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Maximizing shareholder profits can no longer be corporations' main goal, say top U.S. CEOs

A group representing more than 100 of the biggest corporations in the U.S. has released a statement updating its definition of the purpose of American corporations.


JOHANNES EISELE / Contributor
  • The new statement says corporations shouldn't only be concerned about maximizing shareholder profits.
  • Instead, corporations should focus on all of its stakeholders.
  • The idea that corporations need only focus on maximizing shareholder profit took hold in the 1970s and has since remained, more or less, the dominant viewpoint on Wall Street.


Since around the 1980s, most American corporations have agreed their main purpose is to maximize shareholder profits. Now, amid growing concerns about income inequality and Democratic policy proposals that call for restructuring American capitalism, some of the nation's biggest corporations are saying it's time to change the definition of corporate purpose.

The Business Roundtable, a lobbying group of American CEOs, released a statement Monday describing how the corporate world's long-held definition of purpose — often called "shareholder primacy" — "does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable."

"Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity," the statement reads. "We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all."

The Business Roundtable updates its guidelines periodically, but Monday's update is the most explicit to date in rejecting shareholder primacy. The statement — signed by 181 of 192 current members of the Business Roundtable, including CEOS from companies such as Apple, Pfizer, Mastercard, and Ford Motor Company — says members commit to:

  • Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
  • Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
  • Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
  • Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
  • Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

The statement doesn't promise any concrete changes, and it's unclear how corporations might change their practices, if at all. One governance expert said the statement actually decreases these executives' accountability.

"It limits accountability for these people to anyone, because if you have multiple stakes with whom you're accountable, you're always going to get it right on someone," Charles Elson, who directs the John L. Weinberg Center for Corporate Governance at the University of Delaware, told The Washington Post. "You can always make an argument that no matter what you've done, some stake will benefit. If your watch stops, it still gets the time right twice a day."

Still, at the very least, the statement signals a symbolic change in ethos of the American corporate elite.

"It really is quite significant," Peter Cappelli, a professor who studies labor economics at the University of Pennsylvania's Wharton School, told the Post. "It sounds like what they're describing is what was the standard view before the mid-1980s — before the shareholder value idea really started to spread."

'Maximize shareholder profits'

The idea of shareholder primacy can be traced back to the economist Milton Friedman, who wrote a New York Times Magazine article in 1970 deriding the claim that corporations ought to be socially responsible, calling it a "fundamentally subversive doctrine" in a free society, adding, "there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

CBPP

In short, "social responsibilities" are for individuals; corporations need only focus on making as much money as possible without breaking the law.

"That article was very well received in Wall Street," Joseph L. Bower, a professor of business administration at Harvard University, recounted to Forbes. "They loved it. You could see the change in compensation practices. The use of the phrase 'maximize shareholder value' exploded at that time."

Bower once said the idea that corporations need only "maximize shareholder value" is "pernicious nonsense." In a 2017 article for Harvard Business Review, Bower and Lynn S. Paine suggest that Friedman's essential idea "could be damaging to the broader economy," mainly because it gives extreme consideration to shareholders over a short-term timeframe, while ignoring other stakeholders, such as employees or society at large. This results in an "accountability vacuum," they write, because in this governance approach shareholders are effectively treated as owners of the company, when in fact they're not held accountable for any company decisions.

Bower and Paine suggest that a more company-centric governance approach would benefit American corporations' many stakeholders, including but not limited to shareholders. (You can read their detailed piece here.) Meanwhile, some Democratic lawmakers have proposed policy that aims to wrest some amount of corporate power from executives and shareholders and give it to other shareholders.

For example, U.S. Sen. Bernie Sanders (D–VT) wants to prohibit corporations from buying back their own stock, which drives up share prices, unless they boost employee pay and benefits. Separately, Sen. Elizabeth Warren's Accountable Capitalism Act aimed to restructure corporate decision-making, in part by mandating that corporations allow 40 percent of board members to be elected by employees, and by limiting the ways in which directors and officers sell company shares.

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Human brains remember certain words more easily than others

A study of the manner in which memory works turns up a surprising thing.

Image Point Fr / Shutterstock
Mind & Brain
  • Researchers have found that some basic words appear to be more memorable than others.
  • Some faces are also easier to commit to memory.
  • Scientists suggest that these words serve as semantic bridges when the brain is searching for a memory.

