2 Reasons CEOs Are No Longer Concerned With Investors' Feelings
Updated: Oct 7, 2019
It looks like corporations are moving away from the ‘investor-pleasing’ model of old, and want to focus on the wider community. Why the sudden change in strategy?
Back in August, The Business Roundtable issued a statement that reimagined the purpose of a corporation from focusing on shareholders to supporting the community as a whole, and they have their reasons to do so. If you’re wondering what The Business Roundtable is, and are hoping it’s a bunch of medieval knights sitting around, sipping ale, singing songs and rescuing maidens, I’m afraid you’ll be disappointed.
The Business Roundtable is a group of chief executive officers of nearly 200 major U.S. corporations, founded in 1972, in an effort to ensure more collaboration and consistency in policies between businesses. Current members include Apple’s Tim Cook, Amazon’s Jeff Bezos, and Boeing’s Dennis Muilenburg.
Now this roundtable wants to redefine its focus, putting the interests of employees, customers, suppliers and communities on par with shareholders. There are 2 main reasons why, which are discussed below.
1. Long-Term Success
The first point that must be made is, simply put, companies that put a broader focus on the wellbeing of its employees will more likely retain those employees and get the most out of them.
“Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans,” said Jamie Dimon, CEO of J.P. Morgan Chase.
Looking after employees can include anything, ranging from recognition of work to mental health services. Basic services such as this are proven to improve productivity and lower turnover. The employee evaluation site Glassdoor offers direct feedback from employees on a company and allows investors an inside look into how it is being run. You’ll find here that some of the most enduring stocks are ranked highest in terms of employee satisfaction, including American Express (NYSE: AXP), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and Nike (NYSE: NKE).
Maintaining happy employees is just part of it, as companies who want long-term success must also focus on ethical practices and what they give back to the community. Lately, it seems that many people look to larger companies such as Apple, Amazon et al. and their social responsibility. This is evident in modern company practices, as more than 90% of the largest U.S. companies now release annual corporate social responsibility reports, with billions spent on social initiatives, donations, cutting carbon footprint and more.
These practices do build long-term loyalty and success, but what about profits?
In 1970, U.S. economist Milton Friedman argued that companies should have no social responsibility, claiming the "business of business is business" and profits are all that matters. Though supported at the time, the concept is outdated, as social responsibility is the way forward in making a profitable company.
Good company culture, as seen above, is one of the most important factors to consider when weighing up a potential investment in a company. Rarely in modern times does a toxic work environment translate into long-term profits, as seen with Uber (NYSE: UBER), which was sued by its own drivers in 2013 for poor working conditions, knocking roughly $10 billion off the companies value.
Contrast this with companies at the top of social responsibility lists such as Netflix (NASDAQ: NFLX) and Google (NASDAQ: GOOGL), who have successfully marketed themselves to the more socially conscious millennial demographic. Netflix has undergone massive growth in the past decade, coming a long way since its IPO price of $15 per share, now hovering around $266. Google is the richest company on the planet, which is evidence enough of its status, while it has long been famous for its ‘different’ takes on the modern workplace.
A 2018 study showed that companies with ‘nice’ bosses actually outperform the stock markets in general. It showed that the companies that employees say are great workplaces that demonstrate strong financial performance, reduced turnover, and better customer and patient satisfaction than their peers.
Though many companies have self-serving reasons for being socially conscious, such as charitable giving to influential congressional districts in return for influence, at least the money is being used for good, and at the end of the day, the purpose of a business is to make profit.
If social consciousness is the way forward for company profitability, it will mark a vast improvement on the past 60 years of corporate practice.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Alphabet, Apple, Microsoft and Netflix. Read our full disclosure policy here.