The CEO’s Role in Ensuring Social Harmony

Plus, Jeffrey Sonnenfeld's take on the pros and cons of capitalism.

Don't tell Jeffrey Sonnenfeld that a CEO's number one concern should be ensuring a positive financial return to shareholders. Sonnenfeld, a director of Lennar Corporation, senior associate dean for leadership studies and Lester Crown Professor in the Practice of Management at Yale School of Management, and a frequent contributor to Fortune, TIME Magazine and CNBC, among others, isn't buying it. 

“I don't think there's a technology CEO alive today who believes that statement. It took 22 years for Amazon to turn a profit,” says Sonnenfeld. “There were very few businesses that were instantly highly profitable. So I think that's a very misguided notion.”

So if raking in the bucks isn't the entirety of the CEO's job, what else falls onto the chief executive's to-do list? “Building long-term shareholder value is the goal, and doing it responsibly,” he says.

To Sonnenfeld, a major part of the mandate should be ensuring harmony between the company and its stakeholders, including customers and the community. I spoke with Sonnenfeld about the CEO's role as well as his thoughts about the current state of our capitalist system.

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Bill Hayes: You have said that CEOs “are in the business of social harmony.” What does that mean to you in particular, and how can they help maintain that harmony? 
Jeffrey Sonnenfeld: They're not in the primary business of social harmony, but it is part of their responsibility. There are guidelines and rules and elements of responsible conduct that come along with building shareholder value that are inextricably intertwined. So they're not primarily in the business of social harmony, but it helps to provide for free enterprise to function when there is a reservoir of institutional trust. We need that trust. That's not a new concept. People have been referring to it recently as social capital — which is as valuable as financial capital — not realizing that that term goes back to 1840 when de Tocqueville coined it as he visited this country as a French legislator and political science expert. In his book, Democracy in America, it's a much broader statement, including civic engagement through voluntary associations, but also through civic leaders, especially business leaders taking on citizenship responsibilities. And that fortification of community and public trust is vital. We need to have that social capital for the free-market system to work. That's on a collective basis and an individual basis. 

Wherever you look, from financial services to consumer goods and manufacturing, public trust is vital to an enterprise as well as to the whole economic system. So it isn't that it is the primary job, but it is a vital part of the job. 

You wouldn't say that the primary job of a CEO is to have cutting-edge technology, but if they don't have that, they're in the business of obsolescence. They want to be on the frontier of the best methods. But that doesn't mean that's the only job. Legal compliance is also part of it. Attracting great talent to your team is really important. It's vital, but it's not the only responsibility of a CEO, either. These are all balanced. It's like, what is more important, your heart or your brain? They're both on the critical path of life. And these are not mutually exclusive objectives. There's no trade-off between these. They reinforce each other.

Bill Hayes: What are your thoughts on the state of capitalism? What about it is working and what needs to be improved?
Jeffrey Sonnenfeld: There are three things that come to mind. One of them is explaining what capitalism is and isn't. It's not primarily in the business of solving all of society's ills, but it's good if it can do so along the way of building value. Private enterprises and free markets should build responsibly social goods that society needs, and, yes, they should do it profitably. But it doesn't have to be profitable today

CEOs have been ascendant in all the trust barometers out there, especially the Edelman Trust Barometer. The responsibility of trust has fallen to business leadership. Despite periodic scandals and random disappointing misconduct, overall the public trust is soaring in business leadership. But we can't expect too much from them without everybody else. It's not their only job. 

The second issue has to do with short-termism and activist investing. Almost every activist investor has a portfolio on a one-year, a five-year and a 20-year history, if they have been around that long. They don't, for the most part, go after enterprises that have troubled governance or faltering performance. They go after a healthy company. These activist investors, almost every one of them, not only underperforms their target companies, they also underperform the leading benchmarks like the S&P indices. There's a recent run on activism, like the four activists that went after Salesforce and a very prominent one that went after Disney. Their own performance is terrible. But with a lot of this middle-school locker room bravado, they create so much noise in the media. They have bravado as if they were 50% or at least 10% controlling-interest owners. They're not. They create these shakedown schemes that really hurt longer-term investment. 

And related to that is a third concern that has to do with the time frame of investing. When I started serving as a business school professor at the end of the 1970s, the average of stock ownership in a company was five years. Now the average ownership is a little less than 10 months. That makes it hard for business leadership and for capitalism to succeed when people are just looking for an app that you create today that can become a big hit 10 minutes from now. If your pharmaceutical company is going to take you 15 years of investment in research and regulatory hurdles and harmonization globally in different markets and testing, it's really hard to figure out what you're going to do. It's almost traitorous to capitalism to have such rampant short-termism. 

About the Author(s)

Bill Hayes

Bill Hayes is editor in chief of Directors & Boards.


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