NEW YORK – For four decades, the prevailing doctrine in the United States has been that corporations should maximize shareholder value – meaning profits and share prices – here and now, come what may, regardless of the consequences to workers, customers, suppliers, and communities. So the statement endorsing stakeholder capitalism, signed earlier this month by virtually all the members of the US Business Roundtable, has caused quite a stir. After all, these are the CEOs of America’s most powerful corporations, telling Americans and the world that business is about more than the bottom line. That is quite an about-face. Or is it?

The free-market ideologue and Nobel laureate economist Milton Friedman was influential not only in spreading the doctrine of shareholder primacy, but also in getting it written into US legislation. He went so far as to say, “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.”

The irony was that shortly after Friedman promulgated these ideas, and around the time they were popularized and then enshrined in corporate governance laws – as if they were based on sound economic theory – Sandy Grossman and I, in a series of papers in the late 1970s, showed that shareholder capitalism did not maximize societal welfare.

This is obviously true when there are important externalities such as climate change, or when corporations poison the air we breathe or the water we drink. And it is obviously true when they push unhealthy products like sugary drinks that contribute to childhood obesity, or painkillers that unleash an opioid crisis, or when they exploit the unwary and vulnerable, like Trump University and so many other American for-profit higher education institutions. And it is true when they profit by exercising market power, as many banks and technology companies do.

But it is even true more generally: the market can drive firms to be shortsighted and make insufficient investments in their workers and communities. So it is a relief that corporate leaders, who are supposed to have penetrating insight into the functioning of the economy, have finally seen the light and caught up with modern economics, even if it took them some 40 years to do so.

But do these corporate leaders really mean what they say, or is their statement just a rhetorical gesture in the face of a popular backlash against widespread misbehavior? There are reasons to believe that they are being more than a little disingenuous.

The first responsibility of corporations is to pay their taxes, yet among the signatories of the new corporate vision are the country’s leading tax avoiders, including Apple, which, according to all accounts, continues to use tax havens like Jersey. Others supported US President Donald Trump’s 2017 tax bill, which slashes taxes for corporations and billionaires, but, when fully implemented, will raise taxes on most middle-class households and lead to millions more losing their health insurance. (This in a country with the highest level of inequality, the worst health-care outcomes, and the lowest life expectancy among major developed economies.) And while these business leaders championed the claim that the tax cuts would lead to more investment and higher wages, workers have received only a pittance. Most of the money has been used not for investment, but for share buybacks, which served merely to line the pockets of shareholders and the CEOs with stock-incentive schemes.

A genuine sense of broader responsibility would lead corporate leaders to welcome stronger regulations to protect the environment and enhance the health and safety of their employees. And a few auto companies (Honda, Ford, BMW, and Volkswagen) have done so, endorsing stronger regulations than those the Trump administration wants, as the president works to undo former President Barack Obama’s environmental legacy. There are even soft-drink company executives who appear to feel bad about their role in childhood obesity, which they know often leads to diabetes.

But while many CEOs may want to do the right thing (or have family and friends who do), they know they have competitors who don’t. There must be a level playing field, ensuring that firms with a conscience aren’t undermined by those that don’t. That’s why many corporations want regulations against bribery, as well as rules protecting the environment and workplace health and safety.

Unfortunately, many of the mega-banks, whose irresponsible behavior brought on the 2008 global financial crisis, are not among them. No sooner was the ink dry on the 2010 Dodd-Frank financial reform legislation, which tightened regulations to make a recurrence of the crisis less likely, than the banks set to work to repeal key provisions. Among them was JPMorgan Chase, whose CEO is Jamie Dimon, the current president of the Business Roundtable. Not surprisingly, given America’s money-driven politics, banks have had considerable success. And a decade after the crisis, some banks are still fighting lawsuits brought by those who were harmed by their irresponsible and fraudulent behavior. Their deep pockets, they hope, will enable them to outlast the claimants.

