Podcast

Judy Samuelson: The New Rules of Business

Wednesday, January 13, 2021

From her seat at The Aspen Institute, Judy Samuelson has led a 10-year campaign to disrupt Milton Friedman’s narrative that corporations solely exist to maximize shareholder value. The past two years have provided some watershed moments. In 2019, public statements from the Business Roundtable and World Economic Forum signalled corporate leaders were embracing stakeholder capitalism – a mission to serve customers, suppliers, workers, and communities, rather than solely shareholders. But 2020 has severely tested these principes, from the pandemic to racial unrest and political divisiveness. In the wake of all this, have CEOs’ actions supported their words? In this episode, Judy discusses how corporations have responded to current crises, what it means for the future of stakeholder capitalism, and how businesses can succeed in tomorrow’s economic and social landscape.

Judy Samuelson

Judy Samuelson

Judy Samuelson is founder and executive director of the Aspen Institute Business and Society Program and author of “The Six New Rules of Business: Creating Real Value in a Changing World” (Berrett-Koehler, 2021). Signature programs under Judy’s leadership include a 10-year campaign to disrupt Milton Friedman’s narrative about corporate purpose, the Aspen Principles of Long-Term Value Creation, and a partnership with Korn Ferry to rethink executive pay. She previously worked in legislative affairs in California, in the banking industry in New York’s garment center, and for the Ford Foundation’s office of program-related investments. Samuelson is also a board member of the Financial Health Network, a Bellagio Fellow, and regularly writes for Quartz at Work.

Learn more about Judy and her book, “The Six New Rules of Business,” and check out additional episodes of EMERGE Everywhere.

Episode Transcript

Jennifer Tescher:
Welcome to EMERGE Everywhere. I’m Jennifer Tescher, journalist turned financial health champion. As founder and CEO of the Financial Health Network, I’ve spent my career breaking down silos by engaging with innovators across industries. And now I’m sharing those conversations with you. Meet the forward-thinking leaders challenging the status quo and unleashing creative new ways of improving financial health by seeing their customers, employees, and communities in 3D.

What’s the purpose of a corporation? Is it to generate return for shareholders, or is it more than that? My guest today, Judy Samuelson, has been on a decade-long campaign to disrupt the narrative of economist Milton Friedman that corporations exist solely to maximize shareholder value. As the Founder and Executive Director of the Aspen Institute’s Business and Society Program, Judy’s work has begun to bear fruit with CEOs pledging to take a broader view, but have their actions reflected their words? I’m excited to talk to Judy about that today. She’s a friend, a Board Member here at the Financial Health Network, and the author of an insightful new book titled: The Six New Rules of Business: Creating Value in a Changing World. Judy, welcome to EMERGE Everywhere.

Judy Samuelson:
Thank you so much, Jen. It’s a total delight to be here and with you.

Jennifer Tescher:
Same, congratulations on the new book. You were kind enough to share it with me. Actually, your just completed manuscripts this past summer. So, I’ve had a chance not just to read it, but to really ruminate on it. I’m excited to get to have one of our conversations about it. In many ways, the book reads like a capstone of your career, all of the work you’ve been doing around the role of business in society.

Indeed, many of the ideas that you champion in the book seemed to be coming to fruition, whether that’s the need for businesses to act on behalf of all their stakeholders or to think long term, but the fact is you didn’t actually start off life as a business performer. You were a banker. So, tell us a little bit more about how you got from there to here.

Judy Samuelson:
Well, there was one chapter before the banking, which is working in state government in California. So, that was probably closer to my original intentions than banking. Banking, however, was an incredible experience. I came east out of California from business school. I went into banking, because I felt like I didn’t get it yet. I’ve been introduced to accounting and a little bit of the language, but I didn’t get the context. I used to say to people, it wasn’t until I read 100 balance sheets that I understood what it meant to be a $5 million company or a half million dollar company. It wasn’t until I’d done a lot of factory tours that I started to get the sense of scale and what it meant to hire somebody and to really fulfill an order.

So, I learned a tremendous amount in banking, it gave me the language. It also helped me understand what motivated people in the business sector, particularly in investment finance. That position needed to move back closer to my origins and to take a job at the Ford Foundation running what today they would call Social Impact Fund. The start was in banking. It’s what it’s where I went to understand how organizations actually work. How are decisions made? How do we get things done in society? That was why I went to business school and why I decided I needed to get into a place where I’d see lots of businesses functioning, rather than maybe just going inside one of them.

