The following is an excerpt from a conversation that took place at MLR Media's Character of the Corporation conference.
SPEAKERS: Glenn Hubbard, chairman, MetLife Inc.; Carl Hess, CEO, WTW
HESS: What do you consider to be the purpose of the corporation? Do the ideas that were originally espoused by Milton Friedman in terms of what a corporation is all about still hold up?
HUBBARD: I think of the purpose of the corporation in three parts. The first is the way non-economists would think of it, which is just the raison d'être of the company. Every company has to have a reason for being. That's your story, why you exist. But I think the purpose of the corporation also, from an economic perspective, is long-term shareholder value. I think Milton Friedman got it largely, though not entirely, right. The reason for that is, in a competitive world, you've necessarily dealt with issues for many of your stakeholders. You have to compete in labor markets. You have to compete with suppliers. You have to compete for customers. So as long as markets are competitive, if you've maximized the long-term value of that firm, not the short-term value, you're there. But there's a third piece that I think Friedman didn't get right, and that's largely because Friedman's statement on the purpose of the corporation, to be fair, was written in 1970. It was not really an op-ed piece. There was no such thing as an op-ed page in those days. It was in the Sunday magazine of The New York Times, where he said the purpose of business is to maximize its profits. And I think what he missed was social support for business. So, I find it astonishing that even among my MBA students, who surely aren't a random sample of the American people, there's a lot of skepticism about capitalism and about corporate America. I think it's incumbent upon us to think about what it takes to get social support for business.
I think Friedman made some assumptions in his piece that he didn't tell the reader. They may or may not be true. One is that all markets are competitive. Markets are relatively competitive in the United States, not perfectly competitive. But the part that definitely isn't true is he assumed government was doing its job well. So, you don't have to think about what in econ-speak we would call public goods or externalities because the government's handling those well. Guess what? It's not. And a lot of the pressure on business is, when do you step in on some of these things? When should you be taking action directly on climate change or on employment training that doesn't necessarily benefit only you? Those are the big questions, I think, that are still open.
HESS: Where should a board's priorities be at this time?
HUBBARD: On the one hand, as board members, we all have to focus on what we need to do, which is the company's current performance, the company's management, evaluating strategy, talent, all these things. But the way I think about it is a slightly bigger-picture level. The first thing we need to do is understand. Meaning, while I'm not a fan of stakeholder capitalism, I'm a big fan of understanding stakeholders. So really understanding what's going on with employees or with customers. Boards need to do that, not just accept management representation. The second is to be fully engaged with management — not substituting for management, but really taking our roles seriously and overseeing strategy and what the firm is doing. The third and probably the newest, but maybe the most important, is horizon scanning. Boards are facing problems that may not have existed 10 years ago, maybe even five years ago. Yet many of those problems were, at one level, forecastable. So the question is, are we scanning the horizon for things that are going to affect us as a company? Is the CEO scanning the horizon for things that might affect what he or she is going to need to say? I think that's a critical task for the board.