Earlier this year, the Business Roundtable, a group of Big Business biggies, released a new statement on the purpose of a corporation. It was praised by some, condemned by others. Some, including the Editorial Board of The Wall Street Journal were, shall we say, skeptical.
It seems to us that recent events have clearly shown the weakness of the “shareholder returns” model of capitalism driven by activist investors. Both the California wildfires, several of which including one that killed 85 people in Paradise, Calif., and the Boeing MAX crashes, can be traced directly to elevating shareholder demands for profit over concerns for other “stakeholders.”
Indeed, if you don’t like Donald Trump, you can logically blame his political ascent on the shareholder returns model. Companies following that model outsourced a large part of their production to factories in China, displacing U.S. workers and communities in the process. These companies were largely the same people advocating for “free trade,” not “fair trade.”
If you don’t welcome the thought of Elizabeth Warren as president, you can equally well attribute her rise to the same factors.
One of the political effects of the shareholder returns model has been to weaken regulatory bodies, effectively giving responsibility for the safety of some U.S. goods and services to the producers themselves. After all, the argument goes, we can trust producers to do what’s in their own best interests. The question is, what’s in the producer’s interest, and over what time frame. That’s what happened in the Boeing fiasco, and that’s what happened in California.
The result: An emphasis at Boeing to get the 737MAX into the air, even though its test pilots had serious concerns about the airworthiness of the aircraft, and at Pacific Gas & Electric, a failure to inspect, repair and maintain power lines that sparked many wildfires, including the Paradise fire, and, apparently, the Kincade fire.
That’s not to say corporations shouldn’t seek to maximize shareholder returns. Of course they should. But the emphasis should be on maximizing them for the long term, not for the short term.
Tom Phillips, a man who built a newsletter empire starting in his garage in the 1970s and later sold it for a figure rumored to be near $1 billion, used to repeat day after day, “If you take good care of your customer, your customer will take good care of you.”
If that is the standard, it’s obvious both Boeing and PG&E failed. And many other companies have failed, too, in some cases literally (think Enron, General Electric, and during the Great Recession, General Motor and Chrysler).
The problem is, greed is part of human nature. It’s tempting to cut corners to enhance profits, especially when the CEO’s job rides on increasing shareholder returns. In some cases, cutting corners means to knowingly put an aircraft into service when one’s test pilots have serious concerns. In others, it means cutting corners on maintenance. In still others it means loading a company with a super-heavy debt in good times, a load it can’t sustain in bad times.
I used to be very skeptical of building inspectors. One day I mentioned this to an electrical contractor who looked me square in the face, jabbed his finger into my chest and said: “I run 78 crews all over the state of New Jersey every day. There’s no way I can check out each crew’s work each day. I depend upon the building inspectors to do their job and to do it honestly.”
I thought he made a lot of sense. Had the FAA not outsourced its evaluation of the 737MAX to Boeing, the aircraft’s builder, more than 600 people might be alive today. Had the California Public Utility Commission inspected PGE’s transmission lines, at least two major wildfires and several smaller ones might have been avoided.
For the last 86 years, the U.S. has avoided any major product quality issues with alcohol beverages, thanks to the Federal Alcohol Administration Act and the fact that beer, wine and spirits are checked by the Alcohol & Tobacco Tax & Trade Bureau to insure they are safe. The same thing is true when it comes to food and nonalcohol beverages, thanks to inspections done by the Food & Drug Administration and the Agriculture Department.
We all would like to think that we wouldn’t put profit ahead of our customers’ safety, but the temptation is always there.
Yesterday, a wildfire came within 50 feet of the Presidential library of Ronald Reagan, a conservative president who came up with the phrase, “trust but verify.” It seems to us that perfectly describes the attitude that should exist. Whether that verification is done by a government agency or by an industry self-regulatory group such as Underwriters Laboratories is a debate that can be held. But the concept of physically verifying a product’s safety by outside testing and inspections shouldn’t be a subject for debate.
Tom Phillips, a very conservative American, was right. “If you take good care of your customer, your customer will take good care of you.” And you’ll be able to take good care of your employees, your community – and your investors.