Summary of this Article.
This comment on the Business Roundtable
(BRT) announcement on August 19th adopting a new purpose statement
for corporations comes a little late – by more than four months after BRT’s
announcement. This subject of stakeholder purpose or shareholder purpose for
corporations, though, has been continuously discussed and debated since the
1970s.
It is offered to make the case that the
shareholder purpose, or profit-as-purpose, model for corporations is absolutely
the wrong model. It also is offered to strongly make a case that the broad
primary stakeholder group model is the correct model for corporate purpose and
commitment.
The
shareholder profit-as-purpose model has been the dominant and narrow, primary
focus of corporations since Professor Milton Friedman presented it ably and
forcefully in the 1970s – especially in his article in the New York Times
magazine issue of September, 1970. For the most part, the literature and
discussions on this purpose subject since then has pitted the stakeholder
proposed model against the profit model. Books have been written, lectures given
and debates held. Through it all, and in spite of well-presented arguments
supporting the broader model, the profit model has not only remained dominant,
it has become almost an axiom for publicly held corporations – and private
companies as well.
However, it is the wrong purpose, if
maximizing long term profit and value creation of the corporation is in fact
one of or the main outcome corporations seek to produce.
BRT’s August 19th announcement moved away from
the profit-as-purpose model to a shared purpose and commitment to all primary
stakeholder groups of a corporation – customers, employees, suppliers,
communities in which they work and long term value for shareholders. This
commitment was adopted, BRT said, to “deliver value to all of these stakeholder
groups – for the success of our companies, our communities and our country.”
The reactions to the BRT announcement
ranged from 1. Support to 2. Skepticism that it might be merely a public
relations or political strategy in an election cycle to 3. Rejection. Several
journalists and academics weighed in, generally along this range.
It is time for the debate about corporate
purpose or the shared fundamental commitment of all corporations in a free
enterprise capitalist economy to end. There should never have been a debate
in the first place!
BRT and its spokesperson, Jamie Dimon, the
current BRT chairman and chair of JP Morgan Chase, should be commended for, at
a minimum, having good intentions. There probably was good discussion before
the 181 CEOs signed the new corporate purpose statement – probably some healthy
debate.
Embracing the concept, though, is only
valuable to economies and societies if the full breadth and depth necessary to
breathe everyday life into it in practice happens.
Let’s look at both models and see whether
and how they are related. If they are related, we might see if there is a best
way to move forward, a solution to this nagging, irritating and
counter-productive longstanding debate.
Professor Milton Friedman
and Profit as the Sole Purpose.
The dogmatic proclamation by Professor
Friedman in the 1960s and 1970s - the September, 1970 New York Times magazine
article in particular - set the U.S. economy (and other capitalist free
enterprise economies) on a 50 year and counting profit-as-purpose path. This
model is wrong for two reasons:
1. The first reason is that a narrow and dominant focus on profit is
doomed to fall short of maximizing long term profits (value creation) as an
outcome for the corporation – precisely because it is so myopic. To almost
always be looking at and even be fixated on the scoreboard without paying
attention to all the important things that must be done correctly to produce
great scoreboard results as an outcome is self-evidently a flawed model.
2. The second is the failure to understand that a robust, sage and
correct understanding of how to produce maximum long term profit or value
creation for the enterprise itself as an outcome requires a corporate
commitment to and focus on optimization of the long term value it provides to
each of its six (6) primary stakeholder groups. These are essentially those
listed by BRT. They are: Customers, Employees, Suppliers, Communities where it
has a presence, Financial Investors (Shareholders) and The General Public
Interest.
The Broader Stakeholder Purpose and Commitment.
These are summary thoughts about how
corporations can best breathe full life into this one ultimately correct
corporate purpose or commitment. A full
presentation of the pillars supporting this summary is included in the
narrative following this summary statement.
To continue to debate which is best,
shareholder or stakeholder purpose, is a tragic waste of time. In fact, the
last 50 years of narrow focus on profit as the sole purpose has led to
sub-optimal economic performance, including being the primary cause of the
2007-’08 great recession. If and only if the broader stakeholder purpose and
commitment is adopted and lived by corporations will long term profit and value
creation maximization for the corporation itself – and for economies - be a
natural outcome.
