michael barbaro

From The New York Times, I’m Michael Barbaro. This is “The Daily.” Today: For five decades, American corporations have prized profits for shareholders above all else. Now, America’s most powerful chief executives say it’s time to do things differently. Andrew Ross Sorkin on what’s driving that change. It’s Wednesday, August 21. Andrew, tell me what happened in your world on Monday morning.

andrew ross sorkin

On Monday morning, 5:00 a.m. in the morning, the Business Roundtable, which is probably the most powerful and influential lobbying organization for the nation’s biggest companies — think Apple, think Amazon, Walmart, JPMorgan, all of them — came out and said that shareholders were going to be just one piece of a larger puzzle.

[music]

archived recording 1 From the Business Roundtable, 181 of the top C.E.O.s in the country have agreed now that maximizing profits in all situations cannot necessarily be the main goal of corporations. archived recording 2 A statement signed by almost 200 C.E.O.s, including JPMorgan’s Jamie Dimon, says companies should focus on all stakeholders.

andrew ross sorkin

For as long as I covered the world of business, every C.E.O. in America said they had a fiduciary duty to shareholders. Everything was in the name of profits.

archived recording So after decades of explicitly saying that shareholders were the highest end of a corporation, they point out the corporation’s duties to their customers, to their suppliers, to their communities. And then they get to their shareholders. A massive change.

andrew ross sorkin

And so the idea that any of these other stakeholders are even being acknowledged as part of the equation is a major shift. But in many ways, it’s a return to an earlier era, an era almost a century ago, when these other stakeholders mattered in a way that they haven’t for so many years.

michael barbaro

And what is that era?

andrew ross sorkin

If you go back to the 1930s, possibly even earlier, the biggest corporations in America genuinely thought about the full plethora of constituents. Employees mattered, customers mattered, suppliers mattered. The profits mattered, but there was clearly a larger social compact that had been reached between companies and the rest of society.

michael barbaro

And what did that look like? And what’s an example of a company that reflected that?

andrew ross sorkin

You could even go back to the early 1900s and look at Henry Ford and the Ford Company, and his decision to raise the average pay from $2.25 to $5.

archived recording Back in 1914, Ford had revolutionized assembly line production. And to keep his workers from quitting, he announced he would raise their pay to a generous $5 a day, twice what they earned before, and twice what they could earn at any other auto company.

andrew ross sorkin

He believed that it was important for his employees not only to have a fair wage, but to have a wage that might give them an opportunity to actually buy the car that he was selling.

archived recording It was a simple American bargain, security and high wages in exchange for hard work.

andrew ross sorkin

And then you can look even at so many companies, whether they be IBM, General Electric, so many big American companies between 1930 and 1970 that created defined pension programs for their employees, that gave huge amounts of corporate charity to their communities, that became connected in a way that made the companies intertwined with the community that they lived in.

michael barbaro

And what exactly is the motivation for these companies to conduct themselves in this way, as community-minded corporations investing in their employees and in their communities?

andrew ross sorkin

It was ultimately good for business. It was the idea that if you could attract great employees and you could keep those employees, often for life, that you would have a better product, that you would have a better company, and that they were all inextricably tied. The backdrop of all of this is a post-World War II world, in which the United States, in truth, is a monopoly power.

archived recording Factories were churning out products to satisfy the growing consumer appetite in America and to meet the needs of a postwar Europe. The defense industry kept military supplies flowing in reaction to the Cold War. And the nation was building, straight up in the cities and far out into the country. America’s economy was the biggest in the world.

andrew ross sorkin

There really is no international competition. We are it. And that meant that there was a limited workforce, and that meant that you had to be good to your people.

michael barbaro

Because they could go shop around for a different job.

andrew ross sorkin

Exactly. Among the world of academics, this period was really defined as managerialism, the idea that you were managing the company for the people that were in it.

michael barbaro

And when does that start to change?

andrew ross sorkin

In the 1970s, the idea of managerialism went from being a good thing to being a very bad thing.

michael barbaro

Why?

