What are Companies for?
What are Companies for?
On August 19, the Business Roundtable announced a new statement outlining the purpose of a corporation. The Business Roundtable is an association of chief executive officers of America’s leading companies. The current chairman is Jamie Dimon, chairman and CEO of JPMorgan. JPMorgan is a preeminent U.S. bank and one of our longest finance sector holdings. 181 CEOs signed this statement committing to lead their companies for the benefit of all stakeholders: customers, employees, suppliers, communities and shareholders.
This is a significant departure from the focus of corporate purpose that has been a hallmark of corporate management for decades, if not centuries. In 1962, Milton Friedman, who received the 1976 Nobel Prize in Economic Sciences, wrote “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.” For more than 50 years, Friedman’s quote has been most often referenced as the definitive statement on the primacy of shareholder value and the focus on shareholders in business management.
We think this change is long overdue and absolutely correct. As investment advisors, registered with the Securities and Exchange Commission, we are required by law to act as fiduciaries. This means that we must always do what is in the best interest of our clients. For 45 years, since Phil Nelson first became a Registered Investment Advisor (RIA), that has been rule #1.
For simplicity, and to make the focus of our priorities absolutely clear, we have long stated to all of our team members, clients, prospects and providers of services to our clients, the following:
- In everything that we do, our first priority is to do what is in our clients’ best interest.
- As long as it does not conflict with rule #1, we are to do what is in our business’s best interest.
- As long as it does not conflict with rules #1 or #2, we are to do what is in our employees’ best interest.
It goes without saying that without caring for our clients, our business would not exist. If our business did not exist, then our employees would be without jobs. If our employees’ needs are not met, then our business cannot succeed in meeting the needs of our clients.
In these three rules we do not mention our shareholders’ interest, for we believe that as business owners we will benefit over the long term by first taking care of all of the constituents of our business. This then becomes our unstated rule #4, which implies that shareholder value has always been subsidiary to clients, our business and its employees. We welcome the evolution in the change of corporate focus in the U.S. and hope to see this become a reality in all commercial enterprises.
Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.