Shareholders vs. stakeholders, and the purpose of a corporation

Make Me Smart October 10, 2023 Transcript

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Kimberly Adams 

Hey, everybody, welcome back to Make Me Smart where we make today make sense.

Kai Ryssdal 

That was Kimberly Adams. That was Kimberly Adams.

Kimberly Adams 

I don’t know, I can’t read words.

Kai Ryssdal 

I on the other hand, I’m not Kimberly Adams, I’m Kai Ryssdal. It is Tuesday today, the 10th day of October. So here’s what we’re going to do today. And we’ve chatted about this a little bit, I think a couple of times on the podcast, we’re going to dig into it today. Fourish years ago, a couple of hundred really high profile CEOs in this economy signed a statement, promising to serve stakeholders, people like employees and consumers along with their shareholders. If you are at all familiar with Milton Friedman, you remember that Friedman famously said that a company’s duty is to maximize shareholder value. And in point of fact, that might not be the best way to actually do business. I’m just saying. So we’re going to talk about that today.

Kimberly Adams 

Right. And these companies made a big to do about signing this thing back in 2019. And we just want to see you know, how that’s been going, how that’s been going, and how it might tie into the recent surge in labor movement activity. So here to make us smarter about this is Molly Kinder, a fellow at the Metropolitan Policy Program at the Brookings Institution, where they focused on the labor market and low wage workers. Welcome to the show.

Molly Kinder 

Thanks so much for having me.

Kimberly Adams 

So why was the Business Roundtable statements such a big deal back then?

Molly Kinder 

Well, if you can put your head back into 2019, before the pandemic, one of the hot topics, one of the big headlines was that the economy really wasn’t delivering for workers. We had such extreme inequality, the richest were getting richer, but average workers and especially workers at the bottom were really falling behind. So it seemed like a really big deal that companies pledge so many of the top companies in the country said, no longer is it just our purpose to make our shareholders richer, really, we’re supposed to also look after our workers and the community and the environment. And so it was supposed to signal a new era of more responsible and equitable business.

Kai Ryssdal 

“Supposed to” was doing a whole lot of heavy lifting in that answer right there, Molly, with the understanding that this thing was non-binding, and was in fact a very nice public relations play. Has anything changed?

Molly Kinder 

Well, this is exactly the question that two of my co-authors Katie Bach and Laura Stateler. And I set out to answer when we did a really big report at Brookings last year. And what we did was we looked at about 10% of those companies who sign that pledge. Some of the biggest names that we’ve all heard of, and retail and fast food and hotels, FedEx, UPS, Amazon, Walmart, you name it. And we wanted to know, did anything changed for their workers? And we wanted to look at a really unique period of time, which was the first two years of the pandemic. Now, these companies had all signed this pledge about nine months before the pandemic started, and suddenly, overnight, their workers on the frontline were risking their lives. And this question of whether or not workers were going to be taken care of, and be part of the gains of the company’s success mattered a heck of a lot more in the pandemic, because workers were risking their lives. And if you also remember, George Floyd was murdered. And these same companies made pledges to do right by racial equity. So we looked at about 22 companies who collectively employ 7 million frontline workers, over half of which are non-white. And we set out to answer the question in the first two years of the pandemic. Did these companies make right on those pledges? Did workers benefit from what was often just huge success in the pandemic? And did they, did workers benefit in terms of better wages? And frankly, our our findings were very disappointing.

Kimberly Adams

What did you find?

Molly Kinder

Well, what we found was that, you know, of course, we all have heard the headlines that companies raise wages for workers during the pandemic. But ultimately, what we find was those wage gains were really modest, especially when you take into account the fact that these frontline workers at companies like Home Depot and McDonald’s and Target, they started off making very modest wages. So sometimes the wages might have gone up in real terms 5%, 8%. But their starting point was really low. And when you compare that to just the enormous gains for those company, shareholders, it was peanuts in comparison. So we documented that the shareholders of those 22 companies became a trillion and a half, a trillion and a half dollars richer in those first two years of the pandemic, whereas workers, the 7 million workers at those companies, they got about 2% of that. Again, in terms of all the pay increases hazard pay bonuses permanent wage increases. So the gains were really lopsided when companies did well, it was their very wealthy shareholders and their CEOs that did extremely well, and workers only modestly earned more. And at the end of the day, only a minority of companies paid even half of their workers enough to pay their bills. So really, what we saw was that the shareholders, and the companies themselves did extremely well, and workers really didn’t see much of that gain.

Kai Ryssdal 

So with the understanding that correlation is not causality, can you make a logical connection between the I won’t call it the failure, but the underperformance of the companies in that letter to live up to what the letter said to the labor movement that has kicked up in the last threeish or so years, and I’m thinking most specifically here, about the United Auto Workers whose president Shawn Fain has been vocal about his contempt for and his worry about the disconnect between CEOs and shareholders, and what the people actually making the cars are making?

