American Enterprise Institute

Web event — Was Milton Friedman right about shareholder ?

Introduction: Michael R. Strain, Director of Economic Policy Studies, AEI

Panel discussion

Panelists: Clifford Asness, Managing and Founding Principal, AQR Capital Management; Trustee, AEI R. Glenn Hubbard, Visiting Scholar, AEI Martin Lipton, Partner, Wachtell, Lipton, Rosen & Katz

Moderator: Michael R. Strain, Director of Economic Policy Studies, AEI

3:00–4:00 p.m. Tuesday, October 6, 2020

Event page: https://www.aei.org/events/was-milton-friedman-right-about- shareholder-capitalism/

Michael R. Strain: Thank you for joining us today for this discussion of shareholder capitalism. Fifty years ago last month, economist and Nobel laureate Milton Friedman published his famous essay arguing that the social responsibility of is to increase their profits. This view has been controversial ever since. The Democratic presidential nominee, Joe Biden, said in July that the only — I’m sorry, that the idea the only responsibility a corporation has is with shareholders is “simply not true” and “an absolute farce.”

The Roundtable and Association of Chief Executives representing many leading US companies retreated from shareholder capitalism a little over a year ago and embraced the idea that corporations and corporate management have a responsibility to a broader and more diverse group of stakeholders, including customers, suppliers, and workers. Should executives leave their companies for the benefit of all stakeholders, or should they limit their focus to maximizing shareholder value?

To discuss this, we have a distinguished panel. Cliff Asness is joining us. Cliff is the founder and managing principal and chief investment officer at AQR Capital Management. He’s an active researcher who publishes peer-reviewed articles on a variety of financial topics for many publications. And Cliff is a trustee of the American Enterprise Institute.

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in advising major corporations on mergers and acquisitions and matters affecting corporate policy and strategy. Marty is a major public intellectual on the role of corporations and on corporate management decisions.

Glenn Hubbard is dean emeritus and Russell L. Carson Professor of and Finance at Columbia Business School. Glenn was chairman of the Council of Economic Advisers under President George W. Bush and is a visiting scholar at AEI.

This event will begin with a panel discussion, and then we will open up the event to audience questions. You can submit questions to Maryanna Mitchell by email at [email protected]., [email protected], or you can submit questions on Twitter with the #AskAEIEcon. That’s #AskAEIEcon.

And with that, I would like to begin. And we’re going to dive right into the conversation. Let me start with Glenn. Glenn, can you set the stage a little bit for this conversation and share some of your high- level thoughts on why you think that Milton Friedman was basically right, but how you might add some nuance to that proposition?

R. Glenn Hubbard: Well, thanks. I think it’s a great question. It’s worth reminding ourselves what Friedman was motivated to write about in 1970. He was writing against what he saw the weaknesses were in managerial capitalism, that corporate wealth was being dissipated. There was a lack of accountability. It really concerned him. He felt that focusing on shareholder value maximization maximized the total value of the firm.

Economists would say that if you took Friedman’s assumptions — that is, all markets are competitive and the product market and the labor market, doing what he suggests, if you mean by that long-term shareholder value maximization, you must take care of stakeholders. There’s no way to maximize the long-term value of the firm if you’re not treating workers fairly in a competitive market, if you’re not treating your suppliers fairly, if you’re not treating communities fairly. In fact, in Friedman’s near time-space, he gave examples of each of those saying that was very much on his mind. I think the issues we run into and thinking about Friedman today are: What if things aren’t as competitive as he thought?

Well, I think the simple answer would be then make them so. I mean, how about an antitrust policy, or how about something that goes after monopsony powers and problems in labor markets? I don’t

think Friedman’s intuition about the role of a corporation changes at all. Another example is externalities. Suppose there are real problems like climate change. Those are real, but no one company could solve that. That’s a question for public policy.

At the end of the day, I think Friedman saw what he was doing as being about accountability and liberty. He said, for example, in his Times piece in 1970 that if you go the route away from shareholder maximization, if somebody else gets to say what the money is used for and for what purpose, it actually violates liberty, and I think that’s really what most motivated his piece. So, competitive markets, long-term, as opposed to short-term, value maximization, Friedman is still pretty much right. Thinking about externalities is fine, but turning to a company because is broken, that just won’t do.

Michael R. Strain: Cliff, a lot of economists and a lot of defenders of Friedman argue that what he’s really talking about is maximizing value over the longer term. And I think a lot of what Glenn just argued, which is that a corporation can’t maximize shareholder value if it’s mistreating its workers, for example, applies certainly over a longer time horizon.

