Top CEOs redefine the purpose of a corporation with sustainability key

Written by

Tim Greenhalgh

Posted on

September 18, 2019

The move by around 200 of the world’s top CEOs to redefine what makes a corporation tick has sent ripples throughout the business world.

While the language of the Business Roundtable’s “Statement on the Purpose of a Corporation” is hardly fierce, the content is more than a little shocking.

That’s because, for the first time, US corporate leaders have moved away from the classical economic view, enshrined in Milton Friedman’s theories, that public companies benefit the most people by delivering increased value to their shareholders – and so have a legal and responsibility to do solely that.

The Business Roundtable has been active as a Washington pressure group for nearly 50 years and since 1997 has advocated the primacy of shareholder value as the purpose for corporations.

The new statement supercedes previous public declarations on corporate governance, and “outlines a modern standard for corporate responsibility”. It commits the corporations led by the 181 CEOS “to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders”.

The choice of five stakeholder groups identified by the CEOs signals a desire for a broader perspective while the focus on communities, in particular, makes it clear that sustainable practises which protect the environment are central to future corporate governance.

The statement briefly fleshes out the new intention:

  • Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
  • Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
  • Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
  • Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
  • Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

The move by the Business Roundtable can be seen as a new and formal response to rapidly growing fears and very demonstrative actions about the climate crisis, as well as concerns over ethical supply chains, value for customers and long-term growth.

It can be seen as a response to a growing mass of data on consumer preferences and attitudes, particularly among the younger age groups –Gen Z and Millennials – that indicates more concern on ethical business behaviour and environmental issues. The research also shows that these groups of workers want to find an employer who reflects their environmental, ethical and social values.

CEO signatories to the statement include American Airlines’ Doug Parker, Amazon’s Jeff Bezos, Apple’s Tim Cook, and David Solomon of Goldman Sachs.

It says:

“America’s economic model, which is based on freedom, liberty and other enduring principles of our democracy, has raised standards of living for generations, while promoting competition, consumer choice and innovation. America’s businesses have been a critical engine to its success.

“Yet we know that many Americans are struggling. Too often hard work is not rewarded, and not enough is being done for workers to adjust to the rapid pace of change in the economy. If companies fail to recognise that the success of our system is dependent on inclusive long-term growth, many will raise legitimate questions about the role of large employers in our society.”

Not everyone was happy. The Council of Institutional Investors, representing more than 100 employee benefit plans, endowments, and foundations with some $4 trillion of assets was strident in its criticism. It argued forcefully that the Business Roundtable was actually working to diminish shareholder rights.

It said:

“If ‘stakeholder governance’ and ‘sustainability’ become hiding places for poor management, or for stalling needed change, the economy more generally will lose out.”

The CEO group, however, did underline that shareholders remained a key focus, despite the shift I attitudes and acknowledged the essential part they play in corporate development through investment.

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