Upside Down World (Gwen Moritz Editor’s Note)

It’s almost like the Business Roundtable heard Olivia Farrell’s speech when she accepted the Little Rock Rotary Club’s Business & Professional Leader of the Year award in June and decided to get on board.

As I described in this space, the founder and former CEO of Arkansas Business Publishing Group considers shareholders to be just one constituency to which a business owes a duty. The others are customers (in our case, both readers and advertisers), employees, vendors and the community.

Last week, the Business Roundtable, led by JPMorgan CEO Jamie Dimon, declared a new definition of the “purpose of a corporation.” Unlike earlier versions issued periodically since 1978, the new statement does not endorse “principles of shareholder primacy” — the idea that corporations exist principally to serve shareholders. (In 1997, the BR proclaimed “maximizing value for shareholders as the sole purpose of a corporation.”) Instead, the new statement sounds like Olivia Farrell wrote it, except it refers to suppliers rather than vendors.

Now, I worked for Olivia for almost 20 years, until she and her investors sold ABPG to Publisher Mitch Bettis in February, so I know that she really lived by her philosophy. And Mitch named his new company Five Legged Stool LLC in homage to her philosophy. But will the 181 CEOs who signed onto BR’s new statement of purpose really make a fundamental break with the idea that everyone else takes a back seat to shareholders?

There is reason for skepticism — and not just because corporate culture is hard to change.

As Dean Baker, a senior economist at the Center for Economic & Policy Research in Washington, pointed out in The Washington Post, the new statement of purpose “presupposes that maximizing shareholder value is what corporations have been doing all along. They haven’t. Returns to shareholders have actually been unusually low in the past two decades. What has been maximized? Executive compensation.”

While the long-term average real return on investment in publicly traded companies has been more than 7%, Baker pointed out it has been less than 5% since 1997. (He was being generous by not sticking with just the past 20 years, in which annual returns have averaged 3.6%.)

Boards of directors, which set executive salary, tend to be friendly to the C-suite because executives generally help identify new board members, and those directorships pay well for relatively little work. Instead of asking, in Baker’s words, “Can we get a CEO who is just as good for half as much money?,” directors tend to perpetuate the infamous Lake Wobegon Effect, in which all CEOs are above average and deserve to be paid that way.

Recent analysis by the Economic Policy Institute found that the largest 350 corporations paid their CEOs an average of $14 million a year (before stock options), and such generous pay at the top is also reflected in the next levels. Millions upon millions in executive pay means less profit for shareholders (and influences the salaries demanded by other management talent, like university administrators and nonprofit executives.)

Depending on the industry, CEOs can be paid hundreds of times more than their median employee is paid — or even 1,076 times, in the case of Doug McMillon, the Walmart CEO who signed the BR statement. In the 1960s and ’70s, Baker noted, the ratio of CEO pay to worker pay was typically 20 or 30 to 1.

“If CEOs committed to restoring this pay ratio — lowering their pay to $1.5 million or $2 million — they’d go a long way toward achieving the goals they boldly declared Monday,” he wrote.

On the other hand, there is also reason to think that the Business Roundtable’s new statement might actually be more than a charm offensive by overpaid CEOs: Among the signers is Laurence D. Fink, chairman and CEO of BlackRock Inc., the world’s biggest asset manager with $6.5 trillion under management. (BlackRock is a major investor in many of Arkansas’ publicly traded companies — Murphy Oil, Murphy USA, Dillard’s, Bank OZK, Tyson Foods, ArcBest, etc.)

Fink, as I have noted in this space on several occasions, has been encouraging CEOs to abandon “short-termism” — his word for the treadmill of obsessive attention to quarterly earnings and minuscule deviations from analyst estimates. Fink has been begging executives to set long-term goals and directors to reward progress toward those goals.

By signing the Business Roundtable’s new statement of corporate purpose, Fink is giving the companies in which BlackRock has invested permission not to put BlackRock first.

Email Gwen Moritz, editor of Arkansas Business, at GMoritz@ABPG.com and follow her on Twitter at @gwenmoritz.