Business Roundtable – CEOs must maximize value for all stakeholders

In 1970, Milton Freidman (recipient of the 1976 Nobel Memorial Prize in Economic Science) famously asserted in a New York Times essay that a company has no ‘social responsibility’ to the public or to society.  Friedman claimed a company’s sole responsibility is to its shareholders.  Business executives subsequently used this single objective function to guide their decision-making.  They adopted the ‘Friedman Doctrine’ as their guiding principle in business.  Friedman’s advice, after all, was grounded in economics.

In a 1976 paper, William Meckling and Michael Jensen supported the Freidman Doctrine, providing the quantitative economic rationale by proposing a single financial objective for the company.  Jensen formally asserted in a 1983 paper that a corporation’s sole responsibility was to increase shareholder value through higher short-term stock prices, ushering in the Shareholder Theory of the Firm.  In 1990 Jensen (along with Kevin Murphy) recommended using executive stock options to maximize shareholder value.  CEO wealth subsequently increased, as did income inequality.  Commentators have argued ever since.

Recently (Monday August 19, 2019), CEOs from 181 U.S. companies effectively said they were abandoning the Friedman Doctrine.  These Business Roundtable leaders affirmed that the purpose of the corporation is to serve all stakeholders, including employees, suppliers and broader society.  “While each of our individual companies serve its own corporate purpose, we share a fundamental commitment to all our stakeholders,” the CEOs wrote in a joint statement.  “Each of our stakeholders is essential… We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

Financial Decisions: What finance theory holds to be true

While the announcement is indeed news worthy, its substance has long been discussed.  Short-term attention, however, precludes many business professionals from knowing the historic intellectual foundations over optimal business decision-making and the purpose of the firm.  The recent statement by the Business Roundtable CEOs has its roots in ongoing academic research and theory.

In 1952, before Friedman’s famous New York Times essay, Henry Markowitz (the 1990 recipient of the Nobel Prize in Economics) had began formalizing Modern Portfolio Theory.  Markowitz proposed an ‘Efficient Set’ of investment choices.  Markowitz’s Efficient Set describes the optimal combination of securities in a portfolio.  When plotted on a graph, a curving ‘Efficient Frontier’ traces the optimal risk-return trade-off for potential portfolios.  The optimal portfolio choice lies along that curve.

In plain words, Markowitz stated that investors should choose the combination of securities that provides the greatest total return (for a given amount of risk).   They should simultaneously choose the portfolio with the least risk (for a given level of return).  The conclusions appear intuitive; the ramifications, however, are expansive.  According to Markowitz, the optimal investment portfolio is not selected using a single decision factor (i.e. maximizing total return alone).  The ‘best’ portfolio is formed based on more than one consideration.

Other business academics would later expand modern portfolio theory to include additional factors.  They expanded Markowitz’s initial two factor model to include asset classes (equity, fixed income securities, etc.), time horizons (longer versus shorter investment holding periods), global portfolios (developed and developing economies), and social / ethical considerations (environmental, labor-related, firearms, alcohol/tobacco etc.)   Responding to investors’ expanding consideration set, many companies began publishing Corporate Social Responsibility (CSR) Statements in their Annual Reports.

Business Decisions: What management science / economic theory holds to be true

Thomas Chamberlin had much earlier questioned using a single objective function to guide organizational decision-making.  In 1890, he had asserted that business decisions are improved using ‘multiple working hypotheses’:

“In following a single hypothesis, the mind is presumably led to a single explanatory conception.  But an adequate explanation of involves the co-ordination of several agencies, which enter into the combined result in varying proportions.  The true explanation is therefore necessarily complex.  Such complex examples of phenomena are specially encouraged by the method of multiple hypotheses, and constitute one of its chief merits.” (Thomas C. Chamberlin, “The Method of Multiple Working Hypotheses,” Science XV, no. 366 (February 7, 1890): 93)

A half century later, Herbert Simon claimed that business executives actually satisfice – a combination of satisfy and suffice.  Simon asserted executives use an approximating heuristic (i.e., a ‘close enough’ mental model) to make decisions whenever optimal solutions cannot be determined.  In his 1947 book Administrative Behavior, Simon stated that computational complexity and a lack of information preclude executives from using mathematical optimization to solve complicated business problems.  His insights into organizational decision-making and the theory of bounded rationality earned him the Nobel Prize in Economics in 1978.

