson Professor of Economics and Finance at Columbia Business School. Glenn was chairman of the Council of Economic Advisers under President George W. Bush and is at present a visiting scholar at AEI.

Private Companies, Public Policy, and the Problem of “Negative Externalities”

Strain: Glenn, can you set the stage for this conversation and share some of your thoughts on why you think Milton Friedman was basically right, but also how you might modify his proposition to reflect changes that have taken place since then?

Glenn Hubbard: I think it’s a great question. It’s worth reminding ourselves that, when Friedman was writing back in 1970, what he saw as the main threat to the American economy were weaknesses in managerial capitalism. His primary concern was the dissipation of shareholder value through the conglomerate movement, and the associated loss of corporate focus and accountability. And his warning appears to have been vindicated later in the ’70s, when the Dow Jones average had lost as much as half its value. Friedman felt that a private-sector focus on shareholder value maximization was the key to creating social wealth and general prosperity.

But the critical assumption underlying his argument—one that tends to get lost in today’s polemics—is the impossibility of maximizing long-run value in highly competitive product and labor markets without taking care of all your important stakeholders. If you’re failing to treat workers fairly in a competitive market, if you’re not treating your suppliers and local communities fairly, there is no way to maximize the long-term value of the firm.

Now people will no doubt question at least some of Friedman’s assumptions. What if product or labor markets aren’t as competitive as he thought? Well, I think the simple answer to uncompetitive product and labor markets should be to increase competition, perhaps through more vigorously enforced antitrust public policies.

That said, I don’t think that possible problems with today’s market competition affects the power of Friedman’s intuition about the social role of a corporation in the least. Many, if not most, of society’s serious challenges, like climate change, arise from so-called “negative externalities”—from the costs of privately produced goods or services, like pollution, that are not imposed on the producers or consumers. And in such cases, although the companies themselves can and do take some actions to address the problem that are consistent with increasing their own value, corporations in such cases do not represent the appropriate level of action. The market failures that arise from externalities, as we’ve been teaching our economics students for decades, cannot be dealt with by individuals or corporations. Climate change, for example, poses significant challenges for societies and businesses. But significant changes to combat climate change require public policy changes in the United States and abroad. Expecting corporations to volunteer to do more, in ways that reduce their own value and in the absence of regulation imposed uniformly on all competitors, is almost certain to fail.

Finally, let me just point out that Friedman’s 1970 article was intended as a defense of corporate accountability as well as freedom of action. Friedman was warning us that, to the extent you not only allow but actually encourage corporate managers to depart from the shareholder maximization goal, you are saying that someone other than shareholders gets to say for what purpose the firm’s funds should be used. Such a statement amounts to a serious violation of private property rights and liberty itself. As long as we keep in mind that Friedman was referring to the maximization of long-run profits and NPVs—and not next quarter’s earnings, as many of Friedman’s critics seem to assume—I think Friedman is still pretty much right. Thinking about externalities from a public policy perspective is fine—and in fact something almost every economist I know fully supports. But let’s stop blaming companies for what are political failures to create the right public policies.

Strain: Cliff, as Glenn just argued, a lot of economists and defenders of Friedman argue that he is advocating longer-run value maximization and that a corporation can’t maximize shareholder value if it’s mistreating its workers, for example. Do you agree with that? Do short-term asset values actually reflect the longer-term consequences of today’s decisions? Or does shareholder value maximization, as its critics claim, come down to boosting short-term profit by whatever means?

Markets Are Not Myopic—But Maybe a Bit Farsighted?

Cliff Asness: With apologies to my old professor, Gene Fama, let me start by acknowledging that markets are not perfect. But even Gene said, on about the third day of class, that the notion of perfect efficiency is a little crazy.

And, yes, I certainly agree that Friedman was talking about the long term. Although he talked about maximizing profits throughout the original essay, he mentioned stock prices only once. But it seems quite obvious to me that he was talking about value maximization in terms of some kind of long-term net present value. The idea that Friedman was advocating maximizing next week’s profits, even if it dooms future profits, is in fact quite silly.

