“The social responsibility of business is to increase its profits,” economist Milton Friedman wrote in his often-cited 1970 New York Times article, arguing that any other cause is a disservice to stockholders. That idea came to dominate how companies were viewed throughout America, and much of the capitalist world, for decades.

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But a new study from the University of Chicago, where Friedman once taught, makes clear that “maximizing value for shareholders,” as a goal, is firmly on the wane.

Through an analysis of annual letters sent to shareholders by America’s biggest companies in the last 65 years, and a comparison of the goals set out in those letters with financial success, the research also finds that setting up profit-making as the central tenet of a company doesn’t improve returns anyway.

What’s taken the place of shareholder primacy is a more diverse set of goals, with aims like helping to avert climate change. But do those goals—or indeed, any goals—actually work?

How goals got cool

According the study, which analyzes how 150 of America’s biggest companies set—and stick to—their targets, it was unusual for companies in 1955 to spell out any goals at all. By the 1980s, almost all of them did so. And by 2020, not only did every company set goals, but the average number of goals had ballooned to 7.4. It’s a trajectory that points to the trouble companies have in prioritizing what’s important, now that maximizing shareholder value is no longer an easy answer to the question: What are you trying to achieve?

As goals proliferated, objectives like helping to mitigate climate change or cure social ills began to migrate from the public sector into the purview of private companies—a trend that’s right now being hotly debated in the US. But for all this goal-setting, according to the dataset comprising almost 9,000 shareholder letters, analyzed using natural language processing, essentially the only targets that led to financial reward for management—a plausible proxy for what a company truly values—remain the ones linked directly to financial performance.

Teaching computers to read shareholder letters

“I had been interested in the topic of the objective of the firm for a long time,” says Luigi Zingales, one of the study’s co-authors. He’d also seen sentiment fluctuate on the subject of what companies thought they were for. Letters to shareholders seemed like a good source to mine for insight into the long-term trajectory of these raisons d’être. But only recent advances in natural language processing—or NLP, whereby computers read large amounts of text, and can be trained to search it for certain words, phrases, or concepts—made analyzing letters in bulk possible.

From their sample, comprised of the Fortune-ranked 120 largest non-financial US corporations by revenues, and the 30 largest financial corporations by assets, the authors searched for all shareholder letters sent between 1955 and 2020. Companies included the likes of Walmart and IBM. The process of compiling the letters was “tedious,” Zingales said. Creating a labeled sample on which to train the NLP algorithms also took a long time; time which—thanks to the covid-19 pandemic, the researchers had in abundance.

What is shareholder value?

One thing they were looking for was the concept of “maximizing value for shareholders.” In the last 30 years of the 20th century, Friedman’s thesis—that making as much money as possible for a company’s shareholders was the one clear goal all firms should pursue—became hugely popular. It was usefully simple: A company’s one true purpose was to maximize value for its shareholders, Friedman said, and everything else would flow from the achievement of that goal.

But it was also both reductive and potentially dangerous, arguably used for decades by firms to absolve themselves of any need to the mitigate the harms caused while making a profit. And it’s getting less popular.

The study, conducted by Raghuram Rajan, Pietro Ramella, and Zingales of the University of Chicago’s Booth School of Business, and published in March by the National Bureau of Economic Research, shows that “shareholder value” as a metric is now firmly passed its peak.

In the early years of the sample, less than half of companies that mentioned a goal included any version of maximizing profits, and none specified maximizing value specifically for shareholders. In the 1990s, mentions shot up: “virtually all companies mentioning goals indicated a focus on the corporate bottom line as one of their goals, while at the peak 59% of them specifically included a mention of shareholder value maximization,” the study says.

But in the last few years, references to shareholder primacy began to slide. The drop became especially dramatic in 2020, when only 33% of companies mentioned it as a goal, the lowest proportion since 1992.

Why is maximizing shareholder value going out of style?

