The Business Roundtable has a Great New Idea... or Does It?
Friedman succumbs to Emerson…or does he?
Kenneth Miller | Last Updated April 2023
In August of 2019, the Business Roundtable (BRt) issued a new statement materially revising its definition of the purpose of a corporation. For over two decades prior, the BRt had formally and firmly embraced economist Milton Friedman’s half-century old dictum that the “one and only” social responsibility of business was to maximize the financial well-being of shareholders.
BRt’s shiny new statement of purpose (SoP), however, discards the Friedmanesque exclusive focus on shareholders and profits in favor of a much broader role for business in contemporary society.
Indeed, the new SoP articulates “…a fundamental commitment to all [emphasis added] of our stakeholders”, which are characterized as Customers, Employees, Suppliers, Communities, and Shareholders. Whether the sequence in which BRt lists these constituencies has significance, we know not—but it doesn’t seem random, does it? Either way, the era of Friedmanism may well have met its belated, if not inglorious, end.
To be clear, we roundly applaud the Business Roundtable for the substance and moral clarity of its SoP. And yes, its courage in the face of the inevitable reactive rash of skepticism—nay, cynicism—that was bound to roil certain sectors of the business community. In this regard, we’ve not been disappointed.
That said, we cannot but glance askance at the notion that the SoP embodies anything particularly new. Consider just a few bits of the relevant history:
- A century-and-a-half ago, Ralph Waldo Emerson wrote:
“Doing well is the result of doing good. That’s what capitalism is all about” - Over 30 years ago (1983), the Brundtland Commission was created by the UN to unite nations in the pursuit of sustainable development, and managed to successfully form international ties between governments and multinational corporations. The Commission’s 1987 Report, Our Common Future, focused on Economic Growth, Environmental Protection and Social Equality.
- A mere quarter-century ago (1994), the term Triple Bottom Line (3BL) was coined by John Elkington, proposing the precept that business goals are inseparable from the communities and environment in which they operate and that the pursuit of short-term economic gain to the exclusion of social and environmental impact was an unsustainable business model. Metrics for Transparency, Employee Development, and Resource Efficiency are integral to Elkington’s ‘People, Planet, Profit’ construct.
- Conceived in 2006 and configured around 3BL, are the ‘B Corporations’, legally certified entities committed to a ‘Declaration of Interdependence’ that describes them as “…purpose-driven and creat[ing] benefit for all stakeholders, not just shareholders”. Sound familiar?
So the BRt’s SoP is a genuinely good idea, but let’s face it—it ain’t exactly novel.
But that’s not the whole story. You see, there’s a wealth of research and hard data that suggests that in adopting this ‘new’ definition of purpose, corporations may indeed be embracing a strategy that might posthumously warm the cockles of Milton Friedman’s withered heart.
Nearly three decades ago, now change management guru, John Kotter and his Harvard Business School colleague Professor James Heskett published their study of more than 200 large firms over an 11-year period. What they found was that corporate culture has a significant impact on a firm’s long-term economic performance, and those emphasizing the interests of all of a company’s key constituencies, ie, customers, stockholders, employees, outperformed those adopting an exclusively shareholder-oriented focus by ‘huge margins’. Revenue, for example, grew by 682% over the period among those firms attentive to the interests of all stakeholders, versus 166% for the shareholder-centric companies. Most striking, the increase in net profit over the 11-year study period for the all-stakeholder-focused exceeded that of the shareholder-centric group by a factor of over 700—755% to be precise.
That’s not a typo.
Nor, apparently, is it a coincidence.
More recently, a study by the UK-based Barrett Values Centre of the share price performance of the top twenty public companies in the annual Best Companies to Work for in the USA survey over a ten-year period revealed an average annualized return of nearly 17% versus less than 3% for the S&P 500 as a whole. And Gallup studies have revealed that companies with an engaged workforce outperform their less engaged competitors by as much as 220%, and they also enjoy an EPS growth rate more than quadruple that of the competitor group. Gallup research also highlights the fact that an engaged workforce yields averages of 21% and 22% annual increases in productivity and profitability, respectively. Finally, new research recently published by Bain & Company shows that companies with strong cultures are “…3.7 times more likely to be business performance leaders”.
There’s plenty more, but the point would seem clear, if a bit ironic. Companies for whom profit is an outcome rather than an obsession, simply do better–by any measure.
Perhaps it’s time—maybe well past time—to rethink the ‘Conventional Wisdom’.
Perhaps the Business Roundtable already has?
One would like to think so, but we are reluctant to leap to that conclusion…only time will tell.