With all that said, I think the issue of “short-termism” is actually a very different issue from the questions we’re talking about here. A stock price is supposed to be a discounting mechanism. The theory—and it’s one that in most respects I tend to agree with—says that today’s stock price should reflect the present value of all expected future cash flows. It moves around a lot, perhaps for ephemeral reasons, but the big changes usually result from changes in investors’ long-term expectations. So, even apparently short-term moves in stock prices often reflect a reassessment of that long-term horizon. Share price changes may not capture everything of importance in a company, but they usually get most of it.

So, when people criticize Friedman on the grounds of short-termism, they are not only misrepresenting his beliefs, they are also making a statement that I don’t think they intend or are even aware of. They are implying that stock prices are wildly inaccurate and irrational.

So, are stock markets grossly inefficient? No, even though they are never perfect. The market is less efficient in the short term than in the longer term, but markets are still exceptionally hard to beat. If it were obvious which companies were squandering their capital in the hope of getting a short-term pop in their stock price, my job and that of all active managers would be quite easy. But I promise you it’s not.

Let me give you an example from the market today. The so-called FAANG stocks—Facebook, Apple, Amazon, Netflix, and Google—have driven most of the overall market performance in recent years. Yet, those price moves have all been about future long-term expected growth. So, if you believe the markets are inefficient, and are particularly inefficient today, you have to agree that investors are in the grip of an irrationally long-term perspective! Far from short-term oriented, they are exhibiting farsightedness, a willingness, right or wrong, to pay a ton for cash flows in the far distant future. They are betting on very long-term estimates and very high growth rates projecting 10 to 20 years from now. So the notion that the market is all focused on the short term just doesn’t fly.

Other Forms of Market Short-Termism

Strain: Marty, I’d like you to react to what Glenn and Cliff have said but also tell us whether there is a conflict between short-term and long-term value. And if that’s the case, then wouldn’t a lot of the Friedman framework fall apart?

Marty Lipton: Well, I do think that there is a considerable difference between long-term value and shorttermism. It’s one thing to say that the current stock price should represent the market’s view of discounted value over the long run. Nobody disputes that. The difficulty with Friedman is not so much what he said, but how it was interpreted, particularly after he became a god in the business schools following publication of his 1970 New York Times op-ed piece that we are discussing.

It was sort of given that a company should be managed in order to maximize value for shareholders, but maximizing value evolved into a set of short-termist corporate policies and practices, which pressures and incentivizes management to drive up profits, regardless of longer-term costs, and has allowed activists to use the guise of good governance to reap quick and handsome profits. And Friedman’s influence coincided with the growth of institutional investor power over corporations. Pretty soon, competition among institutional investors and major asset managers put unusual pressure on companies to produce short-term profits and use cash to buy back stock.

Management faced enormous pressure to produce increasing profits on a quarter-to-quarter basis and to sacrifice the interests of employees and other stakeholders. Corporate managers were pushed to take undue risks in order to meet Wall Street’s quarterly expectations. Year after year, we read about companies restructuring, reducing employment by 1,000, by 5,000, by 10,000, and then announcing the expected impact of those changes on quarterly earnings so that they can satisfy Wall Street and the stock price will rise. These changes have resulted in a significant financialization of our economy, which in turn has contributed to what I believe to be the very serious levels of inequality in our society. Whatever Friedman might have intended and wanted to accomplish, his argument for placing shareholders’ interests over those of the other corporate stakeholders has resulted in a very serious dislocation in our society.

Does Shareholder Value Maximization Lead to Corporate Underinvestment?

Strain: Cliff, do you want to respond to that?

Asness: Let me start by saying that I am puzzled by that argument. If management is trying to maximize short-term profits, those short-term benefits must come at the expense of long-term profits; and in a reasonably efficient stock market, that would have to be bad for the stock price, right? Management would be failing to invest in or build their businesses. So, how would that reflect a focus on shareholder value?

I have never gotten an answer to that question. The idea that Wall Street and investors force management to focus on the short term at the expense of the long term has actually been pretty popular since the 1980s when all of this nefarious, horrible stuff allegedly started. But if corporations have been sacrificing long-term profits for over three decades now, how was it possible for U.S. corporate profits to be at an all-time high in early 2020 just before the COVID pandemic.