Molly Kinder 

You know, I think that’s a great question. And I do think there’s a very strong connection. You know, I’ve talked with a lot of workers who’ve been part of some of the big union drives, since the start of the pandemic, the Starbucks workers, for instance, you know, a lot of their grievances that caused them to form their first ever unions are the same grievances that we see in the auto workers strike, for instance, or the reason why UPS drivers were willing, willing to strike. And that is these, these workers on the frontline have seen their companies do extremely well, particularly in this volatile period. In a pandemic, when these workers really risked their lives just to show up to work. And when they see this disconnect, where they see these inflated profits, they know the shareholders who are already amongst the most wealthy in the country, are really reaping the benefits. And they really don’t see their paychecks moving very much, especially when you take into account inflation. And you add into that, the feeling they had of having to show up to work and risking their lives. I really think that created such a deep sense of grievance, that they didn’t feel that the companies were doing enough. And I really think that’s what you’re seeing with a lot of these. The fourth, the sort of big swell of formations of unions at places like Starbucks and the strike right now, in the auto work, the auto industry. And you know, I think really what you’re seeing is that workers feel that when companies made these voluntary claims that they were going to do better, but there was no teeth to it. They really feel like well, at the end of the day, if the companies aren’t going to do it, really the only way we’re gonna get our fair shake of this is if we exercise our power.

Kimberly Adams 

Let’s, assuming we don’t take the sort of cynical read of this, which is, you know, greed, are there sort of economic, you know, assuming are there sort of economic or business reasons why companies don’t do this, like other than, you know, just wanting to make themselves and people like them richer? I’m thinking of, you know, some of these shareholder groups or activist shareholders who will literally literally sue a company if they don’t think they’re doing a good enough job making money for the shareholders, are there real economic disincentives to reallocating some of these profits to workers and communities?

Molly Kinder 

You know, that’s an excellent question, Kimberly, I think what what we did my co-authors and I, we actually listened into every single earning call for nearly two years for all of these companies to listen to the kind of questions the investors asked, and what was the discussion, particularly at the height of the pandemic, when there was no vaccine? How are they discussing pay increases, things like hazard pay. And what’s really striking is that investors ultimately, the majority of them that are raising their voices are really interested in the bottom line. They want to know how, how the decisions that company executives are going to make are going to affect their bottom line. So labor is a cost to be minimized. And most of the questions about pay increases, for instance, are on hazard pay, when can these end? And really the company executives are under a lot of pressure to maximize short term results, quarterly results, everything in their incentives is around share price, stock price, so all the incentives that executives face in terms of who they report to their board, their their shareholders, it’s really about maximizing shareholder value in the short run. So what you see then is decisions like what we document in our report, that the companies that we looked at the 22, companies spent five times as much rewarding their shareholders through dividends and stock buybacks than they did and raising pay for workers during those first two years of the pandemic. Now, I’m sure if you asked a man or woman on the street and asked what feels fair to you, what feels right, when workers are risking their lives? If if they’re these companies have, you know, have increased their profits? How would you allocate those resources to their shareholders versus their workers, I’m not sure that public would be in favor of that allocation. But really, executives, I think are under a lot of pressure in the short run, to maintain that share price to make sure their investors and their shareholders are rewarded. And in even I think when you have well intentioned executives, their own incentive structure is not necessarily aligned, in the short run to investing in workers.

Kai Ryssdal 

So look, what’s it gonna take? Right? I mean, you know.

Molly Kinder 

You know, I think that really the conclusion of our analysis is that it’s not enough to ask the CEOs on their own, to just simply do the right thing, these voluntary commitments, absent more structural reforms are simply not enough. Even when they raise wages a little bit for workers, at the end of the day, a lot of their workers don’t, can’t pay their bills, even when they’re making trillions of dollars in, in sort of shareholder value. So I think where we came out is that is less about the discretion and voluntary actions of companies, and more about changing the structure. So making it such that actually workers have more power and CEOs have less power. So that might look like labor law reform to make it easier for workers to do what the UPS workers just accomplished, which was a huge pay increase, I mean, $6 an hour overnight, for part time workers, the minimum wage went up. And that’s because they’re in a union. We think things like raising the minimum wage giving workers more of a voice in corporate governance, some of these reforms, I think, would go a long way toward rebalancing that power between workers, shareholders and companies.

Kai Ryssdal 

Molly Kinder at the Metropolitan Policy Program at Brookings, Molly, thanks a lot. I really appreciate your insights.

Molly Kinder 

Yeah. Thanks for having me.

Kimberly Adams

Thanks, Molly.

