Six New Rules of Business: Creating Real Value in a Changing World (Berrett-Koehler, 2021) is Judy Samuelson’s latest book. Fresh off her testimony to Congress on shareholder primacy, discuss the issues with Judy on Corporate Accountability Forums, Monday 3/28/2022 at 2 pm Eastern – Register now to participate.
My Wordy Introduction
Samuelson is the founder and executive director of the Aspen Institute Business and Society Program. Signature programs under Judy’s leadership include a ten-year campaign to disrupt Milton Friedman’s narrative about corporate purpose and the Aspen Principles of Long-Term Value Creation,
Voice and the New Corporate Boardroom (review) drew my recent attention. Authors in this brief compendium share my concern that we will not have a genuinely democratic society as long as our working lives are spent in organizations that do not reflect that fundamental value. Democratic corporate governance is needed to bring all knowledge to bear if we address the unprecedented crises of our age.
One of Samuelson’s strengths is her compelling stories related to each of the six principles. That helps readers relate to her vision by adding color and bringing concepts to life. In addition, her previous work at the Ford Foundation and current work at Aspen Institute enabled her to discuss the most critical issues with thought leaders, including CEOs who are often inaccessible to the rest of us.
While I may ask Judy about some of these stories during our conversation on Monday and welcome attendees’ questions and comments, I will focus on the six rules and concepts. What are they? Can I relate to them? Do they combine to form a coherent paradigm?
Eric Weinstein, the producer of Corporate Accountability Forums, remarked that our forums had focused more on the subtopic of human capital management than the larger topic of Corporate Accountability. That reflects my attention since Occupy Wall Street, Me Too, Black Lives Matter, COVID-19, and other crises have pointed to the importance of employees. Human capital (a dehumanizing but popular term) is more important than financial capital, but it still feels mostly like lip service rather than genuine change. However, we would be happy to delve into other topics. Please send ideas for issues and future guests.
“Corporations determine far more than any other institution the air we breathe, the quality of the water we drink, even where we live. Yet they are not accountable to anyone.” That was on the book cover of Power & Accountability by Monks and Minow over three decades ago. Samuelson agrees that corporations are the most influential institutions.
Milton Friedman’s worldview of profit maximization and shareholder primacy has been discredited. Six new rules emerging in boardrooms, academia, employees, and shareholders could help reset the guardrails necessary to channel corporate purpose to better align with the needs of humankind and nature.
Six New Rules of Business: Rethinking Risk
OLD Rule: Hard assets determine firm value. NEW Rule: Reputation, trust, and other intangibles drive business value.
This point was driven home to me by Margaret Blair in her seminal work, Ownership and Control. As Blair and I discussed 25 years ago, “something like 75% of the value of the corporate sector cannot be accounted for in plant and equipment… tangible assets on the books.” That 75% figure is too low today, in an age of SAS giants like Salesforce and the growing importance of social media. Judy recognizes a debt to Blair when she later considers the stack of books that most influenced her work.
Samuelson discusses the inadequacy of traditional financial tools like discounted cash flow, which fails to capture material by hard-to-measure risks. She notes that after BlackRock’s Larry Fink’s 2020 annual letter cited the Sustainability Accounting Standards Board (SASB) as a valuable, comprehensive reporting framework, downloads from SASB increased fivefold.
We have all heard of hedge funds taking companies private, loading them up with debt, and putting unsustainable companies back on the market. Samuelson points to leading firms like KKR and Carlyle, who employ ESG specialists to alert analysis to hidden human and environmental costs. They are widening their focus “from risk mitigation to value creation: by focusing on intangible values.”
Samuelson goes on to cite CEOs who are taking a longer-term approach. For example, Roy Vagelow of Merk distributes a drug that cures river blindness, even though Merk will not recover its costs. Likewise, Doug MacMillan of Walmart listens to employees and stops selling certain guns in the wake of shootings, even though it will reduce shareholder returns. “Market civitas” leads corporations to consider social and environmental values, driven by soft information that would have been buried in a world that only measured hard assets.
Cynical me: The vast majority of CEOs are incentivized to reward themselves as large shareholders, not employees who generate the intangible values that drive companies forward.
