On Aug. 19, the Business Roundtable, a lobbying group composed of the US’s leading CEOs, announced an exciting new purpose for corporations. For the first time, the conversation went beyond profit and shareholders to issues of broader responsibility like; customers, employees, communities, equality and the environment. Which if actioned could transform our world and how companies behave and engage with it.
A huge departure
The announcement is a big change in the official stance of America’s top corporate executives which for decades espouses economist Milton Friedman’s theory that a company’s only obligation is to maximize value for shareholders; known as ‘shareholder primacy’ or putting their interests before the interests of all others.
The statement announcing the shift is 300 words long and instead of focussing on shareholders, as is tradition, the group focus on “value for customers,” “investing in employees,” fostering “diversity and inclusion,” “dealing fairly and ethically with suppliers,” “supporting the communities in which we work,” and “protect[ing] the environment.” Shareholders are not mentioned until word 250.
The new statement of purpose was endorsed by 181 of the Business Roundtable’s 188 CEO members, including the leaders of two of the world’s biggest investors: BlackRock Inc. and Vanguard Group Inc. As well some surprising names like Jeff Bezos (Amazon), Jamie Dimon (JP Morgan Chase), Tim Cook (Apple) and Lachlan Murdoch (Fox Corp) not commonly associated with these types of commitments.
The pressure for business to put an end to shareholder primacy has been building for some time. “Younger workers, in particular, are looking for employers that have a loftier purpose than merely maximizing their profits. More and more, customers are paying attention to which companies seem to be doing right by their people and the environment—and punishing brands that fall short. Socially conscious investors have started putting vast sums of money into financial products that use a “sustainable, responsible, and impact” lens,” says Rick Watzman fast company. The leadership benchmark has been set by businesses such as Patagonia and CEO’s like Paul Poleman from Unilver and Chip Bergh at Levis; all of whom now operate their businesses on a Profit through Purpose model.
Most recently CEO Larry Fink of Blackrock, who with $US6.3 trillion ($8.8 trillion) of assets under management counts as the biggest investor of them all, sent a letter sent to chief executives stating that with governments failing to prepare for the future, people were looking to companies to deliver not only financial performance, but a positive contribution to society, benefiting customers and communities as well as shareholders.
He has since gone so far as to say that if businesses and investors do not demonstrate material progress in this direction, they risk more than losing the public trust—they risk losing their license to operate.
Why is it important corporations take the lead?
When it comes to global issues like ethics and sustainability, change needs to come with momentum, scale and power. If it occurs within the borders of a single country, it has limited impact — one country can undo the work of another. Emissions targets are a depressing example of this. But if we look to corporations as the primary source of change things are more hopeful.
If you consider that 50% of worlds’ largest economies are corporations and that Walmart alone is bigger than 161 county’s combined economies, you can see the point.
Corporations also offer us long term agendas, unmatched by most governments. Not subject to ever- changing leadership (the average tenure of the Fortune 500 CEO is now nearly 10 years), big business is better placed to work across international borders and force change. They also have the size and power to do so.
So what can we do?
Unfortunately, whilst admirable, this statement does not make companies legally accountable to do anything more than provide profit and growth for shareholders. So whilst the goals of the statement are a good signal, it’s right to hold doubts until they actually follow through.
We have the power as investors and consumers to put our money where our hearts are, only investing in and buying from those companies who we feel are living this statement. Sending a signal to business and influencing leadership to follow through with action.