Jennifer Tescher:
So, when you saw that, what did you see that led you to think, “Something here is not working right”?

Judy Samuelson:
Well, I remember a moment that immediately draws to mind. I worked for Bankers Trust Company, which is New York City… It was the first, what they say, “merchant bank”. It was a money center bank. In other words, it wasn’t a big branch enterprise like a city banker or a Chase. It was a business leading enterprise that didn’t have retail clients or customers. It got to the point when they had sold off all their branches. We’re consolidating services and going higher up the food chain and functioned both as an investment bank and as a commercial bank simultaneously.

There was a moment where I realized that a deal that was being celebrated at the bank and that was earning the bank a tremendous amount of fees, that those fees were actually fully covering the bank’s credit risk. In other words, they were taking no risk. The idea that I would have gotten a deal like that out of credit committee when I was in middle market lending and serving clients on Seventh Avenue in New York City and in the Diamond District was just preposterous to me.

What it said to me is that the institution had become more about making money than really creating value. I remember going, “Time for me to exit and get back to my roots.” So that’s one. Of course, sadly, the bank failed a few years after I left. I think I saw the beginnings of its failure.

Jennifer Tescher:
So, in the book, you write that “Business is the most influential institution of our day.” At one point, you even compare it to the church in the Middle Ages, which I thought was a very vivid statement about the power that you believe that business wields. Now, some out there would say maybe business shouldn’t be the most influential institution.

I know that if Anand Giridharadas were having this conversation with us, the guy who wrote the book Winners Take All, he’d probably say that no matter how much good business does, it’s always going to put its own interests above societal interests. If I’m reading you right, you’re saying, “Let’s accept the fact that business has a lot of power and harness it for good.” Am I reading you right?

Judy Samuelson:
I’d say it’s part right. You also know since you read the book that I quote, Anand Giridharadas, even though he was highly critical of the Aspen Institute among other organizations like that that bring people together from the business sector as well as other sectors. I’d say that yes, it partly is just what is. I mean, the kinds of companies that we’re talking about here are global enterprises.

They span in some cases hundreds of locations and offices across the world. They have tremendous talent. They have tremendous problem solving skills. We simply will not address our most complex problems, whether you think it’s inequality or you think it’s racism or you think it’s climate change, which I would put at the top of the list, we can’t do it without business at the table thinking deeply and using yes, both its power and its capacity to address these complex problems.

On the other hand, I am certainly not one of the things that business ought to be in charge. Businesses get granted a license to operate. That license to operate is a function of our trust in business. I think that trust is at risk. I believe, to some degree, business leaders have lost their way, that they have become so enraptured with shareholder measures of success that we’ve lost something fundamental. It’s time for a real wake up.

Jennifer Tescher:
So, you frame your thinking in the book around these ideas of the new rules of business. That many of the rules are unspoken assumptions that influence behavior, both in the C-suite and among the rank and file. You’re actually proposing in your book, Six New Rules. But before we go to the new rules, I want to talk about the old rules. What were they generally speaking? Why were they problematic? You started talking about it in the example you gave around Bankers Trust but take us forward from there. What big problems are we trying to solve in the world of business?

Judy Samuelson:
So, I think one foundational thing that I just would start with is that business is not… Let’s remember, it’s not a person here. Businesses are created to do things that we can’t do individually. They’re not good or bad in and of themselves. They’re not moral. They have good and bad results. Business managers, business executives, boards make good and bad decisions. It is for those of us who sit outside business to make judgments about whether the decisions that come from business work for society or not, but the design of companies is what produces those results. It’s not inherent in business that it’s either a good or a bad entity.

So, the old rules tend to keep this area flat. The bounds of the business was the walls of the business or the gates of the business. The definition of what business felt it was responsible for is what it could measure in terms of its own footprint and maybe what its fence line neighbors thought of it. The value of companies was what we could measure in tangible metrics, bricks and mortar and investment and as a roll up of the assets and what they produce over time, and then trying to discount that back and putting a number on it.

