What Is the Purpose of a Company?
When I entered the business world in the early 1990’s, my first job was with the global management consulting firm Booz-Allen & Hamilton. I accepted that role coming from a teaching position at Harvard University, where I had completed my PhD in English Literature. I had a great deal of catching up to do on the way companies and corporate life work, and I was a careful study. Early on in my new career I attended a forum whose participants were senior executives from major companies, and my notebook was ready. At one point, one of the participants, a CFO, vociferously exclaimed “the only purpose of a company is to create shareholder value!” Heads nodded around the table, and I diligently copied that phrase down, certain that I’d captured a truth as essential as Sir Isaac Newton’s three Laws of Motion.
As you’ve no doubt seen from the headlines, last week 181 major company CEOs who call themselves “The Business Roundtable” got together to talk about the role, purpose, and impact of companies in and on contemporary society. Their main agenda item, it turns out, was to reconsider that definitive truth as stated by the CFO above. Cynics will say the reason for this meeting was merely to mollify the media and the general public on hot button issues ranging from diversity and inclusion, to environmental impact, to the ills caused by some products and services (e.g., guns, opioids, sub-prime mortgages). Optimists might regard the gathering as a sign that corporate leaders are finally catching up with the vast changes in society over the last generation, and are at last beginning to think differently about their companies, and business itself, in a manner more befitting the challenges and realities of the 21st century.
A Shift in Mindset?
Last week’s front-page article in The New York Times describes how the Business Roundtable, led by well-known leaders such as Tim Cook (Apple), Brian Moynihan (Bank of American), Mary Barra (General Motors), Jamie Dimon (JP Morgan Chase), and Jeff Bezos (Amazon), discussed topics such as the nature of a company’s relationship with its employees (compensation, training, career opportunities) and what a company’s social responsibilities should be (public health, climate change, income equality). Conspicuously missing from the participant list were leaders of the major technology and social media companies such as Facebook, Alphabet/Google, and LinkedIn—a notable absence, since these companies are creating threats, risks, and unintended consequences that are escalating much more quickly than, and will be much more challenging to address and solve than, issues like carbon impact, working conditions, or LGBTQ policies.
At any rate, the noteworthy output from the Roundtable meeting, allegedly reflecting the changing perceptions of these leaders, was the issuance of a “Statement on the Purpose of a Corporation.” This Statement effectively reverses the group’s longstanding position, as articulated since 1997 in its Principles of Corporate Governance, that “corporations exist principally to serve their shareholders.” The revised Statement can be read in its entirely on the Business Roundtable Website, and the major shift in point of view is the assertion that a company must balance the needs of and commitments to all stakeholders—including customers, employees, suppliers, and local communities—and not just its shareholders.
Perhaps the most influential personage in the Roundtable meeting, even though he couldn’t attend because he is deceased, was Milton Friedman. As an engaging recent podcast by Andrew Ross Sorkin explains, the University of Chicago Nobel Prize-winning economist catalyzed a shift to the primacy of shareholder value with his arguments in the 1960’s that the sole purpose of a company is to generate profit. However, it’s unlikely that Friedman would agree with many of the businesspeople who today claim to be his strongest disciples—and he might find activist investors particularly troubling. In his 1962 collection of essays Capitalism and Freedom, Friedman argued: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game [emphasis added], which is to say, engages in open and free competition without deception or fraud.” At no point in that essay, or anywhere else in his writings that I have seen, does Friedman add “at any cost” or “no matter the negative impact on other stakeholders." Indeed, Friedman believed that corporate executives should behave in an ethical manner and he never advocated a short-term approach to growth or profitability.
But It’s Actually About Leadership, not Policies or Politics
To be clear, the Business Roundtable’s revised statement does not signal that these leaders are considering rejecting capitalism. The second sentence of their revised Statement reads: “We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.” Of course, that sentence (and the Roundtable’s Statement overall) reads as optimistic but not exactly pragmatic or action-oriented. How does any company put into play this kind of capitalism? An article in the most recent issue of The Economist warns against a move toward “collective capitalism” or the impetus for business leaders to address moral or political issues head-on—and with my co-author John Hillen I’ve made that exact argument here on forbes.com. Neither companies, nor individual CEOs acting on behalf of their companies, should fall into the trap of trying to use their businesses to respond directly to social issues. Doing so is and always has been risky business, as my mentor Jim O’Toole explores in detail in his recent book The Enlightened Capitalists.
