Fortune magazine reported that on August 19, 2019, the Business Roundtable announced a new purpose for the corporation. Why did this 300-word, not particularly specific (and certainly not binding on anyone) declaration receive such widespread attention? Why should HBS students care? What might it mean for business and society? In short, is this a big deal or just an attempt by a few CEOs to virtue-signal and not amount to much of any real change? It was certainly covered by much of the media as an event of potentially profound consequence.
Let’s set context first. The Business Roundtable (BRT) is a group of 180 CEOs of many, but not all, of America’s largest companies. The group has been around a long time, and its main purpose is to speak for big business in Washington. There are other industry-specific organizations that weigh in on their issues, but the BRT takes on the macro issues of tax, trade policy, fiscal and monetary policy, patent laws, etc. It has historically steered clear of the broader political and cultural issues of the time, but members have increasingly been individually vocal on those as well. The BRT’s pronouncements and policies do not bind any member to any action, and their policies do not have any specific consequence. But the world sees them as the single most important voice of big business in America.
The other important context to understand is the decades-long debate around corporate purpose and governance. Through law and precedent over the years, a corporation has been seen as an entity owned by and beholden to its shareholders and governed through a board of directors they elect. The primary economic purpose of the corporation has been seen as earning a good return on investment and maximizing over time profit and returns to shareholders. The Nobel Prize-winning Milton Friedman’s words of nearly 50 years ago are often cited as the most influential in articulating this point of view. Friedman mentioned other things a corporation needs to accomplish and consider, but over time his words around maximizing economic returns have been the most widely cited and amplified in the literature and academia. Governing court decisions have consistently reinforced and strengthened the view of the power and primacy around the needs of the shareholder in the affairs of the corporation. Yes, laws and regulations are also important, but they define more the rules of behavior and engagement rather than purpose.
This shareholder-centric and returns-dominance perspective has long been under assault and no more so than now. The criticisms are familiar. Does profit or return maximization not inevitably mean short-term maximization with its attendant shortsightedness about the long term? Do employees really matter, or are they summarily fired “to save a nickel” as a leading politician claims? Do corporations pay their fair shares of taxes, and what does “fair share” mean? What is corporations’ role in the societal challenges of environment, inclusion and diversity, individual rights, education, immigration, income inequality, climate change, and the list goes on? Which other groups should have a voice at the table besides shareholders (e.g., customers, employees, communities, NGOs, activists)?
The BRT’s document clearly stated that in their opinion the corporation should serve “stakeholders,” with “shareholders” first mentioned 250 words in. A leading candidate for President claims, to loud cheers of many, that corporations should receive a federal charter that allows the government to revoke that charter if corporations do not serve their stakeholders well. Who decides what “serve well” exactly means or what the process and consequence of charter revocation might be are left for future discussion and decision. Clearly, something is going on.
Let’s try to unpack all this and see what might happen. As written the BRT document can be noted but has no real consequence at the moment. But what happens if boards and vocal shareholders like BlackRock demand adoption? The goals and purpose of corporations today are expressed in capital allocation, organization and process design, executive and employee compensation, senior executive time allocation, and board focus and prioritization.
Let’s focus on senior executive compensation as an example today. Virtually all companies focus on share or price structured in some comparative return rubric, annual and multi-year financial results, and measurable strategic initiatives the board decides are important. Sometimes measures of employee engagement are in the mix too. Measures and compensation elements relating to the social and stakeholder topics mentioned earlier are usually not included. The thing that will signal real change is when executive compensation structures really embrace these goals and the objectives are clear, impactful, and not easy to do. These goals will also need to be reported to shareholders, perhaps as part of an SEC mandate, to be real.
How to pick which areas for focus, what are appropriate goals and measures, how much time and resources to allocate, and what will be the impact on current goals of this new and expanded goal set remain to be seen. Some think this shift imperative to regain trust and avoid the sometimes harsh hand of government. Some see this possible expression of purpose and focus as unrealistic, unlikely to have any real effect at the broad societal level and in fact likely to weaken and make less effective the corporation’s ability to provide superior products and services and earn a strong return.
What do you need to consider to decide whether the BRT manifesto should be seriously adopted? By seriously adopted, the idea would be that priorities, compensation structure, time and resource allocation, and governance would meaningfully change.
Many would say that more enlightened corporations are already moving in this direction. A good test for the degree of progress made so far would be to identify corporations that allocate as much as 5% of operating income and senior executive time to these broader societal goals in a way that has impact that is systematically consequential. Helping over time thousands of high school students, reducing carbon footprints, and having a truly diverse and inclusive workplace are good and worthy things done today with very minimal time or resource allocation.
But how much impact in the big picture do they really have is a question for consideration. So the first thing that you would need to believe is that corporations can actually make a meaningful dent in the big societal and cultural problems. The area most ripe for impact is diversity and inclusion. At the corporate level this can be measured, acted upon, and changed. This conversation has been happening for decades, yet virtually all CEOs are white men. Should government mandate a desired outcome, are boards just not serious, or are there deeper issues?
The next thing one would need to believe after deciding on focusing on issues beyond diversity and inclusion is that the meaningful time and resource reallocation that inevitably would be required will be acceptable. What is the right amount? Certainly less than 10% would be minimally impactful. Would that reallocation result in any unacceptable outcomes, or is there 10% waste or slack everywhere, making for an easy, “free” reallocation? Will our competitiveness, productivity, and economic value creation be affected, and if so, how much?
Your generation will be on the front lines here. As government and politics continue to not be able to effectively address our problems in many areas, the cry will grow louder to blame, shame, and make business more controlled by government.
No matter where you come out on this, keep in mind some central questions. Where can business make a real difference in broader cultural and societal issues? With what effort and with what cost can that outcome be achieved? Who should really control business, and what would be the consequence of moving from a shareholder/board governance system to a government-mandated stakeholder system?
My advice? Be thoughtful about the scale of problems we face. Be humble about the degree to which business alone can have real impact, and the amount of slack resources and time to tackle them. Be very skeptical and even fearful of more government control and mandates.
Here are some things to think about as your generation takes over. Creating, growing, and sustaining a business is an incredibly challenging task. One needs only to read the news or look at the rise and fall of firms to prove the point. Societal problems are huge, and thinking business can meaningfully impact most of them is profoundly optimistic at best and naïve at worst. Putting the goals and purpose of business in the hands of politicians will be destructive to business. Yet society will most likely expect business to do more while not relaxing any of today’s shareholder imperatives or government-mandated laws or regulations. Be careful what you wish for.
Professor Kevin W. Sharer joined the HBS Strategy unit in the fall of 2012. Before HBS, he was CEO of Amgen for 12 years and, before that, Amgen’s president for eight. He has served on the boards of directors of Chevron and Northrop Grumman and is currently on the board of Allied Minds. For a decade he was chairman of the board of the Los Angeles County Museum of Natural History. Professor Sharer is a Naval Academy graduate and has master’s degrees in aeronautical engineering and business.