Simon suggested that rational choice theory, a principle underlying existing economic theory, was an unrealistic description of human decision-making.  Bounded rationality described situations where the absence of perfect / complete information, combined with cognitive ‘short-cuts’, lead organizations to make decisions / implement solutions that are, in fact, suboptimal.  Most established economists – and most finance professors –nevertheless continued developing subsequent theories based on the rational expectations and optimization premise.

Beginning in 1969, two psychology professors at Hebrew University in Jerusalem — Daniel Kahneman and Amos Tversky – began an extraordinary intellectual partnership exploring the twin concepts of human judgment and decision-making.   Kahneman and Tversky demonstrated that actual human judgments and decisions deviate from optimal economic models.  Not only are such deviations from ‘perfect rationality’ common, they are predictable!  Kahneman was awarded the Nobel Prize in Economics in 2002 for his insight into the ‘illusion of validity’ and ‘anchoring bias’.  [The Nobel Prize is not awarded posthumously; Tversky had sadly died before the Nobel Prize was awarded for their joint pioneering work].

Gary Becker (1992 Nobel Prize recipient for his work on investments and market discrimination), Gary Akerlof (2001 Nobel Prize recipient for his work on market-based information asymmetries), and Richard Thaler (2017 Nobel Prize in Economics for his work developing realistic psychological assumptions explaining economic decision-making) provided the further intellectual foundation for the emerging field of Behavioral Economics.  Building on the work of Simon, Tversky and Kahneman, these economists showed the cognitive limitations causing individuals to suboptimize economic decisions.  Economists are presently researching (and debating) these ‘inexplicable’ (based on neoclassical economics) non-rational components of financial decision-making.

Finance and Economics: Growing disagreement over fundamental questions

Like all physical, natural and social science disciplines, economic theory is perpetually evolving.  Despite commentary to the contrary, there is a growing divergence of opinions / viewpoints in academe over fundamental economic concepts like rational behavior, information and even the definition of value. For example, in my 2003 PhD thesis I documented the lack of consensus amongst academics (and business professionals) concerning the disciplinary / functional definition of business value.  See previous article.

Recently, authors have described these theoretical discrepancies and empirical “disconnects”.  In his 2010 book Economyths: Ten Ways Economics Gets It Wrong, mathematician David Orrell identifies ten key ‘myths’ underlying mainstream neoclassical economics, essentially positing that immutable laws don’t exist for business (based on the social sciences) the way they do for the cosmos (based on the physical sciences).  In his 2013 book Capital in the Twenty-First Century, economist Thomas Picketty empirically shows the rate of return on capital in developed countries is greater than the rate of economic growth, concluding there is a resulting unbalanced capital concentration and inequitable wealth distribution in western economies.  In her 2018 book The Value of Everything: Making and Taking in the Global Economy, economist Mariana Mazzucato describes the underlying ‘fence problem’ that results whenever economists try to define productive business activity (i.e., what should be considered value-adding versus not), arguing that current ‘extractive’ finacial actions mask slowing economic growth in GDP.  Executives might understandably ask: “What then is the definition of value I should use to maximize business value?”

Previously I described Systems Thinking and Complexity Science as well as the rise ‘wicked’ problems in social and anthropogenic systems requiring ‘messy’ solutions.  See previous article.  To be successful in today’s global technology-driven economy, executives must understand and navigate business systems that are Variable, Uncertain, Complex and Ambiguous (VUCA).  See another previous article.  While the issue may appear abstract, its consequences are very tangible and real for companies and governments.  Academic theory, after all, is used as the basis for teaching future managers and setting sound economic policy.  It is particularly relevant on company front lines where employees interact – and often grapple — with customers and suppliers (three different stakeholder groups).

New “Way of Thinking” about business management needed

Supply Chain Management has confronted these issues for several decades now (since the rise of the Shareholder Theory of the Firm).  How should companies optimize their respective value chains, the combination of their upstream suppliers and downstream customers, across firm boundaries, locations, markets, time horizons and stakeholder groups?  How should executives and company employees reconcile conflicting claims and multiple value definitions / objective functions across complex business systems?   How should they manage the current “messy” problems confronting most businesses?

