125th Anniversary of Chicago Booth:
Chicago Booth is celebrating its 125th anniversary throughout 2023. Various social events are planned globally, involving faculty, alumni, students, and business leaders.

Rothman Faculty in Residence Lecture:
Raghuram Rajan is the inaugural Rothman Faculty in Residence. He is the Catherine Dusick Miller Distinguished Service Professor of Finance. Rajan will be based in London for the entire spring quarter.

Rothman London Campus Activities:
Hosts executive MBA programs, executive education short courses, and events from Booth’s academic centers and the college. Regularly hosts small groups of university undergraduate students. Serves as a regional hub for the alumni community. Provides facilities for lectures, conferences, and meetings.

Global Faculty in Residence Program:
The launch of this program enhances access to Booth’s thought leadership. Aims to strengthen and broaden Booth’s visibility beyond its Chicago campus.

Introductory Remarks for Raghuram Rajan:
Elizabeth O’Neill, Executive Director of Chicago Booth Rothman London Campus, introduces Rajan as the featured speaker.

Introduction:
Raghuram Rajan, a renowned economist, delves into the role of modern corporations and their objectives in society. He presents a historical perspective on Adam Smith’s skepticism towards corporations and discusses the relevance of agency costs in corporate management.

Adam Smith’s Perspective on Corporations:
Adam Smith criticized corporations for their inefficiency and poor survival record, despite privileges like tariffs and monopolies. He believed that agency costs, due to the separation of ownership and management, would lead to negligence and profusion in managing corporate affairs.

Efficiency and Agency Costs:
Smith argued that joint-stock companies often failed to compete against private ventures due to their inefficiency. The absence of ownership interest among managers resulted in a lack of careful attention to small matters, leading to poor management.

The Great Depression and Minority Investor Protection:
Burleigh and Means highlighted the dominance of large corporations during the Great Depression and the resulting neglect of shareholder interests by managers. They advocated for minority investor protection to address the power imbalance between managers and shareholders.

Objectives of Modern Corporations:
Rajan raises the question of whether corporations will step up to address social problems in the face of government paralysis. He examines how corporations are responding to the increasing pressure to deliver on environmental, social, and governance (ESG) aspects of business.

Reading of 9,000 Annual Reports:
Rajan and Luigi Zingales conducted research involving the analysis of approximately 9,000 annual reports from 1955 onwards. This research aims to assess the extent to which U.S. corporations are addressing ESG issues and delivering on their objectives.

Conclusion:
Rajan’s presentation explores the historical context of Adam Smith’s views on corporations and agency costs, leading to discussions on the objectives of modern corporations. He provides insights into the role of corporations in addressing social problems and their efforts to deliver on ESG objectives, based on an extensive analysis of annual reports.

Milton Friedman’s Argument:
Friedman believed that managers working for everybody else, pressured to do the public good, was a total aberration. He argued that businessmen defending free enterprise by promoting desirable social ends like employment, eliminating discrimination, and avoiding pollution, was pure socialism. Friedman saw the Johnson administration’s exhortations to corporations to stop raising prices and their free spending policies as responsible for inflation.

Friedman’s View on Government Interference:
Friedman believed that interfering with the price process and generating inflation through government spending was beyond the pale. He saw exhorting managers to curb inflation by reducing price increases as silly. Friedman viewed decisions driven by managerial politics rather than the market as socialism.

Friedman’s Position on ESG:
Friedman would oppose the ESG movement, seeing it as an attempt to push rules through corporations that cannot be passed through Congress. He believed in decisions driven by the market, not by vested interests or political pressures.

Friedman’s Shareholder Value Maximization Theory:
Friedman’s theory emphasizes the primary social responsibility of businesses to increase profits within the rules of fair competition. Maximizing shareholder value, as per Friedman, enhances efficiency by expanding the overall pie available to stakeholders. Friedman’s theory suggests treating stakeholders well to retain customers, attract investors, and maintain a long-term focus.

