Prioritizing Sustainable Stakeholder Value Over Shareholder Profit

What is business? From its most basic roots, business is producing or providing some form of good or service, and ideally trading that good or service for either money, or something else of value. Over time, the definition of business grew, with the end goal becoming the ability to become sufficient off of the profit made from that business. Business became a part of every society, consistently growing into organization-like structures. Then, throughout the 20th century, new production processes, new readily-available technologies and sources of power, and other social/political forces “combined to require larger amounts of capital, well beyond the scope of most individual owner-manager-employees” (Freeman 2). When businesses began growing exponentially, new employees needed to be hired, more capital needed to be acquired, and most importantly, new management needed to be instituted. New goals for businesses began to emerge, mainly revolving around the “shareholders” of the company. Supported by economists like Milton Friedman, the overwhelming idea of business became to make as much money for the shareholders as possible, within the confines of the law, because essentially, the executives and managers of companies are “agent[s] of the individuals who own the corporation or establish the eleemosynary institution” (Friedman 1). Today, this has come to be known as “managerial capitalism” (Freeman). And while this view of business has been dominant for the past 50 years, it is unlikely that this model can continue to be successful in the ever-changing, ESG dominated 21st century. Thus, basing company decisions solely around producing the most profit for shareholders is outdated, and rather, decisions should be made on a much wider scale, concerning more than just high dividends. In this essay, I will argue that executives and directors of corporations should be free to determine whose wants and needs to prioritize in their decision-making processes, as long as they operate within the confines of the law. I will also argue that while financial profit may be included, the overall goal for corporations is not to maximize shareholder profit, but rather shareholder value.

The vast majority of successful companies today have a rather large organization, containing many more factors than just shareholders. From the top down, companies owe to their customers, communities, employees, suppliers, and financiers (Freeman 10). Each of these sections play a vital role in every company, so to aim in only pleasing shareholders is more than just ethically wrong. It is essential that companies provide value for every level, as discontent at any given level can cause inefficiencies and prove costly. Creating value for every level of the company is no easy task, which is why it should be left to the top-level executives and directors of a company. And in order to do this, executives must bolster one key aspect of all work environments: stakeholder relationships (Freeman 8). Companies must have healthy, productive relationships with all stakeholders, because each plays a pivotal in the companies’ success. Being the grave importance of these relationships, the executives of the company should be left with the task of managing these relationships in an effort to promote long-term sustainability and success. Good supplier and financier relations creates a link of trust that can yield future benefits based on loyalty and connections. Customer transparency also proves beneficial, as positive customer relationships also often help in creating a loyal base, providing a competitive advantage over competition. Employees play a critical role in every company, which is why it’s necessary for executives to consider them when making decisions. Healthy, positive relationships between management and employees actually prove beneficial for many companies. In fact, “according to a study that tracked stock performance over 14 years of companies that had received the C. Everett Koop National Health Award, the Koop Award-winning companies’ stock values appreciated by an average of 325% compared with the S&P 500 index of 305%” (Pronk). Essentially, even though these companies may have valued employee health over shareholder wealth, their stock prices still went up, thus providing higher dividends to its shareholders. TOMS, for example, invests heavily into their employees. TOMS “provides training for [their] employees on a number of business and leadership topics, including training for [their] supply chain employees by a respected third-party expert on the important topic of human trafficking and slavery prevention” (TOMS). Included in that, TOMS provides its employees with a variety of medical benefits, including medical, dental, and vision, as well as life insurance and a 401k (TOMS). By prioritizing the well-being of its employees, TOMS’ executives have created a healthy environment that bolsters productivity and long-term sustainability. The importance of employee relations and rights has been steadily growing since the mid 20th century, with numerous laws and acts being passed in support of employees (Freeman 5-6). Companies have grown to care about more than just profit, as there are many other considerations that need to be properly prioritized. One of the most currently emphasized areas for companies to prioritize concerns the communities surrounding them, mostly concerning ESG efforts.

