Corporates 2.0: Profit with a purpose

The corporation is more than just about sustainable production. It is about companies taking into account the social order in which they operate

The line it is drawn/the curse it is cast./The slow one now/will later be fast./As the present now/will later be past./The order is rapidly fadin'/And the first one now/will later be last./For the times they are a-changin'.  Bob Dylan

Twenty-two years after first committing itself to Milton Friedman’s mantra that the principal objective of a business enterprise is to generate economic returns to its owners, the US Business Roundtable has now given corporations a new purpose. In a statement in August, the Roundtable stated that purpose of the corporation is no longer maximising returns to shareholders, rather it is a commitment to all shareholders. This puts shareholders on par with employees, customers, suppliers and communities in which businesses operate. It is useful to remember this is how it was till the Business Roundtable exhorted corporates to embrace the profit motive.
 

The reason to bring this up is that the Business Roundtable has an oversized influence on US businesses — close to 200 US CEOs from Jamie Dimon at JP Morgan to Tim Cook at Apple are members — and therefore on companies across the globe. This statement has the potential to upend the roles and responsibilities of the board and what roles corporates see for themselves. Issues that are placed on the board agenda and the basis of decision making, is all set to change. Will the duty of care be revisited? Will the Revlon Rules be jettisoned, and the board charged with preserving the company, post its sale and not just selling it to the highest bidder? It's too early to say, but change you 

can expect.

The US Business Roundtable statement on the purpose of a corporation: 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, who 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.

It is probably just a coincidence, but still noteworthy, that just around the time the Business Roundtable first painted shareholders sitting at the high table, the UN adopted its Millennial Development Goals, which in 2015 gave way to Sustainable Development Goals. These asked that the corporate sector walk lockstep with governments and broaden their agenda by focussing on hunger, health, gender, sustainability and 13 other goals. Clearly, the pressure to redefine the purpose of a corporation began almost as soon as it was first enunciated.

In parallel, capitalism too tried to soften itself around the edge, and there was talk of shared value capitalism, conscious capitalism, share value capitalism or development with a human face. And with this, the shift to corporates larger role in society.

How might the firms change? Clearly, how they report on their activities will change. The thrust towards integrated reporting is the first step towards this. And as firms change their time horizon, investors need to do so too They will need shift focus away from quarterly results, but the need to look beyond numbers is critical for the long term. Finally, regulations need to recognise this change. Interestingly, the Companies Act 2013 spoke of a stakeholder engagement committee, rather than a shareholder grievance committee, but the committee is floundering to find a meaningful role for itself.

This shift from shareholder to stakeholder is easier said than done. A recent survey by Stanford Business School of the CEOs and CFOs of S&P 1500 companies finds just 5 per cent saying that stakeholders are more important than shareholders. The rest believe shareholder interests are significantly more important (23 per cent), only slightly more (32 per cent), or equally important (40 per cent). Opinion was even divided on who or what the company needs to focus on — community, employees, trade unions etc.

This last is an area where one of the few criticisms has come from. The powerful US based Council of Institutional Investors has said that accountability to everyone means accountability to no one. This is what will trouble academia — maximising many functions rarely has an elegant solution. But this is not about variables. Repurposing the role of the corporation is more than just about sustainable production — ensuring that the area around the factory has emissions well within standards, water is cleaned before it is discharged, raw materials used are biodegradable. That suppliers and employees are respected and rightfully rewarded. 

It is about companies taking into account the social order in which they operate.

The author is with Institutional Investor Advisory Services