Regarding the Business Roundtable’s “Statement on the Purpose of a Corporation”
As you may have read, this past Monday the Business Roundtable, which consists of more than 200 CEOs of large American corporations, released their “Statement on the Purpose of a Corporation.”
Though representing a wide range of companies, the CEOs signed a shared commitment to the following:
- Delivering value to our customers
- Investing in our employees
- Dealing fairly and ethically with our suppliers
- Supporting the communities in which we work
- Generating long term value for our shareholders
As the former Chairman and CEO of Baxter International and member of the Business Roundtable myself in the past, my first reaction was: Is this really something new?
As I mentioned to a reporter from Crain’s yesterday, these were precisely the areas which my team and I at Baxter focused on during my 23 years at the company.
Also, in my second book, “Becoming the Best,” I discuss in detail the need for a values-based company to focus on the Five Bests: Best Self, Best Team, Best Partner, Best Investment and Best Citizen. The Business Roundtable’s statement lines up quite nicely with these.
So why did the Business Roundtable feel the need to promote these principles now? As a good friend of mine, Shae Hassan, reminded me, no matter what the topic, many people get trapped on whether we should do A “or” B, rather than the need to do A “and” B.
As I mention to my Kellogg students, the ongoing debate on the purpose of a corporation got very heated back when Milton Friedman stated that the only purpose of a corporation is to generate shareholder value. His logic was that since the shareholders — not management — own the company, the shareholders themselves could decide how and where they wanted to be socially responsible, not the companies or management.
While there is certainly logic and legal precedent supporting Friedman’s position, many people, (including me) find this perspective too limiting. As the CEO of a company, you have many stakeholders — employees, customers, suppliers, and society overall. You must ensure you’re fulfilling your responsibility to them as well. The pushback to this was usually, “Wow! This is too complicated because many of these stakeholders are in conflict with one another! Which stakeholder should we focus on?”
My response to this question, at Baxter before and now as a Clinical Professor at Northwestern’s Kellogg School of Management, has always been: “YES.” It isn’t one “or” the other, it is one “and” the others.
Here’s my simple way of thinking about it: By being socially responsible and supporting our communities, we will attract fantastic teammates, suppliers, and customers. And if we a have fantastic relationship with these stakeholders, there is a high probability that we will generate an attractive return for our shareholders.
However, I would be remiss if I didn’t mention the important word, “balance.” While Friedman may have been on one end of the continuum, folks that argue we should focus exclusively on employees, customers, and being socially responsible and spend less time on shareholder value are equally at an extreme. We can make customers very happy by reducing our prices by 50%, and we can make employees very happy by doubling salaries, but if that results in the company going bankrupt, nobody will be happy for very long. We must never forget the impact of our actions on the owners of the company.
A few additional thoughts: Many folks are questioning the timing of the Business Roundtable’s release of the statement. If this is what corporations have always been supposed to do, why make a statement about it now? Is the Business Roundtable doing this really as an advertising campaign to ward off criticism, given the current political environment, issues regarding the growing economic inequality, and pronounced hostility towards corporations?
As I reflect on these questions, I don’t think the motive for the Business Roundtable releasing the statement is really worth debating. The key is that the holistic idea of taking the needs of all stakeholders into account is valid; it’s the right thing to do. The signatories of the statement must, of course, follow through on their commitments. Additionally, the statement may bolster leaders at other companies that are not necessarily focused on the Five Bests to strive for a better balance. In so doing, hopefully we can create an environment of “and” rather than “or”….and avoid being at either extreme.
As always, I am happy to hear your thoughts!