Much of the press and commentary in response to last week’s Roundtable meeting has reverted back to fundamental arguments about capitalism, socialism, the role of government vis-а-vis business, the income gap, and so on. All of which misses a key point: what’s most fundamentally at stake in the Roundtable’s re-articulation is less the nature of a company and more the nature of its leader. As the Times quotes Jamie Dimon in a recent interview, “We looked at this thing [the original Business Roundtable statement] that was written in 1997 and we didn’t agree with it. It didn’t fairly describe what we think our jobs are.”
With all due respect to Mr. Dimon and his colleagues, it’s not clear why it took them more than two decades (not to mention two decades that have witnessed perhaps the most social and business change, growth, and volatility since the Industrial Revolution) to rethink their roles as CEOs. That said, Mr. Dimon and his colleagues need to go further: they need to be clearer about defining what their jobs in fact are, and what they are willing to be held accountable to. As CEOs they have the opportunity, and even the moral imperative given the Statement they all co-signed, to re-create the large public company in a way that is enlightened without sacrificing competitiveness and innovation. The first step in doing so is to distinguish the purpose of a company from the purpose of its leader.
In simple terms, the purpose of a company is to have a meaningful vision and then to be profitable in achieving it. And we should qualify “profitable”: profitability means long-term sustainable returns, and each word in that phrase is critical. If a company (even a not-for-profit) cannot deliver returns, sustainably and over the long term, then it cannot realize its vision … because it will not survive! Profitability (and hence Friedman’s argument for the responsibility to return value) is a necessary condition, but as the shift in thinking from the Roundtable suggests, it is not a sufficient condition. De facto, the job of every company is to remain viable, just as the job of every human is to breathe and to eat. Those are mere table stakes; there has to be more.
That “more” is not necessarily part of the company’s strategy or articles of incorporation, nor can it be. Because the “more” is grounded in the purpose and job of the leader herself. It is the job of every CEO (and in fact every corporate leader) to ensure that profitability is achieved in a good, responsible, accountable, and ethical manner and with the best possible outcomes for all stakeholders. Running a successful company for the long term is not just about the “what”: the products, the profits, the financing, the sales and marketing. It’s as much about the “how”: the decisions its leaders make, the way they engage with and treat their stakeholders of all types, the kinds of cultures they build, the values they live and the behaviors they will not tolerate, and the impact they have on their communities and society more broadly.
Debates about the personhood of corporations notwithstanding, inanimate companies cannot and do not make difficult decisions, balance trade-offs, or place bets. Only leaders do. Individually and collectively. And perhaps the biggest challenge for leaders is when the needs or goals of different groups of stakeholders are in conflict, when doing the right thing means being honest about a mistake or not meeting earnings estimates this quarter. That is why effective leadership is so difficult, and why truly great leaders are so rare. And the challenges corporate leaders face today—with the scrutiny of the press, the clamor of social media, pressure from single-minded shareholders, and vocal stakeholders whose desires are often in conflict—are more stressful than when Milton Friedman was lecturing.
What Happens Now?
It must have been so much easier in the 1980’s and 1990’s when business executives could rest assured that delivering shareholder value was all that mattered. The world of 2020 simply isn’t going to accept that position—and the pressure is now on our most visible corporate leaders to address this reality. Kudos to The Business Roundtable for taking their first step. But, what happens now? As the Times article reports, Nancy Koehn, a professor at Harvard Business School, hit the nail on the head: “[These leaders] perceive that business as usual is no longer acceptable. It’s an open question whether any of these companies will change the way they do business.” That said, it’s not so much the companies that need to change, it's the leaders who run them. Are those leaders willing to change, and will they hold each other accountable to doing so? Perhaps that question should be the lead agenda item for the next Business Roundtable meeting.