When Trump Tells You to Eat It
Here’s a conundrum of corporate governance for you: What should you do when the president of the United States starts hectoring your company to keep its prices low, even at the expense of profit margins?
This is not a hypothetical. It is yet another outburst from President Trump, who opened fire on Walmart this weekend after the retail giant warned several days earlier that Trump’s tariffs would probably force the company to raise prices.
Trump did not like that news one bit, so on Saturday morning he took Walmart to task, tweet-barking that the company should “EAT THE TARIFFS” and “I’ll be watching!!!”
The question that immediately sprung to my mind: Where does shareholder primacy fit into Trump’s tweet?
Seriously — if you’re Walmart, what are you supposed to do here? If you eat the tariffs and keep prices low, that will eat into profit margins too; which means you’re not acting in the best interests of shareholders. On the other hand, if Walmart does pass along tariff costs to consumers, it’s pissing off an unstable and vindictive president who has no qualms about using the power of his office to persecute groups he doesn’t like.
More broadly, let’s also notice that through his tweet, Trump has implied that corporations (such as Walmart) have a duty to groups other than shareholders (such as customers). He is, in a roundabout way, endorsing stakeholder capitalism — the notion that companies must consider the interests of multiple stakeholders as they make decisions, rather than acting solely in the interests of shareholders.
To be clear, I don’t think Trump understands that this is what he’s doing, but it is what he’s doing. Indeed, rather than making some nuanced argument for stakeholder capitalism, Trump is just issuing a thinly veiled threat of enforcement actions or some other form of harassment against Walmart if it doesn’t embrace Trump’s desired course of action, shareholder primacy be damned.
Shareholders, Stakeholders, and Trump Tirades
In his one tweet, Trump has put Walmart — and by extension, every other corporation — in a difficult position. There is a large, longstanding body of law supporting shareholder primacy as the guiding principle that boards and management teams should follow when making decisions. If companies toss all that aside to placate Trump, what happens then?
To understand all this at the theoretical level, let’s examine the Walmart case more closely.
Trump is imposing tariffs on imported goods. Those tariffs create higher costs for companies that buy those imported goods. Walmart is one such company, so Trump’s tariffs will drive up the cost of revenue line-item for Walmart.
At this point, Walmart has several choices in front of it:
- Pass along those higher costs to consumers. This will raise Walmart’s revenue to offset the higher costs, and preserve its profit margins.
- Eat the tariff costs. That will mean lower profits for Walmart, since revenue won’t be rising with the cost of revenue.
- Streamline operations somehow to lower other costs, so that Walmart can eat the tariffs, keep prices low, and still preserve profit margins.
We all know that as a practical matter, Walmart will pursue some form of Choice No. 3; Walmart doesn’t want to raise prices on consumers any more than Trump does. My point is simply that the decision should be Walmart’s to make, in accordance with its business objectives and corporate values and after consultation between senior management and the board.
Trump, however, is trying to short-circuit that whole process by threatening Walmart with some sort of punitive action (“I’ll be watching!!!”) if the company even contemplates Choice No. 1.
What should alarm corporate boards, management suites, and legal teams the most is the arbitrary nature of Trump’s demand here. If he’s going to demand this special consideration for consumers now, what other consideration might he demand for other groups in the future?
For example, what if Trump demands that a technology services company bring its back-office operations centers back from India to the United States? What if he demands that a manufacturing company give in to demands from an employee union? What if he demands that banks start offering crypto services at a low price? What if, what if, what if?
How can a company anticipate that? How are you supposed to factor those arbitrary whims into your strategic planning? How do you explain your decisions and courses of actions to employees, suppliers, business partners, regulators from other jurisdictions, and so forth? Or, for that matter, explain those decisions to shareholders, who will still have a large body of law reminding them that their interests are supposed to come first?
More Stakeholder Capitalism Conundrums
Let’s keep charting the headaches here. There are plenty, after all.
First, how is management supposed to weigh a presidential threat of harassment against profit margins and shareholder interests? Sure, a president can (and should) always threaten enforcement if a company does something illegal; but raising prices to offset costs is not illegal. Trump is threatening harassment and enforcement if Walmart simply makes a routine choice about business operations that he dislikes.
Plus, what would happen if Walmart does decide to eat the cost of tariffs? Could unhappy shareholders sue the board for not maximizing profits? Could the company argue that by caving into Trump’s demands and avoiding the threat of presidential harassment, it in fact was in shareholders’ best interest — even though that means lower profits and a depressed share price?
Second, if Walmart eats the tariffs per Trump’s instructions, that means it accepts the idea that consumers are a stakeholder whose interests should be considered in corporate decision-making. What implications follow from that?
We should be precise here, because I’m sure Walmart already does consider consumers’ interests quite extensively. But the question should be something along the lines of, “How much profit can we extract from consumers before we’re asking too much of them and they stop buying?” That’s not the question Trump is asking Walmart to answer. He wants them to answer, “Haven’t we made enough profits already, and should give consumers a break?”
If companies start looking at stakeholders that way — the “we’ve already done right enough for shareholders; let’s think about what we could do for other groups” way — all sorts of possible implications arise.
For example, could a state attorney general also pressure Walmart to lower prices, based on consumer protection statutes? Could shareholder activists file proposals asking Walmart to give more consideration to consumers? After all, if the president can argue for companies to act in a certain way, shouldn’t shareholders have that same right?
Third, remember that a company’s share price is a reflection of its future earnings potential. So if Walmart (or any other company) eats the tariffs, that means lower earnings potential in the future and therefore a more depressed share price — which means lower value for management’s equity-based compensation.
In other words, management’s compensation structure (of equity-based pay) isn’t aligned with what Trump wants companies to do (eat the tariffs, even if that means a hit to earnings). Management has a financial incentive to ignore Trump’s demands to eat tariff costs. Is that the way things should be? If not, what would a better compensation plan look like?
Recklessly Into the Future
The irony here is that many people (me included) do agree with the basic premise of stakeholder capitalism. It’s not wrong to consider what corporations owe other groups beyond shareholders. Let’s remember that in 2019 the Business Roundtable even said as much in its Statement on the Purpose of a Corporation, even if that statement still put shareholders as the first among equals.
Trump, however — in his uniquely ignorant and impulsive way — is showing us how not to embrace this idea. He is just barking out one tweet after another, without any awareness of the implications of his words. The rest of us, from the corporate boardroom on down, suffer the consequences of that chaos.
It’s another cost Trump wants us all to eat, too.