8/28/19
The Wall Street Journal ran the below
letter, in edited form, on Monday, 8/26, and I think my readers might enjoy it
in its unedited original glory. I wrote this missive in response to an editorial piece the Journal
ran on the brouhaha regarding the Business Roundtable CEOs blathering on
about how corporations exist to serve all stakeholders rather than “merely”
serving the shareholders who hired these deep thinkers in the first
place. Apparently, in their desire to
achieve the pinnacle of political propriety, and cater to the next occupant of
the White House, these esteemed ones have forgotten the lessons they learned in
their finance and economics classes, i.e., markets work, often to achieve goals
that appear ancillary to those who prefer feeling to thinking.
8/20/19
The Business Roundtable CEOs who insist on serving a broad
range of stakeholders rather than focusing on shareholders make a distinction
that lacks a difference. (“The
‘Stakeholder’ CEOs,” Review and Outlook, 8/20/19) No company is going to be
profitable beyond the very shortest of time frames if it abuses its customers,
takes advantage of its employees, mistreats its suppliers, and incurs the wrath
of the communities in which it operates and sells. Those stakeholders have a limited tolerance
for such treatment and, at least for now, our free market system provides them
plenty of opportunities to express their distaste by taking their business, or
pursuing their livelihoods, elsewhere.
At the same time, stocks remain a near perfect mechanism for
discounting future cash flows.
Since future cash flows would be imperiled by the type of bad behavior
these self-perceived rock star CEOs correctly abhor, a focus on the price of
the stocks of the companies these executives were hired to run acts as a
mechanism to discourage bad, and reward virtuous, behavior.
To
put is simply, stocks discount future cash flows. Future cash flows are enhanced by
behavior the Business Roundtable CEOs, and, perhaps not by coincidence, certain
Democratic presidential candidates, are trying to encourage. Therefore, focusing on stock prices achieves
socially meritorious goals especially effectively by putting the force of
self-interest behind the efforts to achieve such goals. One would think that these CEOs would have
learned this in the Finance classes they took long before they got consumed
with their press coverage.
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