Self-styled stakeholder advocates also offer a related argument—namely, that share repurchases are bad for the economy and society. Supposedly, share repurchases are “a waste of money” and reduce investment and employment. The reality, of course, is that people receive cash for the shares they tender and that cash is either reinvested elsewhere or used to increase consumption. The money isn’t “taken out of the economy,” as so many critics have suggested. And if share repurchases reduced employment, how was it possible that, pre-COVID, unemployment was also at or near historic lows?

To reiterate, if you’re maximizing the short term to the detriment of the company, you’re hurting shareholders. And despite all the ups and downs we’ve had since 1970, we haven’t seen that yet.

Strain: Glenn, do you want to respond to Marty’s argument. And in the process, can I ask you to comment on the principal-agent problem and whether shareholders are the owners of the company. And if managers are making decisions that are not in the interests of the owners of the company, then how is that a defensible management strategy?

Hubbard: I want to make two points, one about profits and one about pressure on management. Consistent with what Cliff was just saying, Steve Kaplan at the University of Chicago and others have pointed out that corporate profits as a share of GDP have continued to rise for the last three or four decades, starting in the 1980s, despite all this purported focus on the short term.

My second point is about investor pressure on management. Large institutional investors do care about the long-term viability of each of the firms in their portfolios or in the index, if that’s what they own. They have no choice but to care.

And, Mike, as for your question about corporate principals and agents, to whom would corporate managers end up being accountable in a stakeholder-centric world? There are an uncountable number of stakeholders. In such a world, could managers ever be accused of making a wrong decision? If I as a manager justified a corporate decision as serving the interests of the workers, or the community or the Metropolitan Opera, how could my decision ever be challenged? The focus on shareholders is what gives you much clearer accountability.

Let me also say that I’m a fan of many elements of Marty’s “New Paradigm.” For example, I’m all for Marty’s telling boards to be “more conscious of the long term.” But I’m also assuming that, like me, Marty means the long-term value of the corporation.

The New Paradigm

Strain: Marty, what do you say to that?

Lipton: Well, a number of things. First, I don’t view the shareholders as outright owners of the corporation in the way one would own a house or a car. They’re investors in the corporation and own the equity, and they are thus important constituents but they are not the owners of the corporation as a whole. And for that reason, the company should not be run solely in the interest of the shareholders. Second, I don’t dispute much of what Cliff and Glenn say. I think our principal difference has to do with how the stakeholders are viewed and treated in terms of long-run growth in the value of the company.

The New Paradigm basically says that the corporation should be run in the interests of all the important stakeholders, and that includes the interests of the community at large. So, the components of ESG, the environment and social issues, are very important. The company should be run taking those factors into account for the long-term sustainable growth of the value of the company, which ultimately benefits shareholders as well as other stakeholders. At the same time, we would continue to evaluate management according to how well they are achieving long-term growth in the value of the company. If they are doing a very good job and there’s no reason to question how their commitments to their customers, suppliers, and employees are designed to promote the best interests of the corporation, then let well enough alone. But if they’re not increasing the long-term value of the company, then the shareholders should exercise their power.

So, my approach does not in any way deprive shareholders of their ultimate power to change the management of the company. The New Paradigm provides a set of principles for corporate management that are intended to help institutional investors and asset managers monitor companies. It recognizes that although shareholders do have the right to residual free cash flow, they are not in fact the sole owners of the corporation. It also poses questions like: Do you subscribe to ESG factors in terms of promoting long-term investment in the treatment of employees and other stakeholders and so on? But at the same time, it acknowledges that Europe has gone in the wrong direction with state capitalism and all the mandates that have come with it.

The New Paradigm says that it’s up to the management of the corporation and the board of directors to engage with the investors to reach agreement on a sustainable strategy and then to carry out that strategy. And if the corporation fails to do so, it’s up to the shareholders to change management. That was essentially the way it was before Friedman. It was generally accepted that the families that founded these companies and the generation or two that succeeded them and the local people would work with the management of the company to achieve a mutually satisfactory outcome in terms of the growth of the company and dividends paid.

