The Business Roundtable, an organisation consisting of chief executives of most of the largest companies in the US ranging from Apple to Walmart, issued a new statement last month on the purpose of a corporation. In 1997 it had issued a statement declaring that shareholder profit is the sole purpose of a corporation. Now it has reversed and instead declared that, “while each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.”, arguing that companies should advance not just the interests of shareholders, but also employees, customers, the environment and the communities they operate in. Nancy Koehn, a historian at Harvard Business School, described this as a manifestation of a shift in the Zeitgeist.



Some of the executives are more blunt (or honest) than others regarding this. Jack Welch, the former CEO of general electric from 1981-2001, a time when the company saw its value increase by 4000%, said the principle of shareholder profit maximisation as the sole purpose of a corporation was the “dumbest idea ever”. Similarly Xavier Huillard, the CEO of the Vinci group, the largest non-Chinese construction company in the world called the principle “totally idiotic”.



The chief economics commentator of the Financial Times, Martin Wolf, recently published an article in which he “reluctantly” came to the conclusion that “capitalism is broken”, because corporations only seek to maximise shareholder profit. He states:



"Shareholders are least committed, because, unlike employees, dedicated suppliers and the locations in which businesses operate, they can divest themselves of their engagement in the company in an instant. Shareholders are the least knowledgeable, because they are not engaged in the activity of the company.



…contrary to economic wisdom, shareholders are not the bearers of the residual risks in the business… employees, suppliers and locations also bear substantial risk… stock markets allow shareholders to diversify their risks across the world, something employees, for example, cannot hope to do… Moreover, everybody else is at risk from shareholders’ opportunistic behaviour. This has to weaken the commitment of everybody else.



…given the mantra of shareholder value maximisation and the inability of shareholders to monitor management, rewards have increasingly been linked not to the performance of the business in delivering on its purposes, but to accounting profits and the share price. Yet both are subject to manipulation. Some would argue that the result has been excessive remuneration… and chronic under-investment, too.”



It seems we are in an ‘emperor has no clothes’ situation of epic proportions. Everyone accepts that the shareholder profit maximisation as a principle is not working - even those for whom it is working for better than for anyone else. Yet it remains the principle that our global economic system is based on more than anything else. It is hard to overstate the importance of this principle. For example, “Theory of the Firm” by Michael Jensen and William Meckling, argued that the fundamental problem corporations seek to tackle is to get directors and executives to maximise shareholder profits, and this is the most cited paper in business literature. The New York Times article by Milton Friedman titled “The Social Responsibility of Business is to increase its profits” has been described as the the most read article ever written by a Nobel Laureate economist. There is no single goal that our societies are more programmed to achieve than this.



We are at a stage comparable to the Soviet Union’s collapse, that Russian linguist Elena Gorkhova described as the following:



“The rules are simple: they lie to us, we know they're lying, they know we know they're lying, but they keep lying to us, and we keep pretending to believe them.”



The difference is no one is even pretending anymore.