andrew ross sorkin

Because investors, the shareholders, started to raise their hand and say, ah, over here, we’re actually the people who own you. And we think that you’re mismanaging the company, that you’re spending too much money on your own people, that you’re fat and happy. There was a view that managerialism had been perverted and abused. And at the same time, you had the rise of Milton Friedman.

archived recording (milton friedman) First of all, tell me, is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course, none of us are greedy, it’s only the other fellow who’s greedy. The world runs on individuals pursuing their separate interests.

andrew ross sorkin

He’s an economist at the University of Chicago who really becomes one of most popular figures of this time, not just in the world of corporate America, but throughout the country. And it’s in large part because he has a provocative view about the way we do business. And he pens this famous piece, actually in The New York Times Magazine, with the headline “The Social Responsibility of Business Is to Increase Its Profits.” Let me read you what he wrote. He wrote, “What does it mean to say that business has responsibilities?” He almost asked it rhetorically. And then he writes, “Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” It’s effectively a rebuke of the way business has been managed. It’s a rebuke of managerialism.

michael barbaro

And what does Friedman believe will happen if corporations don’t see social responsibility as part of their job, if they just focus on what he says they should, which is profits and shareholders?

andrew ross sorkin

He fundamentally believes that if you focus on profits, everything else will come with — that a company that is not as profitable as it humanly can be will ultimately lose out to other companies that are. And you need a strong company to employ people who will pay taxes to the community, who will give charitable giving to others down the line.

michael barbaro

So all those functions of the traditional corporation that came before, they get served through a healthy company that profitably serves its shareholders.

andrew ross sorkin

I don’t think they called it trickle-down then, but they would now.

archived recording (milton friedman) What are you going to do for the people who are out of work when the public at large decides it’s not going to go in big cars, it’s going to go in little cars? I don’t want to do a thing. I want to let the private market work. The private market system is a system of profit and loss. And the loss part is just as essential as the profit part. It is a disgrace —

andrew ross sorkin

He was a free marketeer. This was all part of a larger free market theory that profits above everything else would ultimately win the day and make the country stronger. So you have this confluence of these two ideas — Milton Friedman on one side, and shareholders that are starting to look at companies and saying, maybe they’re a little too fat and happy. And that really brings about a new era in corporate America where the shareholder becomes the top priority.

[music]

michael barbaro

We’ll be right back. Andrew, once the idea of the shareholder takes hold in the U.S., how does that actually play out? How does corporate behavior change?

andrew ross sorkin

It manifests itself first in the form of what became known as corporate raiders, investors who basically started knocking on the door of companies, saying, you need to make more profits. And if you don’t, we’re going to take you over.

michael barbaro

And what period is this, roughly?

andrew ross sorkin

This is the 1980s.

archived recording It takes a certain breed of stock market investor, the kind with lots of money and lots of guts, to thrive in queasy times like these.

andrew ross sorkin

This is greed is good. This is in the midst of this sort of rush around Wall Street, around capitalism.

archived recording Carl Icahn is one of that breed. He has a knack for turning someone else’s loss into profit for himself.

andrew ross sorkin

And you had some very early investors, like Carl Icahn —

archived recording (carl icahn) I was always good at making money. I always was good.

andrew ross sorkin

— go to some of the biggest companies in the world, that T.W.A.s of the world, one of the biggest airlines in the country, go to companies like U.S. Steel, and say, I’m going to buy you.

archived recording Got some breaking news for you. This time, Carl Icahn is at it again. He has offered to buy Commercial Metals for $15 a share. He already owns about 10 percent.

andrew ross sorkin

I’m going to take you over. I’m going to throw your C.E.O. out. I’m going to lay off scores of employees. I’m going to undo all the benefit programs. And I’m going to manage this company in a much leaner way. That was the euphemism, leaner.

michael barbaro

Because leaner was, in their minds, stronger.

andrew ross sorkin

Leaner was more profitable.

michael barbaro

So these corporate raiders were emboldened by this new guiding philosophy that it was good and right to cut the fat, cut the excess, and increase profits, and that that was actually the socially responsible thing to do, no matter how ruthless it might have seemed.

