Profit, purpose can co-exist

Wendell Willkie II

There has been much commentary regarding the announcement by almost 200 CEOs of America’s largest companies, through the Business Roundtable, that the role of the corporation in society is not simply to maximize value for shareholders but also to serve the interests of other stakeholders, including customers, employees, suppliers and communities.

Rhetorically, this is indeed a substantial departure from the last statement of the Business Roundtable (in 1997) that the purpose of the company was simply to maximize value for shareholders.

That statement in turn reflected the philosophy of the economist Milton Friedman, who believed that focus on profitability was the only legitimate purpose of private enterprise in a free society.

In actuality, the tension between the new statement of corporate mission and the earlier version is less profound than it may appear.

It suggests some recalibration in certain quarters, but not a dramatic, wholesale change in business philosophy. Indeed, there would not have been nearly unanimous agreement on the part of this august group of CEOs regarding the new statement unless it already reflected prevailing business practice.

Most successful business leaders are already of the view that no company can be successful over time without providing value to customers; motivating capable employees, maintaining mutually beneficial relations with suppliers; and retaining trust in communities where they have a substantial presence.

There is substantial empirical evidence that companies with a strong culture and sense of mission beyond profitability are more likely over time to deliver greater value for shareholders.

As Larry Fink, CEO of America’s largest shareholder, BlackRock (with almost $7 trillion in assets under management), wrote to all CEOs earlier this year:

“Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being — what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them.”

Fink was encouraging America’s public companies to resist pressure for immediate results and to be committed to a vision as to how to create value for all constituencies.

His plea comes at a time when public confidence in the virtues of the American free enterprise system is in serious decline.

While our economy is in its 10th year of recovery from the Great Recession, there is still widespread public cynicism about our major corporations and the standards to which they adhere.

This chronic distrust has diverse origins, including recent corporate scandals, outsourcing of jobs and widening income inequality.

But the single greatest factor may be the deep anxiety that many Americans have in a rapidly changing economy regarding diminishing economic opportunity.

Faith in the American dream, in the promise of a better future, and in our free enterprise system has been substantially eroded.

Anger is thus manifested on both the right and the left, as President Trump, in a sharp departure from Republican free market philosophy, berates and threatens companies for plant closings and moving production to foreign countries, while Sen. Elizabeth Warren routinely vilifies the leaders of major industries and promises legislation to place workers on the boards of thousands of companies.

Meanwhile, the Wall Street Journal editorial page and others who correctly contend that a market economy ultimately delivers the greatest prosperity and opportunity for the greatest number, fret that corporate leadership might now lapse back into the managerial capitalism of the ’50s and ’60s, when an elitist business leadership wasn’t really accountable to anyone other than themselves.

That is not about to happen.

Not only is the business environment radically more competitive than a half century ago, business is also under far greater pressure to deliver immediate results for shareholders, who annually elect, and often seek to replace, corporate board members.

Public attacks by activist shareholders on corporate management are now routine, and CFOs report ongoing pressure to cut costs, including human resources and R&D, in order to boost quarterly earnings and today’s share price.

The power of shareholders in the boardroom today is greater than ever before.

This new BRT statement certainly won’t change that dynamic.

Wherever possible, companies need to manage this shareholder energy constructively.

Business has better prospects of executing a strategy that benefits all stakeholders through a substantive engagement with its largest institutional investors.

When they effectively make the case that greater investment in service of a broader purpose will ultimately be rewarded, Larry Fink, and his peers heading other major investment institutions, are indicating they are now ready to listen.

Wendell L. Willkie II is an adjunct fellow at the American Enterprise Institute and an adjunct professor of law at New York University. He also was the senior vice president and general counsel of MeadWestvaco in Richmond, Va. He wrote this column for InsideSources.com.

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(4) comments

Holmes

The Social Responsibility of Business is to increase its profits. If you believe otherwise I have a bridge for sale in Brooklyn, needs work. The doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. What does it mean to say that the corporate executive has a "social responsibility" in his capacity as businessman? the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money. 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.

rdsouth

I agree. We should not expect businesses to be anything other than businesses. It's like expecting an animal to change its instincts. Social responsibility is the realm of government and government should try to create conditions that will encourage businesses to behave in socially positive ways while remaining true to their nature. Ideally, government will do this elegantly and with a light but effective hand.

rdsouth

Tax policy (if we could get everybody to actually be subject to taxes) could be used to promote long term shareholding and discourage day (or microsecond) trading. Corporations owned by shareholders who are there for a quick flip will just mine the value built up in the corporation (much of it in the form of relationships with those "stakeholders") and turn a quick buck. Shareholders in it for the long haul will care about keeping a reliable consumer brand, a loyal corps of employees, and a good relationship with the community.

rdsouth

Sure, when you buy a company you are paying those who built up its assets, and those assets are yours to mine until the vein is depleted. You can sell an inferior product under a trusted brand name, for example, after enriching the founder (who built up that trust). But others are affected. Those affected are not only the "stakeholders" (in this example, customers) but future business builders generally. People will be that much less likely to come to trust a brand, having been burned before. It will be that much harder to produce that asset. Those who raid companies for short term gain may have made a fair deal with those who built them (or not, sometimes) but everyone is affected. So the current system of taxing investment income at a relatively low rate should only apply to those who hold stock for a long period. Not only should trades be taxed, but short term stock flipping profits should be taxed at an almost prohibitive rate.

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