Originally published August 4, 2020 on Forbes
by Doug Sundheim
In his New York Times opinion piece last month, Harvard economist Greg Mankiw, argued that C.E.Os are qualified to make profits, not lead society, and that we should not expect the latter of them. His arguments are too simple, have significant holes, and read as if they were written in 1970 when economist Milton Friedman famously argued the same point.
Friedman’s ideas came to be known as shareholder value theory. Its singular management goal was maximizing returns to shareholders. Conceptualized at a time of increasing global competition and slowing economic growth, the idea caught on fire. By the 1980s, shareholder value theory was at the heart of Ronald Reagan’s and Margaret Thatcher’s supply side economic policies, which spread throughout the world in the ensuing decades. By keeping business leaders solely focused on returns to shareholders, the logic went, benefits were supposed to trickle down to create prosperity for all. It sounded good in theory, but it’s been problematic in practice, leading iconic CEO Jack Welch, a onetime staunch supporter of shareholder value theory in the 1980s and 1990s, to eventually acknowledge it as “the dumbest idea in the world.”
Most troubling about Mankiw’s article is that at time when ~70% of the largest entities on earth are corporations, not nations, he doesn’t acknowledge the need for the executives running these corporations to help lead society.
Following are three of his arguments which fail to grasp the world in which CEOs are now leading, and my thoughts in response.
Mankiw’s argument: Corporate management’s mandate should be the narrow self-interest of achieving greater profits for shareholders, not broad social welfare
To illustrate his point, Mankiw presents a scenario in which a company producing gasoline cars in Michigan considers closing it and opening one producing electric cars further south. He asks the reader to imagine they are an executive deciding whether to approve the plan. In his view, if you’re concerned solely with profits for shareholders it will help “focus the mind.” However, he continues, if you’re concerned with a broader set of stakeholders, including customers, employees, suppliers, communities, and shareholders, it opens up a range of “dizzying” questions that will require CEOs to be broad social planners rather than narrow profit maximizers. He goes on to list several of the additional hypothetical questions that the broad social planners would have to consider:
- How much will the closure of the old plant hurt its workers and their community?
- How do you weigh those losses against the gains to the would-be workers at the new plant?
- Given the nation’s history of systemic racism, should you consider the racial makeup of the two groups of workers, in an effort to reduce economic inequality?
- Does it matter whether the new plant is in South Carolina, providing jobs for American workers, or in Mexico, providing jobs for Mexican workers?
- How should you weigh the benefit of electric cars in mitigating climate change? Should you consider the global impact of climate change or only the impact on the United States?
- How should you balance these concerns against the interests of shareholders, who entrusted you to invest their savings?
Every corporate executive I’ve worked with over the past twenty years would have included some version of the above questions in their considerations. To exclude them is ridiculous. It’s not broad social planning, it’s basic business planning in the 21st century: Business has grown more interconnected and complex. Who, for example, seeing the potential devastation of a community they are leaving, would not spend considerable time, energy, and effort trying to find a cost-effective and innovative solution to stay put. Good CEOs are always weighing social costs that don’t immediately show up on the bottom line. They will always have profit in mind, but they will also be considering the needs of a variety of stakeholders. In this day and age if these questions seem too “dizzying” for a CEO to consider, the answer is not to lower the bar on expected qualifications, but rather to raise it and find or train CEOs who can balance the demands of multiple stakeholders.
Mankiw’s argument: It’s unlikely that corporate executives, with their business training and limited experience, have the skills to be broadly competent social planners rather than narrowly focused profit maximizers
Related to points above, this distinction doesn’t accurately reflect the world in which CEOs now find themselves. Corporate executives can and should play a variety of leadership roles that move beyond narrow profit maximization. This is social responsibility, not broad social planning. The soul has been ripped out of business over the past 50 years as we’ve come to view every decision through the myopic lens of short-term earnings. We’re starting to find our way back to a more balanced view and we need CEO’s leadership in the process.
How should CEOs approach leadership on important issues where they can make a unique and lasting impact? Former Unilever CEO, Paul Polman talks about creating collective courage. He rightly points out that it’s tough for one industry player to impact an issue like reducing greenhouse gases because of the loss of competitiveness. But in his experience, if at least 20% of industry players can come together to move on an issue, they can reach a critical mass and begin tipping the scales. In this way, corporations, governmental agencies, and NGO’s can partner to lead society. Where does this sort of collective leadership live in Mankiw’s simplified model? Unfortunately, nowhere.
Mankiw’s argument: The world needs people to look out for the broad well-being of society. But those people are not corporate executives. They are elected leaders who are competent and trustworthy
This is perhaps the most troubling of Mankiw’s arguments. He claims that our elected leaders, not corporate executives should be looking out for the well-being of society. On the surface, it’s a fair argument: But he fails to acknowledge just how much influence our corporate executives have over our elected officials and the legislative process. Forty years ago, business, labor, and public interest group lobbying was on relatively equal footing. Today, large corporations and their associations outspend labor and public interest groups 34 to 1 on lobbying efforts, totaling upwards of $2.6 billion in 2014. To put that number in perspective, in 2014 the US spent $2 billion on all congressional (House and Senate) operations. That means that business lobbyists had more operational firepower than the entire elected legislative branch of the US government. That’s not a thumb on the scale, that’s an elephant on the scale crowding out everyone else.
In sum, CEOs cannot simultaneously be unqualified to lead society and yet be exerting such immense influence behind the scenes. If they’re qualified, they should step up and help lead on the thorny economic issues of the day. If they’re not qualified, they should take significant weight off the scale. They can’t have it both ways. With great power, comes great social responsibility. We must demand the latter of our corporations, their boards, and their CEOs.