Shareholder profit maximization, as
championed by Professor Friedman and as placed on steroids by Professors
Michael Jensen and William Meckling in 1976, only flows, and flows as an
outcome not a reason for existence or purpose, from primary stakeholder group
value optimization in the long run. It is a functional relationship and a
both-and proposition.
In terms of mindsets, the shareholder
mindset is dominantly short term, inward-focused and win-lose. The stakeholder
mindset is dominantly long term, outward-focused and value-optimizing for the
six (6) primary stakeholder groups. As an important aside, this same
“stakeholder mindset” is also completely applicable to governments in
democracies, especially including representative democracies.
That is, long term shareholder profits
(value creation), and corporate or entity
value, are maximized if and only if the long term value the corporation
provides to each of its six (6) primary stakeholder groups is optimized. The
former is a direct function (result) of the latter!
The Article.
Long Term Profit
Maximization (Value Creation) for a Corporation Is a Function of Optimizing
Long Term Value for Each of the Corporation’s Six (6) Primary Stakeholder
Groups. The Former is a Direct Function of the Latter!
The Business Roundtable (BRT), an
”association of CEOs of America’s leading companies working to promote a
thriving U.S. economy and expanded opportunity for all Americans through sound
public policy,” announced in late August, 2019 its adoption of a new statement
of purpose for corporations. In short, BRT has embraced the broad stakeholder
purpose concept and moved away from the narrow shareholder model of the purpose
for corporations.
The Stakeholder Model.
From BRT’s
news announcement on August 19th, “The Business Roundtable has changed its statement of “the purpose of a
corporation.” No longer should decisions be based solely on whether they will
yield higher profits for shareholders, the group said. Rather, corporate
leaders should take into account “all stakeholders”—that is, “employees,
customers and society writ large.” The release provided more detail about each
of the stakeholder groups but this statement is the heart of the broader
purpose they adopted.
The Shareholder Model.
The
shareholder model holds that the purpose of a corporation is solely to produce
profit for corporate shareholders. Its origin is the teaching of Professor
Milton Friedman of the University of Chicago in the 1960s and 1970s. It was
placed on steroids in a 1976 article by Professors Michael Jensen and William
Meckling who asserted that managers are agents of the shareholders, who they
said were the “owners” of the corporation. This agency theory, with its own
flaws, including this ownership matter, led to the practice of tying the
compensation of the top managers of corporations to the share price and related
value measures of the corporation, adding to the narrow focus on value creation
for shareholders over the last 50 years. For one thing, it has been a major
cause of the multiple of CEO compensation compared to entry level employee
compensation going from about 20 to 30 times in the late 1970s to as much as
300 times by 2015, and through the present time.
Reactions to the BRT
Announcement.
Since the BRT announcement, several
articles and other commentary from academics, reporters and corporate leaders
have been written. The comments range
from endorsement of the BRT decision to cautious support but skepticism about
whether it is just happy talk that might not lead to behavioral changes in
corporations (not walking the walk), to outright rejection of the stakeholder
model. This latter argument is simply and bluntly that attention to other
stakeholder groups like employees, suppliers and communities is fine, but
shareholders are still and always going to be first among equals – King!
The Answer.
In a nutshell, when capitalism is done as we
present it here and when corporate purpose is conceptually defined as we
define it here, and as the BRT has now chosen to define it, then the reason to
debate the merits of these two models will no
longer exist.
Why Not?
Because this debate, this
pitting of shareholder interests - one of every corporation’s six (6) primary
stakeholder groups - against the interests of each of its other five (5)
primary stakeholder groups is counter-productive, even self-defeating. The debate
has been about a choice that need not exist. It is a both-and proposition, not
a choice!
Public companies and all
organizations that focus on optimizing long term value for each of their six
primary stakeholder groups will, as a natural outcome, maximize the long
term value creation, including profit and all value measures, of the
organization itself! Professor Friedman et al simply did not think it all
through deeply enough.