While “shareholder value” was a convenient concept for managers, its rise in popularity as a metric was also due to who owned the companies. The same period saw a massive rise in ownership of companies by institutional investors, as well as activist investors. It made sense that these new owners would want companies to focus on them.

Why is it now less popular? Firstly, perhaps, companies have begun to realize what the Booth paper points out: It doesn’t appear to work. The researchers compared the financial performance of all the companies that talked about “shareholder value” as a goal with those that didn’t, using data on profitability, leverage, and R&D, available from the Compustat financial database. They discovered that it didn’t really make a difference whether companies said they planned to prioritize shareholder value, or not.

“There is no evidence that a focus on shareholder value supports, or is detrimental for, profits long-term,” the authors wrote.

Secondly, companies have begun to talk much more about other kinds of value, as they have begun to recognize the imperatives of climate change, continued social inequality, and many other global problems that their focus on profit has, arguably, made it more difficult for the world to solve.

One turning point came in 2019 when the Business Roundtable, America’s most influential group of corporate leaders, announced an update to its statement on corporate purpose that concluded: “Each of our stakeholders is essential.” The Chicago paper notes that this statement was an expression of the changing times, rather than the spark for that change.

The rise of ESG goals

Of all the study’s findings, Zingales said those related to environmental and social goals surprised him the most. Goals tied to ESG—which stands for environmental, social, and governance—didn’t figure for companies back in 1955. By the 1970s, environmental and social goals were much higher on the agenda, but then essentially disappeared. There was a smaller bounce in interest in the 1990s, but only in 2000 did they really take off again.

“I think that the most surprising thing to me was that there was an early version of diversity and inclusion in the early ‘70s, and how this faded away completely,” Zingales said. (He has his own theory about why, which isn’t expressed in the paper: that regulation in the 1970s took care of—or aimed to—a lot of the problems people saw rising up around them. Now that governments don’t appear to be proportionately responding to the severity many people see in climate and equality spheres, companies find themselves under public pressure to help make change.)

The second surprise were signs that ESG goals actually did lead to positive change. To test this, the authors compared the companies’ goals, as stated in shareholder letters, to their metrics on the Sustainalytics platform, which assigns companies scores out of 100 for their ESG performance. Announcing ESG goals in shareholder letters did lead to an increase in ESG programs and policies, the results showed. But the authors didn’t find evidence they necessarily led to any change in ESG outcomes. For example, environmental fines leveled at many of the companies remained high.

“These findings cast doubt on the hope that self-regulation would suffice to undertake a green transition,” the authors write. “Firms seem very responsive to the public mood in words and programs. Better outcomes? Not yet!”

Are managers rewarded for ESG achievements?

The most decisive finding on ESG was the extent to which those goals were reflected in executive pay, Zingales said. Only a tiny fraction of executives’ pay was actually linked to their performance on ESG goals, the study found. The vast majority—96%—was still based on financial metrics.

“In spite of this proliferation of goals in the letter[s], you do see very little pay linked to these goals. I think that, to me, is the most important finding in that dimension,” Zingales said. “Because I do believe in what president Biden used to say, which is ‘show me the budget and I’ll believe your values.’ Because it’s easy to proclaim certain values, but at the end of the day it’s where you put your money that matters.”

They also discovered that in some cases, for example with pharma firms embroiled in the US opioid scandal, goals were deliberately used as a kind of smokescreen: “For instance, firms embroiled in the opioid scandal announced all manner of stakeholder and societal goals suggestive of responsible corporate behavior after the scandal came to light,” Zingales said.

Overall, the study suggests that the setting of goals itself isn’t inherent in the DNA of every company, but something that’s become much more popular over time, with the most popular goal—and the best rewarded—being to maximize value, usually for shareholders.

The authors also note there are other kinds of value than money—that companies deciding to help make the world a better place could, potentially, impact shareholders in a positive way. Including environmental and social goals have often, though not always, led to attempts to achieve those goals. They might have even have helped move the needle, slightly. But bigger change will have to wait for a time when companies show they truly value those goals by rewarding management for achieving them.

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Cassie Werber