As noted in a previous article, companies seem to have lost sight of the need for integration.  Business integration is not a new concept.  In 1990, Michael Hammer described the concept of Business Process Reengineering (BPR) in his Harvard Business Review (HBR) article “Reengineering Work: Don’t Automate, Obliterate.”   In 1992, Robert Kaplan and David Norton published their HBR article The Balanced Scorecard—Measures That Drive Performance,” asserting business management required a more balanced set (BSc) of performance metrics.  In 1994, I served as Research Manager with Andersen Consulting (now Accenture); the consultancy promoted ‘business integration” – seamlessly combining strategy, process, technology and people– to its clients.  In his 1999 book Integrated Value Management, Peter Gomez advocates a ‘systemic strategic methodology’ using eight principles taken from the St. Gallen [Integrated] Approach to Management.  The 2004 HBR article “Staple Yourself to an Order” recommended adopting a systems view for Order Management Cycle (OMC) integration.


In his 2007 book The Opposable Mind, Roger Martin argues the need for Integrative Thinking, the “ability to hold two opposing ideas in [one’s] mind at once, and then reach a synthesis that contains elements of both but improves on each.” Martin asserts that truly successful leaders avoid “either-or” thinking.  “By seeking factors that are not immediately obvious, considering non-linear relationships among variables, and seeing the problem as a whole, they are able to resolve tensions among opposing ideas and generate innovative outcomes. “ See my previous article where I discuss the perils of dualistic thinking.

A ‘one-size-fits-all’ approach to management – a single objective function — is no longer valid.  All company programs need to be relevant and appropriate across stakeholder groups.  Companies need a robust ‘way of thinking’ about business problems and solutions that is ‘fit for purpose’.  Popular ways of thinking in business are proving reductive (simplistic) and not fit for purpose (as noted recently by Business Roundtable CEOs.)

Use the Integrated Value Process (IVP) to optimize value for all stakeholders
Let’s return to ‘first principles.’  Why does a company even exist?  (Paraphrasing Peter Drucker) a company makes decisions (its value strategy) to deliver products / services (its value proposition) by doing some work (its value-added activities) to deliver customer value at a profit (see previous article).  Since value is the essence of business (see another previous article), executives should use an integrated approach to value management in order to optimize value for all stakeholder groups.

As an outcome of my PhD research in Management, I published the Integrated Value Process (IVP) framework.  IVP includes:

  • Meta-definition of business value (to translate between the many uses of the term value, i.e. value used as a nounverb, and adjective)
  • “First principles” of business value (a set of guiding principles, based on multidisciplinary theoretical synthesis, to guide action)
  • Intra- and inter-firm value process (to interlink value activities within the company and across its value chain)
  • Value gaps (to gauge the evolution of a firm’s value management approach and detect ineffectiveness / inefficiency)

IVP has been tested theoretically and researched objectively and subjectively across UK- / US-based value chains.  IVP was developed with the input of (business) academics, practitioners, executives and management consultants.  It is available to the business community. (ProQuest publication number 3121355)

This ‘new way of thinking’ about business value challenges traditional disciplinary / functional-based theories, models, and methodologies.  A paradigm shift is necessary.  Resistance (‘friction’) from legacy groups (established business school faculties, professional certification bodies, corporate functional departments, etc.) is likely, since the shift challenges the status quo (how companies have traditionally thought about / done things). Many commentators’ reaction to the recent Business Roundtable announcement clearly demonstrates this.

IVP uses the fundamentals of business value creation and value flows to guide company efforts and overcome resistance.  Focus on business value to ‘cut through’ the functional barriers / blockages, reduce organizational friction and optimize your company’s value activities. Align your business using the Integrated Value Process (IVP).  Don’t ignore your company stakeholders!  Let value creation and value flows guide your decisions and efforts.

About the Author

Andrew Swan, PhD is a multidisciplinary and cross-functional integrator of strategy, processes, and information technology. His focus and expertise center on helping executives increase value creation and optimize value flows in business. Dr. Swan holds four degrees in Management, Accounting & Finance, Information & Knowledge Strategy, and Computer Science from the University of Chicago Booth School of Business,  the University of Bath School of Management, and Columbia University.

He frequently publishes articles on value chains, value streams / flows, and Integrative Value Management on his website Dr. Swan created the Integrated Value Process (IVP) Framework to help companies optimize the flow of goods & services, funds, and information across their respective value chains for multiple stakeholders. He can be reached at or at +1.773.633.7186.  He lives in Chicago.