Kai Ryssdal 

I do kind of wonder also, whether and look, this will never happen, because securities laws and also transparency, but the whole thing about forward guidance, and you know, quarterly earnings and all of that stuff, where companies try to hit the number and all of that. I mean, I think there’s some flaws in the structure of how corporate capitalism works to let alone the sort of inside the boardroom machinations.

Kimberly Adams 

If I recall, correctly, around the same time, and maybe a year before or later, they also said that they wanted to disincentivize quarterly guidance, and we’re encouraging more, and I think several of them did stop doing it, but not a lot. Anyway, all right. Well, let us know what you think. What do you see as the role of corporations today and, you know, whether what it might take to rebalance things or if things should be rebalanced, in terms of who gets what profit, because, you know, we didn’t get to this, but a lot of those shareholders are also us. People with 401Ksand, and 403Bs and in our case, and, in investments and things like that.

Kai Ryssdal 

We should say also, sorry go ahead. That was a little Comrex lag. I was just trying to jump in there before you sent us to the break. Well, I just want to point out and this is, we should have said this earlier, we called the Business Roundtable to see what they had to say about this, and they didn’t get back to us. That’s important.

Kimberly Adams 

Yeah. So yeah, let us know what you think our number is 508-827-6278 also known as 508-U-B-SMART. You can also email us at makemesmart@marketplace.org. We’ll be right back.

Kai Ryssdal 

All right. News, Kimberly Adams.

Kimberly Adams 

Yes. So The New York Times has an interesting story about who runs the best schools in the country with the argument that it might be the United States Defense Department. And it goes into all of this data from the National Association of Educational Progress, which is considered to be you know, really good standard for comparing states and districts and how their schools do and the Department of Defense schools do far and away significantly better than schools in the rest of the country in sort of big cities like DC, and including in the pandemic, when so many kids sort of had learning loss, a lot of these Department of Defense schools have bounced back and the kids are the kids are doing all right, you still have some of the racial and ethnic disparities that we have in all schools. But anyway, that is a normal thing in this country, which is sad that it’s normal. But the schools are doing better. And it points to a lot of things such for reasons for that, namely, the schools are well funded through the Department of Defense. And that, you know, there’s a very good, like organized system for how to run these schools. And you know, the families have access to housing and health care. And at least one parent has a job because if your kid is in a military school, one of at least one of the parents is in the military, and you probably have housing. And sometimes just having those basic needs met, allows students to perform better, teachers are well paid, which helps them recruit better teachers, I bring all these things up, because we’re often looking for solutions for our schools. And we have them as in, we have data here showing what actually works. And you know, well stocked supply closets. So the teachers aren’t paying for pencils, and paper and craft things which a lot of American teachers have to do. So there’s that which reminded me of some work that we did on Marketplace Morning Report a while back on homelessness. And when I was researching and reporting for those stories, I found really interesting data about veteran homelessness in the United States. And this was another issue that the US government just threw money at it, they were like, this is a huge problem, we’re going to throw money at it. And since 2010, the number of veterans experiencing homelessness in the United States has been cut, almost in half. This was from 2021, this particular press release I’m reading, I think since then it’s even it’s gotten even better. That’s about half. And several prep factors I’m going to read here played into this progress investments and veterans specific programs, a housing first approach and strong leadership. So a lot of times we hear narratives about you know, keep the government out of things, the government, you know, needs to, you know, stay out of our schools and our homes and this, that and the other. But I think that there is a lot to learn from government programs and how they are run and resourced that can give us data that whether you want the federal government to do it or not, or your state to do it or your local government to do to your community to do it. That shows what works. That’s all.

Kai Ryssdal 

Yeah, for sure. There. There are places in this country where government actually works. Sadly, none of them are in Washington DC, but that’s all. Okay, so I just want to just super quick, and it’s a little dorky, but there’s a guy by the name of Raphael Bostic, who is the president of the Federal Reserve Bank of Atlanta, who said in a speech that instead of remarks today, actually he was answering questions at the American Bankers Association Conference, which I’m sure it’s just a great time that he doesn’t think we need to raise interest rates anymore. Now, Bostick is not a member, a voting member of the Federal Open Market Committee, which is the committee that sets interest rates this year. But he’s an influential voice. He’s, he’s well respected and what he is saying sort of jives with what the Vice Chair of the Fed Philip Jefferson has been saying and the new president of the Dallas Fed, Lorie Logan has been saying that maybe we need to just not raise interest rates for a while and see what happens. So stay tuned. The Fed meets again next month, earlyish. But it’s possible we’ll get another pause as as, you know, sort of the the rate hikes and Milton Friedman’s long and variable lags. We’ve said Milton Friedman twice in this podcast as his long and variable lag take effect. So we’ll see. We’ll see.

