The Marketplace radio program recently carried an interesting interview with the CEO of PepsiCo, Indra Nooyi, about redefining the role of the CEO. She believes that a “maniacal focus on the shareholders” led to the financial crisis, and that now CEOs should focus on the “stakeholder” rather than the shareholder. The “stakeholder” concept is a bit ill-defined; it is “multifaceted, has different interests, represents different constituencies.” Nooyi also contends that corporations should redefine their profit and loss performance to reflect “revenue, less costs of good sold, less costs to society — and that’s your real profit.” At one point in the interview, Nooyi said “a lot of the CEOs I interface with have real desire to do good for society, have a real desire to make change that’s positive, want to help governments address issues.”
I’m a bit skeptical of the “stakeholder” approach. For starters, I disagree with the notion that a “maniacal focus on shareholders” caused the financial crisis. Instead, I think the breakdown occurred, at least in part, because Boards of Directors weren’t really paying attention and approved compensation packages that gave CEOs economic incentives to favor exceptionally risky, but in the short term lucrative, transactions over long-term investment and sustainable growth. I therefore question a model where CEOs are given some vaguely defined charter to try to do good for society. Who knows what they might decide, and why should corporate money be used for anything other than developing and marketing better products, increasing market share, and increasing profits to the benefit of shareholders? If American companies don’t focus on their business they are going to get their clocks cleaned by foreign competitors who are ruthlessly focused on the bottom line. I also think that people who are upset with the Supreme Court’s recent campaign finance decision would be uncomfortable with Nooyi’s formulation. If corporations are expected to advance social causes as part of their charter, they will have even more incentive to participate in political campaigns. Why should we encourage such behavior?
I think the better course is to adhere to the “maximizing shareholder value” model, which at least provides a measurable basis for evaluating CEO performance. That model, however, also requires Boards of Directors to actually play a significant role in supervising the activities of the corporation, to insist that management focus on business issues, and to develop CEO compensation packages that assess value after an extended period — say three to five years — so as to discourage short-term conduct that causes long-term problems.
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