Harvard economist Greg Mankiw argued in a New York Times opinion piece last month that CEOs are qualified to make profits, not lead society. His arguments are far too outdated to fit today’s business models. This concept originated from 1970 when economist Milton Friedman famously argued that by keeping business leaders solely focused on returns to shareholders, organisations create prosperity. The idea caught fire through the 1980s, with support from Ronald Reagan and Margaret Thatcher. While good in theory, the concept is problematic in practice. Iconic CEO Jack Welch – a one-time staunch supporter – eventually acknowledging that it’s “the dumbest idea in the world.”
At a time when over 70% of the largest entities on earth are corporations, not nations, Mankiw’s op/ed is troubling. The sheer number of corporations around the world should make us understand that business impacts societies on a global scale; therefore, business leaders have the responsibility to at least consider those societies and how they impact them.
The COVID-19 pandemic has also changed businesses and created a surge in the number of positive collaborations between companies, institutions and governments. Our article “COVID-19 prompted innovative leadership” reflects how Mankiw fails to grasp the world in which CEOs are now in fact leading communities and helping societies..
The singular management goal of CEOs is no longer about maximizing returns to shareholders, but to support society as business has grown more interconnected and complex. Today, business and society are weaved together in an intricate way, both depending on the other for stability and success.
Mankiw asks the reader to imagine having to make an executive decision on the relocation of a car production plant: If you’re concerned solely with profits, it will help “focus the mind” [however] if you’re concerned with a wider set of stakeholders – i.e., employees, suppliers, communities, and shareholders – it will open up a range of “dizzying” questions. Mankiw defends the idea that corporate management’s mandate should be the narrow self-interest of achieving greater profits for shareholders, not broad social welfare. He goes on to list several additional hypothetical questions. A social-driven leader would have to consider:
- How do you weigh those losses against the gains to the would-be workers at the new plant?
- How much will the closure of the old plant hurt its workers and their community?
- 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?
- How should you balance these concerns against the interests of shareholders, who entrusted you to invest their savings?
However, the above questions are now part of the many new demands from consumers, talent and governments. Consumers have changed; they are no longer only interested in the end product. Consumers are demanding more from companies for their buy-in. And every corporate leader has to include some version of the above questions in their considerations if they want to succeed. This is no longer social responsibility planning; it’s basic business planning in the 21st century. Last year the bosses of 181 Leading US’s biggest companies dropped the shareholder-first principle – they changed the official definition of “the purpose of a corporation” (from making the most money possible for shareholders) to “improving our society.”
Most successful CEOs and corporate leaders have profit in mind, and they always will; but they are also considering the needs of a variety of stakeholders, including the communities they impact. In this day and age, CEOs and corporate leaders are rising up to social expectations and are balancing the demands of multiple stakeholders.
Mankiw questioned CEOs’ and corporate leaders’ ability to be broadly competent social planners. Paul Polman (former Unilever CEO) talks about creating collective courage. He rightly argues that it’s difficult for one industry player to impact an issue like reducing greenhouse gases because of the loss of competitiveness. However, if 20% of industry players come together, they can begin tipping the scales.
It’s starting to happen. In this way, by unifying their efforts, corporations, governmental agencies, and NGOs can partner to lead society.
CEOs and other leaders now find themselves in a changed world … they can and should play a variety of leadership roles that move beyond narrow profit maximization. This is a social responsibility, not broad social planning. Short-term earnings no longer feature in the top of the mission statement for most successful companies. We’re starting to find our way back to a more balanced view, and we need CEOs’ leadership in the process.
Mankiw admits that the world needs people to look out for the broad well-being of society – elected leaders who are competent and trustworthy – but those people are not CEOs. However, Mankiw fails to acknowledge just how much influence CEOs and corporate leaders have over our elected officials and the legislative process. Today, large corporations and their associations outspend labour and public interest groups 34 to 1 on lobbying efforts in the US.
In today’s high-risk environment, businesses have to pay attention to their social and environmental roles not only due to demand, but out of responsibility for the damage they (can) cause. For example, companies that contribute to, but then deny, climate change – the attorneys general of several American states launched investigations into ExxonMobil and whether they had committed fraud by sowing doubts about climate change – even as its own scientists knew it was taking place to firms involved in botched Grenfell Tower revamp refusing to accept responsibility for tragedy. Then there is Chamath Palihapitiya, former Facebook executive, who expressed regret for his part in building tools that destroy ‘the social fabric of how society works’. Companies are responsible for causing great damage on a human scale. We have to hold companies, CEOs and brands accountable for their destructive impact in today’s society; while they have a responsibility to support and help lead society.
CEOs and corporate leaders are exerting immense influence behind the scenes; therefore, qualified CEOs and corporate leaders should step up and help lead on the thorny economic issues of the day. However, with great power comes great social responsibility. Not all of the corporate leaders are equipped to lead societies; therefore, they should take a significant weight off the scale. Contrary to what Mankiw and others of his mindset might think, we must continue to demand more from our corporations, their boards, and their CEOs and leaders. Corporate leaders can make a unique and lasting positive impact, too.