For many years, it has been argued that financial gain and ESG efforts are mutually exclusive, which certainly is not the case. This has only been fueled by past definition of “maximizing shareholder value,” as solely to make the most money possible for shareholders. This, however, assumes that the only thing that shareholders of every company want is financial gain. In reality, this is not the case. While shareholders of course care about the returns they receive, it’s absurd to think that financial gain is their only incentive. Many shareholders are considered “prosocial,” meaning they care about the overall “health and society at large” (Hart 2). If that’s true, wouldn’t they want the companies they invest in to follow suit? Milton Friedman argues that corporate executives are not trained to efficiently make decisions regarding social responsibility, thus spending shareholder money without their consent on issues concerning social responsibility is wrong. Adding to this, Friedman argues that if shareholders genuinely care about an ESG issue, then they should be able to donate their returns themselves, rather than having the corporate executives allocate their money for them. These counterarguments defending the mutual exclusivity of financial profit and social responsibility have been proven wrong time and time again in recent years. In fact, often times, top-level executives can prioritize ESG issues more effectively in their decision making and can even make profit. “A robust ESG program can open up access to large pools of capital, build a stronger corporate brand and promote sustainable long-term growth benefitting companies and investors” (Atkins).

This idea of a robust ESG program has proven true, as “Tim Mohin, CEO of the Global Reporting Index (GRI), explained: ‘In the past decade there has been a tremendous upswing in interest coming from the financial sector. With over 90% of the largest companies now filing sustainability reports (85% of the S&P 500), the data is plentiful’” (McPherson). While this information is not new, McPherson goes onto explain that “A recent study from Oxford University found that more than 80% of mainstream investors now consider ‘ESG’ – environmental, social and governance – information when making investment decisions,” which is entirely new information (McPherson). It seems that executives who consider ESG when making decisions is of some importance to current investors and shareholders, directly countering Friedman’s arguments. Walmart’s executives recently made the decision to stop the sale of “ammunition for military-style weapons” and to “no longer allow customers to openly carry firearms in stores” (Bhattarai). Walmart’s CEO, Doug McMillon, credited the decision to the recent shootings in Walmart’s stores (Bhattarai). Walmart’s shareholders were concerned about mass shootings in the US, but rather than allowing its shareholders to donate money directly to the cause, Walmart’s executives took control of the situation. Walmart’s decision “to restrict the sale of high-capacity magazines or assault rifles in its stores” (Hart) proves Friedman’s argument against executive decision making regarding ESG issues wrong, as Walmart essentially eliminated about 20% of the market share for gun ammunition, which is a greater change than any individual shareholder could have made (Bhattarai). This example also supports the fact that shareholders themselves value more than just financial profit.

Throughout this essay, I used the views of Oliver Hart and Luigi Zingales, and those of R. Edward Freeman to support my thesis: executives and directors of corporations should be free to determine whose wants and needs to prioritize in their decision-making processes, as long as they operate within the confines of the law. Essentially, no matter the end goal for the company, the executives should be free to determine what to prioritize when making decisions, whether that be purely for financial profit or for some other ESG inspired cause. Hart and Zingales offer an efficient counter to Milton Friedman’s arguments supporting “managerial capitalism.” Using Walmart as an example, Hart and Zingales proved that because the executives decided what to prioritize when making an important decision, significant change was made. This example also proved the idea of a “prosocial” shareholder, rather than shareholders only wanting financial profit. Freeman’s theory that financial profit and social responsibility are not mutually exclusive also supports my thesis (and counters Friedman’s argument), as the executives of both Walmart and TOMS prioritize social causes and relationships with all stakeholders, rather than prioritizing financial profit. Now, while Hart, Zingales, and Freeman’s views all support my thesis, I do not believe that these authors would completely agree with my thesis, as all three believe that companies should prioritize social responsibilities and ESG issues over financial profit, which is not my thesis. I agree that prioritizing shareholder profit above all else is an old view, and that there are much more efficient ways to make decisions. With that being said, however, I do not believe that executives and directors of a company are obligated to consistently prioritize any one level of the business, but rather, the executives should be free to determine what to prioritize in the decision-making process. If the executives and directors of a corporation solely aim to increase financial returns, then they should be able to do so. At the end of the day, the executives of a company are there to ensure the overall success of the company, so they should be able to freely determine who and what to prioritize in the decision-making process.