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Sustainability Story: Redefining the Purpose of Business

Sustainability Story: Redefining The Purpose Of Business

What is the purpose of business? The dominant theory has long been that businesses exist to generate profits for shareholders. Nobel Laureate Milton Friedman is perhaps the most famous advocate of what is known as shareholder theory, which says “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it … engages in open and free competition, without deception or fraud.”[1] However, critics have long argued this view is too narrow since it ignores companies’ impact on other important stakeholders like customers, employees, and suppliers, as well as local communities, society, and the natural environment. This critique has led to the emergence of a competing theory — the stakeholder theory — which says “the task of executives is to create as much value as possible for stakeholders without resorting to tradeoffs. Great companies endure because they manage to get stakeholder interests aligned in the same direction.” [2] 

Although many companies have recognized the need to balance stakeholder interests, it’s safe to say the shareholder theory has dominated most corporate boardrooms and executive suites for the past few decades. This appears to be changing. As wealth and income inequalities continue to grow and the threat of climate change materializes, corporations are coming to terms with the demands from various stakeholders to more explicitly consider their impact on society and the environment. Larry Fink, CEO of the world’s largest asset manager BlackRock, has recently devoted his annual letters to promoting long-term thinking and social responsibility:

“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”[3] 

More recently, the Business Roundtable, an association of CEOs from 181 leading US companies (including Apple, Amazon, Bank of America, and Walmart), released a new Statement on the Purpose of a Corporation. For the past 20 years, the Business Roundtable promoted the idea that corporations existed principally to serve shareholders, but now it has begun echoing the sentiment of Larry Fink’s letters as well. The new statement says in addition to generating long-term value for shareholders, Roundtable companies must share a fundamental commitment to all stakeholders – investing in employees, dealing fairly with suppliers, delivering value to all customers, and supporting local communities.

Between Larry Fink’s annual letter and the updated Business Roundtable statement, corporate America now appears to be embracing the stakeholder model of corporate governance. However, the Business Roundtable has also been lobbying the SEC to limit the influence of proxy advisory firms; these firms help investors understand the implications of shareholder resolutions filed with thousands of companies each year.[4] Proxy advisory firms play a key role in the investor ecosystem, providing a rationale for supporting or opposing shareholder resolutions, and their recommendations frequently go against management recommendations. Shareholder resolutions are a major tool for smaller investors to communicate with management teams, directors, and other investors – entities they may otherwise have limited access to. Policies that limit shareholder resolution process effectiveness, such as reducing proxy advisory firm influence, also limit the influence of shareholders advocating for companies to become more sustainable.

It should come as no surprise then these statements have been met with skepticism from those advocating a more inclusive approach to corporate governance. While many applaud business leaders for their rhetoric change, there’s also widespread concern there is little substance behind their words. In fact, just days after the Roundtable statement, a group of companies – all certified B Corps,[5]  including Ben & Jerry’s, Patagonia, and Danone – took out a full-page ad in the New York Times calling for the Business Roundtable CEOs to “Get to Work.” The ad describes how B Corps are “successful businesses that meet the highest standards of verified positive impact for our workers, customers, suppliers, communities, and the environment,” and that “with the continued resistance from investors on this new definition of business, we’ve got work to do to help see that stakeholder governance builds trust and builds value.” The ad ends with a call to action: “Let’s work together to make real change happen.” Whether major corporations will live up to their commitment to fully consider all stakeholders remains to be seen.


Resources:

[1] Friedman, “Capitalism and Freedom” (1962)

[2] R.E. Freeman, “Strategic Management: A Stakeholder Approach” (1984)

[3] Larry Fink’s 2018 Letter to CEOs

[4] Bloomberg – 11/01/2019

[5] Abacus Wealth Partners has been a Certified B Corp since 2007 

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