Organizational Governance Circular Economy

What the CEO ‘Purpose of Business’ Declaration Is — and What It Isn’t

181 CEOs have signed on to broader purpose — skepticism is warranted, but this is potentially a BFD. Now, let’s see if these companies deliver, and help them when they do — and challenge them when they don’t.

By Gil Friend | Published 5 years ago | About a 9 minute read

Image: Skitterphoto/Pixabay

An important provocation

For all the criticism from right and left that the Business Roundtable declaration on the purpose of business has rapidly garnered, this is potentially a very big deal.

Nearly 200 US CEOs have declared that their "Principles of Corporate Governance that … since 1997 has stated that corporations exist principally to serve their shareholders … does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable."

By doing so, they’ve broken with the governing myth of US business (explicitly affirmed by the Roundtable more than 20 years ago, and many times since) that the primary, or for some the only, purpose of business is to maximize return to shareholders.

It had the power of catechism — nine out of 10 people on the street will return the expected answer without hesitation. And yet this “truth” was barely 50 years old, only held dominance for a half century of capitalism’s three-century run.

The founding saint, of course, was Milton Friedman, who fiercely asserted that the “one and only … responsibility of business … [is] to increase its profits.” In contrast, the Business Roundtable and its 181 CEO signatories (with, notably, only one or two fossil fuel companies on board) declared:

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.

Customers. Employees. Suppliers. Communities. Environment. And shareholders (we laid out a similar provocation — and how to fulfill it — in the Declaration of Leadership for Sustainable Business in 2005, offering many of the themes picked up in the Business Roundtable declaration).

Their declaration opens the possibility of a different capitalism, of an historic shift from the mono-capitalism of financial capital to a multi-capitalism —committed to natural, human, social and constructed capital, as well as economic capital.

Its very vagueness opens an opportunity — to figure out what’s needed to make it real; to elevate the global aspirations of the past 50 years, since the first Earth Day, to a new level:

To transform the economy of an entire planet — this planet — within one generation.

Perspectives on purpose

Purpose in business is not a new idea. Management cybernetics guru Stafford Beer declared, “The purpose of a system is what it does.” Bank of America founder AP Giannini said, more than 100 years ago, that the purpose of the bank was not too maximize return to shareholders, but to provide credit to immigrant communities in San Francisco that couldn’t access any: “If we do that well," he reportedly said, "our shareholders will make money.”

"A banker should consider himself a servant of the people, a servant of the community," Giannini said. "There is no fun in working merely for money.” And he built the largest bank in the country.

Christine Arena, in The High Purpose Company, analyzed "extraordinary companies that are driven by purpose — and are making money by being socially responsible, not in spite of it — whereas others simply pretend to be.”

And as I wrote in 2016,

"The 'it’s only business,' profit-above-all focus misses significant, even game-changing, business opportunities. In fact, it literally cannot even see them; they don’t show up on the profit & loss statement, the balance sheet and the other tools by which business steers. It’s not only that we emphasize profit to the exclusion of other things that are valuable to us — life, heath, community — but that we don’t even know how to accurately count even those few things that we acknowledge we value.

"The good news: Getting it right opens a vast arena of opportunity — to build profit in its multiple dimensions, to reduce risk by building agility and resilience in the face of inevitable surprises, to align strategy with purpose — the true purpose of the company itself, and the purpose of the people who constitute it.

"The key: to orient — or reorient — your business to the pole star of purpose; whether the purpose that brought you to it in the first place, or the purpose there for you to discover now."

Walking the talk

The Business Roundtable statement is not the solution to all our ills. Many commentators are skeptical and have challenged it as just talk. Will these companies actually do anything differently? Will they shift their practices, their investments, their lobbying positions, to align? Will they put their policy commitments where their mouths are? Will they both reject and work to end the market-distorting and environment-damaging subsidies and unmonetized externalities that keep the fossil fuel and other toxic industries afloat? Will their boards push past short-termism and embrace strategic duty? Will they pay their taxes?

