In the four decades after World War II, shareholders on net contributed more than $250 billion to U.S. companies. But since 1985 they have extracted almost $7 trillion. That’s trillions of dollars in profits that might otherwise have been reinvested in the workers who helped produce them.
American capitalism is a sick giant.
Larry Fink, Blackrock’s CEO and capitalist sage, blames short-termism. Others claim the damage has been caused by ideology and excess.
However, for all its challenges, the American economy is remarkably strong, resilient, and self-correcting.
Warren Buffett’s economic theory is straightforward: “For 240 years it’s been a terrible mistake to bet against America.”
As we enter an era of mass disruption, it is worth exploring the central organizing unit in the American economy: the company.
Specifically, what is the purpose of a company in an economy?
From Elizabeth Warren to Larry Fink, there is no widely accepted answer.
The Business Roundtable — the leading interest group representing business, currently chaired by Jamie Dimon — has had two diametrically opposed answers to this foundational question.
In 1981, it stated that companies “have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.”
Fifteen years later, the Business Roundtable contradicted its early point by stating that the “principal objective of a business enterprise is to generate economic returns to its owners.”
In theory, these two statements would reinforce each other. My Milton Friedman-believer brethren say that economic returns for owners inevitably generate quality goods, investment, enhance enterprise, provide jobs, and build the economy.
But in reality, these objectives can easily cannibalize one another. Indeed, maximizing economic returns for owners often means dramatically limiting other worthwhile objectives for workers.
This debate is important because the role of companies will determine strategies to a series of large, contemporary issues: income inequality, automation, digitization, and the future of innovation.
After all, if economic engines singularly exist to reward owners, why would we train or nurture any workers?
Until we answer this deeply important question, the giant — our giant — will never be well.