What do you think about the time horizon here? My impression from reading some of your writings on this is that you think that short-term asset values actually reflect the longer term and that it’s focusing on maximizing short-term value is focusing on maximizing longer-term value.

Clifford Asness: Markets are not perfect. I hope my ex-professor, Gene Fama, is not actually listening to that call because I’ll have to apologize. But actually, he says that about the third day of class that perfect efficiency is, of course, a little bit crazy. I certainly agree that Friedman was talking about the long term. He talked about maximizing profits throughout the entire original essay. He mentioned stock prices once. When he talks about profits, I think it’s quite obvious in context that he’s talking about the kind of a long-term present value concept. The idea that Friedman was advocating maximizing next week’s profits, even if it dooms future profits, is quite silly. With all that said, I think the issue of “short-termism” is actually a very different issue.

It has very little to do — Friedman is identifying a principal-agent problem and saying, “That doesn’t work. This is what we should focus on.” He never was even talking about time horizon. But I will, with all that said, defend the stock price at least a little bit. Again, it’s not the crucial thing here. But the stock price, not to belabor the obvious, I think most people on this call are aware, is supposed to be a discounting mechanism. The price today is the present value of all the future cash flows. It moves around a lot perhaps because of some ephemeral reasons. Again, I don’t think the markets are perfectly efficient, but largely because those long-term estimates change. So, when you see short- term moves, it’s not a willy-nilly short-term move just for fun. It is often a reassessment of that long- term horizon.

So, when people criticize Friedman on the grounds of short-termism, first of all, they are bringing up something he didn’t really say. But they are making a statement that is not the one I think they intend. I think they’re making a statement that the stock market is actually wildly inefficient because if they agreed that the price today is mostly a best guess of the future present value, there’d be no issue of short-termism. So, is it grossly inefficient? I think it has times of inefficiency. I think it’s never perfect. There are times it is less efficient than other times. Short term it’s less efficient than it is long term, but markets are still exceptionally hard to beat. Right? If it was obvious which companies were squandering their money and getting a short-term pop, my job and all active managers’ job would be quite easy. And it’s not. I can promise you.

And as just one example to finish this first section. I think currently the overwhelming theme in the stock market today, you look at things like the famous FANGs: Facebook, Apple, Netflix, Google — they keep changing the acronyms, so I don’t — FAMANGs. So, it gets a little crazy. But the stocks that are wildly expensive have driven most of the performance; it’s all on future long-term expected

growth. If you believe the markets are inefficient and particularly inefficient today that we maybe have a bubble-ish environment, another way to say it is you think we’re having a real rash of irrational long-termism that people are willing to pay a ton for very long-term estimates of very high growth rates. So, the notion that the market is all focused on the short term when every successful expensive company dominating the indices and dominating returns is not about the short term, but it’s about them owning the world for the next 10 to 20 years, it just doesn’t fly.

Michael R. Strain: Marty, I’d like you to react to what Glenn and Cliff have said, but also, you know, perhaps more specifically, you believe that there is a wedge between short-term and longer- term value. And if that’s the case, then a lot of the Friedman framework kind of falls apart. So, I wonder if you could address that specifically while also reacting to what Cliff said and Glenn said more generally.

Martin Lipton: Well, I do think that there is a considerable difference between long-term value and short-termism. Let’s put it that way. It’s one thing to say that long-term value is the discounted — that short-term value builds up on a discounted basis and no long-term value. Nobody disputes that. That’s basically a mathematical truism. The difficulty with Friedman is not so much what he said, but how it was interpreted. This raises no question that Friedman became a god in the business schools following his 1960s and particularly his 1970 New York Times op-ed piece that we’re talking about.

And it was sort of given that a company should be managed in order to maximize value for shareholders. And that evolved into a maximizing value on a short-term basis. In a way, Friedman coincided with the development of institutional investors, the growth in power over corporations by institutional investors. And pretty soon competition among institutional investors and major asset managers put unusual pressure on companies to produce short-term profits, each manager wanting to show competitively that that manager was better than all the other manages.

And pretty soon, the pressure on management to produce short-term profit and maximize share prices created enormous pressure on management to produce profits on a quarter-to-quarter basis and to sacrifice the interests of employees and other stakeholders to creating a quarterly increase in profits and indeed cause corporations’ managers to take undue risks in order to meet quarterly expectations and, worst of all, induce them to sacrifice employees in order to satisfy Wall Street that they were going to meet their quarterly expectations.

