It has long been accepted that the number one purpose of corporations is to make money for it shareholders. Nobel economist Milton Friedman first wrote about this mission in 1970, coining what is known as as the Friedman doctrine, saying, "there is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits ..."
For years, this philosophy has been espoused by most businesses based in capitalist economies, and it is indicterined in every newly-minted MBAs (including myself). In 1997, an influential thinktank of 200 CEOs from the largest and most influential companies in the US called the Business Roundtable (BRT), formalized this philosophy with a definition of corporate purpose as "The paramount duty of management and of boards of directors is to the corporation's stockholders. The interests of other stakeholders are relevant as a derivative of the duty to stockholders."
In other words, the number one rule of business is to increase shareholder wealth.
Even while I was in school, many challenged this mantra with valid arguments and debates about the fiduciary responsibility of management and board of directors to other stakeholders of the business. And while many of these arguments were strong and sound, the truth remained that without investors -- and this is especially true for publicly traded companies -- there is no business.
More important, while corporations can have other missions, if their missions deflect from making money or otherwise increasing shareholder value, investors can easily remove their money and put it in other vehicles that will perform better (make more money).
With social media and a rise in consumer influence on business, however, times are changing. As reported at Forbes.com, the BRT announced recently a new purpose for corporations by issuing a brief, 300 word statement (included below) meant to lead the actions of other companies.
In the statement, the BRT mentions creating value for customers, investing in employees, fostering diversity and inclusion, dealing fairly and ethically with suppliers, supporting the communities in which we work, protect the environment -- all before ever mentioning "shareholders," which does not happen until the last paragraph.
Of course, this new statement of purpose is meant to be a guideline, but as almost 200 of the top corporations around the US are formally prioritizing the needs of all stakeholders over the singular need of shareholders, we will see a lot of changes.
For starters, companies can (and in my opinion should) continue to take a larger role in societal needs, leading from the front. As our politics continues to ooze to the edges, both right and left, corporations for many represent a centrist position that many US citizens crave. By formally embracing other stakeholders, corporations can now more comfortably make decisions that can have a positive influence on society while not worrying about profits alone.
This is explained and discussed nicely with Dan Primack of Axios and Fortune CEO and President, Alan Murray at the Axios Pro Rata podcast.
This is also important for employees and students of business. While making money is important -- it is of course actually crucial for business -- so too are important matters of employees, vendors, and community, just to name a few. Moreover, as our culture continues to put a premium on products and services from companies that we respect and admire, this strategy could ultimately build loyalty and, in the end, help increase value.
Statement on the Purpose of a Corporation
Published by the Business Roundtable, Aug. 19, 2019
Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment, and economic opportunity for all.
Businesses play a vital role in the economy by creating jobs, fostering innovation, and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications, and other services that underpin economic growth.
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
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. [They] provide the capital that allows companies to invest, grow, and innovate. We are committed to transparency and effective engagement with shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.