A radical new sense of corporate purpose
Earlier this week, my eye was drawn to an FT article on the topic of corporate purpose. The Business Roundtable, an organisation made up of over 200 CEOs from America’s biggest companies, has agreed to update their definition of “the purpose of a corporation”.
Since 1997, the Business Roundtable’s (BRT) mission statement had been framed around one principle: “The paramount duty of management and of boards of directors is to the corporation’s stockholders.” Interests of other stakeholders, such as employees, were only: “relevant as a derivative of the duty to stockholders.” Stockholders first. Everyone else wait in line.
But the BRT’s approach radically shifted this week as it completed a redraft of its shareholder-first mantra, departing from its foundational belief that businesses serve the owners of their capital. This philosophy, as championed by economist Milton Friedman, has driven corporate America for decades, as profits kept corporations in good health, people employed and the economy fuelled.
Now the BRT is proposing “conscious capitalism,” declaring how a corporation’s responsibility is to society, which it can better serve if it considers all its stakeholders as equals when making decisions. Stockholders first. Everyone else alongside.
“The American dream is alive but fraying,” the BRT and JP Morgan’s chairman, Jamie Dimon, stated. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
A bold and somewhat surprising statement from a man who leads one of America’s oldest and most profitable capitalist machines. It was welcomed by critics of big business but it was met with some scepticism. What’s the motivation behind the shift? Why now? Would this profit-hungry collection of capitalists really deliver their new promise?
Before we consider the future, it’s fascinating to consider how capitalism’s conscience has evolved through the decades. If we look back at business practises and cultures in the 1950s and 1960s, it was assumed that a company should be acting for the welfare of all stakeholders including employees, customers, suppliers and community, not just shareholders.
However, as America welcomed the freewheeling private-equity fuelled ‘80s, a shareholder-first mantra led the way. Financial engineering and cheap debt fuelled a boom that fired equity markets and those who owned public companies, however big or small their stake, got rich.
Of course, with hindsight, we know that Gekko’s “greed is good” mantra is shortsighted as shareholders learned that leveraged buyouts had more to do with financial engineering and tax arbitrage than true improvement in company performance and culture. Yet despite the monumental shift of wealth towards those who owned the bulk of the stock, somehow, the shareholder-first mantra has stuck firm for the subsequent three decades.
It’s interesting to now see the BRT choose to go the other way. Of course, there is almost certainly some self-serving motivation for the shift. US wealth inequality is only getting worse, and we’re starting to see politics is being coloured by this debate.
Democratic presidential candidate Elizabeth Warren, has set out how she wishes to reframe the purpose of corporate charters to ensure they take into account all stakeholders. The rising wave of populism has CEOs of Fortune 500 companies on edge. By getting on the front foot, the BRT is looking to make sure that no matter who wins in 2020, they are proactive and take control of the debate around corporate purpose and structure. Whatever’s to come, the world’s most powerful companies can now point to their pro-employee, pro-community, pro-everybody mantra, be it worth the paper it’s written on – or not.
However, more interestingly, if we look beyond the BRT and the Fortune 500, we find numerous studies and anecdotes that show that it is actually good business to broaden the scope of a corporation’s purpose. Patagonia, Southwest Airlines, Merck, Toms, and many more companies have achieved huge financial success by focusing on something greater than profit and shareholder maximisation.
Of course, unlike the Ubers and WeWorks, these companies are financially sustainable, so while they aren’t prioritising shareholders above all else, they are still treating them with some respect. They aren’t endlessly relying on external capital, but equally they’re not singularly-focused on short-term share-price boosts. Instead, management at these profitable, mid-size firms chose other metrics as their north star. In doing so, they define and lead their markets and do, and as a consequence, do incredibly well for shareholders. As the world faces a growing number of existential crises, and as future generations increase their demands to work for companies with purpose, this trend will grow.
And I hope it does. Radical change is required. As Elizabeth Warren says, we need these adjustments to save capitalism. If not, uncertainty and populism risk damaging its base, which would be catastrophic for entrepreneurs like me. More worryingly, it would be very bad news for a society that’s made up of all of us.