Year after year we read about companies restructuring, reducing employment by 1,000, by 5,000, by 10,000 and then giving out what the run-rate impact that will have on quarterly earnings in order to satisfy Wall Street that the price of the stock that Wall Street is looking for is going to be reached. It’s resulted in a significant financialization of our economy, and it’s given rise to what I believe to be the very serious inequality in our society. And in all respects, whatever Friedman might have intended and whatever Friedman wanted to accomplish, the way his view was as to focusing on shareholders and not on the other stakeholders of the corporation have resulted in what I believe to be a very serious dislocation in our society.

Michael R. Strain: Cliff, do you want to respond to that?

Clifford Asness: Sure. A few things. We got all the way to inequality. I believe it’s also responsible for the designated hitter. The idea that maximizing value has evolved into on a short-term basis, that may or may not be true. Personally, I get very confused over time when advocates of stakeholder capitalism can’t decide if they’re trying to protect stakeholders or shareholders because if we’re trying to maximize short-term profits, if that’s bad, it must be at the detriment of long-term profits. If they’re not — if the long-term profits are still great and they’re maximizing the short-term profits, they’re maximizing, as Glenn talked about, the long-term present value of the company. So, you have to have this trade-off. So, I never know who they’re protecting.

Of course, short-term pressures have negatives, but they can have positives too. There’s a certain amount of efficiency that gets — one can argue as Friedman did in the ’80s that a lot of corporations were fat and happy and unpressured. And there’s probably a happy medium somewhere in there. I’m not saying it has to be one side or the other. But what I would say, and I get back to this point, the thesis has always been they’re maximizing short-term profits. They’re not investing. They’re not building their businesses.

That has been going on since the 1980s when all of this nefarious, horrible stuff allegedly started. And the long-term profit drought that should follow that has yet to occur. Profits are at, you know, effectively, you know, pre-COVID certainly at a low at an all-time high. And I don’t just mean — all- time highs are nice and cheap because things tend to drift up. They were at a strong all-time high. Even talking about reducing employment, again, pre-COVID, you don’t get many better employment situations. Not to sound like Schumpeter here — though, I don’t really mind sounding like Schumpeter — but you can point to every place that reduced employment and say, “But the whole is more employed than it used to be.”

This is like one of my personal bugaboos, which I’m hoping we don’t get to today, but I’ll bring it up: share repurchases. Companies are all wasting this money. It’s being taken out of the system. It’s not being invested. No. People reinvest it in something else. They don’t eat the dollar bills. So, even that, I think there’s very little evidence that the aggregate employment has been hurt by this.

So, I think the major point is this basically sounds like it’s shareholder protection, not stakeholder protection. Again, if you’re maximizing the short term at the detriment of the company, you’re hurting shareholders. And it’s only been about 50 years, and we’ve had ups and downs, but we haven’t seen that yet.

R. Glenn Hubbard: Can I come in on this as well, Mike?

Michael R. Strain: Yeah. And you can add whatever you’d like to, but in addition, to me, a kind of decisive point here is the principal-agent problem and that the shareholders are the owners of the company. And if the managers are making decisions that aren’t in the interests of the owners of the company, then how is that a defensible management strategy?

R. Glenn Hubbard: That’s where I wanted to pick up. The two points I wanted to make are about profits and pressure. And Cliff already made, in part, the first point. Work by Steve Kaplan and others at the University of has reminded us what we already know that the profit share has been rising despite all this purported focus just on short-termism, and so it’s not being lost on markets, but long-term profits are very high.

The other is about pressure. The point about institutional investors if you hold the S&P 500 index, there isn’t an S&P 499. You do care about the long-term viability of each of the firms in the index. It is the index big investors that actually do care and care a great deal. They have no choice but to care. And to the point you were making, Mike, about accountability, if you have a stakeholder view that’s very diffuse, to whom are you accountable? I’ll put it more bluntly. When would you ever make a wrong decision? If I say I did it for the workers or I say I did it for the community or I did it for the Metropolitan Opera or whatever reason I took an action, how would I ever be proven wrong?

Whereas if you focus on shareholders — and, again, in the competitive markets Friedman was looking at that sweeps in the stakeholders — I think you’re there. I’m actually a fan of a lot of what Marty has done in the new paradigm of trying to tell boards to be more conscious about the long- term, but I read that maybe wrongly, Marty, is about the long-term value of the corporation.

Michael R. Strain: Marty, what do you say to that?

