From Shareholder to Stakeholder – A New Corporate Purpose And Brand Identity

A huge, fundamental change on “the purpose of a corporation” was announced by The Business Roundtable on August 19 which basically re-defines the role of business in society.  This seismic event represents a definitive recognition that Government can no longer be trusted to resolve many hot-button problems in our society.  It also marks a possible end of investors focusing solely on maximizing shareholder profits, and a shift to a broader commitment to all stakeholders – e.g. employees, customers, suppliers and communities.

The philosophical role and the brand values of a corporation have undergone noteworthy transformations over time.  In 1932 a seminal academic treatise on “The Modern Corporation and Private Property” by Adolf Berle Jr. and Gardiner Means helped create a new standard for corporate behavior that emphasized all stakeholders.  This initiated a broader accountability for business, concurrent with New Deal legislation, highlighted by stronger organized labor, corporate pension programs, charitable gifts to communities, and an emphasis on research critical for future growth.

Prioritizing Shareholders

The pendulum swung back in the 1970’s to a renewed focus on shareholders and a profits-as-purpose gospel for corporations, driven mainly by activist investors.  This philosophy was spearheaded by Milton Friedman, the University of Chicago economist, who said in 1970 “the social responsibility of business is to increase its profits”.  This mindset encouraged the rise of the corporate raiders in the 1980’s and an unswerving attention on quarterly earnings reports.  This obsession in profits only was visibly demonstrated in the 1987 movie “Wall Street,” where Gordon Gekko famously declared “greed is good.”

It also gave rise to what investors called “shareholder democracy”, the notion that corporations were bloated and not profitable enough.  These corporate raiders convinced executives to slash fat from their budgets, which meant layoffs, cuts in research and development, and pension programs traded for 401k’s.  This resulted in a surge of mergers rationalized by “cost savings”, soaring profits and increased dividends.

Public outrage followed.  Today there is massive distrust, with many Americans even debating the idea of capitalism:

• A 2018 Gallup poll found that less than half of young Americans support capitalism.
• Only 49% of the U.S. general public trusts government and 57% trusts financial services, the least trusted sector (2019 Edelman Trust Barometer)
• However Edelman also showed a robust 67% of employees worldwide today expect their employers to join them for taking action on societal issues, and 71% believe it’s critically important for “my CEO” to respond to challenging times.
• A recent poll by Fortune revealed that 80% of 25-34 year olds want more engagement by companies for dealing with social problems

The 2008 Recession triggered many of these negative perceptions and led to new regulatory scrutiny which helped polarize society.  This financial crisis had three other key results:

1. It undermined the faith in unfettered free markets
2. Investors and companies started to realize that environmental risks could have a serious impact on their portfolios and operations.
3. It unleashed a popular anger against the corporate and political elite, which has since grown.

Darren Walker, President of the Ford Foundation, recently summed it up best:  “the ideology of shareholder primacy has contributed to the economic inequality we see today in America.  The Chicago school of economics is so embedded in the psyche of investors and legal theory and the CEO mindset.”

Impact from New Business Roundtable Commitment

The profound August 2019 announcement by The Business Roundtable of 181 CEO’s reflects the culmination of this emerging renewal of a broader commitment to all stakeholders, not just serving shareholders.  For years now, Larry Fink CEO of BlackRock, which controls trillions of fund dollars, has been calling on companies to be more socially responsible.  ESC (environmental-social-governance) practicing companies and B-Corporations such as Patagonia and Ben & Jerry’s have been successful building on progressive community principles.   CEO’s from other top companies (Jamie Dimon-Chase, Tim Cook-Apple, Jeff Bezos-Amazon,  Mary Barra-GM, etc.), and progressive Democrats like Elizabeth Warren and Bernie Sanders have all contributed to the awareness and public outcry over these social issues.

The response to this expanded corporate purpose has been very encouraging with hundreds of other companies updating their mission statement to focus more on stakeholders.  But there have been no detailed proposals yet on HOW these strategic policies will be carried out.  And there will have to be transparent metrics that allow investors to measure companies by their social impact, instead of just quarterly returns.  CEO’s will be held accountable too.  Indeed the challenge for credible, effective action behind a new commitment for corporate brand identity has just begun.