Company Purpose – Shareholder Worth and/or Social Responsibility

Introduction:

There has been a lot written recently regarding the purpose of a company, particularly since the letter released by 181 bosses of some of America’s biggest companies via the US Business Roundtable on August 19, 2019. Prior to then, as the Roundtable states, “each version of the document issued since 1997 has endorsed the principles of shareholder primacy – that corporations exist principally to serve shareholders”.

The new Statement, whilst acknowledging that individual companies serve their own corporate purpose, posits that corporations are now here for all stakeholders: customers, employees, suppliers, communities and shareholders. That each is essential and that the signatories are committed to deliver value to all of them¹.

Is this as some suggest:

1. A repudiation of the theories espoused in Milton Friedman’s seminal book, Capitalism and Freedom – risking a diminution of the purpose of a company to be “whatever management wants it to be”² and that “accountability to everyone means accountability to no one”³?
2. A response to the call for big business to fix the economic and social problems that Governments seem unable or unwilling to do⁴?
3. A reaction to the current social zeitgeist(s) of inequality, privilege and democratic socialism to head off the possibility of regulation? An example of this includes the Accountable Capitalism Act introduced to Congress by one of the original Democratic presidential candidates (Elizabeth Warren). Part of this Act would give directors a duty of “creating a general public benefit” for all of a company’s stakeholders⁵.

Or is the new Business Roundtable statement reflecting a lift in the consciousness of business leaders to discern a better way forward and reflect a way of being that underpinned the defining trait of a corporation for thousands of years?

Note: Directors’ duties differ across jurisdictions. In Australia directors are expected to “act in the best interests of the corporation” which arguably allows (demands) that directors consider more than just financial returns to shareholders.

History of the Corporation

A detailed account of the historical role of the corporation in society has been provided by Davoudi, McKenna and Olegario⁶.

This account traces the history of a corporation from the early Bronze Age (during the 3^rd millennium BC) through the Assyrians, Babylonians, Romans, the guilds of Medieval Europe, the giant chartered corporations of the early modern era (e.g. the Hudson’s Bay and Dutch East India companies), to the present day. It concludes that “since the dawn of legal personhood, social purpose has been the defining trait of the corporation”, broken only “in the 19^th Century through general incorporation laws”.

So what happened?

Like a pendulum swinging (to the right), the giant global corporations gained so much power and influence and moved further away from their links to social purpose that protests inevitably occurred, leading to anti-trust legislation and greater scrutiny by Regulators. In the USA the Sherman Anti-trust Act (1890) and National Labor Relations Act (1935) along with similar regulations in other countries started to reign in the perceived excesses of big business. These changes ushered in a period of regulation-enforced corporate paternalism and started to legitimise the development of strong worker unions, signalling “good times” for workers through to the 1980’s (a swing back to the left).

With few exceptions, from the 1990’s to the present day, the pendulum has been swinging back to company performance being measured under the primacy of shareholder value, short-termism and profit maximisation and away from the consideration of the interests of other stakeholders.

The “arc” of these swings is ever reducing. Technological advances, globalisation, digitalisation, and the internet have, in a few decades enabled the rise again of global behemoths. This is now reaching the point of proposed regulatory intervention it previously took hundreds of years to get to.

Leadership (Corporation) Consciousness

If history is any guide, the reaction (and we are already starting to see it) to the current generation of large global corporations will be a raft of new legislation and regulatory imposts designed to “right the pendulum”. Smaller corporations seen to be mistreating their stakeholders whether they be customers, employees, shareholders or others are also in the firing line. In Australia for example the government has now bolstered the powers of ASIC (Australian Securities and Investment Corporation) and APRA (Australian Prudential Regulatory Authority) as a result of the Banking Royal Commission.  It has also introduced “big stick” energy legislation to influence company behaviour with the aim of lowering customer power bills. The message behind these initiatives is the same. When corporations can’t be trusted to “do the right thing”, when self-regulation fails, government intervention is required.

So why does/will it take regulatory intervention, why will it succeed sustainably this time if it hasn’t in the past and what of corporations operating in countries that have poorly equipped or funded regulators?