Kimberly Adams 

Yeah, I was just looking on CNBC. I saw earlier today. The Walmart CEO said consumers are starting to buckle for the first time in a decade and was warning of a pullback in spending, which is exactly what the Fed kind of wanted people to do.

Kai Ryssdal 

Right. Exactly. So the Fed raises rates until something breaks and and the sign of something breaking might be consumers sort of saying yeah, we’re not doing this anymore, which would be huge. So keep an eye on that. Okay, mailbag coming up.

Mailbag

Hi Kai and Kimberly. This is Godfrey from San Francisco. Jessie from Charleston, South Carolina. And I have a follow up question. It has me thinking and feeling a lot of things.

Kimberly Adams 

Last week, we had Bloomberg’s Zeke Faux on the show to talk about Sam Bankman-Fried, SBF, trial and the crypto industry more broadly and we asked you all to share your thoughts on crypto. And Richard in New Hampshire sent us this.

Richard

I’m not the world’s biggest crypto for everything cheerleader, but I am the managing editor of the first academic, peer reviewed journal on the topic of cryptocurrencies and the blockchains they make possible. Our authors have published research and everything from blockchain based robotics to blockchain usage in the so called internet of things to the feasibility of using blockchains for rail traffic control. With so many grifters in the cryptocurrency space, it’s easy to miss that there are brilliant, serious academics working quietly behind the scenes on what is in all honesty, still a nascent technology.

Kimberly Adams 

Very fair, very fair. That journal is called Ledger and it’s published published by Pitt Open Library publishing publishing at the University of Pittsburgh. And I think that’s almost the saddest thing. Well, no, it’s not the saddest thing. Saddest thing is people losing their life savings, but it’s really sad that people who are working on this in seriousness, get lumped together with the grifters. That’s a real bummer.

Kai Ryssdal 

Yeah, totally fair. Alright, so we were talking about self checkout and half full half empty the other day, and Anthony, who is very empty on this, wrote us a little story to tell us why here’s what he says, it’s an email: “I was in target with 12 to 15 items and a three year old hanging on to me, and there were no person staff to checkout lines, picture the scene through other carts coming behind me and getting impatient. I’m starting to sweat as my toddler is balancing in my arm near a meltdown, as I tried to scan the banana code, and bag all my items. This too shall pass he says, but it’s not disability, or multiple kid parent friendly,” which is totally true. Totally true.

Kimberly Adams 

And this is what we were saying that it needs there needs to at least be the option, you know. All right. Before we go, we’re going to leave you with this week’s answer to the make me smart question, which is what is something you thought you knew, but later found out you were wrong about? And this week’s answer comes from Charlie’s Sprinkman, founder of Everywhere is Queer, a public resource with a searchable map to locate queer owned businesses,

Charlie

Something I was wrong about being able to start a map based business by myself, I really struggled to take the jump to start because I have no tech background. And so I was really intimidated by that. After some Googling, though, I was able to figure out that I can put together a free application that will flow onto a map, and that will do it. And so that was just really exciting to be able to figure this out by myself. And I definitely relied on some community members around me for their support and advice. I really recommend people to use the people around them for what they know people do want to help. And I’m grateful to say that my map has been viewed over 1.6 million times, which highlights and showcases queer owned businesses all over the world.

Kimberly Adams

Congratulations.

Kai Ryssdal

That’s kind of cool story.

Kimberly Adams 

You know, after I mentioned in passing, I think during half full half empty about this lamp that I have that needs rewiring and my frustrations with it. I have received so many messages from people offering to help me figure out how to wire it pointing me to resources online encouraging me to do it myself. And it was just very warm and fuzzy and I was like, you know what, yeah, I’m gonna try it and so people are like, you know, I’m in the I’m in the DC area, you can send it to me and I was just like, people are so kind and I love that.

Kai Ryssdal

That’s very cool. Yeah, that is very cool.

Kai Ryssdal 

We do want to hear your answer to that make me smart question or number is 508-827-6278. 508-U-B-SMART is how you can reach us.

Kimberly Adams 

Make Me Smart is produced by Courtney Bergsieker. Ellen Rolfes writes our newsletter. Today’s program was engineered by Charlton Thorp with mixing by Jayk Cherry. Our intern is Niloufar Shahbandi.

Kai Ryssdal 

Ben Tolliday and Daniel Ramirez composed our theme music. Our senior producer is Marissa Cabrera. Bridget Bodnar is the director of podcasts. Francesca Levy is the executive director of Digital and on demand. Marketplace Vice President and General Manager is Neil Scarbrough. There we go. We finished too soon. Or Charlton’s playing the long music by mistake.

Kimberly Adams 

Like chatter, chatter, vamp, vamp.