They did not take into account
the better angel dominant characteristics of people as people – including
people as markets in the marketplace locally and globally. If the dominant
capitalism model and corporate purpose model over the last 50 years or so had
been the one we present here, that BRT has now supported in concept but not yet
in action, the world would be a better place – ultimately better.
An Existential and Transformative Change.
It is an existential change to corporate purpose
and to getting capitalism right that the BRT support for the broader
stakeholder concept fortuitously prompts us all to consider and adopt. And, not
just conceptually as BRT has so far done, but as a change that is behavioral,
actionable, teachable and learnable. This is an opportunity to make an ultimate
existential improvement for economies and societies. It also helps get
capitalism right.
Its explanation and details follow here below. To
repeat and be forcefully clear, the opportunity to get corporate purpose right
and get capitalism right is really what the BRT and its signing CEOs have teed
up for all of us. It will take effort. Embracing the concept, talking the talk,
is only a first step.
This
article presents one deeply held belief about how to do it – a belief that is
grounded in part on the real core teaching that the moral philosopher and
father of modern Economics, Professor Adam Smith, intended or should have
intended!
Professor Adam Smith’s most relevant statements
on this core subject are presented here first, followed by a complete
explanation of the broad corporate purpose - the stakeholder-based purpose -
that the BRT recently adopted in concept.
The
primary stakeholder group value optimization model is presented below in its
full detail, following our quotes from Adam Smith. These quotes were
dogmatically expressed by him – he meant them!
His heart and mind are at one in these
statements. His Moral Philosopher self and his “Father of Modern Economics”
self are at one as well. They are:
1.
“The property which every man has is his own labour; as it is the
original foundation of all other property, so it is the most sacred and
inviolable…To hinder him from employing this strength and dexterity in what
manner he thinks proper without injury to his neighbor is a plain violation of
this most sacred property.”
2. “How selfish soever man may be supposed,
there are evidently some principles in his nature which interest him in the
fortune of others, and render their happiness necessary to him, though he
derives nothing from it, except the pleasure of seeing it.”
3. “Man was made for action, and to
promote by the exertion of his faculties such changes in the external
circumstances both of himself and others, as may seem most favourable to the
happiness of all.”
4.
‘He is certainly not a good citizen who does not wish to promote, by
every means of his power, the welfare of the whole society of his fellow
citizens.”
It is as clear as can be
that he connected focus on others with focus on self. He gave us an axiom that
connects self-interest and other-interest.
The Proposed Stakeholder Group Model for
Corporate Purpose and Capitalism.
This is the complete way to express the concept
BRT endorsed. Endorsing the concept is one thing. Breathing everyday life into
it in corporations and entire economies is another. We present the way we think
it should be done here:
I. The Proposed New Model – The Essential Mindset
for Corporate Purpose and Capitalism Going Forward:
Self-interest value maximization is a direct
function of optimization of the value provided by an organization to each of
that organization's primary stakeholder groups – each relative to the others.
This is the complete way to express the concept BRT endorsed.
Here is the same idea expressed as a formula:
IVM= f (S1VO, S2VO, …SNVO), where N=6.
That is, a business (and a person) will maximize
its own long-term value when it devotes its time, talent and treasure to
optimizing the value it provides to each of its six (6) primary stakeholder
groups.
II. The Primary Stakeholder Groups of Any
Organization (or Person) are:
a. Customers, b. Employees, c. Financial
Investors, d. Suppliers, e. Communities in which it has a presence and f.
Society at large (the general public interest).
Every business, in fact every organization (every
group with a unifying purpose), will maximize its own long term value or wealth
creation as a direct function of optimally serving its six (6) primary
stakeholder groups.
The concise model presented above, including the
critically important concept of primary stakeholder groups, is supported by and
incorporates several pillars of human characteristics, including how people
choose to behave as markets for goods and services. These characteristics
represent and truly are at the center of the best of human nature around the
world. The BRT new purpose statement will be actionable through these pillars –
otherwise as said by some, it would all indeed be mostly just anodyne
rhetoric!
Importantly, the details of each pillar follow
the list below, and even the details need further elaboration to enable an
organization to fully live them.