andrew ross sorkin

Absolutely, and Milton Friedman had almost turned it into a moral argument, so that these investors had a moral underpinning for what they were doing.

michael barbaro

And how does that era of corporate raids affect the larger American business world?

andrew ross sorkin

These C.E.O.s start to really internalize what they’re seeing in the headlines with these corporate raiders. They don’t want to be the next target of these guys. All of a sudden, C.E.O.s that historically might have been a little bit looser with the purse, say to themselves, you know what, we should maybe cut back on some of these employees. We don’t need all of these people. We need higher profits. Maybe instead of investing in research and development, we should start buying back our stock, or dividending out money to our shareholders. Maybe we should rethink our defined pension contributions and move towards 401(k) plans, which will cost us less. Maybe that charitable budget that we had for the community, maybe we should scale that back. Over the next 20 or 30 years, you saw a massive restructuring of corporate America that put the shareholder first, the shareholder over the stakeholder. You saw scores of layoffs. Millions of people were laid off over this period. You saw charitable contributions by companies fall in half during this period. You saw pension funds and retirement funds diminish materially. All of this leads to a mindset in the corner office among the C.E.O. world of being very short-term oriented. They all want to hit their quarterly numbers. Their bonuses become tied to the quarterly numbers. Everything is now around the stock price. How high is the stock price? Everybody’s getting compensated in stock. And in some ways, that’s supposed to incentivize managers to do the right thing, to align their interests with the shareholders. But at the same time, it often pitted them against their own colleagues.

michael barbaro

Andrew, is there a sense that this Miltonian, shareholder-first system, that it works in this period?

andrew ross sorkin

Some people loved Milton Friedman. Some people thought he was absolutely wrong. But within the world of corporate America, it became a mantra. This had permeated the brains of the C.E.O. community so much so that by 1997, the Business Roundtable actually changed their mission statement then and said, quote, “The paramount duty of management and of boards of directors is to the corporations’ stockholders.”

michael barbaro

So Andrew, how do we get to this week, this statement from this group of America’s most powerful C.E.O.s rejecting this philosophy that you’ve just described as basically accepted wisdom in American business, that shareholders should be first, why would they suddenly reject that?

andrew ross sorkin

I’d point back 10 years ago, to the financial crisis —

archived recording For Wall Street, it was another case of whiplash. The markets haven’t been this volatile in almost 80 years.

andrew ross sorkin

— to a moment where so much of this crystallized in a national conversation —

archived recording (george w. bush) The market is not functioning properly. There has been a widespread loss of confidence.

andrew ross sorkin

— around the role of businesses, around the role of banks, which had taken on these short-term interests at the expense of the entire country, where questions about capitalism were raised.

archived recording 1 All across the country, plants are closing, and employees are being laid off. archived recording 2 For every job opening, there are six people looking to fill it.

andrew ross sorkin

And when we were living at a time of unemployment of 10 percent, it really changed the narrative about what a company does. And people felt it. They felt it in their bones, because there were so many layoffs.

archived recording We are the 99 percent. We are the 99 percent.

andrew ross sorkin

And it became a political story. The ascendancy of Elizabeth Warren.

archived recording (elizabeth warren) People feel like the system is rigged against them. And here’s the painful part: They’re right.

andrew ross sorkin

The ascendancy of Bernie Sanders.

archived recording (bernie sanders) Yeah, corporate greed is running this country. And corporate greed is destroying the dreams and aspirations of millions of American people.

andrew ross sorkin

And so much of the country started to ask real questions. And I think that the C.E.O. community has had a realization that if they don’t change their ways, if they don’t at least nod to these issues, that capitalism itself, that the system itself that they’ve been living in, will change, that the political forces in this country will change them for them.

michael barbaro

So this evolution, this statement, is about shifting public opinion, not, again, altruism. These C.E.O.s are reading the tea leaves. They’re looking at the polls and the politics, and that is telling them that it’s good business to change the way that they’re doing business.