Critiques of Friedman’s Theory:
Agency costs arise when managers’ interests diverge from shareholders’ interests, leading to potential misalignment. Pay for non-performance and perverse incentives, such as short-term profit-seeking, can occur under Friedman’s model. Friedman’s exhortation to engage in fair competition overlooks the political influence corporations may exert to gain advantages.

The Stakeholder View:
The stakeholder view argues that companies should consider the interests of stakeholders beyond shareholders. This view aligns with progressive political perspectives and suggests that large corporations’ power can undermine the public purpose. The contradiction between Friedman’s emphasis on greed and the need to prevent privileged monopolies is highlighted.

Managers Working for Shareholders vs. Stakeholders:
Recognizing the flaw in the argument that managers should only work for shareholders, some propose that managers should work for the broader interest of stakeholders. This approach raises concerns about diverse interests, tracking managers’ performance, and potential agency problems, such as using company money for personal benefits.

Purposive Stakeholder View:
This view assumes that managers are angels who will maximize social welfare without any effective compensation. It lacks a clear metric for holding managers accountable and can lead to companies losing their way by trying to do everything or underperforming.

Business Roundtable Statements:
The Business Roundtable, a group of large US companies, has made statements about the purpose of the corporation, shifting between shareholder value maximization and stakeholder value. Their 2019 statement emphasized the importance of all stakeholders, but lacks specific metrics for making choices and holding management responsible.

Agency Problems and Trust:
The purposive stakeholder view creates agency problems, as there is no clear way to hold management accountable for their actions. Trusting management to be angelic is misplaced, as evidenced by the failure of platforms to effectively self-police content.

Friedman’s Shareholder Value Maximization Theory:
Milton Friedman believed that maximizing shareholder value was the best way to benefit shareholders. Shareholders could then use the profits to support causes or charities they cared about.

Stakeholder Considerations:
Some companies consider certain stakeholders more important than others. Google’s decision to abandon Project Maven due to employee concerns about collateral damage is an example of prioritizing employee well-being. This approach can create a win-win situation where employees feel valued and motivated, leading to potential cost savings for the company.

Shareholder Preferences:
Luigi Zingales and Oliver Hart proposed considering shareholder preferences instead of solely maximizing shareholder value. This approach suggests that companies should align their actions with the preferences of their shareholders. For example, if shareholders are against gun violence, the company could stop selling guns, which would align with their preferences.

Challenges in Operationalizing Stakeholder Considerations:
Identifying shareholder preferences can be difficult, requiring surveys and ongoing engagement. Balancing the interests of different stakeholders can be complex and time-consuming. Friedman’s approach of maximizing shareholder value is easier to operationalize, as it does not require detailed knowledge of shareholder preferences.

Limitations in Addressing Monopolization:
None of the theories discussed effectively address the issue of monopolization by large corporations. The problem of significant oligopoly structures in various industries remains a challenge. A solution may involve a broad approach that includes various interests in society, such as large unions, academics, and antitrust advocates, colliding to ensure no single interest becomes overly powerful.

Key Trends in Corporate Goals:
Corporations now state more goals than ever before, shifting from a single focus on shareholder value maximization to a broader range of objectives. The average number of goals stated by companies has increased from two to seven, indicating a growing emphasis on multiple stakeholders and societal issues. Companies increasingly emphasize shareholder-oriented goals, with 80% mentioning profit maximization and shareholder returns compared to 40% in 1955. Despite the rise in multiple goals, the use of the term “shareholder value maximization” has declined in recent years. Stakeholder goals, including diversity and inclusion, surged alongside shareholder-oriented goals in the 1980s and 1990s.

Factors Influencing Corporate Goals:
Changed Audience Power: Institutional share ownership and takeover pressure have influenced companies to emphasize shareholder value maximization. Competition from imports has led customer-facing companies to prioritize customer satisfaction. Changes in Audience Preferences: Companies align their goals with the preferences of their stakeholders, such as institutional investors who adhere to responsible investing principles. Firm-Specific Improvement: Companies may announce specific goals to address environmental violations or financial losses.

