Unintended Consequences of the Business Roundtable’s New “Statement on the Purpose of a Corporation”

How a Perceived Mandate to Broaden Corporate Social Responsibility Could Lead Ill-Prepared CEOs into Crises         

9/20/19 – – Ever since its release last month, the Business Roundtable’s “Statement on the Purpose of a Corporation” has been making news and waves. The updated manifesto, signed by 181 CEO members of the Roundtable, “moves away from shareholder primacy,” broadening a corporation’s responsibilities to act in the best interests of “all stakeholders,” including customers, employees, suppliers, communities and shareholders.

Unless you’ve been living in some parallel universe to today’s real world of business, that pronouncement may not strike you as being particularly new or profound. The modern corporation cannot survive, let alone thrive, without a healthy respect for and relationship with its customers, employees, suppliers, communities and, yes, its shareholders. That’s been the case for a long time.

Whenever I see an attempt to make something so accepted and established look new and bold, my crisis antenna goes up. Let me share with you my concern.

You can trace the orthodoxy of “shareholder primacy” back to an essay published in the September 13, 1970, edition of The New York Times Magazine by free-market economist Milton Friedman titled, “The Social Responsibility of Business is to Increase its Profits.” Friedman, who would be awarded the Nobel Prize for Economics in 1976, presented this unambiguous thesis:

In a free society 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 stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Friedman’s view had some vocal early critics. Peter Drucker countered, “There is only one valid definition of business purpose: to create a customer,” and Quaker Oats President Kenneth Mason argued, “Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life.” And while the singular mandate to increase shareholder value has been an accepted dogma held by many high-profile investors and corporate leaders for the last half century, it has been fraying around the edges for decades.

Don’t get me wrong; Friedman still has lots of fans.

The Council of Institutional Investors charged that in publishing its new Statement of Purpose, the Business Roundtable is, “working to diminish shareholder rights,” insisting that, “if ‘stakeholder governance’ and ‘sustainability’ become hiding places for poor management, or for stalling needed change, the economy more generally will lose out.” And this warning came from Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance: “The idea that you’re accountable to everyone means you’re accountable to no one.”

Even observers who welcome the Roundtable’s more enlightened view are questioning the sincerity and motives of the CEOs who signed on. Kristina vanden Heuvel, editor and publisher of the Nation magazine, points out in an August 28 Washington Post column that, “The companies they lead have done little to earn the public’s trust and plenty to lose it . . . if big corporations want people to believe that profits are not their only concern, they need to start walking the walk.” She concedes that, “If nothing else, the group’s about-face is a concession that corporations have failed to serve the public good. In that sense, the statement, uninspiring as it might be, is welcome.”

Here’s where it gets tricky and dangerous for CEOs and the public relations counselors who advise them.

I believe the Business Roundtable by seeming to underplay all the social good 21st-century corporations are already doing — some voluntarily, some forced by changing mores and regulation — is unintentionally “conceding,” as vanden Heuvel observes, that concern for customers, employees, suppliers and communities is a new thing. Those audiences aren’t new priorities for the vast majority of companies I’ve had the privilege of counseling over the last 35 years. And by emphasizing a need to address these broader corporate responsibilities (which are already being addressed within the operations of most companies), they may be sending ill-prepared CEOs, who want to “walk the walk,” right into the crisis minefield known as politics

As I’ve pointed out in this blog many times before, politics is the third rail of social and corporate interaction. It’s one of the primary sources of crises we discuss in Chapter 3 of The Crisis Preparedness Quotient (“Where Crises Come From”). It is undeniable that consumers do appreciate and support social activism when it aligns with their beliefs. But here’s the kicker: They highly resent it when it doesn’t.

A 2016 Weber Shandwick survey of American consumers found 40% of respondents more likely to purchase from a company when they agreed with the CEO’s position, but 45% less likely to be buyers when they disagreed. A 2018 Stanford Graduate School of Business study (“The Double-Edged Sword of CEO Activism”) confirmed this important reality:

The most surprising result of the survey is that, while Americans claim to change their purchasing behavior depending on their agreement with an activist CEO’s position, respondents are significantly more likely to remember products they stopped using or use less because of the position the CEO took than products they started using or use more. Specifically, 35 percent of the public could think of a product or service they use less, while only 20 percent could think of a product they use more.

The Stanford researchers concluded:

CEOs who take public positions might build loyalty with employees, customers, or constituents, but these same positions can inadvertently alienate important segments of those populations.

If you are a CEO wanting or feeling obligated to get out there and take a stand on issues you believe in, understand that the world is evenly divided between liberals and conservatives, Democrats and Republicans. Share your passions on one end of the political spectrum and you’ll ignite passions against you on the other. Do you have the right to do that on behalf of your company?

Senator Elizabeth Warren, a leading proponent of corporate social responsibility, doesn’t trust you to make such decisions on your own. Consider this provision of her “Accountable Capitalism Act,” which she introduced last year:

Prohibits United States corporations from making any political expenditures without the approval of 75% of its directors and shareholders: Drawing on a proposal from John Bogle, the founder of the investment company Vanguard, United States corporations must receive the approval of at least 75% of their shareholders and 75% of their directors before engaging in political expenditures. This ensures any political expenditures benefit all corporate stakeholders.

Which brings us back to Milton Friedman. Way back in 1970, he saw the dangers and wasn’t buying the sincerity of corporate leaders stepping beyond their singular purpose of increasing profits. In his Times essay he explained:

The short-sightedness is also exemplified in speeches by businessmen on social responsibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal a suicidal impulse.

I’m not suggesting that CEOs courageously tackling social causes are suicidal. Some companies (see my 10/24/18 blog “Patagonia and Politics” linked below) can pull this off. But proceed with caution. Don’t get pushed into something your instincts tell you has far more downside than upside. You can do a lot of good for your customers, employees, suppliers, communities and shareholders without picking political fights. In fact, my bet is that you were probably caring about and doing terrific things for those audiences long before the Business Roundtable issued its latest Statement on the Purpose of a Corporation.

https://crisisquotientblog.com/2019/01/28/patagonia-and-politics/

https://fortune.com/2019/08/26/business-roundtable-shareholders-rights-law/

https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans

https://www.forbes.com/sites/stevedenning/2013/06/26/the-origin-of-the-worlds-dumbest-idea-milton-friedman/#60f34205870e

http://www.umich.edu/~thecore/doc/Friedman.pdf

https://www.warren.senate.gov/newsroom/press-releases/warren-introduces-accountable-capitalism-act

https://www.washingtonpost.com/opinions/2019/08/27/big-business-is-suddenly-showing-conscience-is-that-enough/

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