In his 1962 book Capitalism, the Nobel prize-winning economist Milton Friedman wrote, "There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Friedman's doctrine was enshrined not only in our collective psyche but also in a 1997 statement issued by the most influential lobbying body for U.S. business interests, the Business Roundtable, thereby establishing what is effectively the doctrine of U.S. corporate governance.

The Roundtable periodically issues these statements, which they term "Statements on the Purpose of a Corporation." They act as a compass for CEOs setting organizational 
priorities. 

Shareholders are no longer first -- or second.

Each version of the document since 1997 has endorsed what is called the principle of "shareholder primacy," meaning that corporations exist principally to serve shareholders. 

That trajectory has come under increasing scrutiny of late, as has the relentless focus on quarterly performance and its inevitable tie to CEO compensation incentives. 

However, today Friedman is doing pirouettes in his grave. On August 19th, the Roundtable issued a new statement that is nothing short of radical in its near unanimous endorsement by 181 of its 193 members. (There was no official indication as to the position of the remaining 12 members.)

The statement supersedes all previous statements and outlines a modern standard for corporate responsibility, which focuses on stakeholders rather than shareholders. In fact, on its own website, the Roundtable lists customer, employee, supplier, and community responsibility above shareholder responsibility. 

"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. 
  • Investing in our employees. 
  • Dealing fairly and ethically with our suppliers. 
  • Supporting the communities in which we work. 
  • Generating long-term value for shareholders."

You may be tempted, as are many who are commenting about this on social media, to discount the news as just so much noise to appease increasingly frustrated employees, or perhaps to gain favor with Millennial and Gen-Z customers who have been pushing an agenda of community, social, and environmental responsibility. 

Resetting the corporate compass.

In the past decade corporations have been taken to task for being driven single-mindedly by shareholder returns that sacrifice social, environmental, employment, and broader economic implications. 

In a Fast Company article, Rick Wartzman recounts some of what's led up to that frustration.

"Wages for the majority of the American workforce have been stagnant for 40 years, while their health coverage and retirement security have eroded. At the same time, corporate profits--high by historical standards--are mainly being used to reward shareholders, including CEOs themselves. Their compensation has gone up 940 percent since 1978; typical worker compensation has risen 12 percent during that time, according to the Economic Policy Institute."

Clearly, large corporations have been under increasing scrutiny to balance shareholder responsibility with social responsibility. One of the prime architects of this new direction was JP Morgan Chase CEO Jamie Dimon, who is also chairman of the Roundtable. 

Dimon has claimed, independently of the statement, that large corporations are already doing much of what the new Purpose of the Corporation spells out.

While we can argue the value of the Business Roundtable's statement, there is no doubt it establishes a compass setting that is meant to do three things: 

  1. Message that corporations are listening to changing societal attitudes and redirecting their priorities to keep pace.
  2. Take the lead on self-governance before government imposes regulations that take away that ability in favor of regulation and policy that forces corporations to take on more social responsibility. For example, the Accountable Capitalism Act, put forward by presidential candidate Elizabeth Warren.
  3. Set a course for current and future CEOs that will direct their decision making and leadership role in tomorrow's organizations.

At the end of the day, the signal being sent is that the role of the corporation is changing to meet an evolving social mandate to be more balanced and responsible in its obligations to all of its stakeholders.

When I look at what the Roundtable has done, in that context of a challenging socioeconomic landscape, for which policy is increasingly failing us by not keeping up with the rapid changes in technology, it is clear to me that this a welcome message.   

Of course, drafting a statement is a far cry from taking the actions needed to support this new direction. But 181 CEOs standing behind it is certainly a step in the right direction.

Published on: Aug 19, 2019
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