Will "investing in our employees” include sharing productivity gains and flattening pay scales?

Will “supporting the communities in which we work” include ending, not reducing, toxic emissions? Will it include the living world? Will they be transparent and specific re the actions and impacts?

Will protecting the environment include investing in the regenerative capacity of our living systems/economy that undergird the financial economy and all we hold dear?

Bold declarations can be a distraction and a cover, an attempt to divert the rising skepticism about modern capitalism and the behavior of global corporations, both around the world and in US monetary/political systems. But they can also be a banner, provide a rallying cry — a touchstone against which actions can be measured and the declarers held to account.

Because "walking the talk" begins with the talk. The statement is only words, and consistent action is needed. But words set the context for the actions people choose. We create worlds as we speak, and open or close possibilities for action. I hear these words as opening possibility.

Now, let’s see if these companies deliver, and help them when they do — and challenge them when they don’t.

Some have questioned the motives of these CEOs and criticized their declaration as just a defensive reaction to the growing challenges about capitalism, exemplified by the Bernie Sanders presidential campaign. That is doubtless one of the factors, and least for some of these leaders-who-follow.

But just as the Sanders campaign has almost singlehandedly shifted the frame of acceptable political discussion in United States, this declaration has in a single moment shifted the frame of business discussion, perhaps in the world. “The purpose of business” is on the table, and that’s a good and powerful thing.

I’m certain we will see both unevenness and disappointment in how the rubber meets the road. But isn’t that true of everything? I predict a classic Gaussian distribution of rubber meeting the road — or not. Some signatories will do nothing, some the merest of lip service. Most will make largely superficial, wholly inadequate moves. Some will grapple with the challenge, make serious efforts, and take meaningful steps. A few will commit to the depth, power and potential of the declaration, and begin transform.

I’m inclined to place my investments on the latter group — and short the first group.

What to do? Put your money where your purpose is.

The CEOs themselves seem to agree, when they say, "we urge leading investors to support companies that build long-term value by investing in their employees and communities." Sort of.

But for that to work, the signatory companies will need to get specific, and get transparent, about what actions will they take, chosen by what criteria, delivering what results.

I’ve worked closely with leading companies looking for ways to “make money while making sense.” I’m always willing to give both companies and people the benefit of the doubt, and judge them by their present and future as well as their past. But in the words of that noted radical, Ronald Reagan, "Trust but verify.” Back your good words with deeds.

This presents a challenge to asset managers as well as the companies we all invest in, work for, and buy from. There are well-established mechanisms for shareholder accountability, not for accountability to the other stakeholders (other than boycotts, labor action and the like). “Accountability to everyone means accountability to no one,” the Council of Institutional Investors rightly observed, in their rapid criticism of the Business Roundtable for putting shareholders last, seeing them “simply as providers of capital rather than as owners.”

To actually provide accountability to everyone, companies will need to provide a clear line of sight — to investors, customers and employees across their organizations, at every level — connecting purpose, actions, results and impacts.

So, to the signatories, to the thousands of CEOs who have not yet signed on, to their boards, shareholders and stakeholders — that is, to all of us — I offer three challenges:

Know that even though incremental steps are essential in large, complex undertakings, it wasn’t incrementalism that got humanity to the moon and back.

So, ask: “Are my goals sufficient to the challenges, risks and opportunities we face? Is ‘sustainability’ a worthy enough goal, when the challenge perhaps is to nurture the regenerative capacity of the Gaian system on which all that we value depends?”

Know that the purpose of your business is not, as Friedman said, to maximize returns to capital. It is, as Giannini said, to do what the business is there to do.

So, ask: “What business are we really in? What am I really here to do?"

Know that every time a company makes a capital investment or commits to a supplier, launches a product or makes an offer in the marketplace; every time we buy a meal or a car or a t-shirt; every time we slap a dollar or Euro, yuan or dinar on the counter — we’re voting for a future. Not every four years. Every day.

So, ask: “What future am I voting for?”