They are grounded in the special and wonderful
aspects of what can generally be described as the best of human nature in all
parts of life – including life acted out in the marketplace between sellers and
buyers of goods and services, locally and globally. And, capitalism is the key
economic system catalyst that enables all of these characteristics to flourish,
through this model in action.
III. The Supporting Pillars:
1. First,
of course, are the six (6) primary stakeholder groups of every organization – companies
(for profit and non-profit), governments, schools, nations, etc.
2. The
things most valued by each primary stakeholder group of every organization.
3. The
unalienable rights of every person in the world.
4. The
universally (ubiquitously) shared virtues of all people around the world.
5. The
traits (behaviors of people) leading to these virtues.
6. The
better angels of our human nature (all people and peoples around the world).
7. The
gold standard leadership characteristics for all organizations.
8. The
gold standard cultural characteristics for all organizations.
9. The
centrally important role of ethics and ethical behavior for all organizations.
10. The
robust understanding and conduct of fiduciary responsibilities of all
organizations.
11. Happiness.
Here Are The Important Details of Each Pillar.
These details really represent the essence of the
highest nature of people around the world, interacting with each other in all
ways and, especially here, in their role as sellers and buyers in the marketplace.
The BRT new purpose concept gets legs through these pillars and the details
for each pillar:
A. The Primary Stakeholder Groups of Any
Organization:
1. Customers
2. Employees, 3. Suppliers, 4. Financial Investors, 5. Communities where the
organization has a presence, and 6. The General Public Interest.
B. The
things most valued by each primary stakeholder group of every organization. The things listed here for each group are indicative, not exhaustive,
and could be amended. At the same time the valued things listed her are
certainly among the core and finite list of things each stakeholder group
values:
1. Customers:
1. High quality, 2. Reasonable prices, 3. Kindness, 4. Companies that treat
their employees well and 5. Companies that are good citizens.
2. Employees:
1. Opportunity, 2. Fair compensation, 3. Security, 4. Opportunity and Challenge
to achieve as individuals and teams/groups and 5. Company conducts itself as a
good neighbor, a good citizen.
3. Investors:
1. Best value creation from their funds, for any period but especially over the
long term, 2. Positive company participation in communities, 3. Great company
treatment of employees, 4. Great company standing in society (loved), 5. Gold
standard leadership in the company and 6. Full participation in society.
4. Communities
in which it has a presence: 1. Good citizen in local communities, 2. Long term
participative partner in community well-being, 3. Great company treatment of
its employees, 4. Full company involvement in environmental and societal
stewardship for the long term and 5. Openness.
5. Suppliers:
1. Fair dealing, 2. Long term partnership opportunity mutually earned, 3. Great
treatment of employees, 4. Positive citizenship conduct of company and 5.
Enjoyable to work with.
6. Society
(The General Public Interest): 1. Great local and global citizen, participative
and engaged, 2. Great social and environmental steward, long term, 3. Willing
partner and participant with others (including governments) in serving the
public interest and 4. Excellent treatment of its employees, suppliers and
neighbors.
C. The
Unalienable Rights: The basic unalienable rights of people around the world are
treasured:
1. Life, 2. Liberty, 3. The Pursuit of Happiness
and 4. Property (especially that property that is one’s own aptitudes, about
which one is passionate).
Note:
These four rights also incorporate health care and education as universal and
unalienable.
D. The
Globally Held Virtues: Those virtues (and the traits associated with having
each virtue) that are shared as precious by virtually all peoples around the
world:
1. Wisdom and Knowledge (Curiosity, Love of
Learning, Judgment, Ingenuity, Social Intelligence and Perspective), 2. Courage
(Valor, Perseverance and Integrity), 3. Humanity and Love (Kindness and
Loving), 4. Justice (Citizenship, Fairness and Leadership), 5. Temperance
(Self-control, Prudence and Humility), 6. Transcendence (Appreciation of
Beauty, Gratitude, Hope, Spirituality, Forgiveness, Humor, and Zest).
E. The
Gold Standard Leadership Characteristics:
1. Establish direction – Vision, 2. Personal
humility and professional will – modest and fearless, 3. Inclusive, enabling,
inspirational, a listener, 4. Stakeholder-focused – in a maniacally profound
way, 5. Heart of a servant, 6. Ethical, courageous and just and 7. Fun.
