The nation's most powerful CEOs declared the shareholder-or-bust era of capitalism is over. But is it?

The Business Roundtable, an association of almost 200 top CEOs made a splash this week when they announced that, in addition to making money for shareholders, the purpose of corporations is to deliver value to customers, invest in employees, deal fairly with suppliers and support communities.

On one hand, this doesn't seem like it should be a particularly big deal to say that customers, employees, suppliers and communities matter.

My guess is that most Americans already assumed companies, most of the time, cared about their customers.

The reason it is a big deal is because for almost 50 years, American CEOs have loosely followed what is known as the Friedman Doctrine. That doctrine, taken from a 1970 essay by economist Milton Friedman in the New York Times Magazine entitled "The Social Responsibility of Business is to Increase Profits," says, "there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits...."

For America's top CEOs to sign a statement implying that the Nobel-prize winning economist was wrong obviously was headline-worthy.

But then, Friedman's article was an equally big deal at the time. It was a response to a wave of post-WWII social activism by business leaders, including Robert O. Anderson, CEO of ARCO, who, along with Walter Paepcke, CEO of Container Corporation of America, founded and led the Aspen Institute to further their vision of business and business leaders participating actively in society, particularly through philanthropy. To Friedman, though, CEOs like Anderson and Paepcke were spending "someone else's money." Friedman saw social responsibility as a slippery slope that would lead to "pure and unadulterated socialism."

Friedman's work and that of others like Michael Jensen laid the groundwork for the shareholder value movement of the 1980s, associated in the public mind with ferocious CEOs like Sunbeam's "Chainsaw" Al Dunlap and "Neutron Jack" Welch at GE. The shareholder value movement was perhaps best summed up by fictional character Gordon Gekko in the 1987 movie Wall Street who said, "Greed, for lack of a better word, is good."

Los Angeles Times called this week's Business Roundtable statement a "shocking reversal." Not really, at least for anyone who reads Fortune, Harvard Business Review, or the McKinsey Quarterly. It's a reversal, but it's not shocking. For the last 15 years or so, the pendulum's been moving back in the other direction. The trend is toward the activist, engaged and socially-responsible CEO.

The basic argument is that businesses owe something to society in response to being given a license to operate and that by being good citizens, they not only help society but themselves. It's called "doing well by doing good." The current trend started with entrepreneurs like Patagonia's Yvon Chouinard, Sir Richard Branson of Virgin and Lady Lynn Forester de Rothschild. But it's taken a while to get mainstream traction. It's one thing for founders of lifestyle-brand companies to argue that companies should give away money to other stakeholders, because much of it is their money and anyway, it's good marketing. It's another thing altogether for public companies.

But academics like Harvard's Michael Porter and Oliver Hale have giving the movement intellectual respectability and boardroom air cover. Paul Polman and Harish Manwani of Unilever put theory into practice and encouraged other CEOs to do the same. In 2014, Manwani gave a famous TED speech entitled "Profit's not always the point."

Yet the tipping point may have come in 2018 when Laurence Fink, CEO of BlackRock, the largest asset management firm in the world with over $6 trillion dollars under management, in his annual letter called for corporations to play a more active role in taking on societal problems. After all, BlackRock represents the very shareholders whose interests so bothered Friedman. If Fink says corporations shouldn't be just about profit, it must be okay, reasoned some CEOs.

Now the idea is mainstream. The U.S. Chamber of Commerce called for a broader role for business last year.

One of the more intriguing arguments for societal responsibility was put forward by London-based writer Umair Haque in the Harvard Business Review a decade ago. Simply put, his view is that at one time businesses could get by with screwing customers and suppliers, because, for the most part, customers and suppliers had no way of knowing they were being screwed. His example was of a rug merchant who sold an over-priced rug to a customer who got on a train and left. As he put it, for the rug merchant, "in a disconnected world, the costs of evil are minimal." But in a connected world, the costs of evil are enormous. The customer talks to other customers and realizes he's been taken, puts it on TripAdvisor and the merchant's business suffers and so does overall trust in business and capitalism. So it isn't that the doctrine was wrong when Professor Friedman introduced it then, but rather that the internet has made it obsolete now.