But since we no longer have this historic approach to corporate governance to guide us, we’re now running the risks of state corporatism imposed through new legislation and regulation—and that in my view would be very bad, the worst possible outcome. Week after week new proposals are being made to impose very close guardrails on how corporations are operated. Once you get legislation that narrows management flexibility, you’re moving into state corporatism, and pretty soon you’re in effect taking the competition out of markets, and then you’re losing capitalism.

My view is the only way to preserve capitalism and a flexible economy is for the investors who have voting control over companies to work closely with management, eliminate activist pressure for short-term performance, and continue to have open competitive markets. Without it, we’re going to move rapidly in the direction of Europe with stricter and stricter limitations on both companies and investors. The EU has already moved to impose ESG mandates on both investors and financial institutions as well as listed and other large companies. To preserve capitalism we must ensure that companies perform well and increase long-term value by taking into account the interest of all stakeholders, including the public.

Response to the New Paradigm

Strain: Cliff, what do you think? Should we think of investors as owners?

Asness: Let me start with the part I not only agreed with, but greatly appreciated. I share and admire Marty’s aversion to state corporatism and the idea that European welfare capitalism represents a movement away from the goal. I guess the Soviet Union is the opposite of the goal, but Europe’s still a pretty bad outcome for capitalism.

I admire Marty for that and agree with him to that extent. But I don’t agree that shareholders are not the owners. I’m certainly not stupid enough to get into a legal argument with Marty because he knows so much more about the law than I do. But Marty did concede that the shareholders can replace management and are entitled to the residual cash flow. And to me, that’s a real functional definition of ownership. I think, ultimately, this is not a legal question, but an economic one.

Marty has talked as if there were some time in the past when corporations acted differently, but he may be seeing things through rose-colored glasses. Perhaps some sort of unwritten social contract was in force in the immediate post-World War II period and in the 1950s, when America was producing most of the world’s goods. But I’m old enough to remember when we all used to yell about the robber barons, even though I’m not old enough actually to have seen any robber barons. It’s not like corporations have always been these charitable institutions, and that they’ve become unpopular only since Milton Friedman wrote his article.

My big concern here is that once you say that the shareholders are not the owners and abandon the idea of long-run value maximization as the goal, you throw corporate governance into this murky world that invites parts of current management, their consiglieres, and various outside constituencies to take part in a highly political process. And that’s when all the confusion about the corporate mission arises. While I am very sympathetic to and agree with Marty’s concern about too much regulation, I think there are real dangers to this trendy idea that the shareholders aren’t the real owners.

Strain: It’s this issue of private property rights and the related beliefs that investors own the firm and managers are their agents that are probably the main reason why I’m with Friedman on this question. If you don’t believe in shareholder capitalism, then you must believe there are times when management decisions should work against the interest of the owners. And that doesn’t seem like a defensible management practice to me. Glenn, should we think of investors as the owners of the company?

Hubbard: I do. From an economic perspective, I would start with Cliff’s point about residual cash flows and residual ownership. Having a claim on the cash flows that are left over after everyone else gets taken care of is the definition of ownership from an economic perspective. The way we put it is this: If we as shareholders sell the company to some other company, who gets the cash? The answer, of course, is that we the shareholders do.

Now, Marty’s concern here is about the possibility that part of a company’s increase in value may come from its failure to meet the claims of non-investor stakeholders. Maybe a company abrogates contracts with workers or treats local communities badly. But as I said earlier about Friedman’s doctrine, that’s not really the optimal thing for a firm to do if it’s aim is to maximize long-term value. And having said that, I do think that corporate reputations for making good on their contracts get reflected in their stock prices. So I just don’t buy Marty’s argument that shareholder value maximization is contributing to corporate shortsightedness and bad behavior.

The second part of Marty’s argument I have some trouble with is what I like to call the “Cadburyization” of business, the romantic idea of the entrepreneur who builds a great company and then uses part of its profits to write checks to the community. That’s great, and some entrepreneurs have done and are continuing to do this. But as Friedman noted, “Although it’s fine, and admirable, for individuals to use their personal wealth for charity, corporate charity is likely to be a misuse of shareholder capital.” George Cadbury is entitled to spend his private funds any way he chooses, but spending decisions by public companies should be approved by their decentralized owners.

