C Gopinath

US firms now looking beyond shareholders’ interest

C Gopinath | Updated on September 04, 2019 Published on September 03, 2019

They are now increasingly pursuing social and environmental goals, in addition to profit maximisation

Johnson & Johnson, the global pharmaceutical company, was found guilty of contributing to the current opioid-addiction crisis and fined $572 million (about ₹4,060 crore) by a judge in Oklahoma, US, late last month. Many states are facing the challenge of rising opioid-addiction and prosecutors are going after pharmacies and pharmaceutical companies seen as part of the problem. The state’s case was that J&J’s marketing campaign suggested that opioids did not pose an addiction risk and were suitable to treat a variety of chronic pain situations.

To see J&J associated with causing a societal problem should come as a surprise. That is because J&J set itself a much higher standard than most other companies. The company’s credo, a statement of its values, has put its responsibility to patients, doctors and nurses first, then employees, communities and lastly its shareholders. The company was one of the earliest to reverse the conventional order of importance for a US company that has always been to put its shareholders first.

The Business Roundtable (BR), a business lobbying group, has since 1997 said that companies should focus on its shareholders. That is the prime purpose of the corporation and if it does that job well, the rest shall follow.

This principle was also followed in law, as when courts enforce the ‘business judgment’ rule. If a plaintiff argues that the director of a company made a bad decision, the court’s criteria is to see if the decision was in the best interests of the company — that is, in the best interest of the shareholder. If a company’s decision favours the consumer or the community’s interests over that of the shareholder, namely that of profit maximisation, it can be seen as a violation of the rule.

To get away from the restrictions of this business judgment rule and with a desire to pursue a social or environmental mission, companies began a push for an alternative. Beginning with the state of Maryland in 2010, 36 states have passed laws with some variations that allow for a company to be registered as a ‘Benefit’ corporation. These laws allow for a shift from a shareholder to a stakeholder paradigm and generally enshrine three criteria about how companies are to be managed, namely those of accountability, purpose and transparency. The company is free to pursue social and environmental goals, in addition to profit maximisation.

For example, Patagonia, known for its outdoor clothing, converted itself from a traditional to a benefit corporation. It has set itself goals like using only recycled and renewable materials in its products by 2025.

Now, the Business Roundtable, in a statement released to the press recently and signed by a majority of its members, has declared the ‘purpose of a corporation’ to be to all stakeholders and puts customers, employees, suppliers, communities on a list ahead of the shareholders. The ideological shift taking place is the effort to ask the question: Can private capital be used as a force for good? James Dimon, CEO of JPMorgan Chase & Co., the financial services company, has been addressing this in his annual letters to his shareholders.

He has also pushed his company into activities like financing affordable housing and job training. With that track record, he must have been instrumental as head of BR to declare its new purpose of a corporation. In a sense, you may say that this change in BR’s position is only to keep pace with what many of its members have been saying and doing for some time.

J&J, a member of the BR, said it would appeal the judge’s decision in the opioid case. It is not going to be easy for many companies to live up to the standards and expectations that the new corporation’s purpose will bring.

The writer is a professor with Suffolk University, Boston.

Published on September 03, 2019
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