Monday, August 03, 2020

C.E.O.s Are Qualified to Make Profits, Not Lead Society

An old debate over the proper role of C.E.O.s has entered the political arena. But chief executives aren’t well equipped to take on broad social issues.

By Greg Mankiw. Excerpts:
“It’s way past time we put an end to the era of shareholder capitalism, the idea the only responsibility a corporation has is with shareholders,” he said. “That’s simply not true. It’s an absolute farce. They have a responsibility to their workers, their community, to their country.”

Mr. Biden echoed a stand taken last year by the Business Roundtable, a lobbying group. In a new “Statement on the Purpose of a Corporation,” 181 chief executives belonging to the organization committed themselves “to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.”

In forsaking a mandate of narrow self-interest for one of broad social welfare, this approach to corporate management sounds noble, perhaps even obvious. But it is more problematic under closer scrutiny.

Imagine that you are the chief executive of an auto company. Your management team brings you a proposal: Let’s close a plant producing gasoline cars in Michigan and open one producing electric cars farther south. You must decide whether to approve the plan.

Under a conventional approach to management, you ask yourself one question: Would the change yield greater profits for shareholders?"

Under the Biden and Business Roundtable approach to management, you must ask many more questions. The range is dizzying. Here are just a few:
  • How much will the closure of the old plant hurt its workers and their community?
  • How do you weigh those losses against the gains to the would-be workers at the new plant?
  • Given the nation’s history of systemic racism, should you consider the racial makeup of the two groups of workers, in an effort to reduce economic inequality?
  • Does it matter whether the new plant is in South Carolina, providing jobs for American workers, or in Mexico, providing jobs for Mexican workers?
  • How should you weigh the benefit of electric cars in mitigating climate change? Should you consider the global impact of climate change or only the impact on the United States?
  • How should you balance these concerns against the interests of shareholders, who entrusted you to invest their savings?"
"From a company’s share price, a board of directors can glean how well its chief is serving shareholders."

"No similar metric is available to judge how effectively a chief executive is serving society as a whole."
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For a humorous view of this issue see

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