So I agree with Friedman that it is the shareholders who should make the decisions and that the company shouldn’t be engaged in these broader missions. Now, if the shareholders agree that some charitable cause would be supported more efficiently through the company than as individual shareholders, then that’s okay; but shareholder approval is critical.

I agree with Cliff that, for most important purposes, it is the shareholders who effectively “own” the company. But none of that implies that business people have to be unresponsive to social issues and problems. For example, the Business Roundtable is certainly right to tackle social issues, such as the BRT’s recent work on policing. It is perfectly fine for the business community to express support for a broad social concern that affects the value of all businesses.

The Business Roundtable Statement—Preempting State Capitalism?

Strain: Marty, want to respond?

Lipton: It’s important to keep in mind that corporations are not completely separate from their host societies. Corporations exist only within the overall umbrella of the government and society. No corporation can function unless government is providing infrastructure, rule of law, a currency, and safety net that solves the problem of dislocations in the economy. And because corporations exist as part of and are dependent on society, they must take into account all of the interests of society in order to thrive. They can’t succeed only on the basis of maximizing profits for one set of stakeholders in corporations—shifting negative externalities onto society has real and long-term consequences on companies themselves and these consequences have been made stark by the pandemic and the challenges climate change poses to many businesses.

Corporations today basically are the business of society. They’re the ones who are producing the services and the products on which our existence depends, and they are part of an overall fabric of society. If you try to separate them out for the sole benefit of shareholders, you are daring society to mandate exactly how corporations should conduct business. And to me, that’s the last thing we want.

We’ve managed to evolve a system, particularly in the United States, where we maintain flexibility in markets and flexibility in management.

And every now and then it goes off a bit, but when it does, we have a group like the Business Roundtable who say, “We went off. Let’s get back on the right track to accomplish what all of us want to accomplish.”

So I think what the Business Roundtable did was magnificent. They said, “We were wrong to endorse shareholder primacy in our ’97 statement, absolutely wrong. This is the way corporations should act, this is what we should do.” By making such a statement, the BRT is restating the purpose of corporations in order to effectively preserve the freedom of corporations to work in open markets. Otherwise, corporations are not going to have open markets in which to function; we’re going to have state corporatism of one kind or another.

Hubbard: I wouldn’t be throwing down a gauntlet to society. I’d want to give society a socially distanced hug in two Friedman ways.

The first one Friedman not only understood but wrote about in the 1970 piece—and that’s the importance of community and other governmental relationships for long-term value. And he gave specific examples, such as corporate contributions to the communities in which they operate.

The second is that corporations and their capital providers employ many people and pay enormous amounts of taxes. So it’s not that the underpinnings of society are some free-riding problem for owners of capital; they pay for that privilege. If the argument is that they don’t pay enough for that privilege, we could have that as a tax policy discussion.

And like all of us, I too hate state corporatism; I’m 100% with Marty on that. But I think Friedman got that and really felt that if you did things in the way he envisioned capitalism working, you would never have to worry about excessive state intervention.

As for the Business Roundtable’s new statement, my question is this: under the BRT’s criteria, how could I ever fail as a CEO? As long I’m taking care of at least some of my stakeholders, even if my shareholders are losing money, I can never be shown to be wrong—or lose my job. And, sorry, but I don’t see that as a workable solution.

Strain: Cliff, let me ask you to respond to the BRT statement, and to answer two more questions. One, are you aware of any decision that any Business Roundtable executive has made following the statement that effectively subordinates shareholder value? And if not, then did the statement have any teeth? And secondly, why shouldn’t I view the Business Roundtable statement as simply a PR maneuver and not as an actual statement of a change in management practice?

Asness: Mike, you are making my point. I mildly disagree with Glenn, but I completely disagree with Marty on this issue. Marty says that corporations can only exist with the government’s approval, but that’s no less true of sole proprietorships and partnerships. And according to that argument, suburban homeowners don’t actually own their own houses either. If you accept that logic, it’s not a big step to say nobody owns anything. I don’t mean to be histrionic, but “abolish private property” should then be our topic. And I see no point in going there.