andrew ross sorkin

This is straight survival instinct. They’re doing this because they think it’s good for their business.

michael barbaro

O.K., so let’s talk about this statement and the people who put it out. I wonder what would actually change about the behavior of corporations if they put into practice what they’re saying here, if they actually mean it? Like, how does the C.E.O. of JPMorgan — one of the people who signed it — Jamie Dimon’s job change if he puts into practice this change in approach that this document outlines, where shareholders are just one of a dozen people he now thinks of his corporation as serving.

andrew ross sorkin

I’m going to give you my hopefully skeptical but not cynical view. I think there’s some element of progress here, because it changes the conversation. It provides for an allowance, if you will, for a board of directors or C.E.O. to say, you know what, let’s raise the minimum wage, let’s actually spend the money on this plant, let’s increase our research and development budget. You know what, in this community, maybe we should give a little bit more and increase our charitable giving budget. You know what, we’re not going to nail our profit number next quarter, because we’re going to invest in these other things.

michael barbaro

And it’s O.K.

andrew ross sorkin

And that’s O.K.

michael barbaro

Because before, there wouldn’t have been an allowance for that.

andrew ross sorkin

There might not have been an allowance for that. In certain boardrooms in America, there was no allowance for not hitting your profit number. Now, there may be. That would be the positive view of this.

michael barbaro

That’s not all that optimistic.

andrew ross sorkin

Well, the negative view of this is that they’re words on a page, and that’s all they are. Politicians will look at this, maybe give them credit for it, maybe not, and what does it cost them? Their signature on a piece of paper. They got a front-page story in The New York Times out of it. They get a “Daily” podcast. There’s safety in numbers here. That’s probably the best that can be said about this.

michael barbaro

Mm-hmm. I don’t hear you saying that you think this is representing a fundamental change in how corporations see themselves or function.

andrew ross sorkin

I still think that ultimately, if these companies are not profitable, that these executives are going to lose their jobs, full stop. I still think the investment community is very short-term. I think we are, over the long term, on a journey where social responsibility is going to be a central piece, at least a piece, of this larger puzzle. I think it’s almost impossible that it’s not going to be. And I think you’re seeing it in the voices of politicians, in the voices of the public, in the voices of regulators. And as a function of that, companies are listening.

michael barbaro

But only because social responsibility is also good for business, and good for profits, and good for shareholders.

andrew ross sorkin

At the end of the day, C.E.O.s are only going to do things that are ultimately profitable. And in this moment, thinking about all of these other stakeholders may be profitable. Ultimately, if you’re looking for big social change, I don’t think you’re going to look to corporate leaders for that. I don’t think that’s where it’s going to come from. Companies ultimately have to be profitable entities. If they’re not profitable, they don’t exist, and they can’t serve any of these other purposes, which is to some degree what Milton Friedman was trying to say.

michael barbaro

Andrew, thank you very much.

andrew ross sorkin

Thank you very much.

michael barbaro

We’ll be right back. Here’s what else you need to know today.

archived recording (giuseppe conte) [SPEAKING ITALIAN]

michael barbaro

On Tuesday, Italian Prime Minister Giuseppe Conte resigned, after his government, a 14-month-old coalition of populists and nationalists who are skeptical of the European Union, collapsed. His resignation was triggered by one of Conte’s own ministers, Matteo Salvini, an increasingly popular right-wing figure, who called for a vote of no confidence in Conte’s government, and who has now plunged the country into political uncertainty. And —

archived recording (donald trump) Yes, any questions? archived recording Mr. President, what sort of contingency steps or plans is the White House thinking about to stave off any kind of economic slowdown? What are you looking at? archived recording (donald trump) We’re looking at various tax reductions, but I’m looking at that all the time anyway, tax reductions.

michael barbaro

President Trump said he’s weighing a set of tax cuts to stimulate the U.S. economy amid growing fears it may be entering a recession.

archived recording (donald trump) Payroll tax is something that we think about. And a lot of people would like to see that. And that very much affects the workers of our country.

michael barbaro