Creating shareholder wealth was championed as the ultimate role of every CEO until recently. This definition of a business's ultimate purpose has fallen from its boardroom pedestal. This comes as no surprise in a world where the lines between the roles of public and private entities are in a state of flux. For the first time, employees are looking to their employers for stability and security, according to the most recent Edelman Trust Survey. Leadership within corporations now find themselves charged with not just solving for the bottom line, but solving larger issues in society.
This concept shouldn't feel foreign to founders, owners, executives, or entrepreneurs. In a world where capitalism seems to resemble the superheroes of The Boys and less those of Stan Lee's Marvel Universe, a growing number of people are looking to businesses to solve the world's ills. But isn't that why you began your enterprise in the first place? To solve for the customer? To bring something better into the world? Maybe this is why most businesses are not shirking the idea immediately and why maybe some are embracing this new era of business for benefit — not the bottom line.
The real question behind this shift in attitude is — will this new era bring about better businesses and communities? Or instead, will it usher in a new c-suite focused on soft metrics instead of the bottom line that pays for society's benefits?
Shareholder value is no longer everything
As reported by NYTimes.com, this shift in social sentiment comes at a moment of increasing distress in corporate America, as big companies face mounting global discontent over income inequality, harmful products, and poor working conditions. This inequality isn’t imagined. Income disparity in America is at the highest level reported since the US Census began tracking the metric. Sixty-seven percent of middle-class workers earning between $50,000 and $100,000 would have difficulty coming up with $1,000 to cover an unexpected bill, according to bthechange.com.
Income inequality isn't the only pitfall of the current economy. While unemployment is historically low and jobs are available, growth is slowing. Environmental and political policy concerns are on the minds of entrepreneurs and employees alike no matter where one stands on the issues.
Enter The Business Roundtable, composed of the CEOs of America’s leading businesses. They recently redefined a corporation's purpose as the commitment to all stakeholders including employees, communities, and country. This is a dramatic change in how a business is defined as it was first introduced in 1963 at the Stanford Research Institute and refined in the 1980s by R. Edward Freeman.
A source of identity, power, and purpose, businesses now find themselves redefining the idea of capitalism. In the most recent Deloitte Millennial Survey, almost 40% of respondents stated that the goal of a business should be to “improve society” (second only to “generate jobs” in terms of priorities).
Corporate wealth can no longer be defined as benefiting shareholders, that a corporation's true purpose is to maximize value for society. Most businesses begin on a principle of solving a problem for a customer, the customer by extension is a member of a larger community to which the company serves.
“Ultimately it isn't a business's role to interpret what society wants overall.”
We believe this is why the concept of businesses serving a larger purpose isn't a revelation, rather The Business Roundtable executives formalized what most corporations are already practicing in some form.
Some criticize a move to emphasizing performance metrics based on employee well-being and community investment, feeling that this is a preemptive strike ahead of elections when possibly a more Democratic-controlled government may emerge. Businesses that offshore and outsource work have been recent targets of the current political climate as well. The signal from Washington focuses on bringing corporate investment back to the US regardless of party affiliation.
Have corporate social responsibility programs made an impact?
The idea of corporations working to better the lives of their employees, customers, and community isn’t new. In a time of explosive economic growth and subsequent recessions caused by the dot-com and housing bubbles, society has challenged the effect that businesses have on society. Championing corporate social responsibility programs throughout the 2000s and 2010s, the fruits of those programs have come to bear.
On the whole, corporate social responsibility (CSR) programs have two audiences — internal and external. Internal audiences include the perception employees have of their employer’s brand and leadership. External audiences would be the customer and public perception of the brand and leadership. More than empty slogans, corporate social responsibility focuses on corporate contribution to society through philanthropic, activist, or charitable acts.
The benefits of these programs are largely found in employee attraction and retention KPIs, brand awareness, and customer loyalty markers. The intangible benefits of CSR include the ability to recruit employees and increase public relations equity. Businesses may choose to leverage their organization’s efforts as a marketable asset that helps align their products and services with their customers.
An example of this changing mindset is the global rise of the B Corp movement, a group of businesses committed to pursuing better social or environmental performance alongside their financial targets. Founded in 2006 B Corps now number almost 2,500 businesses across 50 countries – including the likes of Triodos Bank, Warby Parker, Patagonia, Natura, and Ben & Jerry’s. Not all businesses wish to undertake the rigorous process of becoming a certified B Corp, but actionable programs with social impact that focus on issues that affect working families, living wage issues, public health, real estate, climate change, and equality issues, are met typically with a favorable response both inside and outside of the organization.
Do soft metrics lead to better business performance?
The critics of this charge to position businesses for social good feel that this emotional positioning will have unintended consequences. The headline of the August 22, 2019, edition of The Economist asked, "What are companies for?" and put forth the idea that competition, not corporatism, will solve capitalism's current issues. The author stated that the broader definition by the Business Roundtable of stakeholders "risks entrenching a class of unaccountable CEOs who lack legitimacy. And it is a threat to long-term prosperity, which is the basic condition for capitalism to succeed."
