Last month, 181 CEOs of the Business Roundtable, a lobbying group that represents the chief executives of 192 of the United States’ biggest companies, signed a Statement on the Purpose of a Corporation, signaling a move away from shareholder primacy to leadership that benefits all stakeholders – customers, employees, suppliers, communities and shareholders.
The announcement was met with mixed sentiments, with some viewing it as a step in the right direction, some questioning the commitment due to the lack of specifics, and others running a full-page ad in the New York Times, ostensibly to help the Business Roundtable companies walk their talk.
Business Purpose is Older than Shareholder Primacy
But as a Quartz article pointed out, the Business Roundtable’s emphasis on companies’ responsibilities to all stakeholders is nothing new. It was emphasized in the group’s founding mission. In fact, businesses were focused on social purposes long before they did on shareholder value, and the obligation to balance profits with the common good can be traced as far back as to the business guilds of medieval Europe.
In the mid-20th century, “Many American corporate leaders came out of World War II with a profound sense of the need to put social goals and workers’ needs high on their corporate agenda,” said Rick Wartzman, Director of the Drucker Institute’s KH Moon Center for a Functioning Society, who described the Business Roundtable’s new statement as one with a “back to the future feel”.
But all that changed in the 1970s, with the emergence of ideas that would come to dominate market structure and regulations. Most notably among those ideas was the emphasis on “shareholder primacy” by academic economists such as Milton Friedman, who, in a 1970 New York Times article, called businessmen who supported wage and price guidelines or income policies “schizophrenic” and “shortsighted,” and wrote that the one and only social responsibility of business was “to increase its profits so long as it stays within the rules of the game.”
Despite the flawed assumptions of shareholder primacy, the idea has evolved into a thought system that has been especially popular among “economists unburdened by knowledge of corporate law,” and embraced by hedge fund activists, institutional investors, boards, managers, lawyers, academics, and even some regulators and lawmakers. One reason is that private sector firms and executives, then feeling the pressure of global competition and desperately seeking ways to increase their returns, wanted to believe in an idea that focused entirely on maximizing profits, even if at the expense of the interests of employees, customers and society.
Partly as a result of employee activism and pressure from investors and customers, we now see an emerging trend of corporates developing purpose-led strategies for their core business. In 2010, Unilever scrapped its corporate social responsibility department and went on to create a new business model with sustainability at its core instead. Earlier this year, it shared details of suppliers for all of its British tea brands in response to a supply chain transparency campaign by charity Traidcraft Exchange; today, it has met about 80% of its commitment to sustainable development.
Patagonia, which brands itself “The Activist Company” supporting grassroots activists for four decades, runs a project called “Worn Wear” to help its customers repair, share and recycle their gear to reduce carbon, water, and waste footprints. Last year, CEO Rose Marcario dedicated the company’s US$10 million in tax cuts to environmental charities in protest of President Trump’s tax bill. To meet its goal of making its supply chain carbon-neutral by 2025, Patagonia is working with recycled materials while pushing its suppliers to adopt more sustainable practices. From Patagonia Action Works to Patagonia Provisions, the retailer shows that when you commit to your social mission, profits will follow, and Patagonia is by no means the only such company.
In their own ways, these two multinational companies are part of the “B Corp movement”, a global community of 3,023 companies across 150 industries in 64 countries that meet “the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose”.
But here’s the thing: you don’t have to be a B Corp to balance profit and purpose. And some even wonder if setting up a distinct designation wouldn’t make it more difficult to encourage non-B Corp companies to create positive impact.
Balancing profits with stakeholder interests is a no-brainer. Instead of maximizing shareholder value, entrepreneurs should seek to solve social issues, drive systems change through commercial solutions, generate long term value and maximize stakeholder value. At FSI, we believe that every entrepreneur should take time to understand the social impact created by their business, whether good or bad. And all entrepreneurs should pursue positive social impact, whether through providing quality employment, more efficient services, inventions that make the world better, or some other means.
As an example of an impact-driven model, Fair Employment Agency was born as a solution to the exploitative migrant worker employment industry in Hong Kong. This month FEA celebrated its fifth anniversary of operations, and during that time they have become a Top 5 agency in Hong Kong. They have placed more than 3,400 workers, and since they never charge fees to workers, they have helped workers avoid US$4.5 million in recruitment debt. That is the equivalent of 750 years of forced labor!
There are many similar examples around the world, and rising generations are increasingly placing purpose over profit. So let’s all celebrate what is hopefully a new beginning in terms of how companies define their purpose, recognizing all stakeholders as essential.
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