Home Compliance With Capitalism at an Inflection Point, It’s Fair to Ask: What Is the Purpose of a Corporation?

With Capitalism at an Inflection Point, It’s Fair to Ask: What Is the Purpose of a Corporation?

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Four years ago, the Business Roundtable released its landmark statement on a corporation’s purpose. Since then, the world has seen a pandemic, widespread civil unrest and a global cost-of-living crisis. It’s through that lens that Protiviti’s Jim DeLoach revisits the statement now.

The prevailing notion in the United States of a corporation’s purpose in a free-enterprise system, largely framed by the economist Milton Friedman, is that its responsibility to the public or society is subservient to satisfying the interests of its shareholders within the bounds of fair play. Over time, critics of Friedman’s view have expressed concern over the short-termism and dysfunction it spawns and, more important, its perceived ineffectiveness in addressing such 21st-century challenges like innovation, strategic renewal, environmental and social sustainability, domestic political pressures and changing geopolitical realities.

Four years ago, the Business Roundtable (BRT), an association of CEOs of leading American companies, issued its “Statement on the Purpose of a Corporation.” Citing the free-market system as “the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all,” the statement noted that the 181 CEOs who signed it shared “a fundamental commitment” to deliver value to all of their companies’ respective stakeholders consisting of customers, employees, suppliers, communities and shareholders. 

I discussed the BRT’s statement in a prior column on these pages two years ago. Now, it is time for a revisit on its fourth-year anniversary.

A marked shift in focus

The BRT’s statement is a departure from its prior statement embracing the Friedman doctrine. But this seemingly altruistic move by some of America’s leading companies is not unexpected. Below are seven reasons why broadening the corporation’s purpose makes sense:

  1. Concerns over short-termism. Wariness about a near-term focus on results abounds amid the activist attacks it spawns and its effects on wages, research and development, innovation, other long-term sustainable investments and the economy at large.
  2. Increased emphasis on sustainability reporting. In recent years, institutional investors and asset managers overseeing trillions of dollars in sustainable, responsible and impact-investing assets have conveyed to America’s CEOs and their boards the need to broaden their focus beyond bottom-line profitability. With their demand for a stronger focus on sustainable performance comes the attendant need for improved disclosures. This has given rise to many reporting frameworks with an emphasis on ESG issues germane to the industry.
  3. Extraordinary shifts in workplace dynamics. Automating intelligence, the increasing power of skilled workers and challenges in matching skills with needs amid tightening labor markets have created the need for more flexible, diverse and inclusive labor models. These factors also are driving, or will continue to drive, the need to reskill and upskill millions of people as present jobs are displaced and new jobs are created in a rapidly changing workplace.
  4. Need for supply chain alignment. Consumers and regulators see flaws and abuses in a company’s supply chain as a reflection on its reputation and brand image, prompting a strong emphasis on requiring suppliers to deliver value according to the company’s brand promises. The shift to friend-shoring, near-shoring and reshoring are impacting supply chains as global ties forged by the forces of globalization unravel.
  5. Formidable political gridlock. Current and foreseeable political realities raise serious doubts as to whether the public sector can lead effectively in addressing the challenges of the 21st century.
  6. Rise of government activism. As more Americans, particularly those who are younger, view capitalism as failing to address present-day environmental and social challenges, proponents of governmental intervention are proposing significant and even radical taxpayer-funded alternatives.
  7. Uncertainty in international affairs. Geopolitical issues are forcing their way into the strategic calculus in the C-suite and boardroom as companies revisit old assumptions about doing business in certain markets, countries and regions and recognize the emergence of new realities.

By asserting that corporate decisions should not be made solely on the basis of generating higher profits for shareholders, the BRT statement presents significant policy implications. Implicitly, it suggests that delivering superior financial results is no longer the only benchmark of corporate success.

But there is opposition

Growing, intense opposition to ESG bears a mention because ESG reporting is often viewed as a surrogate for stakeholder reporting. Arguments advanced by ESG critics range from concerns that the SEC is exceeding its statutory authority in proposing climate change disclosures to the concern that asset and pension managers are violating their fiduciary obligations by using ESG to screen investments and redirect capital flows

Some assert that ESG ratings are evaluated inconsistently. Others argue that ESG reporting itself is inconsistent. There is even the view that Friedman was right all along. These arguments have politicized ESG reporting, particularly in the U.S., undermining the concept’s usefulness.

Regardless of where one lines up in the ongoing debate over ESG, there is the fundamental truth that the success of the corporation and the success of the communities in which it operates and serves are inextricably linked. The BRT statement alludes to this truth by observing, “Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity.”