Martin Lipton: Well, I say a number of things. First, I don’t view the shareholders as owners of the corporation. They’re investors in the corporation. They’re not owners of the corporation. I don’t want to get into the legal argument with respect to how the shareholders relate to the other stakeholders in the company and whether the real owner of the company is the shareholder, but I don’t agree that shareholders are the owners of the company. And for that reason, the company should be run solely and only in the interest of the shareholders. Second, I don’t dispute with much of what Cliff and Glenn say. I think our principal difference is with respect to how the stakeholders are treated in terms of long-run growth in the value of the company.

As Glenn mentioned, the new paradigm basically says that the corporation should be run in the interest of the stakeholders, and I’m including within the interest of the stakeholders the interest of the community is at large, which includes the ESG environment and climate and social issues as well that. The company should be run taking those factors into account for the long-term sustainable growth in the value of the company.

It’s no different than measuring management as against the price of the stock on a current basis. You’re measuring management against are they achieving long-term growth in the value of the company. If they are doing a very good job and there’s no reason to question how they have differentiated among customers, suppliers, employees, and so on, if they’re not increasing the long- term value of the company, then the shareholders should exercise their power. My approach does not in any way deprive shareholders of their ultimate power to change the management of the company.

The whole approach of the new paradigm is, okay, corporations, boards of directors, and management ought to act in these matters as against each other and as against the shareholders. In other words, a set of principles that should be followed. The same with respect to the institutional investors and the asset managers. Do you or don’t you subscribe to ESG factors long-term investment in the treatment of employees and other stakeholders and so on?

And the way in which to get both the corporations and the investors on the same strategic plane is engagement, and that it’s up to the management of the corporation and the board of directors to engage with the investors to reach an agreed strategy that a corporation should follow that strategy. And if the corporation is not successful in following that strategy, it’s up to the shareholders to change the management in order to make the corporation successful following that strategy. It is the way that was essentially conceived prior to Friedman. It was generally viewed that the families that founded these companies and the generation or two that succeeded them and the local people would work with the management of the company to achieve a mutually satisfactory outcome so far as the growth of the company and the dividends it had paid were concerned.

Now, we have a situation where, absent the success of this approach to corporate management, we’re running the risks of state . Week after week new proposals are being made to impose very close guardrails on how corporations are operated. Glenn had mentioned before well, then we ought to have legislation with respect to climate and so on. But once you get legislation, that narrows the ability of management to be flexible. You’re moving into state corporatism, and pretty soon you’re, in effect, taking the competition out of markets, then you’re losing capitalism.

So my view is the only way to preserve capitalism and the only way to preserve a flexible economy is for the people who control the companies to wake up and work closely with management, eliminate activist pressure for short-term performance, and continue to have open competitive markets. Without it, we’re going to move rapidly in the direction that Europe has already moved in terms of imposing stricter and stricter limitations on both companies and investors. The EU has already moved to impose ESG factors on both investors and on financial institutions and providing financing to corporations. So, I just see it basically in terms of preserving capitalism by making sure that companies do perform well and do increase the value of the long-term by taking into account the interest of all of the stakeholders including the public.

Michael R. Strain: Cliff, what do you think? Should we think of investors as owners?

Clifford Asness: Let me start with the part I not only agreed with, but appreciated. The aversion to state corporatism, the idea that Europe is the opposite of the goal. I guess the Soviet Union is the opposite of the goal, but Europe’s a pretty bad outcome for capitalism. And I admire Marty for that, and I agree with him. The statement that shareholders are not the owners. I’m certainly not stupid enough to get into a legal fight with Marty. My sense is if we did discuss it, I’d be about as convinced as I am that I shouldn’t be allowed to grow wheat on my own property because of the interstate commerce clause. But I would lose the debate because he knows that much better.

I think ultimately, Marty conceded that the shareholders can replace management. They own the residual cash flow. That’s a real functional definition of ownership. For me, it’s not legal. It’s economic. Marty talked about a prior time when corporations acted differently. First of all, it’s nice to know he’s an originalist. I’m just joking. But I think there is a little bit of a rose-colored glasses there. There were times, you know, the 1950s, post–World War II where there was this kind of — and we can all still argue about exactly what was going on, but in this nirvana period America was producing most of the world’s goods. There was kind of a social contract there.

