In August of 2019, the Business Round Table, a group made up of the CEOs of the 200 largest businesses in the U.S, released a revised statement on the purpose of the corporation. The revision was significant in that it was a recognition that the purpose of the corporation needed to extend beyond the previous view of “maximizing shareholder value.” Before the Coronavirus pandemic, there had been a steady stream of commentary both supportive of the shift away from shareholder primacy and critical of it. The current crisis has made the statement even more relevant and timely. Before discussing the implications or forming your opinion, a historical perspective can be very helpful as presented by my colleague Dr. John Kotter here, or in this piece for the Washington Post by Steven Pearlstein.
A reading of the history of the mantra of “maximizing shareholder value” shows that 1) this is a relatively new idea that emerged in the 70s and 80s, 2) it came about in response to the move from owner-run firms to professionally managed ones and the increased competitive landscape of the 70s, and 3) it has no basis in any laws or even in the idea of fiduciary duty – which is to the corporation, not to the shareholders. Of course, none of that suggests that focusing on shareholder value is a bad idea, and many would argue that this focus has unlocked capital, increased productivity, and enhanced value to customers and society in general. However, the data does not really support this viewpoint. The short-termism that is inherent in the shareholder primacy world leads to a focus on cost-cutting over innovation (a quicker way to improve financial ratios), very high thresholds for investments (so returns can be seen quickly), and an under-investment in value-creating ideas that don’t deliver immediate financial impact. Even the data on the average stock market return before and after the shift to shareholder primacy does not indicate any benefit to value creation, with returns being roughly equivalent before and after. In recent times, the companies that have shown the greatest increase in valuations have been those that are more focused on purpose and vision and less influenced by quarterly results.
The biggest criticism of the revision from a focus on shareholders to a focus on all stakeholders (employees, customers, suppliers, communities, and shareholders) is that in trying to serve the needs of all stakeholders, organizations will no longer serve the needs of any. The argument is that having too many goals will lead to confusion and splintered focus. In fact, this argument has also been presented by those who argue against shareholder primacy. In his HBR article arguing for a new age of customer capitalism, Roger Martin makes the case for putting customer satisfaction above all other stakeholders for the same reason – that one primary goal is necessary. While a focus on customer satisfaction certainly leads to a longer-term view, it too creates its own problems. While poor employee working conditions might well lead to lower prices and thus higher customer satisfaction, it is not a winning formula for the long run, as many businesses have found out. How about putting employees first? After all, recent studies have shown that happy employees lead to higher customer satisfaction. This idea too has limitations. You can easily imagine a scenario in which a business has incredibly happy employees but makes poor decisions for long-term success.
All these ideas – shareholder capitalism, customer capitalism, and employee centricity are based on a flawed assumption: the seductive argument that there can only be one goal – an argument that has face validity. The idea that a single-minded focus is what creates outstanding performance is ingrained in our thinking. But taking a deeper look at it, the argument starts to fall apart quite quickly. We, as human beings living in today’s world, are adept at managing multiple goals – we have career goals, family goals, personal development goals, health goals – and contrary to the belief that focusing on only one area of our lives, such as our careers, will lead to success in this area, more and more research is finding the opposite. By thinking expansively and holistically about the purpose of our lives – or in the case of an organization, the purpose/mission of the corporation – we actually perform better in all areas.
You might think this is all well and good in times of plenty, but a resource-constrained or otherwise challenging business environment requires choices and tradeoffs. Some of these tradeoffs have come into sharp focus through the pandemic and the resulting economic crisis. How long do you keep your employees on the payroll when revenues are down? How much of the additional costs of safe operations do you pass on to customers? How much risk can you expect employees to take while serving customers? There are very real tradeoffs to contend with, and there will inevitably be situations where, in the short term, the needs of employees might be in conflict with those of customers. Yet, in the long term, all stakeholders are interested in the success of the corporation and these needs very quickly converge when taking a longer-term view. Take, for example, the question of how to reduce payroll in the face of decreased demand. By taking a long-term view, many businesses have recognized that temporary pay cuts or furloughs are a far better option than layoffs and terminations (which would lead to better short-term performance).
This is not to suggest that every decision in every situation will perfectly balance the needs of all stakeholders. After all, furloughed workers will still be in a very difficult position and some people would argue that pay cuts for all workers is worse than layoffs for some. But making decisions through a holistic lens that is nuanced, reflective of context, and does not unthinkingly put one group of stakeholders ahead of the others in every situation will lead to better long-term performance. The arguments for maintaining focus on a singular goal are largely about providing clarity for decision-making. The key question is: what criteria should I use in making decisions? The answer: the purpose and the values of the organization. If a particular action or decision is congruent with the company purpose and values, it will also be in the best long-term interest of all stakeholders. This, of course, puts more onus on a clear articulation of the business purpose and values – one that goes beyond a superficial public relations focused exercise and is truly reflective of the beliefs and commitments of the business and its leaders.
For many businesses, embracing this multi-stakeholder view will take a significant cultural evolution. The mantra of shareholder primacy has been so dominant and deeply believed that actions and behaviors aligned with maximizing profit above all else are what have been recognized and promoted within organizations for decades. Culture shifts when new actions and behaviors are demonstrated, rewarded, and recognized, leading to new habits and eventually a new culture. Leaders can begin the journey of cultural evolution by role modeling their commitment to a more holistic view of the purpose of the organization. These new behaviors could, for example, be reflected in the performance metrics they chose and the hiring, firing, and promotion decisions they make.
The idea that successful organizations optimize for one singular stakeholder group is simply flawed. Research going all the way back to has clearly demonstrated the performance advantage companies gain from having a culture that values multiple stakeholders. Business performance is not governed by a mathematical equation that requires optimizing around one variable. We are capable of balancing the interests of multiple stakeholders, and doing so creates a lasting competitive advantage – and hence lasting value.