Challenges and Implications:
Agency Problems: Aligning management incentives with long-term shareholder value remains a challenge, despite the use of share-based compensation. Externalities and Societal Roles: Corporations face increasing pressure to address externalities such as emissions and pollution, as well as contribute to societal solutions like diversity and inclusion. The Interdependence of Corporations and Government: Corporations need government regulation to ensure ethical behavior, while government needs corporations to address societal issues. The Need for Evidence-Based Policy: Research on corporate goals and behaviors can inform policy decisions and address concerns about the role of corporations in society.

Companies’ Response to Debt and Profitability:
Companies with high debt loads commit to risk management and debt reduction, while those with low profits focus on increasing them. These commitments often don’t lead to significant performance improvements but show an intention to do the right thing.

Commitment to Stakeholders:
Companies with highly paid and hard-to-retain employees tend to prioritize employee welfare and say the right things to their employees. This reflects their commitment to specific stakeholders.

Deflecting Pressure:
Companies caught up in scandals often shift their focus to positive objectives like community, society, ESG, etc. These actions align with deflecting public pressure and maintaining a positive image.

Correlation between Ethics Objectives and Public Pressure:
A study analyzing the frequency of the term “accounting fraud” in media and corporate objectives showed a strong correlation. Companies respond to public pressure by emphasizing ethics, particularly after high-profile scandals.

Compensation for Corporate Managers:
70% of corporate manager pay is long-term incentives tied to share price. Only 20% is a bonus related to non-financial metrics like environment, diversity, and inclusion. This suggests that while companies may commit to these metrics, they don’t significantly impact executive compensation.

Limited Impact of Corporate Sustainability Goals:
Companies that claim to prioritize ESG (Environmental, Social, and Governance) factors often score well on sustainability assessments. However, these assessments primarily measure processes rather than outcomes. There is little evidence that companies with high sustainability scores have lower emissions, fewer EPA fines, or achieve better environmental outcomes.

Corporations’ Response to External Pressure:
Corporations respond to external pressure from NGOs and stakeholders. They may adopt sustainability measures to improve their public image and meet stakeholder expectations. However, this response is often limited to symbolic actions and process changes rather than meaningful performance improvements.

The Importance of Government Involvement:
Corporations alone cannot solve societal problems such as climate change. Governments must also play a significant role in setting regulations, providing incentives, and addressing systemic issues. Overreliance on corporations to solve these problems is risky and may lead to insufficient action.

Government’s Limited Ability to Regulate Corporations:
The relationship between governments and corporations is complex and dynamic. Governments may lack the expertise or political will to regulate corporations effectively. Corporations, in turn, may face pressure from various stakeholders, making it challenging to align their actions with government goals.

The Need for Competence and Long-Term Thinking among Elites:
There has been a decline in the competence and long-term thinking of elites in recent years. This has contributed to short-term decision-making and a lack of preparedness for crises like the energy crisis. A balance is needed between corporate involvement and government regulation, with both sectors working together to address systemic issues.

Incompetence of Elites:
Elites’ incompetence has been a significant issue in recent years, leading to challenges in governance. The global financial crisis exposed the incompetence and corruption of the “smartest guys on the street,” damaging trust in their decision-making abilities.

Class Divide in Concerns:
Protests like the Gilets Jaunes in France and the Tea Party in the US highlight the divide between elites and the average person. Elites tend to have a longer-term, global perspective, while the average person is more focused on immediate, local concerns. This divide leads to conflicts in policy decisions, such as environmental regulations affecting livelihoods.

Loss of Trust in Elites:
The loss of trust in elites has made it difficult to find leaders who can make decisions and inspire confidence. This loss of trust is a contributing factor to the current social and political problems.

Upcoming Events:
A fireside chat between Professor Rajan and Martin Wolf, Chief Economics Commentator from the Financial Times, will be held on June 6th. The 125th-anniversary celebration in Chicago includes a management conference, a visit to Wrigley Field, and other exciting events.