Business Roundtable Statement of Purpose of a Corporation (serving stakeholders)

The Business Roundtable made major news recently with its adoption of a statement regarding the Purpose of a Corporation.  It was seen by supporters and opponents alike as a major restatement of corporate purpose and philosophy.

I have espoused these principles since at least the 1980s, as demonstrated by an article from a 1993 Transamerica publication. (I can send it upon request.  I'll admit that I am proud of it.)

Unfortunately, my philosophy was not as well-received as the article might suggest.   At times, superiors criticized me for being “too concerned” about the company’s employers on my staff. 

When I started reporting to a particular very highly-regarded (by everyone, generally with good reason) President of one of our subsidiaries, I told him “When we are a meeting with our distributors, I can imagine someone coming up to us and commenting to me ‘I see you now work for [name]’.  You’ll hear me slightly demur by responding ‘Yes, I report to {name].’  I report to you, but I work for our shareholders, our policyholders, our policyholders’ beneficiaries, our empoyees, our distributors, our suppliers, and regulators.  We share those stakeholders, so my efforts support yours.  In addition to reporting to you, I also work for you because you are part of many of those constituencies.”  Several years later, I learned that, in relating my comment to someone, he told that person I would rise no further in the company.

During the 1980s, “participatory management” training was common.  It meant being receptive to staff input and assuring that they have opportunities to contribute (😊).  Class attendees often said they were participatory managers but their “boss” was not a participatory manager (perception bias).  I would challenge them, stating that your “boss” can’t stop you from participating.  If you have a contribution to make, you can make it!  (Of course, a boss could retaliate but it is important to live with integrity.  I don’t like the term “boss” but use it here for simplicity.)

Over a longer period of time, a frequent management training discussion topic was: “Who is our client?”  In the insurance industry, the question boils down to a choice between the financial advisors who sell our product to consumers and the consumers who buy the insurance policy.  Those discussions frustrated me tremendously because I felt we should consider each of them and our other stakeholders.  A particular issue might force us to choose between conflicting interests of various stakeholders, in which case an issue-specific decision would be made to maximize the long-term mission of the company.  But in principle, there was no reason to give either distributors or consumers a subordinate position.

The President mentioned above joined us at the end of such a training program to summarize and answer questions.  Someone asked "who is our customer?".  I threw him what I thought was a nice softball, commenting that despite all this discussion, too many employees act as though the customer is the person to whom they report.  His comment was something like “Claude’s comment is interesting, but when ‘the man’ tells me what he wants, I do it.”  My initiative prompted him to undermine the supposed purpose of the two-day class.

A big problem in many companies is short-term focus.  I remember how excited I was the first time I was invited to a “long-term strategic” meeting.  I prepared by thinking about what the world might be like in 15 years, what we could contribute, how we might do so and steps we could take to be prepared.  When the meeting started, I learned it was about the balance of the current year and the next full year.  I criticized myself greatly for not having read the memo carefully and being unprepared as a result.  Sadly, the next time I got invited to such a meeting, the same thing happened, at which point I got a cold, clammy feeling realizing that the insurance company management considered this short horizon to be “long-term” planning.  We were issuing insurance policies which might be paying benefits in 60 years or later, and our “long-term” horizon was so short!

An interesting sidelight is that the Business Roundtable statement seems to draw more closely together the principles of managing a for-profit and a non-profit.  As a member of non-profit Boards, I was frequently told that non-profits have to be managed differently than for-profits because for-profits manage on behalf of the shareholder and non-profits manage on behalf of the people receiving their services.  I would counter that good for-profit and non-profit management are similar.  You fill a need for your clients.  If, at the end of the year, your financial results are not adequate, you need to take corrective action.  In each case, you project your results in advance, in order to steer properly.

Obviously, I agree with the Business Roundtable statement.  However, I would prefer the statement to tie stakeholder principles more closely to long-term profitability for the following reasons:

1. Long-term profitability of the business justifies/requires a stakeholder perspective for many reasons, including, but not limited to, the value of a good reputation and retention of staff, distributors and clients.  The statement is consistent with Milton Friedman’s position that corporations should maximize shareholder value and was unnecessarily controversial.  (My approach would not have muted all controversy, but it would have avoided some and resolved some discussion.)
2. The statement appeared, to many, to be a weak-kneed concession to Senator Elizabeth Warren’s demands that corporations allow employees to pick 40% of the Board membership.  Seeing the world in infinite shades of gray, I generally don’t favor strict proscriptions of that type.  But it seems to have worked well in Germany.  However, Germany has little employee ownership.  If we pass it in the USA, I would suggest an exemption or reduced requirements based on employee ownership and a sunset clause (would make it more acceptable to many).  See separate write-up.  
3. Rather than deterring regulation, it might inspire what I might consider to be over-regulation.
4. By not tying it to long-term profitability, the statement risks proliferating lawsuits.
5. As noted above, I’d like to consider a long-term view in all respects, including profitability.

I believe we should achieve such goals through cultural change, by education and purchasing decisions (consumers and shareholder investment decisions).  That might be a Pollyanna approach, but we need some bully pulpit leaders to encourage ethical behavior and proper education in general.