“Capitalism Is a Successful Means of Serving Society”: Q&A with Peter Georgescu
When the Business Roundtable released its “The Purpose of a Corporation” statement in August, which marked a change from shareholder primacy to putting the interests of various stakeholders first, it was a moment of validation for Peter Georgescu.
The former CEO of publicly traded communications company Young & Rubicam (now Y&R) advocated for the principles adopted by the Roundtable in his 2017 book, Capitalists, Arise!: End Economic Inequality, Grow the Middle Class, Heal the Nation.
Georgescu, who came to the U.S. as a Romanian refugee as a teenager, spoke to Patricia O’Connell for “This Is Capitalism” about the role corporations and capitalism can play in changing lives and creating opportunity for the vast majority of Americans.
Many people, rightly or wrongly, blame capitalism for economic inequality. Why do you see it as the solution?
Most people would define capitalism as the process of making money. That is both myopic and incorrect. Capitalism is a successful means of serving society in many ways: creating jobs, paying people well, optimizing benefit to society, and treating shareholders well. Free market capitalism has proven to be the most effective means and creator of growth and prosperity in history.
Yet you also say in the book that free market capitalism has reached a dead end and is committing suicide. So how can it be the solution?
The critical issue is what do we want free market capitalism to produce, and for whom? When Milton Friedman wrote in 1970 that the primary purpose of the corporation was to create shareholder value, people shifted to a very limited view of capitalism. And we eventually doubled down, looking for short-term shareholder maximization. From that perspective, free enterprise capitalism has been very successful.
But we’ve asked it to do the wrong thing. And it’s now clear that almost 200 of the most influential CEOs in our country see that.
How do you view the statement from the Business Roundtable?
I was impressed that they had the wisdom and the courage to do what they did. I can’t overestimate the importance of it. And yes, there is safety in numbers. It wouldn’t be enough for just a few CEOs to promise not to be ruled by shareholder primacy, and there have always been companies that haven’t operated that way. But a critical mass was needed to put a stake in the ground, because they knew the backlash was coming. That’s why I say it took both wisdom and courage.
The backlash has already started. There are those who say the statement is only empty rhetoric, and there are others who say that this is unfair to shareholders. How do companies prove them wrong?
The Business Roundtable didn’t intend to provide all the details in their statement or claim to. Nor should they have. Now it’s up to others to come forward publicly and say, “I believe in what the Business Roundtable did and we’ll support the companies who do the right thing and are committed to it”–especially equity managers and pension funds.
As far as shareholders, people need to understand that shareholders are not owners of the corporation. They have some rights, but they are not owners. That is a myth. And too often, activist shareholders, who think they are entitled to run the business, have abused those rights.
What is the crux of the argument against shareholder primacy?
When you seek to maximize shareholder value, you marginalize investment in the corporation, you reduce research, and you reduce wages to the lowest possible level. Ultimately these actions lead to inequality in income and opportunity. When inequality gets too wide, the traditional solutions are either redistribution of wealth or redistribution of poverty.
Instead, we should use capitalism to create more wealth, with stakeholder governance as the guiding principle. And when I say wealth, I’m not talking about the kind of wealth that is measured by shareholder returns. The stock market isn’t an adequate measure of economic health, because most people don’t benefit from it. When so many people are going into debt just to survive, how are they contributing to or benefiting from GDP?
How should we measure economic health, if not by the stock market or GDP?
We should look at job participation, not the unemployment rate, and take into account the number of people who need more than one job to get by. We should look at the net worth of the vast majority of Americans. At the time I wrote the book, nearly 60% of Americans had to borrow money to pay their bills and put food on the table. This isn’t sustainable–for people and for us as a country.
What is the proper role of government when we are looking to the free markets for solutions?
The government can–and should–play a supportive role, with tax incentives to create more jobs, train and retrain people, and to increase R&D spending.
The other thing the government needs to do is invest in basic research. We did it in health care. The government spent $40 billion to decode the human genome, and that in turn created well over a million jobs that pay between $90,000 and $110,000. There’s no way private enterprise could have afforded to take on a project of that size, or that much risk.
Partnerships between government and business are welcome, but only the private sector can produce prosperity and growth.