The purpose of a company.

In my June article I wrote about sustainability and changes being implement by our Government towards environmental sustainability (read the article here), so when The Business Round Table issued an updated statement on the Purpose of a Corporation on 19 August 2019, proclaiming companies have a commitment to all stakeholders, it caught my attention. This statement from a staunchly capitalist organisation is a significant departure from Milton Friedman’s teachings that the aim of a company is maximising shareholder value and companies that did adopt ‘responsible’ attitudes would be faced with more binding constraints than companies that did not, rendering them less competitive.

The American Round table statement reads… While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

  1. Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
  2. Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity, and respect.
  3. Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
  4. Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
  5. Generating long-term value for shareholders. They provide the capital that allows companies to invest, grow, and innovate. We are committed to transparency and effective engagement with shareholders.

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 statement has been signed by the CEO’s of 181 of the world’s largest corporations. These are lofty aspirations and the placement of generating long-term value for shareholders at the bottom of the list, has been an attention grabber.

What’s driving this and how committed are these CEO’s to adhering to their statement?

Society is changing. The internet and mobile communication technology has enabled cheap fast access to information and over three billion people now have that access.

Throughout history people have always strived for a better life and the internet has not only provided a window on what that life can be, but means for people express their dissatisfaction justified or not. Consumers and employees are using these communication channels to share their expectations of products, services, corporations and entire industries. This is quickly changing social norms and individual expectations.

Corporations are very aware of the values of Millennials and Gen X who tend to support businesses that make a positive impact on society and align with their own values.

However the biggest driver is society’s reaction to the environmental impact humans are having on our planet. This issues is so large and thorny it will not be solved without a collective human intelligence, will and capital. BRT Member Corporation’s commitment to stakeholder communities and their environment will be hard to navigate against generating shareholder value. The recent case taken against Johnson & Johnson highlights this. When the BRT statement was released the CEO of Johnson & Johnson commented –

“People are asking fundamental questions about how well capitalism is serving society.”

Alex Gorsky, CEO Johnson & Johnson – Fortune 19 August 2019.

The statement a few days later by the Attorney General Mike Hunter when commenting on the court decision on Johnson & Johnson’s alleged contribution to the opioid crisis in Oklahoma.

“Johnson & Johnson will finally be held accountable for thousands of deaths and addictions caused by their actions.”

Attorney General, Mike Hunter – BBC 27 August 2019.

Some corporations are rising to the challenge such as Orsted formerly known as Dong (Danish Oil and Natural Gas) which is now dedicated to green energy.

“Our focus going forward will be on green growth based on our existing business platforms in offshore wind, biomass, green customer solutions and advanced waste-to-energy solutions.”

CEO Henrik Poulsen.

The strategic decision to be a first mover in offshore wind farms has proved to be a winner for the company which has had a dramatic turnaround in profitability and a steady increase in its share price since listing in 2016. It is notable that the company is 51% owned by the Danish State which has been a supportive shareholder and Mr Poulsen has admitted…

“Sometimes there was a temporary trade-off between maximising profit and making the transition away from fossil fuels.”

So what about the shareholders, let us not forget they are the people who risk their capital to enable companies to grow and develop their business which in turn produce products, and provides employment to enable many people to have healthy and comfortable lives. Interestingly there are changing exceptions from some shareholders who are pressing companies to focus on how they contribute to society. In the current economic, political and social environment adopting Milton Freidmen’s ‘responsible’ attitudes may actually provide a competitive advantage!

Corporations are redefining their purpose and in doing so they are placing greater emphasis on maximising long-term shareholder value and taking greater account of all stakeholders. The references in this article have been to large international corporations, however the content is equally relevant to small and medium sized privately owned companies.

If you have been thinking about:

  • Reviewing the purpose of your business
  • Reviewing or developing a strategic plan
  • How improve value to customers
  • What investing in employees means and how to implement this

We may be able to help you, please email me.

If you don’t know where to begin, want to talk through something, or have a specific question but are not sure who to address it to, fill in the form, and we’ll get back to you within two working days.

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