Cognitive psychologist Weizhen Xie (Zane) of the NIH's National Institute of Neurological Disorders and Stroke (NINDS) works with people who have intractable epilepsy, a form of the disorder that can't be controlled with medications. During research into the brain activity of patients, he and his colleagues discovered something odd about human memory: It appears that certain basic words are consistently more memorable than other basic words.

The research is published in Nature Human Behaviour.

An odd find

Image source: Tsekhmister/Shutterstock

Xie's team was re-analyzing memory tests of 30 epilepsy patients undertaken by Kareem Zaghloul of NINDS.

"Our goal is to find and eliminate the source of these harmful and debilitating seizures," Zaghloul said. "The monitoring period also provides a rare opportunity to record the neural activity that controls other parts of our lives. With the help of these patient volunteers we have been able to uncover some of the blueprints behind our memories."

Specifically, the participants were shown word pairs, such as "hand" and "apple." To better understand how the brain might remember such pairings, after a brief interval, participants were supplied one of the two words and asked to recall the other. Of the 300 words used in the tests, five of them proved to be five times more likely to be recalled: pig, tank, doll, pond, and door.

The scientists were perplexed that these words were so much more memorable than words like "cat," "street," "stair," "couch," and "cloud."

Intrigued, the researchers looked at a second data source from a word test taken by 2,623 healthy individuals via Amazon's Mechanical Turk and found essentially the same thing.

"We saw that some things — in this case, words — may be inherently easier for our brains to recall than others," Zaghloul said. That the Mechanical Turk results were so similar may "provide the strongest evidence to date that what we discovered about how the brain controls memory in this set of patients may also be true for people outside of the study."

Why understanding memory matters

person holding missing piece from human head puzzle

Image source: Orawan Pattarawimonchai/Shutterstock

"Our memories play a fundamental role in who we are and how our brains work," Xie said. "However, one of the biggest challenges of studying memory is that people often remember the same things in different ways, making it difficult for researchers to compare people's performances on memory tests." He added that the search for some kind of unified theory of memory has been going on for over a century.

If a comprehensive understanding of the way memory works can be developed, the researchers say that "we can predict what people should remember in advance and understand how our brains do this, then we might be able to develop better ways to evaluate someone's overall brain health."

Party chat

Image source: joob_in/Shutterstock

Xie's interest in this was piqued during a conversation with Wilma Bainbridge of University of Chicago at a Christmas party a couple of years ago. Bainbridge was, at the time, wrapping up a study of 1,000 volunteers that suggested certain faces are universally more memorable than others.

Bainbridge recalls, "Our exciting finding is that there are some images of people or places that are inherently memorable for all people, even though we have each seen different things in our lives. And if image memorability is so powerful, this means we can know in advance what people are likely to remember or forget."

spinning 3D model of a brain

Temporal lobes

Image source: Anatomography/Wikimedia

At first, the scientists suspected that the memorable words and faces were simply recalled more frequently and were thus easier to recall. They envisioned them as being akin to "highly trafficked spots connected to smaller spots representing the less memorable words." They developed a modeling program based on word frequencies found in books, new articles, and Wikipedia pages. Unfortunately, the model was unable to predict or duplicate the results they saw in their clinical experiments.

Eventually, the researchers came to suspect that the memorability of certain words was linked to the frequency with which the brain used them as semantic links between other memories, making them often-visited hubs in individuals's memory networks, and therefore places the brain jumped to early and often when retrieving memories. This idea was supported by observed activity in participants' anterior temporal lobe, a language center.

In epilepsy patients, these words were so frequently recalled that subjects often shouted them out even when they were incorrect responses to word-pair inquiries.

Seek, find

Modern search engines no longer simply look for raw words when resolving an inquiry: They also look for semantic — contextual and meaning — connections so that the results they present may better anticipate what it is you're looking for. Xie suggests something similar may be happening in the brain: "You know when you type words into a search engine, and it shows you a list of highly relevant guesses? It feels like the search engine is reading your mind. Well, our results suggest that the brains of the subjects in this study did something similar when they tried to recall a paired word, and we think that this may happen when we remember many of our past experiences."

He also notes that it may one day be possible to leverage individuals' apparently wired-in knowledge of their language as a fixed point against which to assess the health of their memory and brain.

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