There has been much commentary regarding the announcement by almost 200 CEOs of America’s largest companies, through the Business Roundtable, that the role of the corporation in society is not simply to maximize value for shareholders but also to serve the interests of other stakeholders, including customers, employees, suppliers and communities.
Rhetorically, this is indeed a substantial departure from the last statement of the Business Roundtable (in 1997) that the purpose of the company was simply to maximize value for shareholders. That statement, in turn, reflected the philosophy of the economist Milton Friedman, who believed that focus on profitability was the only legitimate purpose of private enterprise in a free society.
In actuality, the tension between the new statement of corporate mission and the earlier version is less profound than it may appear. It suggests some recalibration in certain quarters, but not a dramatic, wholesale change in business philosophy. Indeed, there would not have been nearly unanimous agreement on the part of this august group of CEOs regarding the new statement unless it already reflected prevailing business practice.
Most successful business leaders are already of the view that no company can be successful over time without providing value to customers, motivating capable employees, maintaining mutually beneficial relations with suppliers and retaining trust in communities where they have a substantial presence.
There is substantial empirical evidence that companies with a strong culture and sense of mission beyond profitability are more likely over time to deliver greater value for shareholders. As Larry Fink, CEO of America’s largest shareholder, BlackRock (with almost $7 trillion in assets under management), wrote to all CEOs earlier this year:
“Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being — what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them.”
Fink was encouraging America’s public companies to resist pressure for immediate results and to be committed to a vision as to how to create value for all constituencies. His plea comes at a time when public confidence in the virtues of the American free enterprise system is in serious decline.
While our economy is in its 10th year of recovery from the Great Recession, there is still widespread public cynicism about our major corporations and the standards to which they adhere. This chronic distrust has diverse origins, including recent corporate scandals, outsourcing of jobs and widening income inequality. But the single greatest factor may be the deep anxiety that many Americans have in a rapidly changing economy regarding diminishing economic opportunity. Faith in the American dream, in the promise of a better future, and in our free enterprise system has been substantially eroded.
Anger is thus manifested on both the right and the left, as President Trump, in a sharp departure from Republican free market philosophy, berates and threatens companies for plant closings and moving production to foreign countries, while Senator Elizabeth Warren routinely vilifies the leaders of major industries and promises legislation to place workers on the boards of thousands of companies.
Meanwhile, the Wall Street Journal editorial page and others who correctly contend that a market economy ultimately delivers the greatest prosperity and opportunity for the greatest number, fret that corporate leadership might now lapse back into the managerial capitalism of the ’50s and ’60s, when an elitist business leadership wasn’t really accountable to anyone other than themselves.
That is not about to happen.
The business environment is not only radically more competitive than a half century ago, business is also under far greater pressure to deliver immediate results for shareholders, who annually elect, and often seek to replace, corporate board members. Public attacks by activist shareholders on corporate management are now routine, and CFOs report ongoing pressure to cut costs, including human resources and R&D, in order to boost quarterly earnings and today’s share price. The power of shareholders in the boardroom today is greater than ever before.
This new BRT statement certainly won’t change that dynamic.
Wherever possible, companies need to manage this shareholder energy constructively. Business has better prospects of executing a strategy that benefits all stakeholders through a substantive engagement with its largest institutional investors. When they effectively make the case that greater investment in service of a broader purpose will ultimately be rewarded, Larry Fink, and his peers heading other major investment institutions, are indicating they are now ready to listen.