Six New Rules of Business: The Question of Business Purpose
OLD Rule: “Shareholder value” or “profit maximization” is the organizing principle of the corporation. NEW Rule: Businesses serve many objectives beyond shareholder value.
In his 2018 annual letter, Larry Fink wrote that purpose “is a company’s fundamental reason for being–what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them.” But unfortunately, too many companies mouth a noble purpose in their corporate social responsibility report but continue to live by short-term “profit maximization” as their real credo.
In this chapter, Samuelson acknowledges the influence of Lynn Stout’s The Shareholder Value Myth and Marjorie Kelly’s The Divine Right of Capital, both of which I have discussed extensively on CorpGov.net. In addition, Samuelson sees a new narrative forming in boardrooms after the Business Roundtable issued its Purpose of the Company (the “Statement”). I have to admit to being considerably more cynical concerning their motivation since that action occurred at the same time they worked with the SEC to emasculate shareholders.
Judy sees “the narrative about the purpose of the corporation” changing in MBA classrooms. Maybe the next generation of business leaders will study the cases cited by Samuelson and complete an actual transformation, which I still see at this point as green-washing accepted by green-wishers hoping reality has already changed.
Six New Rules of Business: Responsibility Redefined
OLD Rule: Corporate responsibility is defined by host communities and fence-line neighbors. NEW Rule: Corporate responsibility is defined far outside the business gates.
Samuelson begins this chapter with her first job after college working as a legislative and lobbyist of public interest groups. She recounts successful campaigns at Nestle around infant formula and subsequent transformations of Nike, Shell, Uber, etc. I spent a lot of time in the same capitol building. My experience was what a cynic might imagine. Corporate attorneys and lobbyists wrote much of the legislation to obfuscate its purpose, which was to provide loopholes to environmental protection. Most of the environmental lobbyists I knew were stretched too thin to influence or even understand much of the laws that were being enacted.
Yes, Indra Nooyi moved the needle at PepsiCo but was eventually pushed out for threatening shareholder value. Cargill may have been key to addressing the palm oil challenges but so were responsible shareholders like Green Century. NGOs are applying pressure on the frontlines. “The power of social media is catalytic.” Yet, I am still having difficulty getting companies to disclose contributions to the lobbying efforts of their trade associations, which often provide cover for corporate policies that would damage reputations if known.
Six New Rules of Business: The Voice of the Employee
OLD Rule: Labor is a cost to be minimized. NEW Rule: Employees give voice to risk and competitive advantage.
Employees have direct knowledge of frontline risks and working conditions. Open communication with the workforce is critically important since employees are the business. Covid, #Metoo, #GoogleWalkout, @AMZNforClimate captured the media by storm. Employees are in a position to ask the most provocative questions.
Samuelson notes employees in Europe have much more influence. She discusses Facebook’s influence on the 2016 presidential election. “Who cares more about the reputation of the company than its employees? No one.” Aspen’s First Movers Fellowship is admirable, supporting innovators working at the intersection of business and society.
However, the logic of workers having more voice is not new and is not dependent on the transformation of the shift from tangible to intangible assets. For example, back in the mid-1960s Katz and Kahn noted:
It is paradoxical that the standard justification for autocratic practice in industry is its alleged efficiency, since the empirical research results do not support that conclusion. In fact increased rank-and-file responsibility, increased participation in decision-making and increased individual autonomy are associated with greater personal involvement and productive results. (The Social Psychology of Orgainizations)
More than forty years ago, when I was a fellow with the National Institute Mental Health, the best explanation I could find for the lack of movement was a study done by the National Science Foundation. They concluded that although the evidence strongly supports modes that encourage “ownership of the workplace and the work itself by the workers, organizations have not adopted such models. Creating participatory structures runs contrary to the desires of most decision-makers, whose status is derived from dominating their subordinates.” Job Satisfaction and Productivity, Suresh Srivastva)
The Aspen publication Voice and the New Corporate Boardroom (review) outlines some more power shifting possibilities.
Six New Rules of Business: When Capital is No Longer Scarce
OLD Rule: Capital is king; shareholders rule. NEW Rule: Culture is king; talent rules.