The new stance of America’s most powerful CEOs is, of course, welcome. But we will have to wait and see whether it’s another publicity stunt, or whether they really mean what they say. In the meantime, we need legislative reform. Friedman’s thinking not only handed greedy CEOs a perfect excuse for doing what they wanted to do all along, but also led to corporate-governance laws that embedded shareholder capitalism in America’s legal framework and that of many other countries. That must change, so that corporations are not just allowed but actually required to consider the effects of their behavior on other stakeholders.

NEW YORK – The Business Roundtable, an association of the most powerful chief executive officers in the United States, announced this month that the era of shareholder primacy is over. Predictably, this lofty proclamation has met with both elation and skepticism. But the statement is notable not so much for its content as for what it reveals about how US CEOs think. Apparently, America’s corporate leaders believe they can decide freely whom they serve. But as agents, rather than principals, that decision really isn’t theirs to make.

The fact that American CEOs think they can choose their own masters attests not just to their own sense of entitlement, but also to the state of corporate America, where power over globe-spanning business empires is concentrated in the hands of just a few men (and far fewer women). As a matter of corporate law, CEOs are appointed by a company’s directors, who in turn are elected by that company’s shareholders every year. In practical terms, though, most directors remain on the board for years on end, as do the officers they appoint.

For example, Jamie Dimon, the chairman of the Business Roundtable’s own board of directors, has been at the helm of JPMorgan Chase for over 15 years. During most of that time, he has served as both CEO and chairman of the board of directors, in contravention of corporate-governance principles that recommend separating these two positions.

By capturing the process to which they owe their own positions, American CEOs have made a mockery of shareholder control. The Business Roundtable itself has long favored plurality over majority voting, which means that incumbent board members need only receive more votes than anybody else, rather than a majority. At the same time, the organization has fought the Securities and Exchange Commission tooth and nail to block a rule that would allow shareholders to write in their own candidates when votes are solicited. And it continues to try to weaken shareholders’ ability to propose agenda items for shareholder meetings.

In short, for the Business Roundtable and the CEOs it represents, shareholder primacy has never meant shareholder democracy. Instead, the shareholder-value model has given CEOs cover to avoid discussing corporate strategy, especially when it comes to considering alternatives to the share price as a metric for corporate performance. For CEOs, the share price is everything, because it protects the company from takeovers (the greatest threat to incumbent managers), and it increases their own remuneration.

Why, then, would CEOs come out against a status quo that has allowed them to reign almost unchallenged, in favor of a stakeholder-governance model that puts employees and the environment on an equal footing with shareholders? The answer is that revolutions often devour their children. Share-price primacy has not only ceased to protect CEOs in the way it once did; it has become a threat.

After all, it is one thing to champion shareholders when they are too dispersed to organize themselves. It is quite a different matter when shareholders have assembled into blocs with effective veto power and the ability to coordinate in pursuit of common goals. Some 74% of JPMorgan Chase’s shares are held by institutional investors, five of which – including Vanguard, BlackRock, and State Street – control one-third of total shares. And JPMorgan isn’t alone. Recent research in the US shows that the same few global asset managers are top shareholders at almost all of the largest financial intermediaries, Big Tech firms, and airline companies.

For CEOs, the emergence of powerful shareholder blocs has changed the corporate-governance game. With trillions of dollars of savings that need to be invested, institutional investors simply cannot be ignored. Even if asset managers do not actively involve themselves in corporate governance, they can still send a powerful signal to the market simply by dumping shares.

For years, the shareholder-primacy model led CEOs to eke out profits through outsourcing or labor-force downsizing, regulatory and tax arbitrage, and stock buybacks that shower cash on shareholders at the expense of investing in their companies’ future. But now, they have finally realized that these strategies are better for institutional investors than they are for the sustainability of firms.

Confronted with the headwinds they themselves generated, American CEOs seem to have concluded that best defense is a good offense. But if they are serious about abandoning the shareholder-primacy model, public statements will not suffice. They must also support legal reforms, particularly the measures needed to hold corporate directors and officers accountable to the principals they serve. That could mean extending board representation to employees and other stakeholders, or it could take the form of special audits, along the lines of those to which public benefit corporations submit.

Either way, if the new stakeholder model is going to amount to more than the old charade of “shareholder democracy,” the principals themselves must be involved in setting up the new regime. If we leave it for the agents to decide for themselves, we will end up right back where we started.

