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The debate about shareholder value

The issue of shareholder value has been at the forefront of recent public policy discussion surrounding sustainability.

The Mexican Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food has issued a policy statement entitled Food and Agriculture Policy: Toward a Sustainable and Inclusive Model.

Its goals include “gender equality,” “action on behalf of the climate,” and “responsible production and consumption.”

In Israel, where half the territory is desert, sustainability has been a central force in making the nation into a food exporter.

“Sustainability makes good business sense for the farmer,” stresses Israeli agriculture expert Dan Alluf. “It maximizes your harvest, the quality of the food is better, and you save money.”

Similar ideas have made their mark on American business. In August 2019, the Business Roundtable, a consortium of leading corporations in the United States, issued a wide-ranging document stating that it is a corporation’s purpose to benefit “all its stakeholders—customers, employees, suppliers, communities, and shareholders.”

The statement, signed by CEOs from companies ranging from General Motors and Ford to Apple and Goldman Sachs, attempts to dethrone a god that has been worshipped by business in recent decades: shareholder value.

It goes back to an axiom delivered by economist Milton Friedman in 1962: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

By this view, the purpose of a company is only to benefit shareholders. All other concerns are purely secondary and should be set aside if they threaten shareholder value.

Of course, this idea can turn into a license for anything. Is it in the shareholders’ interest to obey the law? Usually, because legal problems can and will hurt a company’s value.

But what if no one gets caught? This leads to moral questions that go back as far as Plato’s Republic, but in quite a few cases, management has been more than happy to take the risk.

In the new way of looking, shareholders are only one part of the picture. They were only mentioned, in fact, rather far down in the Business Roundtable statement.

Reaction to this statement was mixed. Not everyone liked the idea a business might have responsibilities beyond its own ledgers. Some wondered whether this manifesto was anything more than window dressing.

The Economist magazine fretted that this approach could entrench “a class of unaccountable CEOs who lack legitimacy”—meaning management might use social initiatives as an excuse to shield itself from mediocre profits.

As usual, altruism and self-interest are intricately intertwined. Today’s consumers are more than ever concerned about sustainability. Businesses are increasingly subject to the “spillover effect,” by which a company’s behavior toward communities, employees, and the environment affects perceptions of the quality of their product.

In short, public trust is the sum total of public views of a company’s performance in all areas. To a degree this is obvious: growers who are cited frequently for environmental violations may well discover that customers are starting to suspect the safety of their produce.

In the final analysis, as Wall Street Journal columnist John D. Stoll contends, “shareholders are still king.” Profitability is going to remain the final criterion for business success.

At the same time, public pressure toward greater social responsibility for businesses isn’t likely to go away. The pressure will remain most intense for companies with a direct public interface—like the produce industry, which has to work ceaselessly to make sure not only that its products are safe and of high quality, but that the public believes they are.

This is multi-part feature on sustainability adapted from the Nogales supplement in the January/February 2020 issue of Produce Blueprints.

Richard Smoley, editor for Blue Book Services, Inc., has more than 40 years of experience in magazine writing and editing, and is the former managing editor of California Farmer magazine. A graduate of Harvard and Oxford universities, he has published eleven books.