The purpose of the enterprise was basically baked into these flat financial metrics that tend to be backward looking, not forward looking. It’s all about competition. It’s about reducing costs and employees or cost of doing business. So, it’s flat. I’d say it’s backward looking, not forward looking and not as dynamic as we know business is both in terms of its influence and its potential. So, I think we’re seeing a real shift that’s a result of both forces that business confronts on a daily basis, both the power of employees and other agents of change and the reality of where the public is, what it thinks of business and what it expects.

Jennifer Tescher:
Is it fair to blame business and blame capitalism for the dramatic inequality that we face today? Do you think? Is it a direct line?

Judy Samuelson:
It’s a complicated domain, right? I never place all the blame on something as amorphous as business. I think it’s a more nuanced question than that, but absolutely, the design of firms produces a result we’re getting now. We released some work earlier this year that we call the modern principles for sensible and effective pay based on five principles of what CEO pay would look like if we were designing companies to be the kinds of engines of creativity and innovation and problem solving that we know we need. One of the principles is about fairness. It asks a very simple question. What’s the right relationship between the CEO’s pay and his or her direct reports and then on down the food chain to people at the front of the factory and on the retail floor?

And then it says, “How much goes to the shareholders versus how much do we retain for investment in employees and in the needed infrastructure to continue to grow and flourish?” These are fundamental questions that boards are failing to ask today. The lack of building communities that kind of share well is a problem not only for the design of companies and making sure we deploy our talent well, but it definitely contributes to inequality. One of the big contributors to inequality is the fact that companies put more money back to shareholders through buybacks and dividends. They do in reinvesting in their own enterprise. So, that’s a real problem. That’s a real prominent big contributor of inequality.

In fact, the stock market itself, I mean, 50% of Americans own shares of stock, but the vast majority, 99% of them have very small holdings, under $100,000. So, the concentration of wealth we have witnessed in the last 40 years as we put shareholders at the center of the bullseye is in fact directly connected to inequality. So, that’s a market effect. It’s about finance. It’s about investment. It’s not just about specific enterprises. But it’s part of the system that we have built and designed and that we have to build differently.

Jennifer Tescher:
So, now one of the new rules in your book really relates to this idea of stakeholder capitalism. That businesses serve a broad range of stakeholders, not just their shareholders. This is really a key idea in how I think about the role of business and promoting the financial health of their customers, their employees, and their communities. But I’d like to focus in on one particular group of stakeholders that you mentioned a moment ago: employees. Employees are actually the subject of your rule number four. Employees give voice to risk and competitive advantage. So, share more about how businesses are starting to engage their employees differently and why this is so critical to the bottom line.

Judy Samuelson:
One of the friends and advisors to the Aspen Business and Society Program is Leo Strine, the former chancellor of the Delaware Court. He keeps reminding me that when you use the term ESG, environments, social, and governance measures of success, that that S is way too complicated and that we need to pull employees out. That’s a different component all together. I reject the language of stakeholders. I don’t think it’s very useful to us. It’s been used for a long period of time. I’d like to undo it and unpack it a bit, because I think every company is different. They’re organized for different purposes.

What’s critical to their success depends on that enterprise, but one thing is absolutely true. In every single enterprise, employees are the company. They’re the source of creation. They’re the source of innovation, and yes, of risk identification, and of seeing the opportunities that we might otherwise missed, and of quality control, and of customer service, and of building the kinds of enterprises that are resilient. They’re the link between the inside and the outside. That was never more apparent than with the younger generations that are moving into the workforce today that clearly bring… That expression about bring your whole selves to work.

I mean, between that and their command of social media, it’s hard to divide their experience as employees from their roles in communities and in families and as citizens. I think all of this cauldron of experience of the kinds of employees that are moving into business today. It’s something that CEOs have needed to respond to forcefully. What we’re seeing in the last couple of years in particular, we certainly saw a lot of it after the election of Donald Trump, where we had CEOs that needed to lean in and say, “I’ve got your back.” No, I hear this call to throw out citizens of seven different countries with Muslim majorities. Well, I know where you live and I know where you come from. I have your back. We’re going to support you as an employee and as an important contributor to our success. So, we saw it with that.

We saw it with the bold statements and actions that companies took on guns, on the social justice issues and the Black Lives Matter movement and after Salzburg. It’s been a cacophony of issues that CEOs heretofore would not have touched out of fear that they would be offending part of their employee base but also their customer base. Those days are over. So, they’re responding to their employees when they speak forcefully on an issue. It’s usually because they’re speaking to the nature and concern of their employee base.

