A leading business association just published an updated definition of the purpose of a corporation that represents a paradigm shift in corporate governance. The Business Roundtable is an association of chief executive officers of America’s leading companies. For over 30 years the organization has supported the primacy of the shareholder as the focal point of corporations.
“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.”
It was drilled into us in business school that the purpose of a business was to increase shareholder value. It always struck me as wrong headed. That said, shareholders must remain a critical stakeholder for corporations since they are lending the capital… but not the only stakeholder of concern. This theory was brought forward in the mid 1970’s from Ivy League business scholars and enthusiastically adopted by business leaders. In fairness, as originally proposed, the theory posited that the focus on increasing shareholder value should be a long-term strategy (HBR, Reclaiming the Idea of Shareholder Value). After nearly 30 years working in corporations that have built their strategies around this concept, I can tell you that this has to be one of the most destructive management philosophies. It has been so destructive, particularly in the societal area, because business leaders have practiced it exclusively as a short-term strategy. American corporate leaders universally equated shareholder value with share price, thus driving nearsighted decisions focused on increasing share prices each quarter at the expense of all other aspects of the business.
The current social, political and natural environmental conditions have finally forced these leaders to accept that the short-term hyper focus on shareholder value is a failed strategy and no longer sustainable (an example from Aviation Week: Are A&D Companies Good Citizens Of The World?) (also see The National Review: Business Roundtable Pretends to Redefine What a Corporation Does.). This is a pivotal development for our profession as we are uniquely capable of bringing significant value in not only the financial performance of the organization but also it’s impact on the social and natural environments. See my previous post: The Coming of Organizational Transparency: This is the Moment for OSH, for a deeper discussion of OSH’s potential impact.
Below is the full statement from the Business Roundtable. It is refreshing to see these leaders take an enlightened view and provide inspired stewardship into the 21st century.
Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.
Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.
Link to the full Business Roundtable statement: https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans
These are great words and I am hopeful that they are the beginning of a true shift in the impact big business has on the social fabric of our country and the world. It is my firm belief that all stakeholders benefit when the impact of an organization creates virtuous cycles across the business and community aspects it touches. At this point I must comment on the fact that corporations have been quick to offer up such ideals in the past and then work quietly behind the scenes to continue their single-minded focus on share price. Business author Anand Giridharadas has been a sharp critic of such actions. His point is that as these corporations, and their leaders, have often made a public donation of note only to use their influence in government and other circles to work in the opposite direction regarding policy that protects their business and personal interests. Often, Giridharadas asserts the net impact of these conflicting actions is negative for the general public (Fortune: An Insider Takes Aim at Corporate America’s ‘Elite Charade’).
The bottom line is that the Business Roundtable’s statement is a good start, but only a start. It is up to business leaders to take this to heart and show sustained progress in improving the poor record their organizations have earned over the last 40 years. Their resolve for improvement must be strong, the fate of the American economic system just may be hanging in the balance.