The Business Roundtable has put out a statement that American corporations should aim to promote “an economy that serves all Americans.” It seems America has come to embrace stakeholder capitalism. On purpose thinking, it is still one chapter behind current events, however.
The recent statement of the Business Roundtable, which is a Washington, DC based non-profit organization whose members are CEOs of large American companies, has made headline news in the United States. 181 CEOs signed off on a promise that they would lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and yes, also shareholders.
For European readers, it might come as a surprise that any such statement might make it to the front page of American newspapers. A concern for all stakeholders has been an acquired business practice in Europe for decades, and company governance rules have been set accordingly. In the Anglo-Saxon world however, shareholders are the beneficiaries of a significantly larger degree of protection than other classes of stakeholders do.
Of course, the update made to the Business Roundtable’s Principles of Governance did not now just suddenly usher in a new era of management thinking about company responsibilities towards stakeholders. What it did do was put into words, in an almost ritual fashion once could say, a mental shift that has been percolating for quite some time now.
James R. Copland of the Manhattan Institute for Policy Research was right in saying in his Washington Post op-ed that the statement leaves intact the fiduciary duties of the leadership of for-profit companies to manage their companies to the benefits of shareholder interests. Non-shareholders are not put on an equal footing with shareholders, but their interests are given more attention nonetheless. (This is not the place where I can elaborate in great length on my views on shareholder primacy – at any rate, I have no principled objections against it.)
In search of purpose
In the statement the word “purpose” plays a central role. The word is used so often in so many different ways nowadays that it is now almost impossible to discern what anyone might mean to convey when they talk about company purpose. The definition used in the statement seems to encompass a lot of things. Let’s take a look at the text.
“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.” The purpose of business is to provide necessary goods, so to speak.
“[…] each of our individual companies serves its own corporate purpose,” the statement continues (that purpose are the aforementioned goods, I presume) and then it adds that companies share a fundamental commitment to all of their stakeholders in that they commit to delivering value to their customers, investing in their employees, treating suppliers fairly, supporting their local communities and generating long-term value for shareholders.
There are a lot of good things to be said about all of this. What we do not read here however is an understanding of purpose that is in sync with how purpose is increasingly understood in the marketplace today. Millennials are asking the companies they work for and buy products and services from to pursue social goals that supersede or at least complement profit seeking goals. When Deloitte asked Millennial workers in a recent survey what the primary purpose of business should be, 63 percent more of them said “improving society” than said “generating profit.”
Purpose-driven companies do not only make for happy stakeholders, they also outperform the stock market by 133 percent, as Markus Kramer and Husein-zadeh have recorded in The Guiding Purpose Strategy. Investors have taken note and people such as BlackRock CEO Larry Flink have been very outspoken about the need for companies to listen to the growing demand from stakeholders that they pursue a social purpose.
Competitive and systemic risks
This brings us full circle. We started our story drifting away from investor interests to come back to shareholder concerns realizing that their long-term interests are best served when the companies they own seek profits in a manner that leaves plenty of room to take their Umwelt into consideration.
It is also important here to be cognizant of the fact that in the United States, because of the very limited role that government plays in promoting the interests of the aforementioned stakeholders, what is at stake for companies is not just their market share but the perceived legitimacy of the Anglo-Saxon capitalist system in itself. Wall Street is too smart to not care about the systemic risk, meaning that the Rountable’s Principles of Governance are poised to need another update within the next few years.