But the long-term history. I’m old enough to remember when we used to yell about the robber barons. I’m not old enough to have seen the robber barons, but I’m old enough to remember that. It’s not like corporations have always been these alien mercenary institutions, and it’s only since Milton Friedman that we have a problem with them. I do think, you know, part of this principal-agent problem is if you say, which I do not concede, but if you say the shareholders are not the owners, you throw it into this murky world where ends up being some combination of current management, their consiglieres, and outside constituencies in a highly political process.

And I am very sympathetic and again agree with Marty’s worry about too much regulation. And I do find it odd to somehow be on the more regulation, less management deciding side. But I think there are real dangers to this idea. Trendy ideas, people get forced into doing crazy things. Things are done for show all the time and people are spending — if the shareholders aren’t the pure owners, which again, not conceding, but for purposes of this, management and their advisers are certainly not the owners. And they are the ones who will be driving the bus as this gets murkier and more subject to current whim.

Michael R. Strain: But as I said when I posed the question, my last question to you, maybe the main reason why I’m with Friedman on this question, really, is the issue of private property and the idea that investors own the firm and managers are their agents. And if you don’t believe in shareholder capitalism, then you, by definition, believe there are times when management decisions should work against the interest of the owners. And that doesn’t seem like a defensible management practice to me. Do you think we should think of investors as the owners of the company?

R. Glenn Hubbard: I do. From an economic perspective, I would start where Cliff is about residual cash flows and residual ownership. That’s the definition of ownership from an economic perspective. The way we put it is: If I sell the company, we as shareholders sell the company to some other company, who gets the cash? And the answer would be the shareholders of the firm.

If there is a subtle concern that, well, maybe some of that is true long-term value and some of it is an expropriation from a shareholder. Maybe I abrogated a contract with workers or I treated communities badly. That again, I already gave my point of view on. Friedman argued that’s not really optimal for a firm to do that if it’s maximizing long-term value. So, I just don’t buy that.

But the second piece that Marty suggested that I have some trouble with is what I would call the George Cadburyization of business, you know, a romantic idea of the entrepreneur who builds a great

company and then, you know, just writes checks to the community. That’s perfectly fine, and Friedman noted that. Friedman said, “Look, it is fine for individuals to use their personal wealth for charity.”

The question is: When we move from George Cadbury to decentralized owners of a firm, who should make that decision? Now, more or less I agree with Friedman that it is really shareholders who should make their own decisions. That company shouldn’t be engaged in these broader missions. A slight tweak to Friedman would be if the company has a more efficient way of doing that trade-off than I have as a shareholder, then okay, maybe it should do it. But by and large, it is the shareholders that own the company.

The final thing I would say is it doesn’t mean that business or business people have to be passive. One use of the Business Roundtable is less about signing statements that move against their original 1997 statement on the corporation and more toward tackling issues that businesspeople should do together. For example, the BRT’s work recently on policing. It is perfectly fine for the business community to express a broad social concern that affects the value of all business. But that’s very different from either the George Cadburyization point or from saying people, shareholders don’t even own their own companies.

Martin Lipton: Well . . .

Michael R. Strain: Sorry. Go on, Marty.

Martin Lipton: I think you have to be careful not to draw a distinction with respect to corporations and remove corporations as a piece of property that shareholders own and not consider that corporations can only exist within the overall umbrella of the and society. No corporation can exist unless government is providing infrastructure. No corporation can exist unless government is providing rule of law. No corporation can exist unless government is providing a currency. No corporation can exist unless government is providing the ultimate safety of stepping in to solve the problem of dislocations in the economy and so on.

Corporations exist as part of society. And they have to take into account all of the interests of society. They can’t exist only on the basis of maximizing profits for one small element of the stakeholders who have a stake in corporations. Corporations today basically are the business of society. They’re the ones who are producing the services and the products on which we exist. And they are part of an overall society.

And if you try to separate them out for the sole benefit of the people who happen to have it invested in them, you are, in a sense, throwing down a gauntlet to society and saying, “Well, okay, if you don’t like the way this is going, why didn’t you enact this statute and that statute and so on,” to tell them how they should operate. And to me, that’s the last thing we want.

We’ve managed to evolve a system, particularly in the United States, where we maintain flexibility in markets, flexibility in management. And every now and then it goes off a bit. But, okay, so when it goes off a bit, hopefully, you have a group like the Business Roundtable who say, “Oops, we went off. Let’s get back on the right track to accomplish what all of us want to accomplish.” I think what the Business Roundtable did was magnificent, to say, “We were wrong in ’97, absolutely, wrong. We should never have said that. This is the way corporations should act. This is what we should do.” And by doing that, they are preserving the freedom of corporations to work in open markets. Otherwise, corporations are not going to have open markets to function. And you’re going to have state corporatism of one kind or another.

