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The Changing Role of Business

  • 27 Sep 2019
  • 9 minute read
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A Comment on the Recent U.S. Business Roundtable Statement

By Chris Laszlo and Robert Widing

On August 19, 2019, 181 CEOs who are members of the U.S. Business Roundtable (BRT) issued a statement on the purpose of a corporation. Its opening sentence speaks to each person’s right to lead a life of meaning and dignity. It goes on to acknowledge the central importance of stakeholders, including customers, employees, suppliers, local communities and the natural environment, all of which are mentioned before any reference is made to shareholders.

Compare this statement to the one issued by the BRT in 1997 in which the paramount duty of management was to the corporation’s shareholders, while the interests of all other stakeholders were seen as only derivative of this duty. Such single-minded purpose echoed an even earlier New York Times editorial, written by Nobel-prize winning economist Milton Friedman in 1970, stating that the only social responsibility of business was to make a profit.

What does such an about-face statement mean for America and the world?
We argue that replacing “shareholder primacy” with a stakeholder-centric view of business is a historic milestone. It restores the corporation to a healthier and more relevant place in society, one originally envisaged by Adam Smith in the Wealth of Nations, in which he wrote that “the interests of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.” In Smith’s lifetime, shareholder capitalism occupied only a relatively small part of the way business was done. Family workshops, tradesmen, merchants, guilds, and village markets served the communities in which they lived by concentrating on end-benefits such as feeding, clothing, and providing tools of a trade. In that era, local producers were much more likely to promote the interests of consumers than to focus on disembodied shareholder profits, while large mercantile businesses worked to constrain trade and capture monopolistic rents.

Given how important business has become in our lives — from the products and services we consume to the paycheck we earn and the wellbeing (or not) we experience in the workplace — a sweeping revision in its purpose has the potential to touch us all. Since the BRT is the closest we have to a voice for Corporate America, we might do well to listen to it.

The skeptics view
There are compelling reasons, of course, to see the current BRT statement as hollow words or as a defensive ploy against media attacks on, for example, the growing gap between CEO compensation and average employee pay. A World Resource Institute blog noted that many of the companies whose CEOs signed the statement have been talking about stakeholder commitment for decades. It concluded that “the only way this statement won’t be just another lofty pronouncement is if CEOs bolster the announcement and back up their aspirations with big actions.”

We do need to see substantial reform in areas such as shareholder rights and the criteria for measuring corporate performance as well as executive compensation. We need to see much greater growth in new legal entities, such as B Corporations, designed to serve and protect the interests of stakeholders. Until such reforms take place, there will be a large gap between words and actions.

An illustration of the gap between words and actions arose on August 26, one week after the BRT statement, when a judge awarded Oklahoma $572 million after finding the state successfully proved Johnson & Johnson created a public nuisance by aggressively pushing addictive drugs to doctors. Oklahoma Attorney General Mike Hunter directly addressed J&J’s CEO, Alex Gorsky, citing the company’s participation in the BRT statement. Alex Gorsky, who is Chair of the Business Roundtable Corporate Governance Committee and who took a lead in drafting the BRT statement, had gone on record that week to say that “this new [Business Roundtable] statement better reflects the way corporations can and should operate today. It affirms the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.” In the courtroom on August 26th, Attorney General Hunter challenged Gorsky to “put his money where his mouth is and open his checkbook to pay this judgment.”

Yet even without proof that the signatory companies are walking the talk of stakeholder value, two factors make the current BRT statement a landmark achievement. The first is that it reflects new market realities in a radically more complex world in which rising expectations and increased transparency are giving many stakeholders unprecedented influence on business outcomes.

The second concerns the power of words. Dominant narratives shape the way we think, the way we educate young people, and how we behave. As our colleague Ron Fry says, words create worlds. There is enormous power in the dominant story we tell ourselves about the role of business. On this score the BRT statement offers a radically different narrative about the role of business for the first time in nearly 50 years.

Factor #1: The new social responsibilities of business
Social welfare, community wellbeing, and national security were once seen as the exclusive domains of government and civil society. The business of business was to make money. To each sector its own sphere of operation. This is no longer true today. Corporations are now on the hook for everything from climate change and income equality to gun rights and community health. At the same time, many national governments are disengaging from their responsibilities on social and global issues, whether these be wildfires in the Amazon, mosquito-borne epidemics, refugee crises at their borders, mass shootings, or opioid epidemics. Such disengagement by government is making the role of business, often in collaboration with NGOs, that much more critical.

Consider the last G7 meeting held in Paris. When President Trump skipped the final-day of meetings on climate change, U.N. Secretary-General António Guterres told reporters that he believes American businesses will take action to protect against climate change even if Trump does not. Guterres optimistically added that it is “the business community and local authorities that will determine the level of emissions and the contribution of the country to the climate action.” A Fortune magazine piece reinforced this blurring of roles between government and business. “At a time when U.S. political leadership is becoming increasingly polarized, having companies more consciously focusing their powers on solving society’s biggest problems is a good development.”