I have a slightly different take on the Business Roundtable than Marty. I oscillate between two opposite portrayals of them. The bad picture of them is as feckless, greedy wealth maximizers who signal their virtue while pretending to be courageous, even though boasting of things you get praised for does not require much courage. The good or sympathetic portrait of the BRT is as prisoners in a North Korean-like hostage video who have been forced to say these things because they are under duress; they will lose their social standing or license to operate if they don’t confess to having done bad things.

Again, I admire Marty’s desire to maintain flexibility and to retain the capitalist system, but his version of capitalism seems to have an element of compulsion: If you don’t do what we want, we’ll make you do it. I’m not sure that’s real freedom.

Finally, to answer Mike’s question, no, I’m not aware of any corporation that’s made a significant sacrifice of the long-run profitability of its business as a result of the latest Roundtable declaration. There was actually just an article in The New York Times about what major corporations have done since this announcement, and The Times is decidedly unimpressed.

Lipton: I think you’ll find, Cliff, example after example of major corporations that have made major commitments following the Business Roundtable’s commitment to stakeholders. I think it’s a gross canard to say this is just a public relations ploy of the numerous CEOs who endorsed the BRT statement. They really meant it—and more and more companies have committed to publicly reporting their goals and their performance on ESG matters. It was debated extensively, it was very carefully considered, and it was the right thing to do.

Very recently, Brian Moynihan, the Bank of America CEO, announced a $1 billion project on investment in minority lending. Although I don’t have permission to use his name, I received an email from a recently retired but very successful CEO of another very large company right after he saw the AEI announcement of this webcast. He explained how his company invested in various things such as employee education, which has resulted in great returns both to the corporation and to society. So, Cliff, you’re just wrong. You’re just dead wrong on the motivations of these people and what they have done. I have the advantage of age. I go way way back. I started this with Adolph Berle in 1955, and I’ve been at it ever since. And in my experience I have found that, in the vast majority of cases, corporate management has tried to do the right thing. It’s gotten off base when it’s been pressured by shareholders looking for short-term returns and forcing them away from the business strategies that they believe are appropriate for maximizing long-term corporate growth and value.

Asness: I have to respond to that, because I was called absolutely wrong. Clearly, we’re not going to settle this here today but I think Marty is absolutely wrong, and it is obvious that this is all progressive peacocking. But Marty, you and I are not going agree on that. You have been consistent throughout. I can’t accuse you of being trendy, because you have been saying this since the 1970s.

I’ll mention two other things. Although, I believe that research has demonstrated that this idea of short-termism hurting U.S. companies and the economy is a red herring, you just keep restating it as if that somehow makes it a fact. So we obviously disagree strongly on that. And let me again state this as clearly as I can: there is no credible evidence that short-termism has hurt U.S. corporations or employment since this myth became popular in the 1980s.

Marty, you, like other stakeholder advocates, tend to switch back and forth seamlessly between saying that stakeholder focus is actually in the long-term interests of shareholders— but then, in almost the next breath, you point to cases where it clearly isn’t. Let me just say that if, and to the extent, stakeholder capitalism is in fact in the long-term interests of shareholders, then nobody in this room would argue with you. We’d be in complete agreement. If doing charitable things also happens to be the NPV-maximizing corporate strategy, then we needn’t have bothered with this one-hour webinar. But in a great many instances, stakeholder advocates have been demanding, or holding up for admiration, decisions that will clearly reduce the long-term efficiency and value of public companies. You can’t have it both ways; you have to draw the line somewhere between too little investment in stakeholders, and too much.

Finally, let me just point out that Milton Friedman anticipated the Business Roundtable statement of 2019 when he said the following: “It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window dressing because it harms the foundation of a free society.

That would be to call on them to exercise a social responsibility. If our institutions and attitudes make it in the self-interest of corporate executives to cloak their actions in this way, I cannot summon much indignation to denounce them.”

So not only did Friedman get everything right 50 years ago, he even saw the Business Roundtable statement coming!

Strain: Glenn, do you want to get in on this?