MILAN – This month, the Business Roundtable, a group comprising the CEO’s of America’s largest and most powerful corporations, formally abandoned the view that maximizing shareholder value should be a company’s primary objective. The implication is that shareholders will no longer always take precedence over other stakeholders such as customers, employees, suppliers, and the communities in which firms operate. In its statement justifying the move, the organization cites the need to pay fair wages, provide more benefits, and invest in training to help employees navigate a rapidly changing economy.

Corporate governance has been moving in this direction for some time, owing to a growing awareness that private-sector engagement will be necessary to address society’s most difficult challenges. Customers, employees, and investors have reinforced this trend by increasingly voicing their concerns about social issues. This emerging consensus is crucial for reconciling the multi-stakeholder model with corporate investors’ longer-term financial interests.

A similar evolution has occurred in the asset-management sector. The share of investors embracing “environmental, social, and governance” (ESG) criteria has been growing over the past few years, with many top asset-management firms helping to lead the way.

This trend raises the question of whether shareholders with a purely financial interest still have the upper hand. Much will depend on their numbers, the assets they control, and their time horizons. But, clearly, support from long-term investors such as pension funds and others managing major pools of assets has helped tip the balance toward ESG.

At any rate, the point of the multi-stakeholder model is not to render investors and corporate boards passive or disengaged. We are not returning to the era of “managerial capitalism,” the corporate-governance model that preceded the arrival of the activist investor and the principle of shareholder primacy. But nor should one interpret the Business Roundtable’s announcement as merely another small positive step in a longer trend. It is much more than that.

For starters, the group’s statement this month is a clear signal of American CEOs’ intention to change not just corporate governance, but also the role of business enterprises in society. It establishes new boundaries for the pursuit of returns on capital – boundaries that are meant to protect constituencies (employees, poorly informed customers, suppliers, future generations) that often lack the market power to protect themselves. Most important, the move comes at a time when wealth inequality is rising, and when the ownership of financial assets is becoming increasingly concentrated.

But an even more exciting feature of the shift toward socially conscious corporate governance is that it opens the door for new, more creative business models. Already, some of the world’s most impressive companies (in terms of returns to investors) have built business models around solving economic and social challenges. Consider the Chinese e-commerce giant Alibaba. Founded with the goal of expanding market access for small and medium-size companies, it and its financial arm, Ant Financial, remain committed to that mission. A growing body of evidence in China and other countries suggests that vibrant e-commerce and fintech ecosystems of the type created by Alibaba can make substantial contributions to inclusive growth.

Earlier this month, before the Business Roundtable announcement, the Indian conglomerate Reliance Industries Limited held its annual meeting in Mumbai, where its chairman, Mukesh Ambani, delivered a striking speech. After pointing out that value creation for the company now depends on partnerships with Indian firms as well as multinationals like Microsoft (for its cloud-computing offerings), Ambani identified Reliance’s stakeholders as the “Indian economy, Indian people, our customers, employees, and shareowners.” There could be no clearer statement of the multi-stakeholder model.

A key component of Reliance’s strategy is its affiliate Jio, which started selling affordable smartphones in 2016 with the goal connecting everyone in India. According to Ambani, Jio has more than 340 million subscribers, and is adding ten million each month. In other words, a company founded with a social mission less than three years ago is already the largest smartphone operator in India, and the second-largest single-country operator in the world.

Moreover, with the use of India’s biometric-identification program (Aadhaar), Jio appears to be making a major contribution to digital connectivity for a wide range of Indians, including poorer people who previously did not have bank accounts or access to credit. And as it continues to grow, it will develop a host of other valuable services for small businesses and millions of entrepreneurs, reinforcing the positive impact it is already having on inclusive growth.

Digital technologies tend to come with high fixed costs, but low to negligible variable costs. Once established, a firm like Alibaba or Jio can thus provide a platform for countless other business models built around social objectives. And this effect is especially powerful in potentially large markets like China, India, Indonesia, Brazil, and the United States.