The age of social media and rising stakeholder demands are forcing chief executives into unknown territory. While corporate social responsibility (CSR) was once focused on doing less harm, companies today are increasingly expected to provide solutions of public interest by creating disruptive innovations that not only are profitable but also benefit society and the environment. Examples include industrial facilities and buildings that give back more clean energy than they use; companies that design products that leave behind zero waste — only “waste-as-food” that becomes a cost-saving input into the supply chains of other industries; open-hiring practices that offer ‘second-chance’ employment opportunities to nonviolent felons; bottom-of-the-pyramid enterprises that are helping eradicate extreme poverty; and regenerative agriculture techniques are being used to increase biodiversity, enrich soils, improve watersheds, and enhance ecosystem services. Outdoor apparel leader Patagonia, a USD $1 Billion company whose sales have quadrupled over the last decade, recently revised its mission statement to read: “We’re in business to save the planet.”

None of these examples is meant to suggest that paying attention to shareholder returns is no longer important. In order to survive and thrive, companies will always need to attract investor capital by delivering market-competitive risk-adjusted returns. A better interpretation of the BRT statement is that those businesses that create value for stakeholders and the natural environment now have the opportunity to create even more value for their customers and shareholders. Doing the right thing for stakeholders is simply smart business. For growing evidence of “Doing well by Doing Good,” see the over 2,000 stories of business innovations for good published on AIM2Flourish.com by students around the world. The needs and wants of stakeholders such as employees, communities, and environmental watchdogs are now part of the corporate landscape like never before, and cannot be ignored.

Factor #2: The power of narrative
The narrative we hold about the role of business in society is critical to how we think and act at work. On this score the BRT statement can be seen as a narrative revolution for the first time in nearly 50 years.

The “old” shareholder primacy narrative

The dominant narrative of the past half century extols competition, profit maximization, free markets, and limited government. Its proponents view economic growth (GDP) and consumerism as the defining aspects of society. For example, nature exists largely as a resource for human consumption. Corporations have the same legal rights as those accorded to people.
The development and dissemination of this narrative was shaped by a group of conservative economists and pro-business leaders — Friedrich Hayek, Frank Knight, Karl Popper, Ludwig von Mises, George Stigler and Milton Friedman — who founded the Mont Pelerin Society (MPS) in the wake of WWII to defend freedom in the face of what they saw as rising totalitarianism. The work of the MPS later led to the 1971 Powell Memorandum written as a blueprint for the American Chamber of Commerce to support a concerted campaign to institutionalize neo-liberalism and the architecture needed to ensure its widespread adoption. The Powell Memo recommended specific ways to influence (1) college campuses by selectively promoting certain faculty members and favoring text books deemed friendly to the cause, (2) the political election process by funding politicians deemed supportive, (3) the political and legal infrastructure of neoliberalism by creating think-tanks such as the Heritage Foundation, and (4) the social and religious allies most likely to evangelize its agenda.

Today’s dominant narrative of shareholder primacy pervades the vast majority of business schools. Its ideas have been so widely disseminated into our culture, into textbooks and economic thinking generally, and the news cycle, that we hardly recognize it as a story we tell ourselves. Its ideas also largely define the agendas for business, government policy, and higher education.

Adam Smith condemned the sole focus on producers and their interests when he noted who would be responsible for perverting priorities in the system of his day: “It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to.” The potentially undesirable outcomes associated with a sole focus on shareholder value are why Smith attacked the erroneous notion of placing producer interests ahead of those of the consumer. Indeed, the BRT’s recent statement comes full circle by correcting an imbalance Smith observed at the dawn of capitalism.

The “new” stakeholder-centric story

The recent BRT statement can be viewed as the recognition of a new narrative that is already emerging but has not yet been well articulated or made visible. Since Edward Freeman’s Strategic Management: A Stakeholder Approach was first published in 1984, a stakeholder-centric narrative has been slowly taking form. Recent efforts include the U.N. Sustainable Development Goals and their implications for business as well as movements such as Conscious Capitalism. Here we choose just one illustrative vision among many that is intended to displace the shareholder primacy narrative of neo-liberalism.

True freedom and success depend on creating a world where individuals and groups flourish and we all prosper… To thrive, businesses and society must pivot toward a new purpose: shared well-being on a healthy planet. (draft text from Leading for Wellbeing, 2017).

At Case Western Reserve University’s Weatherhead School of Management, the mission is “Developing transformational ideas and outstanding leaders for the advancement of business and society.” This mission takes its highest form at the Fowler Center for Business as an Agent of World Benefit, whose own mission within the School is to advance the scholarship and practice of flourishing enterprise.

Flourishing Enterprise is about people being inspired every day and bringing their whole selves to work; it’s about innovation arising from everywhere; and it’s about realizing remarkable relationship value with stakeholders — customers, employees, communities, and the biosphere — to create unprecedented, enduring business advantage. — David Cooperrider

So which will it be? As an institution, will business become an agent of world benefit capable of advancing flourishing and prosperity? Or will it return to its ways on enriching shareholders at any cost to society? In the short term, seeming conflicts of interest may exist between shareholders and stakeholders, although even these can be often overcome through innovation, but in the fullness of time the BRT statement recognizes that the interests of a for-profit company will be best advanced by explicitly serving the interests of its key stakeholders.

These are some of the questions we face at this pivotal time in history.


Chris Laszlo is Professor of Organizational Behavior at Case Western Reserve University’s Weatherhead School of Management. Chris.Laszlo@case.edu

Robert Widing is Professor of Marketing and former Dean at Case Western Reserve University’s Weatherhead School of Management. Rob.Widing@case.edu

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