Purpose of a corporation – PR or needed change? - Activate World

Purpose of a corporation – PR or needed change?

The Business Roundtable, a lobbying group made up of the nation’s leading CEOs, recently announced they are the changing the definition of the “purpose of a corporation.”  Rather than focusing solely on delivering value for shareholders, the new edict is that a corporation’s actions benefit all stakeholders, including shareholders, as well as its employees, suppliers, customers, and communities. 

Lunchtime Conversations: 

  • In 1970 Milton Friedman wrote, “The discussions of the ‘social responsibilities of business’ are notable for their analytical looseness and lack of rigor.” What metrics would indicate stakeholder value success?  
  • How can eliminating shareholder value as the primary focus begin to address pay inequities? As CEO, what steps would you take?
  • How can the Business Roundtable adopt the B Corporation’s challenge to use their stakeholder model – sooner rather than later? 

Noteworthy: 

  • The Business Roundtable’s decision received major media coverage as it significantly changed the capitalist goal of maximizing profits at any cost, to a more encompassing one of advancing the well-being of everything a company’s actions affects. 
  • On Twitter, B Corps invited the Business Roundtable to work together to achieve their newly announced stakeholder values. 
  • Since the definition of the “purpose of a corporation” is not legally binding, the announcement may be just good PR for the Business Roundtable.  

Storyline:  

There is an existing group of thousands of companies known as B Corporations that already do what the Business Roundtable says it will now address. In an op-ed in Fast Company, the founders of the B Corporation movement explain they have long committed to delivering value to all of their stakeholders, and they’ve pushed for legislation that legally requires them to do so.  

The B Corporation also took out a full-page ad in Sunday’s edition of the New York Times  imploring Business Roundtable companies to join its B Corporation movement and get certified by them, which would mean that the Business Roundtable’s new “purpose of a corporation” definition would need to be made legally binding. 

It’s unclear if the Business Roundtable will respond to the B Corporation’s ad. It’s clearly a direct challenge to the world’s most powerful companies, essentially saying, “your promises are nice, but it’s time to put up or shut up.” 

There has been significant pushback on the new definition of “the purpose of a corporation.”  

Some believe there is a distinct possibility that the CEOs who endorsed this modern corporate “manifesto,” were trying to appease the current wave of progressive political voices. Or, perhaps it was an attempt to seek relief or approval from activist investors who constantly agitate public companies through shareholder meeting protests.  

In the Wall Street Journal, Michael Bordo, a Rutgers University economics professor and former student of Milton Friedman, said the Business Roundtable’s new stance would have corporate executives behave like regulators. “That’s not what business is; that’s what government is,” he said. “I still think Friedman was right.” 

David Bahnsen in the National Review said “The reality of competition in a free marketplace is a constant check on “runaway profits,” as the need to continually innovate, compete, and produce forces an equilibrium of accountability and profit-seeking activities, all the while incentivizing optimal treatment of all company stakeholders.” 

Sources: Fast CompanyFoundation for Economic EducationNational ReviewThe Wall Street Journal 

Photo by Adeolu Eletu on Unsplash