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Business Roundtable moves corporate purpose forward
by Professor Jordi Canals
The Business Roundtable, one of the most influential U.S. business associations, has reignited the debate on the importance of corporate purpose. In its Statement on the Purpose of the Corporation, issued on August 19, 2019, it highlights: “Each of our (company) stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country” (see Statement). The statement is supported by close to 200 CEOs of some of the largest U.S. companies.
In this statement, industry leaders do not forget about shareholders and the need to generate long-term value for them. What is relevant in this document is the importance given to the other stakeholders: customers, employers, suppliers, and communities.
In some ways, this is an approach that has been more dominant within the business community in Continental Europe. The concerns of companies for employees, customers or the protection of the environment have been more prominent than in other parts of the world. The notion of the multi-stakeholder company has been applied more actively in Europe, including large well-known companies such as Unilever, Nestlé, or Schneider, among others. On the contrary, over the past 30 years, the U.S. regulation and business practice have adopted the notion of shareholder primacy, even if there is no legal support to avoid concern for other stakeholders.
Moreover, the board of directors and the top management team have some fiduciary duties not only to shareholders, but to all stakeholders. The long-term development of the company -and long-term value creation- needs to take all of them into account.
While we should welcome this initiative, there are some caveats to keep in mind. The first is that making a multi-stakeholder company work well requires not only a well-defined statement of purpose, but a very competent and committed top management team, which translates that purpose into strategy and execution. It is not easy to define and execute a business model that takes into account the perspectives and interests of such a variety of people. As we have discussed in the Unilever case (see Unilever (2017): The Board of Directors and the CEO in Governance and Strategy, IESE Case, 2019), the level of sophistication of strategy making and implementation are extremely high.
The second is that a statement of purpose is not an excuse for lower profits. Companies need to keep delivering economic value while taking into account other dimensions -including investment and expenses- that are key, such as employee education and health care benefits, total customer service, or environmental impact along the whole value chain. Unless companies that signed that statement work very effectively in this direction, it would be a useless statement.
The third is that the statement may be seen as one more step in the PR process organized by some large companies to offset some negative activities that they carry out by pointing out some concerns on the social impact of companies. While any generalization in this respect is unfair to companies that do a lot of good work, there has been a lot of talk and initiatives related to corporate social responsibility over the past 20 years. Some progress has been achieved, but there are still some areas under the direct responsibility of companies and their boards where companies’ efforts have not been enough. These areas include, among others, poor employee education and training, low wages, complex tax structures to pay lower taxes, anti-trust behavior, and negative environmental impact.
In the case of the U.S., there is an additional caveat. The looming possibility that a 2020 Democratic administration could put additional pressure on companies regarding social issues is real. Senators Elizabeth Warren and Bernie Sanders have recently declared that U.S. companies are making record profits and spending record amounts on share buybacks, while wages have stagnated. Senator Warren has announced some specific measures to reform the business world. The Business Roundtable statement may be seen as a defensive line that CEOs want to draw to protect their companies from more intense scrutiny and tougher regulation in the near future.
Empirical research points out that companies with higher purpose -measured in different ways- eventually generate higher financial returns over long periods of time. Moreover, a good purpose that has an impact on strategy and execution can better engage employees and help articulate a more human view of companies. This is a good step. Nevertheless, this requires the board of directors and senior managers’ commitment to better governance and more competent and human management. Otherwise, the statement could become a useless piece of paper.
Jordi Canals
President
IESE Center for Corporate Governance
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