To be fair, very few corporations have ever followed the doctrine to its sociopathic extreme. Think of it as a spectrum. Unvarnished greed is on one end and pure altruism is on the other. A rigorous adherence to Friedman would mean a company operated solely on greed. The other extreme would be a company that gave all its profits away, essentially a not-for-profit. Almost all public for-profit companies operate somewhere in the middle, between what ethicists call "enlightened self-interest," doing good opportunistically through things like philanthropy, and "rational selfishness," doing good as a byproduct of normal operations. An example of that is creating jobs.

What the Roundtable statement is really saying is that businesses should nudge themselves a bit along the continuum to the right. It's not a wholesale rejection of profit, nor probably, a capitulation to the "pure and unadulterated socialism" Friedman predicted.

Not everyone is sold.

In The Washington Post, Senator Bernie Sanders suggested it was a publicity stunt. He's right to be skeptical. It remains to be seen how this new purpose will hold up once put to the test.

Managing under the Friedman Doctrine is straightforward. Should a corporation close an uneconomic factory in Tennessee and move production to Mexico? Under Friedman, yes, because that maximizes profits. If the new answer is no, because the corporation owes it to those employees and that community to keep the factory open, that makes the decision far more complex. How much of a penalty in higher labor costs should the corporation be willing to tolerate? Should it pass those increased costs on to customers, or does that violate a different tenet of the new purpose? Do shareholders get a say, or is their only recourse to sell that stock and buy one in a company that still operates under the old rules?

One of the signatories of the Business Roundtable was Jeff Bezos, who leads Amazon, the company that played cities off against each other for the right to domicile Amazon's second headquarters, called HQ2. Amazon sought and received commitments for billions in tax breaks from the cities under consideration. Under the new Roundtable rules, should Amazon forego those tax breaks and let those communities keep that money and put it into new schools and roads? If so, what about a shareholder who owns a hundred shares of Amazon? Are shareholders okay with Amazon writing a thousand-dollar (roughly) check from their retirement account? If tax breaks aren't a consideration factor, then why use economics at all in the decision? Should Amazon just place HQ2 in whichever community needs those jobs the most, perhaps inner-city Baltimore instead of suburban Virginia?

Jeff Bezos
CEO and founder of Amazon Jeff Bezos participates in a discussion for the Economic Club of Washington on September 13, 2018. Bezos and nearly 200 CEOs agreed this week to change the purpose of corporations. Alex Wong/Getty

And Amazon and others have long been criticized for using accounting tricks to avoid paying taxes. Former Supreme Court Justice Oliver Wendell Holmes argued that taxes were a societal obligation. Perhaps there was a far simpler way for companies to do good, like paying their tax bills.

Other prominent signatories to the Business Roundtable statement whose business models and strategies have drawn criticism include Doug McMillon of Walmart, Darren Woods of Exxon Mobil, James Quincey of Coca-Cola and Alex Gorsky, Chairman and CEO of Johnson & Johnson. J&J is currently under fire for marketing baby powder that the company allegedly knew was contaminated with asbestos and for pushing the sale of opioids long after it became obvious they were being over-prescribed. This isn't to dump on J&J. Business decisions are complex and are made with incomplete information, e.g., the safety issues associated with a product may not be known for many years until after launch. Even then, the information isn't always clear cut.

But it illustrates the real-world challenges inherent in the living into the Roundtable pledge. At a minimum, trying to optimize the interests of five sets of stakeholders introduces complexity into decision-making, and in business, complexity is synonymous with cost and delay.

It remains to be seen if the commitment to societal responsibility is just CEO trendiness—or a permanent shift in how business thinks about its role in society. At best, the redefined purpose is a deliberately vague, in order to give the signers room to interpret the Roundtable Doctrine on a case-by-case basis.

As one of my left-wing friends said, "Yes, but what do they mean and when do they mean it?"

Let's see what, if anything, happens next.

The nation's most powerful CEOs declared the shareholder-or-bust era of capitalism is over. But is it? | Opinion