A CFO Questions Business Values

Is the main purpose of business to serve society or make money for shareholders? It’s an old debate that’s got new life as the Sandy Hook massacre ...
David RosenbaumDecember 19, 2012

During the three years Barry Rowan served as CFO and treasurer of Nextel Partners, the company’s market capitalization grew from $2 billion to more than $9 billion. In June 2006, telecommunications giant Sprint bought it for $10 billion, becoming Sprint Nextel. One could safely say that during his time at Nextel, he helped create a ton of shareholder value. However, reflecting on that period in his life, Rowan says, “Creating shareholder value was not getting me out of bed in the morning.”

He says he was in psychic “pain” due to the fact that he was unable to make a connection between what he was doing in the moment and his “purpose in life.”

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The pain led to what he calls “a purposeful pause” in his career. “I was always a windup toy for achievement,” says Rowan, who graduated from college summa cum laude, got his MBA from Harvard Business School, and at 32 was promoted from CFO to president of start-up technology company Comlinear. For the next two decades, Rowan moved from shop to shop, to increasingly larger businesses until, he says, it was time to stop winding up the automaton he feared he had become.

The pause lasted four years. He did volunteer work and conducted an extensive “interior dialogue” in which he says he attempted to forge a meaningful connection between what he did in the world and who he was. During that time, he began to change his view of the purpose of business.

“The purpose of business,” he says now, “is to serve society.”

That’s an assertion with which many would disagree.

Shareholder Versus Stakeholder Value
“The social responsibility of business is to increase its profits,” wrote Milton Friedman, the late economist and leader of the anti-Keynesian Chicago school of economics. Friedman went on to propose that businesspeople who think business should be promoting “desirable social ends” are “preaching pure and unadulterated socialism” and have become “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”

Friedman’s argument is that corporate executives and management work for shareholders, period. “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business,” he wrote, and the executive’s employers generally want to “make as much money as possible.” To imply, as Rowan does, that business has a social responsibility, means, according to Friedman, that he must inevitably act “in some way that is not in the interest of his employers.”

Friedman’s view, while still widely supported by CFOs, has of late come under attack both from practitioners such as Rowan and in the academic literature. A 2012 article focusing on environmental corporate social responsibility, by Caroline Flammer of the Massachusetts Institute of Technology’s Sloan School of Management, argues for a synergy between social responsibility and business advantage. By studying coverage of companies in The Wall Street Journal and comparing articles about them to stock-price fluctuations around the time of publication, “[w]e find,” Flammer wrote, “that companies reported to behave responsibly towards the environment experience a significant stock price increase, whereas firms that behave irresponsibly face a significant stock price decrease.” In general, she argues that corporate social responsibility “generates new and competitive resources for firms.”

Friedman speaks only of shareholders. But Rowan and people who share his belief that business has a social responsibility beyond maximizing shareholder value speak of stakeholders. Stakeholders can be defined narrowly as a business’s employees, suppliers, and partners, or more broadly as a business’s customers, the general public, and even the nation; that is, any entity in an increasingly interconnected and interdependent world that can be affected by a company’s actions.

The Newtown Massacre and Social Responsibility
Last week’s tragic massacre at Sandy Hook Elementary School in Newtown, Connecticut, has generated a great deal of political activity. On Monday President Obama announced the formation of a task force on gun-violence reduction, and on Wednesday he promised to bring new gun-control policy proposals to Congress no later than next month.

No one is surprised when politicians respond to events that capture the nation’s emotions, but when business responds it may hold an even deeper significance. For example, Cerberus Capital Management, a private equity and investment firm with more than $20 billion under management, announced Tuesday that it was putting one of its portfolio companies, Freedom Group, in which it had invested $157.8 million and held a 94% ownership stake, up for sale. Freedom Group makes the Bushmaster rifle that was used in last week’s school shooting. Cerberus’s decision reportedly came about due to concerns about its ownership of Freedom Group voiced by the California State Teachers’ Retirement System, which has $750 million invested with Cerberus.

Certainly, keeping the California teachers happy is important to Cerberus, even though one could reasonably presume this may not be the best time to take a gun maker to market. The price Cerberus will get for Freedom Group can reasonably be expected to be less than what it would have gotten before the massacre, and therefore, in Friedman’s terms, selling now would not be in the best interests of the firm’s shareholders who only want to “make as much money as possible.”

In a public statement, Cerberus first noted that “the Sandy Hook tragedy . . . has raised the national debate on gun control to an unprecedented level,” and then declined to associate itself with that debate (“[a]s a Firm, we are investors, not statesmen or policy makers”) while asserting that its actions were based solely on the best interests of its investors: “We believe that this decision allows us to meet our obligations to the investors . . . without being drawn into the national debate [over gun control] that is more properly pursued by those with the formal charter and public responsibility to do so.”

Translation: right now, owning a gun maker is bad for our business.

However, Cerberus’s definition of business seems to be broader than Friedman’s. Although the firm makes no mention of its social responsibility (should it conceive itself as having one), it would be naïve to think it would be selling Freedom Group right now had the Sandy Hook massacre not taken place.

Nor would Dick’s Sporting Goods, the nation’s largest gun retailer, have suspended sales of what it calls “modern” sporting rifles, nor would Wal-Mart, which reportedly sold guns in 1,750 stores last year, have removed ads from its website for rifles similar to the one used in Newtown.

Whether these businesses are demonstrating corporate social responsibility or simply making decisions about the impact of recent events on their business, there’s no question that they are responding to social inputs. But the search for value in business goes deeper than that.

A CFO’s Search for Meaning
“I was thinking about work all wrong,” says Rowan. “I was trying to derive meaning from work rather than bringing it to work.”

After his “purposeful pause,” Rowan became CFO of Internet-communications provider Vonage in 2010, attracted by what he saw as a powerful business model “buried under poor financial management.” He was able to restructure Vonage’s debt, reducing its interest rates from 20% to less than 4% in two rounds of refinancing, thereby cutting its annual interest expense from $49 million to $2 million. That was part of a dramatic turnaround that took EBITDA (earnings before interest, taxes, depreciation, and amortization) from -$50 million to $165 million in four years.

But in February, after affixing his name to Vonage’s 10-K filing, Rowan will leave to become CFO of Cool Planet Energy Systems, a prerevenue, biofuel development company that’s just completed its Series C round of funding after winning $17.7 million in Series B funding. Rowan is leaving a big public company where he earned millions in compensation to join a far-smaller business because, he says, creating a viable energy alternative promotes a social good.

“It helps energy independence; it helps the environment,” he says, defining Cool Planet Energy Systems’s stakeholders both nationally and globally. The company’s patented process for making gasoline and jet fuel from corncobs and wood chips (or any other biomass), says Rowan, extracts greenhouse gasses from the atmosphere and sequesters carbon, which can then be put into the ground to feed crops. In other words, it’s a green, sustainable model that he believes represents “responsible value creation.”

Rowan says his first job at Cool Planet Energy Systems will be to raise money to scale the operation to a point where it can prove itself as a viable business. That will also entail putting the “financial capabilities and systems in place to support growth” and, he adds, “establish the company values we want to have.”

But, he adds, “what really moves my needle is accomplishing significant things.” And although the significance of creating shareholder value is something he acknowledges, that’s not what he’s talking about.