On August 19, 2019, the Business Roundtable made waves in the business press and the media in general with this press release. The key paragraph reads:
Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders. With today’s announcement, the new Statement supersedes previous statements and outlines a modern standard for corporate responsibility.
The full “Statement on the Purpose of a Corporation” is quoted below.
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.
Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
– Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
– 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.
– 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.
– 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.
– Generating long-term value for shareholders, who 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.
While the change implied in this statement is overdue and welcome, it cannot flow from the words to the world without fundamental changes in business culture and in the way managers are educated. The latter challenge includes both undergraduate business programs and graduate schools of business or management.
The problem lies in the dichotomous nature of the relationship between the shareholders and the other stakeholders listed in the above statement. The relationship to the shareholders can be captured in a quantitative sense by some measure of return on their investment in a business. Profit has been the primary measure used historically and will surely continue to be so used. Backing up from the metric to the strategic and operational machinery that companies, in general, use, this means a continuation of some form of utilitarian calculus, but one that would have to include corrections for non-market effects, as valued by all the other stakeholders.
Stakeholders include anyone who would argue that the actions of the business negatively or positively spill over the bounds of the market, and have some effect on them. The list in the statement omits a very important stakeholder, Mother Nature. I use a metaphor here, but the natural world is an important stakeholder because the activities of businesses almost always have some, usually negative, impact on the conditions of their external world. The acceptance of environmental regulations by business and their stakeholders since the 1970s is, implicitly, an acknowledgment that Mother Nature is, indeed, a stakeholder, even if loosely represented by some human beings.
So far I have been writing about this statement as just another technocrat, largely using the language of economics because I expect that such language will be the way that these businesses go about implementing the changes contained in the statement. If that is the case, the statement will mean next to nothing. To make it real, business will have to change not only its spots, but its heart and brain. And that is simply because its relationships to the stakeholders, other than shareholders, are fundamentally different from that it has with the shareholders.
Each kind of stakeholder can be defined by asking the question, “How is the business affecting what I care about (authentically).” Authentically means that the response comes from the heart, not from some institutional source. It leads to quite distinct categories for each of the groups listed in the statement. This is not a new kind of question. It has been asked for about as long as businesses have been around, but, since economics has become the lingua franca of all the key institutions that constitute the political economy of a polity, both the question and the answer have been reduced to expressions of monetary value. This shortcut facilitates summing the responses from a group of stakeholders, but fails to recognize that individuals “cares” or “concerns” are qualitative and are related to the gap between the present world and their picture of what it should be.
I should stop here for a moment and explain that I am coming from a very different place than almost everybody else. I have been arguing for some time that humans exist by taking care of their concerns, not by maximizing some utility function, usually cast in monetary terms. They form some “picture” of the world in their brains, and act to make the world fit closer to it. If they have some way of deciding what concern to take care at any moment, the choice mechanism is not clear. But it is not some simple marginal cost basis.
Their goal in acting is to find their way to flourishing and stay in that state. Flourishing, in my way of speaking, is, in part, the satisfaction of one’s personal wholeness, or in practical terms, the assessment that one’s concerns are being met to a satisfactory degree. Robert Browning’s famous lines from “Pippa Passes” do a great job in capturing my general sense of flourishing:
The year’s at the spring,
And day’s at the morn;
Morning’s at seven;
The hill-side’s dew-pearled;
The lark’s on the wing;
The snail’s on the thorn;
God’s in his heaven—
All’s right with the world!
He explicitly mentions two of four domains of concern that need attention: the natural world, other than humans, and the transcendent. In my books, I include two others: 1) taking care of oneself, and 2) taking care of other humans. Together, they circumscribe the entire world in which a human actor exists.
Getting back to the Business Roundtable statement, what’s the connection? If business truly wants to respond to the concerns of their stakeholders, they are going to have to know what they are. But not simply as some average quantity. Concerns are idiosyncratic and contingent on the individual’s place in the world. Impossible job? Close to it, but it is the only way, that their commitment can be realized. They have to translate the categorical entities in the statement — customers, suppliers, employees, and communities — into real live human beings and figure out how to respond to them. They also have to figure out how to respond to the concerns of the critical missing stakeholder: Mother Nature. She will probably be the most important stakeholder in many cases, for example, the current concerns over the ubiquitous use of plastic straws.
Any move in this direction will take a profound change in the cultural base of businesses and their managers. And because businesses are embedded in the larger culture of society, it will ultimately also require that culture to change. But business can do and has done it and can choose to be the agent that leads. It will take, as I have written in this blog and in my new book, a shift from the dominance of left-brain thinking and action to putting the right-hemisphere back in charge.
To respond to the stakeholders, one has to ask questions like “How do you feel about X?” or “What’s on your mind about Y?” No more questions like, “How much are you willing to pay for Z compared to A?” Interchanges between stakeholders and businesses will have to be what I call “caractions”, as opposed to the “transactions” involved in any technocratic/economic framework. They are nuanced and reflect the context of the stakeholder. They are empathetic rather than strictly affectless.
This is already too much for a single post, so I will stop here and continue later. I will, however, add this last note. The shift between the brain hemispheres shows up, among other manifestations, as a change in the way problems are solved — switching from customary analytic practices to a pragmatic framework. Fortunately, we have a very good example of such a pragmatic system — The Toyota Production System — and the more general framework that has evolved from it — lean thinking/manufacturing. The Business Roundtable needs to take a serious look at these with an eye to implementing them. Past attempts – there have been many – have largely failed for failure to understand that they require a sea change in the very being/thinking of firms. These are pragmatic in the sense of continuously working to understand the how the whole system works and use that understanding to nudge the system ever closer to the satisfaction of the stakeholders concerns.