The Business Roundtable’s recent declaration represents a major step forward for the multi-stakeholder model. The example set by industry leaders matters. And it is no accident that some of today’s most successful global companies were explicitly conceived and built on the basis of multi-stakeholder values.

But a word of caution is in order. Although the transition to a multi-stakeholder model is necessary to make progress toward other social goals, it is not sufficient. Corporations alone cannot solve our most pressing global problems. They will need the support of governments, which have a responsibility to create the space and provide the tools for multi-stakeholder businesses to maximize their positive social impact.

WASHINGTON, DC – In 2015, the international community launched a renewed effort to tackle collective global challenges under the auspices of the United Nations Sustainable Development Agenda and the Framework Convention on Climate Change (COP21). But after an initial flurry of interest, the progress that has been made toward achieving the Sustainable Development Goals and tackling climate change has tapered off. Around the world, many seem to have developed an allergy to increasingly stark warnings from the UN and other bodies about accelerating species extinctions, ecosystem collapse, and global warming.

Now is not the time to debate whether progress toward global goals is a matter of the glass being half-full or half-empty. Soon, there will no longer even be a glass to worry about. Despite global news coverage of civic and political action to address our mounting crises, the underlying trends are extremely frightening. In recent months, the Intergovernmental Panel on Climate Change (IPCC) has marshaled overwhelming evidence to show that the effects of global warming in excess of 1.5^oC above preindustrial levels will be devastating for billions of people around the world.

A recent report from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services serves as yet another wake-up call. Human activities, the report concludes, have put an unprecedented one million species at risk of extinction. The oceans that supply food and livelihoods to more than four billion people are under threat. If we do not take immediate action to reverse these trends, the challenges of playing catch-up later will probably be insurmountable.

For decades, most of the major economies have relied on a form of capitalism that delivered considerable benefits. But we are now witnessing the implications of the Nobel laureate economist Milton Friedman’s famous mantra: “the social responsibility of business is to increase its profits.” A corporate-governance model based on maximizing shareholder value has long dominated our economic system, shaping our accounting frameworks, tax regimes, and business-school curricula.

But we have now reached a point where leading economic thinkers are questioning the fundamentals of the prevailing system. Paul Collier’s The Future of Capitalism, Joseph E. Stiglitz’s People, Power, and Profits, and Raghuram G. Rajan’s The Third Pillar all offer comprehensive assessments of the problem. A capitalist system that is disconnected from most people and unmoored from the territories in which it operates is no longer acceptable. Systems do not work in isolation. Eventually, reality asserts itself: global trade tensions reemerge, populist nationalists win power, and natural disasters grow in frequency and intensity.

Simply put, our approach to capitalism has exacerbated previously manageable social and environmental problems and sowed deep social divisions. The explosion in inequality and the laser focus on short-term results (that is, quarterly earnings) are just two symptoms of a broken system.

To maintain a well-functioning market economy that supports all stakeholders’ interests requires us to shift our focus to the long term. In some ways, this is already happening. But we need to channel the positive efforts underway into a concerted campaign to push systemic reforms past the tipping point. Only then will we have achieved a feedback loop that rewards long-term, sustainable approaches to business.

Most important, we must not succumb to complacency. Short-term tensions over trade and other issues will inevitably capture the attention of people and governments. But to permit the latest headlines to distract us from impending environmental and social catastrophes is to miss the forest for the trees.

Having said that, the impetus for driving positive change cannot be based on fear. The looming crises are both real and terrifying, but repeated warnings to that effect have diminishing returns. People have become immune to reality. Long-term change, then, must come from a readjustment of the market and our regulatory frameworks. Although consumers, investors, and other market participants should keep educating themselves and pushing for change, there also needs to be a thorough and rapid re-examination of the rules and norms governing capitalism today.

We need to impose real costs on market participants who do not change their behavior. That won’t happen through speeches, commentaries, and annual reports. The market economy is a powerful force that needs direction, and regulators and market participants themselves are the ones holding the compass. It is time to get serious about establishing the direct financial incentives and penalties needed to drive systemic change. Only after those are in place can we begin to debate whether the glass is half-empty or half-full.