Capitalists are not good students of history. The first correction to capitalism came in the form of unions and government policy. Once some industrialists had run amok with profits at the expense of their workers, governments and unions stepped in to create standards and best practices. Unions attracted thousands of workers and negotiated better conditions, living wages, retirement planning, and education. Unfortunately, when some unions failed to work with large corporations with the understanding that the company must also benefit from the relationship for survival, the idea of shareholders above all took hold after the stagnation of the 70s. This idea has held firm through current day. With one look at the US's GDP growth since that time period, you would conclude the experiment a success — a three percent increase, from five to eight percent, in the last 20 years.
Present-day critics of businesses and shareholders are not entirely wrong in their assessment, but also not entirely correct. Large-business missteps often make headline news and shape opinions concerning all businesses — large and small. There is an ironic current state of affairs — the public turns entrepreneurs, hustlers, and gig-economy workers into heroes while vilifying those entrepreneurs, hustlers, and gig-economy workers who built successful enterprises. This is the same audience being judged differently at different stages of the business cycle. It's as if operating a successful business has become a participation trophy sport — only acceptable to a certain level of success.
While corruption does exist in the form of large bail-outs, shell corporations, tax evasion tactics, and the sales of addictive drugs to consumers to name a few, American business investment is thriving. Investment in America is in line with historical levels relative to GDP, and higher than in the 1960s (The Economist). Even though there are markers of an upcoming recession, no one can argue that the country has experienced the longest expansion period on record. This includes the performance of the stock market which judges corporations by the nanosecond by the share of their value derived from long-term profits. Add the innovation and disruption of long-held industries by new companies such as Netflix and Uber — it's not a bad time to be in business or to be employed by one.
By switching to softer metrics critics fear companies will lose sight of what helped them grow in the first place — a strong eye for the bottom line and shareholder value. Without a balance between the softer metrics of community and country with the harder performance focus that comes from stockholders, I don't disagree. A company needs both to grow and succeed — tipping the scales too far in one direction or the other leads to corporate greed or stagnant growth.
Are B Corp Certifications the answer to better businesses?
Previously we explored the idea of a B Corp Certification as the formal answer to the CSR movement of the last 20 years. Looking closely at the definition of a B Corp, you can't help but wonder if the new Business Roundtable's definition of business isn't just restating what already exists under the B Corp structure — except with real certification and governance.
The B Corp Declaration of Interdependence states:
"We envision a global economy that uses business as a force for good.
This economy is comprised of a new type of corporation — the B Corporation — which is purpose-driven and creates benefit for all stakeholders, not just shareholders.
As B Corporations and leaders of this emerging economy, we believe:
That we must be the change we seek in the world.
That all business ought to be conducted as if people and place mattered.
That, through their products, practices, and profits, businesses should aspire to do no harm and benefit all.
To do so requires that we act with the understanding that we are each dependent upon another and thus responsible for each other and future generations."
Becoming a B Corp is a rigorous process. The certification takes around 15 months, and according to some accounts, can bring about a time of upheaval in a business. Unlike the calling from the Business Roundtable to adopt a larger definition of stakeholder, a certified B Corp not only must perform financially but also must adopt other best practices across the organization including governance, human resources, community, environment, and customers.
Applicants to the process take a baseline impact report and then work to improve the score continually through best practices cultivated by other high-performing B Corps. Leadership is challenged to tackle topics around inclusion, environmental impact, diversity, charity, and supply-chain impact.
A B Corp designation is recertified and requires performance standards are met. This certification has the promise to offer a balance between shareholder profit and larger societal gain without the interference of government policy that shapes our larger economy. It doesn't limit the firm's ability to be competitive or to innovate, but rather encourages both. And maybe most appealing of all — B Corps are governed by the Standards Advisory Council, a board of directors and multiple advisory boards that are comprised of business leaders.
Ultimately who should decide a business's role in society?
Ultimately it isn't a business's role to interpret what society wants overall. A CEO is not equipped and should not shoulder the burden of choosing what societal path their employees and communities should embark on. However, a business does have a duty to shareholders, both primary and secondary. This includes actual shareholders, employees, customers, and other stakeholders such as the communities in which the business operates and serves.
Consumers place billions of votes daily telling a business what their role should be in society. The beauty of capitalism in its most angelic form is the encouragement of innovation and drive for improvement through competition, from which the consumer benefits. Society tells corporations what they want through the most powerful vote of all — purchase.
The purpose of a business and its role in the greater community which it serves is best set by the owner — the ultimate shareholder — who has the greatest to gain or lose. Owners have a longer-term vision for companies than a consumer or employee, and if that business fails to serve its community, ultimately through the power of those consumer votes, the market will correct that business or it will cease to exist.
The idea that the leading direction of a business is to be set by large groups (society or government entities) stifles innovation, lowers competition, and slows growth. Accountability comes from competition. Allowing The Business Roundtable juggernauts to define the leading direction of a society isn't the answer either, as most corporations who redefined what a business stands for are sitting in large monopolistic corporations.
How a business is defined and who it serves is entirely up to the business owner — as it should be. How successful that business is is entirely up to the customer — as it should be. Customers of the business are not limited to just those that make a purchase from the firm, but also the company's vendors, suppliers, and employees. These internal customers have a vote to work with the firm or not. The economy has to allow for businesses to compete, innovate, and react to society's votes through spending.
Ultimately, a business's role in society is defined by you, dear consumer.