The Future Purpose of Corporations

Below is a short article from As You Sow that discusses how CEOs envision the future of corporations. Archaic wisdom that corporations exist solely for short-term shareholder profits is indeed changing. Increasingly, although not fast enough, corporate leaders are accepting that the focus needs to be on long-term value of ALL stakeholders, including employees, customers and the environment. It is encouraging to see that this ethic does not just exist in the eyes of hopeful world citizens but is also supported by corporate heads of Amazon, Apple, Bank of America, Coca Cola and Ford. Read more below for the details of this recent roundtable and some excerpts from the 2019 Statement on the Purpose of a Corporation.” See signatories here (scroll down ¼ page).

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In a 1970 Times magazine article, economist Milton Friedman stated that corporations exist solely to serve their shareholders and must maximize shareholder financial returns to the exclusion of all else. Moreover, he maintained, companies that did adopt "responsible" attitudes would be faced with more binding constraints than companies that did not, rendering them less competitive. This has been the dominant interpretation of capitalism for nearly 50 years. 

Recently, nearly 200 CEOs of the world’s largest corporations did an about-face with an updated “Statement on the Purpose of a Corporation” from the Business Roundtable. This revised statement champions investing in employees, cleaning up supply chains, and respecting the communicates in which they work (including the environment). 

“If companies fail to recognize 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.”

Shareholders alarmed by growing global social and environmental risks have been vociferously raising these issues — and it is a welcome sight indeed to see that the Business Roundtable has been listening.

Stakeholder-centric capitalism is not a new or radical idea. In fact, according to a recent Forbes article, there are more than 10,000 businesses operating as benefit corporations with stakeholder-centric governance baked into their by-laws. Studies increasingly demonstrate something we have known all along — that a corporation will benefit in a broad range of ways by considering not only its shareholders, but also the company’s impact on its full range of stakeholders. 

After the new statement that echoes this concept, the question is: will action follow? 

  • The new Statement of Purpose speaks of “investing in employees.” We expect to see corporations treating all employees as partners in the future of the company; inviting employee representatives onto the board; reducing executive compensation and raising minimum wages to balance pay ratios; ensuring pay and promotion equality for all protected classes; and listening to employees to increase overall company value and board diversity. 

  • The new statement also speaks to “delivering value to customers.” Treating customers poorly by making defective products or using toxic materials and ingredients may save money in the short term, but ends in value destruction as the trusted company brand is associated with these practices and customers flee to safer and better competing brands. Safe and healthy products win a customer’s loyalty time and again.

  • The statement also discusses “dealing fairly and ethically with our suppliers.” Allowing slavery in supply chains, not paying living wages by suppliers, purchasing from companies that expose their workers to environmental toxicity, and cruel working conditions are practices that must end.

  • The new statement acknowledges the goal of “supporting the communities in which we work.” We are pleased to see that the Business Roundtable understands that polluting rivers, creating toxic air, harming the climate, and depleting natural resources eventually ends in litigation, harms health, damages the brand, reduces environmental resilience, reduces companies’ social license to operate, and in the end can raise existential risks to the planet. Investment in cleaner operations make sense when you’re focused on long-term value.

A recent New York Times article written by an ex-corporate lawyer sums up the problem that this new Statement of Purpose has hopefully addressed:

Under the current system “…corporate executives are legally obligated to act like sociopaths ...

The corporate entity is obligated to care only about itself and to define what is good as what makes it more money. "Pretty close to a textbook case of antisocial personality disorder.”

The new statement, if truly adopted into the bylaws of all corporations will enable the humanity of the people who run these companies to be unshackled from the legal obligation to think only of their most base profit motives.

Shareholders are ready to put these words into action for the benefit of all. Together we can reshape the definition of capitalism to accommodate all stakeholders, including those that have been increasingly left behind to create a safe, just, and sustainable world.