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The Business Roundtable is a group of nearly 200 Chief Executives of leading U.S. companies, whose purpose since its formation in 1972 is “to promote a thriving U.S. economy and expanded opportunity for all Americans through sound public policy.” Since 1978, the Business Roundtable has regularly issued Principles of Corporate Governance, a set of guidelines and best practices for corporations to uphold ethical standards and deliver long-term economic value.
On August 19, 2019, the Business Roundtable issued a Statement on the Purpose of a Corporation. In it, for the first time, they suggested that shareholder value is not the only purpose of a corporation. Instead, their statement lists five stakeholders to whom every corporation should be committed: customers, employees, suppliers, communities and shareholders. Significantly, the five stakeholders are listed in the order shown here, with shareholders being the last.
The Business Roundtable statement, which is signed by the chief executives of almost 200 of the largest U.S. corporations, bodes well for those who aim to increase inclusion, diversity and equality. In fact, the second bullet point, focused on employees, ends with this sentence: “We foster diversity and inclusion, dignity and respect.”
To put into context the significance of this action by the Business Roundtable, consider that shareholder primacy finds its roots in the pro-business attitude of the Coolidge administration from nearly a century ago, and was cemented into the mindset of corporate America by the profit-driven economic philosophy promoted by economist Milton Friedman in 1970. The specific focus on shareholder value became a sacrosanct principle of corporate governance during the Reagan Administration, first popularized by former General Electric CEO Jack Welch. The corporate focus on shareholder value is widely believed to be the cause for eroding labor rights, skyrocketing executive compensation, and other key drivers of economic inequalities.
Will the new stance of the Business Roundtable actually have an impact on the way corporate America conducts its business, and on the growth of corporate diversity and inclusion? Some critics are already questioning whether the statement is simply paying lip service to current trends, while others point out that the statement is too vague as it does not propose any specific actions. However, it is worth noting that, in the last four decades, the Business Roundtable has had very tangible impact on government regulations, playing a significant role in a range of initiatives to undermine consumer protection and labor rights, while pushing to reduce corporate tax, corporate oversight and CEO accountability. Hence, if it chooses to follow through on its written commitment, there is reason to believe that the Business Roundtable will have a significant impact on corporate diversity.
It is also worth noting that, just earlier this year, BlackRock CEO Larry Fink was widely criticized for encouraging executives to support corporate diversity in his annual letter to CEOs (Fink is one of the signatories of the new Business Roundtable statement, which was spearheaded by Jamie Dimon, chief executive of JPMorgan Chase and chairman of the Business Roundtable). Critics complained that Fink’s suggestions were going against the principle of upholding shareholder value in order to promote his personal agenda. The Business Roundtable statement clearly rebukes this viewpoint.
My own work on diversity and inclusion supports the views espoused by the Business Roundtable. Through years of academic research and commercial projects, I have become convinced that diversity is a key ingredient of corporate success , and that the “inclusive enterprise” will dominate our economy in the not-so-distant future. My conclusions stem from a quantitative understanding of the relationship between the satisfaction of individual employees and the overall performance of a company, which my colleagues and I have achieved through computer simulations that capture the day-to-day activities and interactions of typical companies.
But even without the benefit of computer simulations, there are two simple concepts that should convince readers that an increased focus on diversity and inclusion stands to be beneficial to corporations. First, there is no reason to believe that homogeneous companies are optimal. From a purely logical perspective, it is likely that there are alternative configurations that can make more efficient use of our human capital, and refusing even to explore the possibility is irresponsible.
Second, inclusion has a direct impact on company performance. To see this, imagine a team that is performing at its absolute peak level: each team member is performing optimally, and they work optimally with each other. Now imagine doing something that interferes with the ability of one team member to perform optimally; clearly, overall team performance will drop. And if you interfere with a second team member, performance will drop even further, and you may start a chain reaction as other team members need to pick up the slack, lowering their performance as well. Hence, if a company is doing anything that has a negative impact on its employees as a result of their personal characteristics (i.e., if it is not being inclusive), it is shooting itself in the foot. By the same reasoning, improving the level of inclusion can only increase company performance.
Skeptics and critics of diversity and inclusion need to realize that economists like Friedman based their theories on an incomplete understanding of the relationship between individual workers and company performance. While this misunderstanding was comprehensible five decades ago, when we lacked the tools that can link individual satisfaction and productivity to overall company performance, today it would be irresponsible to continue to ignore the profound impact that individuals – including not only employees but also customers, suppliers, community members and shareholders – have on the success of a company. Given these observations, the Business Roundtable statement has the potential to be a watershed moment in the history of corporate diversity and inclusion.
