Business Roundtable Statement on the Purpose of a Corporation

In August 2019, the Business Roundtable, an organisation comprising the CEOs of major US companies, released a new statement on the Purpose of a Corporation. The statement stressed a company’s responsibility to all stakeholders, not just shareholders. In contrast, the prior statement, which had been in place since 1997, claimed that a company’s primary responsibility is to shareholders.

The revised statement attracted substantial attention. There are at least three main reactions:

A.     It’s positive and revolutionary. It’s a rejection of the “Friedman doctrine” which argued that companies should focus entirely on maximising profits and ignore stakeholders. 

B.     It’s a backwards step. Giving stakeholders equal priority to shareholders will be at the expense of profits, ultimately hurting investors – savers, pension funds and insurance companies. 

C.    It’s greenwashing. The signatories may not truly believe that companies have a responsibility towards wider society, but released the statement to pre-empt regulation. 

What does Pieconomics – the theme of the book – have to say about the statement? Chapter 2 stresses that the “Friedman doctrine” that “the social responsibility of business is to increase profits” is much more nuanced than commonly criticised. Friedman acknowledged that a company can only be profitable in the long-term if takes its responsibility towards stakeholders seriously. Thus, the prior statement that focused on shareholder primacy did not ignore stakeholders (contrary to the views of Group A); the new statement that stresses a responsibility towards stakeholders need not be at the expense of profits (contrary to the fears of Group B). 

Despite this, the revised statement still represents an important development. Under the correct interpretation of Friedman, companies should invest in stakeholders but only instrumentally: if they can predict that this investment will boost long-term profits. The revised statement, which gives stakeholders equal priority, argues that companies should invest in stakeholders intrinsically: even if they cannot predict an impact on profits. Indeed, it’s fully consistent with Pieconomics – the view that companies should first seek to “grow the pie” (generate social value) and see higher profits (a larger slice of the pie) as a by-product of doing so, rather than the end goal. As argued in Chapter 2, and evidenced in Chapter 4, this approach may actually generate more profits than one that targets profits directly – because it frees up companies to undertake investments that ultimately become successful, but the success could have never been predicted at the outset (e.g. investing in an exploratory drug). Thus, addressing Group C, it’s in CEOs’ interest to genuinely implement the new statement, rather than use it as a way to pre-empt regulation. Responsible business is not simply “worthy”; it’s good business sense.

The big challenge, of course, is to put it into practice. In reality, companies can’t give equal priority to all stakeholders. They face tricky decisions which involve trade-offs. For example, should a company close down a polluting plant? Doing so will help the environment, but make workers redundant. As explored in Chapter 8, companies need to have a clear, targeted purpose statement that acknowledges these trade-offs and recognises which stakeholders are “first among equals”. Having a statement which prioritises everyone may be good PR, but offers little practical guidance to navigate these trade-offs. The Business Roundtable correctly statement does not give a priority ordering, since it depends on each company’s individual circumstances – it stresses “each of our individual companies serves its own corporate purpose.”

Moreover, understanding which stakeholders are particularly material, rather than investing in all stakeholders indiscriminately, is critical to a stakeholder-focused approach generating long-term value for investors, addressing the concerns of Group B. Taking stakeholders seriously should not be a license to be unaccountable to shareholders. The tragic collapse of UK travel company Thomas Cook shows how a failure to generate profit hurts all stakeholders by endangering the firm’s viability.

Leave a Reply

Your email address will not be published. Required fields are marked *