Opinion Corporate governance Shareholders always come first and that's a good thing The economy would suffer if chief executives could unilaterally disempower investors JESSE FRIED Tim Cook, Apple chief executive, is among the CEOs who vowed to lead their companies for the benefit of all stakeholderrs, not just investors @ Getty Jesse Fried OCTOBER 7 2019 In August, 181 chief executives, including Apple's Tim Cook and JPMorgan's Jamie Dimon, officially demoted their shareholders. They all signed a Business Roundtable statement in which they "commit to lead their companies for the benefit of all stakeholders - customers, employees, suppliers, communities and shareholders". If you believe what the members of the influential business group say, equity holders will no longer be paramount. In reality, the Business Roundtable is merely paying lip service to broader social concerns. I predict that the pledge will not actually affect how they run their companies. But that's a good thing. Shareholder primacy is what keeps managers accountable and allows capital to flow where it is needed in the economy. Here's why things won't change: shareholder primacy is hard-wired into these companies' legal arrangements, known as corporate charters. Each of the CEOs who signed the statement serves at the pleasure of a board of directors. That board, in turn, is elected - and can be replaced - by shareholders. Directors and executives can also be sued for breach of fiduciary duty if they openly prioritise other stakeholders over shareholders. While CEOs have substantial power, they cannot stray too far from what their shareholders want. Unless those shareholders change the charter, investors, not the CEO, will continue to decide how, and for whom, the corporation is run. To be sure, investors themselves may choose to ask companies to consider broader stakeholder interests. Some may think that doing so would indirectly lead to more profits in the long run, which of course benefits shareholders. Others might be willing to sacrifice some financial return to avoid harming other parties or to benefit society. If the shareholders are in agreement, a CEO is free to take steps to benefit other stakeholders. But shareholders will continue to have the last word. That after all was the original bargain. Shareholder-favouring charters were originally set up to help attract outside money. When companies are small, they need funds to grow. Investors supply that financing, hoping to profit. Since most early ventures fail, investors count on gains from successful companies to more than offset these disappointments. But they worry that the managers of the profitable ventures will want to invest excess capital in pet projects, rather than returning it to investors. -...
Just in case, investors generally insist on a charter that protects their ability to shake loose the extra cash. They typically - but not always - insist on the right to remove directors and a legal requirement for the board and management to act in the best interest of shareholders above all. The shareholder-primacy system has generally worked well in America for both individual