R. Glenn Hubbard: I come back on this point because it’s come up a couple of times. I wouldn’t be throwing down a gauntlet to society. I’d want to give society a socially distanced hug in two

Friedman ways. So, one, Friedman, not only understood — he wrote about it in the very 1970 piece — the value of community and other governmental relationships for the long-term value. And he gave specific examples.

The second is corporations and their capital providers do pay enormous amounts of taxes. So, it’s not that the underpinnings of society are some free-riding problem for owners of capital. They do pay for that privilege. If the argument is they don’t pay enough for that privilege, we could have that as a tax policy discussion.

So, I hate state corporatism. I’m 100 percent with you. But I think Friedman got that and really felt that if you did it his way, you wouldn’t have that. To the Business Roundtable, I would humbly ask: What would be wrong? So, in the new statement, what could I do that’s wrong as a CEO? I can’t figure it out.

Michael R. Strain: Cliff, can I ask you to . . .

Martin Lipton: [inaudible] read that quote before we had tax arbitrage.

Clifford Asness: Eventually, Michael.

Michael R. Strain: Cliff, let me ask you to dive in on that. And to build on one second question, I’m going to ask you two questions. One, are you aware of any decision that any Business Roundtable executive has made following that statement that sacrifice shareholder value? And if not, then did the statement have any teeth? And secondly, why shouldn’t I view the Business Roundtable statement as simply a PR maneuver and not as an actual statement of a change in management practice?

Clifford Asness: You’re ruining my point by saying it for me. I mildly disagree with Glenn, who was too nice. And I completely disagree with Marty. Let me back up a little bit. Marty makes the point that corporations can only exist with government. Whether you like this idea or not, that has great shades of “You didn’t build that.” It’s essentially the same statement. What I would say is it also applies to sole proprietorships. It applies to your home in suburbia.

So, if you take that logic and it’s not even a big step to say nobody owns anything. And suddenly not to be histrionic, but “abolish private property” is actually the title of what we’re talking about. So, if corporations don’t or if shareholders don’t own corporations because they need a government to operate, none of us own anything. So, I am not ready to go there.

On the Business Roundtable, I do have a slightly different opinion than Marty. I vary between two hypotheses that they are affectless, personal, greedy, wealth maximizers advertising their goodness while pretending to be courageous when being the opposite of courageous because telling the world things you get praised for is not courage. That’s the bad one. The good one is they’re simply prisoners in a North Korean hostage video and they have to say this and, you know, are not really excited to do it. They’re just blinking out, you know, on the video.

Marty, again, I admire his desire to maintain flexibility, to keep a capitalist system, which is not rigid, but it also has a little bit of a flavor of “All right. If you don’t do precisely what we want you to do — and by the way, we don’t really know what we want you to do. It’s all very amorphous — but if you don’t do what we want you to do, we’re going to be forced to, and then it’ll be really bad.” So, I’m not sure that’s real freedom. If it’s recursively — if you don’t do it, we’ll make you do it.

Finally, to answer your question, no, I’m not aware of any significant. You can always point to a corporation donating X dollars to often very worthy things. But they’re often — they’re a rounding error. I don’t know of any corporation that’s made a significant sacrifice to the health of its business to do this.

There was actually just an article in that noted libertarian screed . I believe the guy was named Goodman. I don’t remember. I could be wrong about that. Just saying, you know, report — I think it was called “Report card on the Business Roundtable” and what they’ve done since this announcement. And it was very poor. Not very poor to me, who doesn’t think they should have made the announcement, but very poor to The New York Times.

So, I know the other end of the spectrum, and I don’t mean to be mean about it. But I truly think either a lot of these guys just don’t believe it. Well, I don’t think they believe it, period. Either they’re saying in a callous way to maximize or because they think they have to.

R. Glenn Hubbard: Can I come in?

Michael R. Strain: Yeah, go ahead.

Martin Lipton: One thing, Brian Moynihan, the Bank of America, announced a $1 billion project on investment in minority lending. And I think you’ll find, Cliff, that there’s example after example of major corporations that have major commitments as a result or following. I wouldn’t say it’s a result, but following. I think it’s a gross canard to accuse the 200 CEOs to have just doing a public relations ploy and this they meant it. It was debated extensively. It was very carefully considered. It was the right thing to do. They are trying to do the right thing.