F. The Gold Standard Cultural Characteristics:
1. Adaptive, with a core ideology (purpose and
values), 2. Risk taking, trusting and proactive, 3. One in which all are heard
and the truth is heard, 4. Reflective, humble, anticipatory and involved, 5.
Rational and respectful, A conscientious mindset, 6. Quietly confident,
unassuming while pursuing the organization’s vision and mission with passion,
perseverance, humor and zest, 7. Disciplined people, thoughts and actions in a
fun and dynamic environment, 8. Open, supportive and enthusiastic, 9 Happy in a
stakeholder-centered (H3) way and 10. Fun.
G. Three
Essential Elements of Correct Organizational Behavior at All Times:
1. Ethical behavior in all things, 2. A robust understanding
of fiduciary responsibility and 3. Happiness.
H. People
As Markets: “Markets” here is a
synonym for “people.” It presents the optimization idea in street language, as
follows:
1. Markets like companies that have and live the
globally held virtues, 2. Markets like companies that treasure and honor the
unalienable rights, 3. Markets like companies that fully understand they have
fiduciary obligations to all their primary stakeholders, 4. Markets like
companies that are ethical and fair, 5. Markets like companies that are
effective, efficient, productive, creative and innovative (the basic blocking
and tackling requirements of every excellent organization), 6. Markets like
companies that produce high quality products and services at reasonable prices,
7. Markets like companies that are good citizens, pitching in and helping out
in their communities, 8. Markets like companies that treasure the environment
and are good stewards for future generations, attending to the public interest
and 9. Markets like companies that compensate their employees fairly and create
great, stimulating work environments for them – helping them be creative,
innovative, challenged and fulfilled.
I. The
Better Angels of our Human Nature:
What are the better angels of our human nature?
A.
President Lincoln suggested these are: 1.
Humaneness, 2. Compassion, 3. Good will, 4. Tolerance and 5. Other good things.
B.
Harvard Professor Steven Pinker examined four
motives that "can orient [humans] away from violence and towards
cooperation and altruism." He identifies:
1. Empathy: which
"prompts us to feel the pain of others and to align their interests with
our own," 2. Self-Control: which "allows us to anticipate the
consequences of acting on our impulses and to inhibit them accordingly,"
3. The Moral Sense: which "sanctifies a set of norms and taboos that
govern the interactions among people in a culture." These sometimes
decrease violence but can also increase it "when the norms are tribal,
authoritarian, or puritanical" and 4. Reason: which "allows us to
extract ourselves from our parochial vantage points.”
J.
Relevant Quotes From Iconic Leaders Over The Centuries: Each of These
Quotes Supports the Broad Primary Stakeholder Group Purpose in Concept and
Action.
1. All wrong-doing arises because of mind. If
mind is transformed can wrong-doing remain? Buddha.
2. A man
is but the product of his thoughts - what he thinks, he becomes. Mohandas Gandhi.
3. I want you to be concerned about your next
door neighbor. Do you know your next door neighbor? Mother Teresa.
4. It is very important to generate a good
attitude, a good heart, as much as possible. From this, happiness in both the
short term and the long term for both yourself and others will come. The
purpose of our lives is to be happy. The Dalai Lama.
5. “Do to others whatever you would like them to
do to you. This is the essence of all that is taught in the law and the
prophets. (Matthew 7:12).
6. Life's most urgent question is: what are you
doing for others? Martin Luther King, Jr.
7. “Every
good act is charity. A man's true wealth hereafter is the good that he does in
this world to his fellows.” Mohammed.
8. Forbes Thought of the Day – 10/21/’13. “A
man's true wealth is the good he does in this world.”
9. Every art and every inquiry, and similarly
every action and choice, is thought to aim at some good; and for this reason
the good has rightly been declared to be that at which all things aim. Aristotle.
IV. Adaptive Strategic Planning (Organic,
Changing but Grounded, etc.).
So, the day to day conduct of the work of a
corporation, and every organization, must be grounded in the new purpose and
the pillars supporting it.
