by Mark P. McDonald | August 20, 2019 | Comments Off on The Purpose of the Corporation – an update that reflects reality
The Business Roundtable released its Statement on the Purpose of the Corporation yesterday. The updated statement is getting heavy media play and attention as it stresses a “fundamental
commitment to all of our stakeholders.” Their emphasis on “all”. The energy around this new statement of purpose is that shareholders – the owners of the company – are relegated to last place. Mentioned just once in an over 300 word statement, making shareholders one of many stakeholders is the source of debate over this statement.
The Reality of the Words and Commitments
The actual commitments are a pretty boiler plate set. They can be found in most company’s mission, vision or strategy statements. The Business Roundtable’s commitments are:
- “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.”
In that regard the commitments are fair with most companies using them to one degree or another to create shareholder value. The ‘so what’ of these commitments is in how people interpret these commitments and the expectations they create for society, governments, basically everyone.
Corporations are a bigger family
It is important to keep in mind the essential criticality of customers, employees, suppliers and communities in creating positive economic, social and environmental returns. Shareholders should care about how a company interacts with and supports these critical constituents.
Business and economic activity is a system of interactions among these groups. Customers have needs and provide resources (money) to companies who create value. Employees have skills, motivation and insight to make decisions, deliver services, etc. that creates that value. Suppliers give corporations leverage, provide quality inputs and support scale. Communities are the context in which we all live, our experiences and the forum for social and business interactions. The better that system runs, for the mutual benefit of all, the better our standard of living and shared environment.
Publishing this statement formalizes the reality of competition in a digital world. Executives, politicians and other leaders cannot lose site that in recognizing multiple stakeholders we are not demoting anyone. This is particularly important in the case of shareholders who were the “only child’ but now are just a member of a bigger family.
That is a tall order for executives, employees, suppliers etc. These constituents should recognize that they are one among many stakeholders and that pleasing all stakeholders all the time is not always possible. That my fear in reading reviews of this new corporate purpose statement. If everyone sees themselves as more equal than others, then stability and growth are at risk.
Shareholders are important
All stakeholders, governments, other institutions etc., need to keep in mind that generating shareholder returns remains important. If this purpose puts shareholders last in line, then we are ignoring the role shareholders have in addressing major issues facing American Society including:
- Creating incentives for innovation and new business development that generate growth
- Providing resources for those retiring on their 401K and other market based investments
- Supporting efficiency and effectiveness in the economy for business operations, the environment and communities
- Aligning incentives and accountability end to end in the economy
These are issues that are either solved by increasing the value to shareholders or through direct government involvement in the economy. Viewing this statement of purpose as a repudiation of sound business decisions would be a grave mistake.
We have been living in shareholder first environment for more than thirty years. This makes it difficult to remember what society, the economy and communities were like in the 1960s and 1970s. The rise of shareholder interests was in direct response to a form of corporate and CEO imperial-paternalism where business knew best for all. Ignoring shareholders also means that you ignore the other stakeholders relative to a corporate or its executive leadership. That period provided scarce returns to investors and investment levels were lower than they are today.
The shareholder focus has pluses and minuses. While most talk about the negative, short term, quarterly thinking, let us consider some of the other developments created during this period. Shareholders demanded greater transparency of corporate decisions, executive perks and pay which help foster trust and advancement. Shareholder demands for returns are central to the ‘creative destruction’ of underperforming businesses and products. These are two developments over the past thirty years that it would be a shame to rollback.
It should be a Both And
My takeaway from the revised statement is one of BOTH AND. Adopting an ‘either or’ view creates a zero sum game to the detriment of all stakeholders. There is much to be gained by formally recognizing the needs of customers, employees, suppliers and communities. These groups should be, and often are, considered in business decisions. I welcome the broader definition. It reflects reality. It should not become a rational to curtail, control or otherwise compromise our societal and economic growth. That would harm all stakeholders and benefit no one.
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