Business Roundtable

The Business Roundtable is a high-profile, non-profit association composed of the chief executive officers (CEOs) of major U.S. corporations. Think of it as an exclusive club for the leaders of America's biggest companies, from Amazon and Apple to JPMorgan Chase and Walmart. Its primary function is to engage in Lobbying and public policy advocacy, aiming to shape laws and regulations in a way that promotes a favorable economic environment for business. For decades, the group was a staunch defender of Shareholder Primacy—the idea that a corporation's main purpose is to maximize profits for its owners (the shareholders). However, in 2019, the Roundtable sent shockwaves through the financial world with a new statement that dramatically redefined its view on the purpose of a corporation, a shift with profound implications for every investor.

Understanding the Business Roundtable's evolution is key to grasping modern debates about Corporate Governance. The group's change of heart represents a major pivot in mainstream corporate thinking.

For nearly 50 years, the dominant philosophy in the American boardroom, championed by economists like Milton Friedman, was simple: a company's one and only social responsibility is to increase its profits. This meant every decision, from product pricing to employee wages, was viewed through the lens of maximizing shareholder value. In August 2019, the Business Roundtable flipped this script on its head. In its “Statement on the Purpose of a Corporation,” signed by 181 of the most powerful CEOs in the country, the group declared that companies should serve not just their shareholders, but all of their stakeholders. This philosophy is often called Stakeholder Capitalism. The group committed to:

• Delivering value to customers.
• Investing in employees through fair compensation and training.
• Dealing fairly and ethically with suppliers.
• Supporting the communities in which they work.
• Generating long-term value for shareholders.

Notice that shareholders are now just one of five groups, and they come last on the list. This was a radical departure and sparked a massive debate that continues today.

For a Value Investing practitioner, this shift is not just an academic debate; it gets to the very heart of what makes a business valuable. The question is: does this new philosophy help or hinder the creation of long-term, sustainable value?

A value investor's dream is to own a wonderful business with a durable Economic Moat—a competitive advantage that protects it from rivals. One could argue that a genuine focus on stakeholders is the best way to build such a moat.

• Happy Customers: Loyal customers who feel they are getting great value are less likely to switch to a competitor.
• Engaged Employees: A well-paid, well-trained, and motivated workforce is more productive, innovative, and provides better service.
• Strong Communities: A company with a good local reputation faces fewer regulatory hurdles and can attract better talent.

In this view, profits are not the goal but the result of serving all stakeholders well. A company that masterfully balances these interests creates a virtuous cycle that leads to sustainable growth and superior returns for shareholders over the long run. Warren Buffett has long praised companies like See's Candies that delight customers and, as a result, produce wonderful financial returns.

The skeptical view is that this new philosophy, while sounding noble, is dangerously vague. If a CEO is accountable to everyone, are they truly accountable to anyone? This can create a massive Agency Problem, where management (the agents) can justify almost any decision in the name of “serving stakeholders,” even if it destroys value for the owners (the shareholders). For example, a CEO could use “investing in the community” as a justification for a wasteful pet project, or “supporting suppliers” as an excuse for overpaying for materials. Without the clear, unforgiving metric of shareholder return, it becomes much harder to judge management's performance. It raises a critical question for investors: How do you measure success? If a company's profits are falling but management claims it's doing a great job for “society,” should you be happy? This diffusion of focus can lead to poor Capital Allocation, eroding a company's competitive edge and, ultimately, its long-term value.

The Business Roundtable's statement doesn't change the fundamental rules of investing, but it does add a new layer of analysis when evaluating a company's management. Be a skeptic, not a cynic. Don't dismiss the statement, but don't take it at face value either. Instead, use it as a framework for your own investigation.

• Actions, Not Words: Look past the glossy corporate social responsibility reports. Does the company's behavior match its rhetoric? Are they making genuine, intelligent investments in their products and people, or is it just virtue signaling?
• Follow the Money: The ultimate test is still financial performance. A well-managed, stakeholder-focused company should, over time, exhibit superior returns on capital. If it doesn't, the strategy isn't working.
• Read the CEO's Letter: Pay close attention to the annual letter to shareholders. A great CEO can clearly articulate how serving customers and employees creates more value for shareholders. A weak CEO will use vague platitudes to mask a lack of clear strategy.

Ultimately, the goal remains the same: to find a great business at a fair price. The Business Roundtable's statement is simply a reminder that the “G” in ESG—governance—is more important and more complex than ever.