Jennifer Tescher:
So, it sounds like this might be enlightened behavior on their part that whether they want to or not, they’ve got to be thinking differently about their employees, because employees are demanding it.

Judy Samuelson:
Yeah, I think that’s true, but I also think that it’s about culture. It’s a more connected culture. They’re concerned with building a place where they’re getting the best out of their employees. They see the connective tissue, and again, the power of social media and the ability for employees to both build teams to get work done but also build teams to challenge the corporation where they live. We saw this with Amazon, with employees that rose up and started using their own shares of stock to challenge the company’s posture on climate change or their lack of progress on climate change.

We saw it with the #MeToo movement with Google and the Google walkout. We’ve seen it on behalf of employees that have challenged whether or not their company ought to be taken down certain kinds of contractors or in the defense industry or ICE. There’s been a number of ways in which these executives are also playing defense here. They’re trying to make sure that they are ahead of the game. They understand and are listening to the concerns that their employees have, which may, in fact, reflect not just their own personal beliefs but the concerns of a wider public here. So, they’re just very interesting.

I do believe I used the term allies. I think employees are the firm’s allies. To the extent that we’re designing companies with that in mind, we’re more likely to be identifying both the risks and opportunities that will present themselves through growth.

Jennifer Tescher:
I do wonder though, if the events of the last couple of years in particular, where we’ve seen employees speak out in a way that maybe has led to allyship, if that’s not really more of a phenomenon of white collar workers and as it relates to blue collar workers, either currently unionized or ones that might have been unionized in a day long past, whether they get the same treatment?

Judy Samuelson:
Yeah, I think that is true. I think voice is probably a function of power. Employees that feel empowered are more likely to use it. So, we certainly see it in the tech industry, for example. I think there’s some interesting examples though of we could go back again to Amazon, where organizing has been present again. That’s not a function of empowered employees. That’s a function of the power of employees who decide to collaborate to try to command something different. So, I think we’re seeing some interesting examples.

I think, another interesting piece of this puzzle is that in a world that has been quick to contract outwork as a way to reduce costs, we’re seeing employees increasingly identify with the person on the other side of the cubicle who may be doing exactly the same job as they are but without the same pay and benefits, because they’re working in the company’s name, but they’re not on their payroll. That identification is also enabled by technology, by just adjacency. It’s one of those domains where I think we haven’t yet seen this play out yet.

Will companies have to step up? It’s another huge contributor to inequality as you know and instability and financial insecurity. Will employees enable a more thoughtful approach to saying, “Why and when does it really makes sense to outsource jobs? What are the terms of that? What piece of this do we need to understand and be responsible for as an enterprise?”

Jennifer Tescher:
Yeah, let’s shift now to your rule number six, which is co-create to win. I tend to think of this as the partnership rule or maybe the strange bedfellows rule. One of the themes of this podcast is around creating integrated systems in order to truly meet the holistic needs of the people we serve. This rule seems critical to me in building those systems. Talk to us a little bit more about your thinking here.

Judy Samuelson:
So, it comes up a lot in the environmental domain, climate change, fisheries, the health of the ecosystem. At a time of what really does feel like existential crisis, the answers are not found within individual firms that are competing with one another. It’s found in building a commons that is going to support and sustain the ecosystem. So, one of the examples I use in the book is about fisheries and a stunning example of cod fishing industry in the North Atlantic. You’re right, Jen, that it is also about partnership, because what happens is usually, there’s an aggressive NGO and then there’s a less aggressive NGO who is more of an intermediary between the aggressive NGO and the businesses that are called to the table, usually, because they’ve got a brand at risk.

The one that I talked about is a guy named Jim Cannon who runs something called the Sustainable Fisheries Partnership. He was the intermediary between the investigative journalists that were looking at the practices in the pollock and cod industry that is what we find in fish sticks in McDonald’s food products, and needed to weave together the partnership, where the largest of the players in the industry was the first to step forward and say, “We need to raise the standard across our industry if we’re still going to have jobs in the next 20 or 40 years.” So, how do we help the commons?

It’s simply going to require common protocols for operating, giving up something with everybody at the table in order to stabilize the situation. Of course, climate is very much like that. We have seen in the last year the Business Roundtable, which represents the largest US corporations, finally land a position paper on climate change. This is the first time that they’ve spoken out on climate in 15 years. I think it’s fair to ask whether the individual members that have signed on to this what they’re actually doing in terms of their own lobbying dollars. I think that’s something we’ll learn more about in the next weeks and months, but the intention has been set.