Most companies today go public, not to raise the money needed by the business to expand but to allow current owners to sell shares. As a result, finance capital is no longer a scarce resource. (Since the top 1% owns more than the bottom 92%, maybe they have fewer and fewer places to put all that money.)
Samuelson speculates capital continues as king because of “sticky ideas and habits” from a bygone era. Yet, she also points out the disconnect between the role of the stock market and value creation is highlighted by companies like Snapchat going public and offering stock buyers no voting rights.
If even the best leaders, like Satya Nadella of Microsoft, are heading decade-long tax avoidance programs, Aspen Institute examples seem a bit tattered. “It’s about mindset and about building a culture to embrace and absorb standards that are constantly evolving as the business context and public expectations change.”
Six New Rules of Business: When The System Is at Risk
OLD Rule: Compete to win. New Rule: Co-create to win.
In this chapter, a telling quote comes from Sire Mark Moody-Stuart, CEO of Royal Dutch Shell: “You know, the brand isn’t really your problem: The ones you need to worry about are the ones with no brand to protect.” Reputation is everything. We rely on companies with brand names to sign agreements, such as the UN Global Compact. As a result, governments are powerless to address overfishing, toxic cotton-producing, and climate change.
“Within every corporation, capable, courageous staff and managers with a belief in business as a powerful platform for change are stepping up on complex business problems… When public interest and business needs are aligned extraordinary change is possible.”
I am reminded of the Netflix movie, Don’t Look Up. Public interest and business needs are aligned. We can both save the world and mine precious minerals from the comet headed to destroy Earth. Oops, we should have put the needs of Earth first, but we thought we could do both. Maybe Severance is a more widespread phenomenon than an Apple TV thriller. Too many intelligent people are too willing to sever their work and home life values, especially if the compensation is much better than average. The most unrealistic thing about Severance is that the characters do not seem to earn $450,000 a year, like the base pay at Netflix for working on those algorithms without fretting too much about the implications.
Samuelson takes note of Mark Benioff, CEO of Salesforce and an outspoken critic of shareholder primacy.
Research shows that companies that embrace a broader mission–and, importantly, integrate that purpose into their corporate culture–outperform their peers, grow faster, and deliver higher profits.
The realistic Judy then points out, “data may help break through what one of our fellows called the ‘mud layer of middle management,’ but it rarely resets the intentions of key decision-makers.” The wake-up call to the CEO comes from personal experience.
I would hate to rely on the sudden enlightenment of CEOs to save a salubrious planet. Samuelson agrees and appears to pin her hopes not on fixing pay and incentive systems that undergird share price but by building something new.
In the end, she seems to focus on what is taught in business schools. What is the purpose of the corporation? If not “maximizing growth,” what? What is the role of the executive?
Together with The Shareholder Commons, we have a shareholder proposal at BlackRock, which asks them to adopt stewardship practices designed to curtail corporate activities that externalize social and environmental costs that are likely to decrease diversified portfolio returns, even if such curtailment could decrease returns at the externalizing company.
BlackRock’s no-action request, request to the SEC appears to argue BlackRock can look at each company in its portfolio in isolation when negotiating with them or voting. I asked Former Chief Justice Leo Strine, a recent guest on Corporate Accountability Forums, something like the following:
Should large universal owners, like the Big 4, adopt stewardship practices designed to curtail corporate activities that externalize social and environmental costs and decrease their portfolio return, even if curtailing such practices could reduce the returns of the externalizing company?
I think Leo Strine responded with an unqualified yes. What do you think? See the first five minutes of this clip.
The world’s largest fund seems to take the approach of the mining company in the movie Don’t Look Up. Fiduciary duty is viewed in isolation as they look at each company in their portfolio. The walls between business and society that Samuelson sees as collapsing are holding for BlackRock. Externalities are “an inconvenient truth” that threatens to undermine their success and profitability.
Samuelson concludes, “There are unmistakable signals of irreversible forces that place us on a stronger footing than when I began this race 25 years ago. The new rules not only are written but are producing real results – and in time to tackle the unprecedented challenges facing our world.”
Let’s hope she is correct, but we must keep working. It will take more than CEOs finding enlightenment or business schools asking tough questions. Judy plays a vital role in bringing people together to discuss the issues at the Aspen Institute. Much more needs to be done by each of us.
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