It also must be accompanied by a disciplined but
not stifling near and long term planning process – tactical, strategic and
adaptive.
A Brief Explanation of the Role of
Multi-Year Planning and Doing, The Main Action Vehicle For Our Model, is in
order.
Strategic plans are often spoken of in a negative way. The criticisms
include being too slow, irrelevant before the ink is dry on the document,
esoteric and a waste of time. They are characterized as being (and often are)
placed on a shelf collecting dust. It has also been said that “plans are
worthless but planning is essential.”
The truth is quite the contrary. Plans and adaptive planning go hand in
glove. In fact, actionable multi-year adaptive, adaptable plans, or playbooks,
are the essential vehicle through which this new mindset-based purpose
happens. The actionable plan is the dynamic
vehicle through which it all springs to life – and continues to be vibrant.
Again, let’s be clear: An adaptable,
adaptive plan is the very definition of planning, which in turn keeps us on the
maximum value creation trajectory over time, and it fulfills, it is fun.
To be more pointed: The SEC
quarterly reports by corporations in the United States are primarily focused on
the financial condition of a company (the investor primary stakeholder group).
The SEC reports in the U.S. –
and corresponding reports in other nations - and all regular reviews of company
financial health must be complemented by regular reporting and discussion, such
as quarterly reports, on progress toward goals for each of the other primary
stakeholder groups as well. That is how optimal value improvement can be
obtained for each primary stakeholder group – and long term value
maximized for the organization.
In addition, daily, weekly,
monthly and all leadership focus behavior should consider the effects of
decision choices on each of the six (6) primary stakeholder groups, so that
the optimization of value criterion is front of mind always. It can
sound burdensome but as it becomes second nature it is both invigorating and
liberating – it leads to long term corporate value maximization as an outcome
precisely because the dominant focus is correct – primary stakeholder group
value optimization!
A Final Thought on This Existential Change - and Ultimate
Improvement – To Corporate Purpose
and Capitalism Done Right.
All too often
over the years, the easy way out is to do pretty good - to beat the
competition. Excellence is therefore too often not pursued. Of course
breakthrough innovations have been made and do happen, but so often they have
preceded organizational behavior and have flowed from the passion of true
innovators before the fact.
The great news
here is that the full life well-lived – the happy life - and the highest value
creation for each and all corporations (all organizations) will flow from, and
only from, adopting and acting out this timely broader corporate purpose that
the BRT has adopted in concept and, of equal importance, this integrally
related and deeper appreciation and adoption of capitalism done right!
A Perennial Debate?
The decades
long debate about whether shareholder value or stakeholder value is the proper
purpose or commitment of corporations is in fact a debate that should end. It
should never have been necessary.
Shareholder
value and, more generally, corporate long term profits - value creation - is
maximized if and only if the corporation focuses on and delivers optimal long
term value to each of its six (6) primary stakeholder groups.
Capitalism as
the best catalyst to enable corporations to act this purpose and commitment out
is itself done right if and only if it is perfectly in harmony with and thus
facilitates this model.
The essential
next step is to breathe behavioral, actionable, teaching and learning aspects
of what Adam Smith really intended when he wrote and taught about societies and
economies 250 years ago.
A Final Thought.
The BRT
initiative is timely and commendable. It prompts this elaboration on the
perennial question of what the best purpose and commitment of corporations,
indeed all organizations, really should be – the purpose that will enable
corporations to maximize their own long term value (wealth, profit) creation as
an outcome.
This
elaboration makes the case that it is if and only if corporations focus on
optimizing the long term value they each provide to their six (6) primary
stakeholder groups will the corporation’s own long term value (wealth, profit)
outcome be maximized. The model requires focus on serving these groups, not on
fixating on the scoreboard – the corporation’s own profit near and long term.
Fortuitously,
serendipitously or perhaps ironically it is this model that does what Professor
Milton Friedman, economist, wanted as an outcome. It also is the model that
Professor Adam Smith, moral philosopher and economist, taught and advocated. It
enables capitalism, as a catalyst, to bring the highest long term well-being to
all societies using it – all people and peoples everywhere!
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