It’s clearly saying, even though there are members of the Business Roundtable that there’s winners and losers here if we get a price on carbon and we represent both of them. There is a sense that we’re in this together and we’re simply going to have to change the rules of the game if we’re going to survive. So, I think we’re seeing more examples of that. We’ve always seen them. We saw them after World War II when businesses banded together to create jobs for the guys coming home from the front. It created 6 million jobs to absorb the army when they came back.

Judy Samuelson:
So, that enterprise is something that fades from view for us in this modern era. I think we’re starting to see some of the reweaving of the kinds of coalitions and intentions that require more people at the table together collaborating and creating a system of change. Clearly, that spans multiple sectors. It’s not just a business enterprise. It engages nonprofits. It engages government and others.

Jennifer Tescher:
Yeah. So, you mentioned the Business Roundtable and their statement on climate, but in a way, their latest dare I call it activism really started about 15 months ago now when they announced the release of a new statement on the purpose of a corporation signed by, I think it’s 181 CEOs, who committed to leave their companies for the benefit of their customers, their employees, their suppliers, their communities, and their shareholders. Notice I did not use the word stakeholder there, my friend.

Judy Samuelson:
Well done.

Jennifer Tescher:
You were an important influencer behind the ultimate creation of that statement. Here we are a little more than a year later. What a year it’s been, right? Pandemic, economic downturn, racial unrest, extreme divisiveness, historical election with all of this-

Judy Samuelson:
Growing inequality.

Jennifer Tescher:
Growing inequality, right? Corporations have really been put to the test. How are they doing do you think? Have they gone beyond their signatures to walk the talk?

Judy Samuelson:
I think we’re seeing movement, but I think we’ve got ways to go. I’m not a Pollyanna about this. Just yesterday or just in the month of December, the Vatican released the name of their guardians of inclusive capitalism, something to that effect. It’s some of the executives, same executives who signed on to the Business Roundtable. Once again, it’s like a set of principles and ideas that we share and that we think is going to help us all move together in this Kumbaya moment here. Ultimately, this is a province of boards and executives.

Yes, I felt that the Business Roundtable statement was critically important as a change of direction and a setting of intentions, but as I like to say, purpose is revealed through our operations. The measure of success is through the health of the society that business is wholly a part of. So, you don’t have good customers if they’re not healthy themselves. So, it’s obviously in business’s interest to lean into this, but there’s a lot of contrary forces that reinforce the status quo. Those also give me concern. I mean, we can talk about CEO pay and how it’s structured and what it’s rewarding.

We can talk about what we are actually teaching in business classrooms and law classrooms about the purpose of the corporation. We still have work to do. I’d like to think that we’ll see a lot of change with the people that are already in command, but in some respects, I think where we’re going to see it is in a generational shift. I think we’re going to be recruiting and building the pipeline with people that are much more of this era, of this moment, of tremendous complexity and changing expectations of the firm and who naturally will build the kinds of coalitions and decision rules that will stand the test of time.

However, that means they’re going to need to resist the tremendous power of investors. We talk about shareholders as if they’re a monolithic class here. They’re not. They’re all over the map. They have all kinds of different expectations and demands. Consumers are not our friend here. Consumers rebound to pricing convenience. Business the agency to do it, but it’s going to require courage. It’s going to require defining success in a different way. It’s going to require standing up to the demands of shareholders who are going to be more likely to short your stock if you hire people than buy your stock.

Jennifer Tescher:
Well, I can see the agenda for the next decade of your work forming now as we speak. I really appreciate you joining EMERGE Everywhere. I encourage everyone to get your new book, The Six New Rules of Business: Creating Value in a Changing World. Thank you, Judy.

Judy Samuelson:
Thank you, Jen. Look forward to seeing you again soon.

Jennifer Tescher:
This has been EMERGE Everywhere, a Financial Health Network production. I’m Jennifer Tescher, and I’d love to hear your ideas for future guests and your reactions to the show. You can connect with me on Twitter @JenTescher. If you liked this episode, please review the show and subscribe wherever you get your podcasts. To learn more about the work and research we do, please visit emerge.finhealthnetwork.org. See you next time.

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