This paradigm shift is not going away. One thoughtful paper sums up the picture:

“Corporations have … been faced with technological disruption, globalization and the rise of China, capital markets dominated by short-term trading and focused on quarterly profits, and unrelenting attacks and threats by activist hedge funds. In response to these pressures, corporations focused primarily on increasing shareholder wealth in the short-term, at the expense of employee wages, customers, suppliers, long-term value and the local and national communities in which they operate. The prioritization of the wealth of shareholders at the expense of employee wages and retirement benefits, with a concomitant loss of the Horatio Alger dream, gave rise to the deepening inequality and populism that today threaten capitalism from both the left and the right.”

With the pace of change in the digital economy and the optics of what’s taking place in the environment, society and the global marketplace, profit as the corporation’s sole objective is not sustainable. Embracing the status quo and riding the current business model rather than innovating processes, products and services and reinventing the company is the kind of short-termism that is tantamount to playing a losing hand in the long-term game.

These changing realities are challenging leaders to revisit 20th-century assumptions and pursue objectives that are more inclusive of the interests of multiple stakeholders. But as they do so, they must accept accountability for tangible results versus leaning on lofty, aspirational statements. To that end, greenwashing remains an issue and undermines the trust so essential to sustaining market permission to play. Exaggerated, false or deceptive claims or vague, unsubstantiated statements are not going to cut it. A company’s sustainability narrative cannot resonate in the market if it is not viewed as credible. Sustainability reporting is no longer a marketing tool. It needs to be as disciplined as financial reporting. Further, sustainability initiatives should make a difference in executing strategy and creating value. The bottom line is that, for many companies, improvements in the rigor, quality and consistency of these reports are needed.

Capitalism is at an inflection point in a digital economy with enormous opportunities and risks. The BRT’s call to invest in workers and communities, enhance the customer experience and preserve the quality and integrity of suppliers is a critical step toward sustaining shareholder value creation over the long term. It offers a balanced perspective, one that can be supported by boards of directors so long as the actions undertaken by management are in the shareholders’ long-term interests. This is a 21st-century view.

Where does your company stand?

The discussion about corporate purpose is complex and nuanced. It raises the need for a thoughtful, nonpartisan public policy dialogue. There are legitimate concerns hanging in the balance. Yes, climate change, social issues and governance dynamics have long-term implications. But in the meantime, economies must continue to function, pensioners expect to receive their checks, senior citizens must navigate inflationary pressures on fixed incomes and people need dependable energy sources in conditions of extreme heat and cold.

Swinging the pendulum back and forth depending on which direction the political winds are blowing does not lead to an effective transition to the future. The conversation should be a smart, strategic dialogue that embraces that transition while preserving a semblance of life quality that is affordable for the masses in the near-term. It behooves policy makers to think in this manner. Leadership is needed on this front.

It is also important for companies and their boards to view ESG considerations with a long-term lens and a focus on enterprise value that has staying power. The divisive ESG debate is creating such a buzz that it is easy to forget that ESG “is merely a collection of … disparate risks that corporations face, from climate change to human capital to diversity to relations among the board, management, shareholders and other stakeholders,” Martin Lipton wrote in Harvard Law School’s Forum on Corporate Governance. Corporate law presumes that corporations “conduct lawful business by lawful means.” The Caremark doctrine requires that companies design and implement reporting systems that provide reasonable assurance to management and the board that they are receiving timely, reliable information that informs their judgments, decisions and actions with respect to compliance with applicable laws and regulations. “The stakeholder governance model aligns closely with Caremark,” says Lipton.

The focus on sustainability and stakeholder governance will more than likely reward companies choosing to be proactive. A resilient, ethical and trust-based culture founded on values best equips companies to face the future confidently. Boards and their CEOs should consider ESG-related risks while rationalizing the appropriate balancing of stakeholder interests. Companies that balance shareholder interests with the interests of employees, the communities in which they operate and other stakeholders are more likely to possess the resilience to adapt to inevitable market shifts than those focused solely on maximizing profits.

CEOs and boards engaged in big-picture, out-of-the-box, bold and disruptive strategic thinking should recognize that ESG risks are germane to their fiduciary responsibilities to ensure the long-term viability of the companies they serve. Accordingly, they should challenge leaders across the organization in a constructive manner with a long-term focus on appropriate sustainability objectives while keeping an eye toward delivering expected financial results.

Final thought

Since the turn of the century, only one company — Microsoft — maintained a steady presence on the list of the 10 largest U.S. companies by market cap. As new entrants and long-revered brands come and go as the world changes in fundamental ways, it makes sense to remember that organizations must attract three things to succeed — customers, talent and capital. Today, signals from all three have expressed a preference for companies that are leaders in contributing to a sustainable world. That is why the BRT statement is relevant to American companies (as well as to companies outside the U.S.) as a call for action to broaden the corporate perspective.

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