Hubbard: Mike, I absolutely believe in the sincerity of the 181 CEOs who signed the Business Roundtable statement. I don’t doubt the statement’s genuineness one bit. I do believe that there’s a real soul-searching in corporate America about purpose, and I view all of that soul-searching as healthy.

But with respect to long-term value maximization, I agree with Cliff. To the extent that stakeholder capitalism amounts to long-run positive-NPV corporate investments in their stakeholders, then there’s no debate. That’s clearly good for everybody. But if you’re talking about significant transfers of wealth from shareholders to stakeholders—which is clearly what many stakeholder advocates have in mind—then Cliff and I are against it, and I think the Business Roundtable would be, too.

So I think the Business Roundtable statement is not nearly as clear as it could have been—it is what it is. What it fails to provide is a clear way of distinguishing between long-run value-increasing and value-reducing investment in stakeholders. And as a result, the statement provides no standard or basis for holding management accountable for overinvesting in stakeholders or otherwise failing to increase value. As I said, I just don’t know how any company or management could ever be seen to fail in that counterfactual; even if shareholders suffered, managers could always point to the good things they had done for some other stakeholder group.

And so I probably would have drafted the statement differently if somebody had asked me. But I don’t doubt its sincerity: it reflects a very genuine sense, by corporate leaders like Doug McMillon at Walmart, that many U.S. companies have underinvested in their employees and suppliers and, by so doing, missed some major opportunities to increase long-run efficiency and value.

Evidence of Corporate Short-Termism: The Case of Heinz

Strain: Marty, can you give us the strongest piece of evidence you have in favor of the idea that a focus on short-term profits is hurting long-term value?

Lipton: We often see companies reducing investment in R&D, capital investment, and in their employees in order to increase short-term profits to meet the expectations of Wall Street. And this has a cumulative adverse effect on long-run economic growth, employment, commitment to innovation, corporate culture, and consumer welfare—all of which threaten the long-term viability of a business.

Take the case of Kraft Heinz, which is a great example of a company that announced that they were doing zero-based budgeting and reducing investment in marketing and product development, cutting operating expenses, and increasing margins. When companies do that, it catches up with them, and their earnings and value start going down. If you look at the recent history of Kraft Heinz from the time it was taken over by the group that now manages it, both the earnings of the company and its value have been largely diminished.

Now, if we assume that zero-based budgeting is now being practiced by, say, half of all U.S. publicly traded companies in response to short-term pressures, then I would say that corporate America has been sacrificing large amounts of shareholder value by underinvesting in its stakeholders. You can’t, in the long run, stop investing, stop R&D, cut your advertising, cut your marketing, cut employment and employee training, and expect to create long-term value. But as shareholders put pressure on corporate management to increase profits on a quarterly basis, that’s what you’re going to end up with.

And as I said earlier, that is the road to government mandates. Those have never produced a prosperous society. No Communist or socialist society has ever ended up as a utopian society. Almost all of them end up as totalitarian, and those that aren’t totalitarian end up as generally being second-rate economies.

Asness: Marty is trying to trick me into defending socialism now, but I’m not going to fall for it. I don’t know anything about Heinz—to me it’s just another piece of anecdotal evidence with no statistical support behind it.

What I will note is something interesting that Marty has told us about the company—namely, that, in an effort to boost its short-term profits, management has somehow managed to destroy its short-term profits. That sounds like managerial idiocy to me and, as Marty will agree, nobody has ever outlawed idiocy.

Lipton: They destroyed long-term profits, not short term; their myopic focus undercut long-term viability.

Asness: It didn’t take very long to destroy the earnings. And they clearly didn’t help the shareholders who they’re supposed to be helping.

But the bigger question here is this: in what sense is the story of a company like Heinz representative of a U.S. economy in which corporate profits and stock prices, as Steve Kaplan has pointed out, have pushed steadily higher for the past 40 years? The broad averages tell us that Heinz is not a representative case, but clearly an aberration. But to make my point, I would like to cite one more person, Steve Rattner, who is by no means a conservative ideologue. In 2018, Rattner published a New York Times op-ed called “The Myth of Corporate America’s Short-term Thinking” noting that “the easiest path for companies to goose earnings would be to cut back on investment.” But as Rattner goes on to say, “Business investment by U.S. companies has remained between 11% and 15% of GDP since 1970. Last year [in 2017], corporate investment, which includes structures, equipment, and the like, totaled 12.6% of GDP. Included in those investments is corporate spending on research and development, which has reached its highest-ever percentage of GDP, and has become a more important part of overall investment.” And to this comment let me add that today’s most highly rewarded companies by the stock market are the ones making the largest R&D investments.

