This summer, 181 CEOs from the Business Roundtable called for a policy shift that would redefine the purpose of a corporation.
Rather than focusing on maximizing shareholder profits, they said, a corporation’s duty should be to create value for all stakeholders, including employees, suppliers, customers and communities.
Their call for change is timely – research has shown consumers are increasingly looking to public and private companies to address social and economic issues as part of their charge, says Cathy Clark, faculty director for the Center for the Advancement of Social Entrepreneurship at Duke University’s Fuqua School of Business.
Clark has worked with entrepreneurs, investors and others for more than 30 years to launch and grow profitable businesses that benefit stakeholders and communities. As an advisory council member for the non-profit organization B Lab, Clark helped develop the standards for public benefit corporations and certified B Corporations.
She analyzes the Business Roundtable’s efforts in this Fuqua Q&A.
Q: What’s pushing businesses toward more transparency and social accountability?
There is increasing interest in the social impacts of business, especially from Millennials around the world, as we have seen in surveys from groups like Deloitte and JUST Capital. In fact, according to a recent JUST Capital survey, the majority of working Americans say they would work at a more just company, even if it paid 20 percent less than the same job elsewhere. In the same survey, 63 percent of people said CEOs of large companies have a responsibility to take a stand on important social issues. But as my colleague Aaron “Ronnie” Chatterji has noted, the rules of the road on how and when to do that are largely unwritten. So, one could say the Business Roundtable is timely and smart to start to address these concerns head on.
Managing to one bottom line is hard enough. How will this affect financial performance?
Some insist that managing to multiple bottom lines is irresponsible, as I outlined in a recent Linked In post. Others believe that doing good will correlate with financial performance or even increase it. There is early evidence of the latter. But it’s short-sighted to think every action to benefit stakeholders will also save money. Or the converse – that companies should only do the things that pay off financially.
My colleague David Robinson has co-authored insightful pieces about the efficient frontier of social responsibility. I may be an outlier, but I believe that as public policymakers continue to loosen the public safety net around health, insurance and retirement, big companies such as those represented by the Business Roundtable, will at times have to step off of the efficient frontier line to do what’s right, just or simply humane to keep their license to operate. Perhaps the Business Roundtable announcement was the first sign of this. At the least, it was an invitation to help businesses become more attentive to the communities on which all business depends.
How do businesses move beyond a mission statement?
I’m generally optimistic, but the truth is, a statement alone could mean next to nothing. Businesses need to show customers, workers, and their communities they are good corporate citizens, and that when conflicts arise, they are prepared to make smart compromises across competing interests when it’s the right thing to do. In my view, you can’t do that credibly without aligning your corporate governance with this intention. Thousands of companies have already done this by becoming a public benefit corporation (if they are based in one of the 37 jurisdictions in the U.S. that have passed the necessary legislation) or by pursuing a B Corporation certification from B Lab. Without making a legal commitment to considering the needs of other stakeholders in your decisions, history shows current standards of fiduciary duty will supersede your lip service.
How would businesses define and measure success for stakeholders?
Just as there are standards for measuring and reporting on financial performance businesses need to adopt standard ways of reporting it so stakeholders can evaluate their effectiveness. The Sustainability Accounting Standards Board (SASB) is setting standards for public reporting on sustainability issues, and environmental, social and governance (ESG) screening for public investments is also growing. Nearly one out of every four dollars that is professionally managed in the U.S. is now screened for socially responsible or ESG factors.
Today business is judged predominantly on financial performance, and I doubt that will change. But I do see the opportunity to add other factors – and most importantly the voices of other stakeholders – to the conversation about performance. Imagine a company report that included feedback from the community on how well the company served them that year, or third-party data on how well the company addressed climate change. Groups around the world are working on new ways to report and audit this performance, and I predict that with boosts like this new statement from the Business Roundtable, stakeholder performance will become part of standardized reporting sooner than we think.