If opposite sides of the pendulum represent binary choices – shareholder primacy versus social responsibility, how do we avoid falling into the dualistic trap of win/lose?  How do we hold for the sustainable middle – meeting the needs of other stakeholders without lessening focus on creating value for shareholders?

A corporation is made up of people and it follows therefore that its culture – the way it behaves and what is allowed, rewarded and condoned – will be in part a reflection of its board, CEO and senior executives. The leadership style (consciousness) they adopt will permeate the corporation and shape its culture.

We identify 4 generic styles of leadership equating to 4 types of corporate culture:

It’s about me/my organisation. I will do whatever it takes to be successful and survive. Being bigger, better, competing and winning is what is important. Hence if recognising and valuing a broader range of stakeholders is going to benefit me or my organisation then I am happy to do so, not because I accept that they have different views/rights/concerns that are equally legitimate.

Because I’m right, if you have a different opinion you must be wrong. Therefore, whatever I decide to do (according to my view of the world) will be the right thing to do. If it doesn’t work, either its someone else’s fault (blame) or it’s all my fault (be blamed).

Benevolent

I genuinely care about others and my impact on them – employees, customers, communities, and other stakeholders impacted by my activities. I know what is best for you even if you don’t so I can fix it. Whilst I care about broader issues, my focus is directed towards those within my immediate circle of family/friends/community/team/organisation. I am less interested/aware of broader strategic challenges or of taking a holistic view so my actions whilst born of compassion and caring and therefore well-meaning, can be naïve, ineffectual and potentially damaging.

Strategic

I recognise that other stakeholders exist and that their views/ongoing support are important and may be critical to my continued prosperity. Cooperating with all my stakeholders and supporting them to get their needs met is a wise thing to do if it is in my best interests, the trade-offs have been quantified and the benefits of doing so outweigh the costs. Cooperating with other organisations where it benefits/is aligned to our interests is a logical thing to do.

Conscious

I seek to understand the complex interacting needs of stakeholders (“what is it like to be you?”) to best discern and answer “what is the right thing to do?” in any situation. These questions are asked from the heart in an authentic, compassionate way free from emotive reaction, judgement and duality. They are asked with the intent to bridge divides and bring people (stakeholders) together in shared recognition of larger common interests and needs, uplifting the whole.

In each case the leader/organisation believes they/it is “doing the right thing” however in fear based, benevolent or strategic corporations this construct comes from a narrower view of the world and what is possible. The style most frequently adopted will determine the decisions made and actions taken.

Walking the Talk

We have been here before, the US Business Roundtable’s 1981 Statement on Corporate Responsibility⁷ states that “the long-term viability of the business sector is linked to its responsibility to the society of which it is a part”. This nearly 40-year-old statement mirrors the 2019 version in that it identifies customers, employees, suppliers, communities and shareholders as “constituencies” (rather than “stakeholders”) and goes further, including “society at large” as another constituency to be considered. The statement includes seven recommendations that directors, officers and managers of corporations should consider. It closes by stating “A corporation’s responsibilities include how the whole business is conducted every day. It must be a thoughtful institution which rises above the bottom line to consider the impact of its action on all, from shareholders to the society at large. Its business activities must make social sense just as its social activities must make business sense”.

Given the above, whilst boards, CEO’s and executives such as those signatories to the 2019 US Business Roundtable statement may talk about valuing and “being here for all” stakeholders, how will we know the underlying intent is not personal or organisational aggrandisement? How will we know which level of consciousness these individuals and corporations are operating from, particularly if we don’t have insight around intent and aren’t aware of the underlying individual beliefs and value systems and corporate culture underpinning the decision making? How will we know if outcomes will be different this time around?

Part of the answer will lie in how any changes are communicated and implemented.

Decisions and actions derived from fear-based, benevolent or strategic levels of consciousness whilst in some cases well-meaning, will be:

• head based – rational, deductive, linear and dualistic – trading one stakeholder off against another, picking winners and losers depending on the situation and challenge at hand.

and/or

• egocentric, tribal or socialised – doing what is best for me, my organisation or what “society” expects – either unwilling or unable to see holistically, to discern and understand the complexity of different stakeholders’ conflicting needs, interests and pressures.