I won’t name him but now retired but very successful CEO of a very, very large company when he read the AEI announcement of this sent me an email about how his cooperation invested in various things, employee education, and so on, that resulted in great returns both to the corporation and to society. You’re just wrong. You’re just dead wrong on the motivations of these people and what they have done. I have the advantage of age. I go way, way back. I started this with Adolf Burly at 1955, and I’ve been at it ever since.

Now, my experience is that overall, corporate management has tried to do the right thing. It’s gotten off base when it’s been pressured by shareholders looking for short-term returns and forcing them away from the business strategies that they believe are appropriate for maximizing long-term corporate growth and value.

R. Glenn Hubbard: Can I come in?

Michael R. Strain: Glenn, did you want to get in?

Clifford Asness: I got to respond to that, Glenn, because I was called absolutely wrong. Clearly, we’re not going to settle this. I think you are absolutely wrong, and it is obvious to everyone, including those of you who say it, that this is all progressive peacocking. But you and I are not going agree on that. You have been consistent. I can’t accuse you of being trendy. You have been doing this since the 1970s. That does not make you right, Marty. I’ve been saying I’m 5-foot-11 since the 1970s, and I’m two inches short of that. So, time doesn’t necessarily prove these things.

The other thing I’ll mention, and I’ll mention, there are two other things. I keep thinking we’ve disproven this whole idea of short-termism and you just keep restating it as if it’s a fact. So, I just — we obviously disagree strongly on that, but I think it should be clear that we disagree on it, that the evidence that short-termism has killed corporations since the 1980s is the evidence that employment is doomed since the 1980s because the short-termism is quite lacking.

And finally, you do this. Everyone who advocates do this. You switch back and forth seamlessly between saying it’s actually the right thing for the shareholders for long-term value and kind of not doing that. And I’ll just say for a fact if it’s the right thing for the shareholders for long-term value,

nobody has an argument here. We’re all in complete agreement. If doing wonderful things happens to be the PV maximizing strategy, we’re having an hour webinar over nothing.

Finally, I will point out that Milton Friedman anticipated the Business Roundtable, though, he was kinder than I am. He said, “It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window dressing.” Maybe he wasn’t that much nicer than me. “Because it harms the foundation of a free society. That would be to call on them to exercise a social responsibility. If our institutions and attitudes make it in their self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them.” So, not only did he get everything right, but he even knew about the Business Roundtable 40 years ago.

Michael R. Strain: Glenn, do you want to get in on this?

R. Glenn Hubbard: Mike, because I actually am 5-foot-11, so let me try to weigh in on this. So, I’ll try to inject my sort of nice southern manners into this.

I absolutely believe the sincerity of the people who signed 181 names the Business Roundtable statement. I don’t doubt their sincerity one bit. I do believe that there’s a real soul-searching in corporate America about purpose. What’s the true north of the company? Why does it exist? I view all of that as healthy.

But I do think all the examples that I hear really are about long-term value maximization, in which case, I sort of agree with Cliff. What’s the debate? We certainly don’t take umbrage at anybody not maximizing long-term value. So, I think the Business Roundtable statement is what it is. My fear would be that it’s too hard to falsify. I just don’t know when it would ever fail. And so I probably would have drafted it differently if somebody had asked me, but I don’t doubt their sincerity.

Michael R. Strain: Marty, can you give the one strongest piece of evidence or the one strongest argument you have in favor of the idea that a focus on short-term profits is hurting long-term value?

Martin Lipton: Yes, I can. I think that just day after day what you see companies reducing investment in R&D CapX employees in order to increase short-term profits to meet expectation of Wall Street. And it has a cumulative adverse effect. I’ll give one example. Kraft Heinz, I think, is a perfect example of a company that announced that they were doing zero-based budgeting and we’re reducing investment in marketing and product development and so on and cutting expenses and increasing margins. And as companies do that, it catches up on them, and their earnings start going down and so on. And if you’re just to look at the recent history of Kraft Heinz from the time it was taken over by the group that now manages it, the earnings of the company disappeared and the value of the company has disappeared.

And if you can match that with probably half the publicly traded companies responding to short-term pressures, you can’t, in the long run, stop investing, stop R&D, cut your advertising, cut your marketing, cut employment, stop employee training, and so on and expect to create long-term value. And shareholders put pressure on corporate management to increase profits on a quarterly basis; that’s what you’re going to end up with. And unless you realize that and face it, you end up requiring government action. If you look at Europe, that’s what you end up having, and government action never ends up with a happy society. No Communist or socialist society has ever ended up as a happy society. Almost all of them end up as totalitarian, and those that aren’t totalitarian end up as generally being second-rate economies.

