The New York Stock Exchange. The Business Roundtable has just announced that companies' ... [+]
This summer, some of the world’s biggest companies quietly abandoned one of the key tenets of US capitalism for the last half century or so – the primacy of shareholders, or the idea that companies primarily exist to serve the needs of shareholders.
Almost 200 CEOs, including the chiefs of JPMorgan Chase, Amazon, AT&T, Boeing, GM and Johnson & Johnson, signed a new Statement on the Purpose of a Corporation, in which they committed to lead their companies for the benefit of all stakeholders – customers, employees, suppliers and communities as well as investors.
It is a significant departure from the previous consensus, which was built on economist Milton Friedman’s dictum that “the business of business is business” and its only social responsibility is to increase its profits. “The new Statement outlines a modern standard for corporate responsibility,” the Roundtable said.
The Social Responsibility of Business is to Increase its Profits
We’ll consider whether that’s really true later on, but it reflects an increasing trend for companies to take into account environmental, social and governance (ESG) issues – some $12 trillion of US assets, about a quarter of the total, consider ESG issues when investing or engaging with companies through shareholder resolutions, while consumers are increasingly dissatisfied with companies’ short-termism, excessive executive pay and failure to tackle climate change, among other issues.
“The world faces enormous, thorny challenges that business is feeling: climate change, growing inequality (and awareness that these CEOs make hundreds of times more than their employees), water and resource scarcity, soil degradation and loss of biodiversity, and more,” says sustainability consultant Andrew Winston in the Harvard Business Review. “These issues require systemic efforts, co-operation, and pricing of those “externalities” (like pollution and carbon emissions) that business has been able to push off to society. The current shareholder-obsessed system is not fit for this purpose. Individual profit-maximizing businesses will not be incentivized to tackle shared global challenges.”
At the same time, there is a battle for the next generation of talent and millennials want to work for companies with “purpose”.
“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. 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,” the Statement says.
The signatories commit to investing in employees, including compensating them fairly and providing important benefits and training, as well as dealing fairly and ethically with suppliers, support the communities in which they work and protect the environment by embracing sustainable practices across our businesses, as well as providing shareholder returns. "Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country," the Roundtable says.
The American dream is alive, but fraying, said Jamie Dimon, chairman and CEO of JPMorgan Chase and chairman of Business Roundtable. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
But, as Winston says, “for many of the BRT signatories, truly internalizing the meaning of their words would require rethinking their whole business”, from their use of fossil fuels to buying products produced on deforested land in the Amazon.
So, the Roundtable’s fine words will have to be followed up by concrete actions, not least because the group has been accused in the past of trying to stop shareholders raising the issues that it has now embraced. “If the Roundtable’s new statement is to be taken seriously, we expect to see it withdraw its ongoing attempts to eliminate shareholders’ voices and welcome the engagements designed to implement these new practices,” said Andrew Behar of sustainable investor As You Sow, in an Impact Alpha article.
“The BRT statement is a nice start. This new discussion of purpose is good, and it mirrors what some big investors are saying,” Winston says. “But we need a much bigger pivot to circular, renewable-energy-based business models that value the long-term, protect natural capital, and invest in human development and equality. That level of change is currently light years beyond the BRT statement.”
Mindy Lubber, CEO of sustainable investing group Ceres agreed, saying: “On its face, the statement gives me hope. With it, the largest companies in the US have affirmed that fair dealings with customers, employees, suppliers and communities are core to a company's purpose and to its overall role in the American economy and society. I could not agree more.
“But the statement is only a small step in the marathon of challenges before us. We require bold, immediate action from these powerful corporate leaders — whose products underpin every aspect of our daily lives and whose influential voices can move policy proposals that impact our economy and the world around us.”
The World Resources Institute’s Kevin Moss and Eliot Metzger added that the statement was “the corporate social responsibility plan of an earlier generation. Many of the companies whose CEOs featured prominently in the announcement—including chief executives at IBM, GM, Cummins and JP Morgan Chase—have talked about commitments to stakeholders for decades.
“We don’t need just more of the same—we need innovative, sustainable business models. We need companies to set science- and context-based sustainability targets. We need bold corporate action. And the best some of the largest corporations can offer is a plan that was considered cutting-edge in the 1990s?”