This will result in decisions that whilst presented with an impression of empathy, compassion and respectability at an intentional level, are at worst self-serving and at best socialised; conforming to the latest zeitgeist. Actions will therefore be piecemeal, lacking an understanding of, and not valuing the needs of all stakeholders.

Individuals or organisations operating from these levels of consciousness be they corporations, governments, unions, regulators, superannuation/pension funds, asset managers or the judiciary, risk being stuck in dualistic ways of thinking/behaving and beholden to their view of “the right thing to do”.

Being Different to Do Different

There is another way to be, attainable by individuals and corporations – Conscious Leadership. This leadership is animated by a different force. To shift into this way involves accessing a different perception lens through being connected inside ourselves, heart and mind working in synergy. Grounded in enlightened holism, compassion, humility and kindness, this is leadership that is open and accepting of others’ views and needs and has an intuitive commitment to collective upliftment. 

This does not mean a lessened focus on creating value for shareholders. A conscious leadership approach is not fluffy – consensus-driven and trying to please everyone.  Nor is it an individual or organisation with a ‘winner takes all’ imperative. Finally, it is not solely strategic, adroitly calibrating costs and benefits.

Conscious leaders and corporations transcend all these approaches. They are discerning. They understand the whole, the parts and their interacting complexities. They accept responsibility for their own reactions/behaviours/culture and are open to change. They care about others as much as themselves. Finally, because of their ability to consider a broader range of stakeholder needs and being open to less constrained thinking, conscious leaders are, over time, more likely to be effective in delivering tangibly positive results for their organisation while also uplifting the whole.

The journey of leading in this manner is often messy, sometimes unclear, never perfect and always dynamic.  Nonetheless the general trajectory of what is accomplished is an upwards, positive one. This is when sustainability becomes possible. 

Conclusion

History demonstrates that using regulatory intervention to change behaviours and arrest declining corporate social responsibility, whilst improving things in the short term, does not produce sustained long-term change. This is because the change is externally referenced, driven by the fear of the big stick rather than internally referenced, driven by an organisation (and leader’s) beliefs, values, understandings and intentions. You can have all the press releases, rules, policies, procedures, principles, value statements and laws, however if they are at odds with an individual’s beliefs or values or a corporation’s culture, the individual/corporation will likely find a work around.

Well-meaning motherhood statements such as that released by the US Business Round table whilst appealing to some, will not achieve the desired result.  Moving away from a binary choice of shareholder worth/social responsibility and discerning the right thing to do requires a shift in consciousness by individuals and corporations.

It is only when a shift to conscious leadership occurs that sustainable transformation is possible. Absent this shift in leaders and their corporations, no amount of regulator intervention, shareholder or other activism will achieve balance in shareholder worth and social responsibility.

References

1. Business Roundtable August 19, 2019. Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’. https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans
2. Kohler, A. August 24, 2019. A nail in Friedman’s coffin. The Australian. https://www.theaustralian.com.au/business/a-nail-in-friedmans-coffin-as-americas-leading-companies-revise-their-game-plan/news-story/3601a54ae68455d9e245284eac172482
3. Council of Institutional Investors. 2019.Council of Institutional Investors Responds to Business Roundtable Statement on Corporate Purpose August 19, 2019. https://www.cii.org/aug19_brt_response
4. The Economist August 22, 2019. What companies are for. https://www.economist.com/leaders/2019/08/22/what-companies-are-for
5. Accountable Capitalism Act. https://www.warren.senate.gov/download/accountable-capitalism-act-one-pager
6. Leonardo Davoudi, Christopher McKenna and Rowena Olegario (2018), ‘The historical role of the corporation in society’, Journal of the British Academy, 6(s1): 17–47. DOI https://doi.org/10.5871/jba/006s1.017
7. The Business Roundtable October 1981. Statement on Corporate Responsibility. http://www.ralphgomory.com/wp-content/uploads/2018/05/1981-Business-Roundtable-Statement-on-Corporate-Responsibility-11.pdf