Clifford Asness: Marty is trying to trick me into defending socialism now. I’m not going to fall for it. I don’t know anything about Heinz. It’s one anecdote. I will note that what Marty said is that in an effort to boost short-term profits, they’ve destroyed short-term profits. Nobody has ever outlawed idiocy.

Martin Lipton: Long term, not short term.

Clifford Asness: It didn’t take very long. They didn’t help the shareholders who they’re supposed to help. But I would like to quote a few more people. I have one more person. Noted conservative ideologue Steve Rattner, writing in The New York Times in an article debunking short-termism: “The easiest path for companies to goose earnings would be to cut back on investment. However, business investment has remained between 11 percent and 15 percent of GDP since 1970. Last year corporate investment, which includes structures, equipment, and the like, totaled 12.6 percent of GDP. Included in those investments is corporate spending on research and development and undertaking the long payback, which has reached its highest-ever percentage of GDP, not a fake number that’s nominal, and has become a more important part of overall investment.”

And I would add to that, the company, some of which I think have gone too far, I’m a value manager, that are being most rewarded in the stock market today are the ones making the largest R&D investments. So, Marty comes, he’s very convincing, and he’s very smart, and he gives you an anecdote about one company that is not borne out by the actual aggregate numbers slightly.

Michael R. Strain: Glenn, how do you read the evidence?

R. Glenn Hubbard: Well, I think if you look at the Kraft Heinz story, I view it as a strategic blunder. Those weren’t short term. Those are the long-term private equity investors, including Warren Buffett. And this is hardly Mr. Short-termism playing around. They made him — they just, full stop, made a mistake. I read the evidence that, you know, corporate America has remained vigorous in long-term maximization. The question for this panel, I think, is: Is that enough? If you’re trying to maximize the long-term value of the company, are you generating the largest potential resources for society? I would say yes. The only way you could say no is if you think that value maximization is transferring wealth systematically from other stakeholders. But then I wonder what else isn’t working in the economy to make that true. And so I end where I started that Friedman more or less got this one right.

Michael R. Strain: Well, let me ask you a follow-up on a point you made earlier. And this may be a good place to end since we’re coming up on the end of it. There’s a classic example of what corporate executives should and shouldn’t do. There’s widespread agreement that corporate executives should not donate to charity. The corporate executive could write a $100 check to a charity or the corporate executive could give the $100 to the shareholders and let the shareholders donate to the charities they want to. There may be times when a corporation can pursue social good and social benefit better than shareholders can. And, Glenn, I think that you’ve used some of those situations as opportunities where every corporation should engage in these activities.

R. Glenn Hubbard: Absolutely. There may be times where the corporation’s trade-off is better than the individuals in selecting and making those contributions. Friedman himself noted that. He also noted that there may be times where for the benefit of long-term value having a healthier community and civil society around it makes that so. So, I don’t think Friedman was saying never should the corporation give to charity. It’s just he was a little concerned about corporate executives simply wanting the best seats at the opera or sports stadium.

Michael R. Strain: Marty, can you give us 30 seconds of concluding thoughts?

Martin Lipton: Yeah. That’s all I need is 30 seconds. And all I have to say, Cliff, is FANG against the steel companies. I think it’s obvious. The numbers you’re using reflect high tech and all the new companies that have basically covered over the decline of the older companies. Those numbers [inaudible].

Clifford Asness: That’s happened for 200 years of the Industrial Revolution. That’s my final comment. That has happened for 200 years of the Industrial Revolution, the new company paints over —

Martin Lipton: My trouble, Cliff, I was there at the beginning.

Clifford Asness: I appreciate that.

Michael R. Strain: What I’ll be taking away from this for sure is that all four of us agree that socialism will lead to the ruin of the United States and any nation that the practices it. And so I’m glad we can get some agreement on that. This is obviously a complicated and an important question. And economists and the public at large have been wrestling with it for a half a century now since Milton Friedman published his essay and, of course, for even longer than that.

I’m so pleased we could host this discussion with such distinguished panelists. Cliff, Glenn, Marty, thank you so much for coming on the Zoom here today and sharing your views on this. And let me thank everybody who tuned in to the livestream and let me also thank everybody who will end up watching this video at their convenience later on. And I will leave it at that. Thank you so much.

Clifford Asness: Thanks, guys.

Martin Lipton: Thank you. Thank you. It’s great to —