So, again, it’s very hard to view Marty’s story about Heinz as anything other than an aberration, a cautionary tale about what happens when corporate managers fail to apply the lessons they were taught in Finance 101. Take all positive-NPV projects—and reject the rest.

Strain: Glenn, how do you read the evidence?

Hubbard: Well, I view what happened at Kraft Heinz as a strategic blunder. That wasn’t a short-term decision. Kraft Heinz has long-term private equity investors backing it, including Warren Buffett. That is not Mr. Short-Termism playing around with corporate assets. The company’s leaders simply made mistakes. And my take on the evidence is that corporate America has remained vigorously committed to and effective in maximizing long-term value.

But the question for this panel is whether value-maximization is enough? If you’re trying to maximize the long-term value of the company, are you generating the largest potential resources for society? And I would say that, in general and under most circumstances, the answer is yes. The only way it would not be true is if lots of companies are achieving shareholder gains by transferring wealth systematically from other stakeholders—which of course is what the most populist stakeholder advocates are arguing. But to back this claim, you would need to explain how that happens, and no one has made that argument in a credible and convincing way. Yes, one could argue Amazon may be subjecting its warehouse workers today to the risk of contracting COVID-19. Nevertheless, by providing employment for hundreds of thousands of workers who would otherwise be unemployed, the company surely appears to be exercising good business judgment and having a broader positive social impact.

And so I will end where I started. Friedman more or less got this one right.

A Role for Corporate Philanthropy Strain: Well, Glenn, let me ask you a follow-up question on a point you made earlier. There’s widespread agreement that corporate executives should not donate to charity; but as you suggested earlier, there may be times when a corporation can pursue social benefits more efficiently than its shareholders acting as individuals. And I think that you’ve said that those could actually be appropriate, and even value-increasing, opportunities for corporations to invest in.

Hubbard: Absolutely. There may be times when the corporation’s trade-off is better than the individuals in selecting and making those contributions. Friedman himself noted that there may be times when such corporate charity can be justified in terms of the benefit of long-run value from having a healthier community and civil society. And I think that’s clearly happening today in corporate contributions dealing with the pandemic.

Friedman never suggested that corporations stop giving to charity. As in the case of the pandemic, donations designed to address urgent social problems could easily be justified by their effect on a company’s reputation, and its benefits on both future sales and in limiting the company’s political and regulatory vulnerabilities. Friedman’s concern about donations was about the abuse of such practices, about corporate executives simply wanting to promote their own social standing, or get the best seats at the opera or sports stadium.

Closing Thoughts

Strain: Marty, can you give us 30 seconds of concluding thoughts?

Lipton: All I have to say, Cliff, is that today it is FAANG against the steel companies. Our high-tech companies are doing fine, but the old economy companies are struggling under the market pressures I’ve been talking about.

I think it’s obvious that short-termist pressures have hindered the ability of many companies to compete and create value over the long term. The average numbers you’re citing reflect the successes of high tech and all the new companies that have basically covered over the decline of the older companies.

Asness: But Marty, that’s been happening for the past 200 years since the Industrial Revolution. We somehow keep moving forward, and creating more shareholder value and jobs—more social wealth. And I don’t expect that to change, even with the pandemic. That’s my final thought.

Lipton: My problem, Cliff, is that I’m now old enough to have been there at the beginning of all that!

Asness: I appreciate that, Marty, and that’s why we’re all giving you the last word.

Strain: What I’m taking away from this is that all four of us agree that socialism will lead to the ruin of the United States and any nation that practices it. I’m glad we can agree on that. This is obviously a complicated and important question. Economists and the public at large were wrestling with it well before Milton Friedman published his essay a half a century ago.

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