Archive for April, 2023|Monthly archive page
Don’t change the purpose of corporations
In Business on April 12, 2023 at 6:00 am
This article originally appeared here in 1819 News.
The Business Roundtable is a national association of influential CEOs from numerous fields, industries, and publicly traded companies. It lobbies for policies that allegedly generate jobs and economic growth. In 2019, it issued a controversial statement purporting to redefine the purpose of corporations.
What, historically, was the purpose of corporations? The traditional understanding was that chiefly they maximized profits for shareholders. Profits, of course, are the total revenues of a corporation minus its expenses.
If they don’t earn profits, companies go out of business.
The Business Roundtable suggested that shareholder primacy was no longer optimal for corporations. Instead, stakeholders were at least as important as shareholders to companies’ long-term health.
What’s a stakeholder? It’s difficult to say. Some stakeholders are easy to identify — employees or customers, for instance. Others are vague: communities or society writ large.
The Business Roundtable predicated its announcement on two fallacies: first, that businesses don’t help communities or society when they prioritize profits and, second, that businesses pursuing profits don’t adequately account for the interests of customers, employees, or suppliers.
In fact, businesses that satisfy customers, employees, and suppliers outperform competitors. Moreover, profits enable companies to contribute to communities and society. After all, companies need profits to hire employees, offer benefits packages, provide goods and services, reach new markets, and expand their operations.
Without profits, companies cannot satisfy financial obligations. Simply put, companies that aren’t profitable fail. And what can failed companies do for communities or society — other than provide useful data about their failure?
Consider what profits, directly or indirectly, make possible: cures for disease, ease of communication and transportation, renewable energy, and revolutionary technology. Because individuals and companies sought profits, we live longer and healthier than our ancestors did.
Even successful creatives who chased dreams or ideals rather than solely profits could not realize their ambitions without profits to support them.
Although The Business Roundtable intended its redefinition to make corporations look good, it inadvertently widened the latitude for executives to do harm. Profits are a clear measure of success and usually a straightforward matter of accounting. But how to assess ambiguous standards like “societal impact”?
A company president might explain away declining profits by prevaricating, “The purpose of our corporation isn’t strictly the profit motive. We may have sold fewer units this year, but we met our benchmarks by integrating environmental and diversity quotas in our governance and practices.” This excuse illustrates how executives can characterize losses as wins, or failures as successes.
Moreover, stakeholder capitalism empowers bad actors to conceal mischief and mismanagement by diverting attention from the company’s bottom line and towards popular social trends. For example, corporations have misled consumers and regulators by “greenwashing” or “wokewashing.” (If you don’t know those terms, look them up!)
A perfect example is Silicon Valley Bank (SVB). Its 2022 Environmental, Social, and Governance (ESG) report is full of grand declarations about responsible governance and risk management. A few months after issuing this report, SVB failed, precipitating banking troubles all over the world.
Or consider the failed crypto exchange and hedge fund FTX Trading, which received high ESG ratings despite a governance structure that contributed to financial collapse and bankruptcy.
Businesses that follow the law, differentiate themselves with hospitality and customer service, engage in philanthropy, and operate honestly and ethically already improve the lives of stakeholders, multiply opportunities across society, and add value to communities. They need not reinvent themselves along the modern model propounded by The Business Roundtable.
“If it ain’t broke, don’t fix it.” The Business Roundtable’s definition is unnecessary and damaging. Although outlier businesses have been guilty of scandal or fraud, and not every executive is honest or upright, most businesses most of the time act with decency and integrity when the laws they follow are just and the appropriate incentives are in place.
Just because some famous CEOs claim they’re changing corporations for the better doesn’t make it so. They may have ulterior motives.
Advice for millennials
In Economics on April 5, 2023 at 6:00 amThis piece originally appeared here in Alabama Political Reporter.
Millennials are hurting. Recently The Wall Street Journal ran an article titled “Americans in their 30s are piling on debt.” The author, Gina Heeb, claimed that Americans “in their 30s have racked up debt at a historic clip since the pandemic.” “Their balances,” she wrote, “hit more than $3.8 trillion in the fourth quarter.”
Heeb warned that “the debt buildup could worsen a generational wealth gap that was already on the rise for millennials.” She factored inflation, interest rates, childcare, home prices, cost of living, and student loan debt as causes.
There’s more to the story: millennials, the largest demographic in our workforce, began their careers during the Great Recession, a period of low wages and high unemployment. Their struggle to find good jobs and build careers made it difficult for them to pay off loans and debt. Businesses during the recession froze hiring and cut staff, salaries, and benefits. Millennials fell behind. As of 2020, over half of adults between 18 and 29 still lived with their parents.
Student loans, university administrative staff, the race to improve and expand facilities—these magnified the costs of higher education. As a result, millennials took on substantial debt to pay for college.
Those whose parents could afford the price of college began careers ahead of students from low-income families who depended on loans and worked through college, sacrificing study time to earn rent money through odd jobs and menial labor.
Some millennials believe they can’t find jobs as easily as their parents did. They don’t want to work for an employer for decades until they earn a company watch or their names on a plaque. Many of them work freelance jobs or part-time gigs lacking health insurance benefits or retirement contributions. Some may enjoy the flexibility that contract work provides, but others would prefer more stability.
What’s to be done?
Mass student-loan forgiveness isn’t the answer, although anyone with student loan debt should research whether they’re eligible for income-based repayment plans or loan forgiveness under current rules.
Families should continue supporting their adult children or relatives. Maybe it’s good that so many young adults still live with their parents. After all, aren’t families supposed to be close and nurturing? For centuries extended families cohabitated, if not in the same house, then at least on the same land. If parents aid their children well into adulthood, might the children one day reciprocate, taking care of their parents who reach old age? Is it so bad to see hearth and home return to the center of community?
Regardless, millennials must learn to budget, save, and invest, ensuring that expenses don’t exceed incomes. They must put away for retirement even if retirement seems far off.
Rather than ordering new credit cards, millennials should avoid debt by living within their means. If they receive tax refunds, they should save or invest them, or use them to pay off debt, but they shouldn’t spend them on luxury goods or exotic vacations. They should build an emergency fund for unforeseeable exigencies such as home or vehicle repairs.
Millennials are sometimes accused of embracing socialism, but that does not appear to be so. A 2019 Gallup poll suggested that half of young adults viewed socialism favorably. Yet the same poll indicated that 83 percent viewed “free enterprise” favorably.
That’s promising. Free enterprise will help millennials as older generations age out of the workforce. Free enterprise yields competition, which, in turn, incentivizes companies to innovate, produce goods more efficiently, and allocate resources more effectively. The net result is to boost production, increase demand for labor, and multiply opportunities.
Millennials should embrace entrepreneurship and challenge barriers to entry that stifle innovation. People should be free to discover and create, find needed fixes to difficult problems, improve existing technologies, invent new products, and cultivate partnerships in different markets.
But before millennials, or other younger generations for that matter, can change society, let alone the world, they must change themselves. They must work hard, improve their credit scores, pay bills on time, avoid bank overdrafts and excessive borrowing, consolidate debt into lower interest loans, establish sound financial goals, and invest (if possible) in diversified funds or assets that appreciate in value.
Millennials, heed the words of Benjamin Franklin: “Beware of little expenses; a small leak will sink a great ship.” And hang in there! I’m a millennial too, and I can feel it: Spring is just around the corner.
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