Corporations: Temporary Sanity?

A press release this week from the Business Roundtable:

“Business Roundtable today announced the release of a new Statement on the Purpose of a Corporation. It was signed by 181 CEOs who commit to lead their firms for the benefit of all stakeholders. They include customers, employees, suppliers, communities, and shareholders. Therefore, the new Statement supersedes previous ones. And it outlines a modern standard for corporate responsibility.”

“While each of our firms serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to these activities:”

  • Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
  • Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
  • Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
  • Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
  • Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

“Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

OK, so why exactly does this matter?

The previous philosophy had been to focus on “shareholder value” — for public companies, that’s stock price. That had led companies to play games with quarterly earnings reports and treat both employees and customers as chicklets — that is, interchangeable and replaceable. Because stock price cannot be directly controlled and is subject to market fads, that had driven some CEOs nuts and some companies into the hands of private investors (e.g., vulture capitalists). It had also encouraged a fad of stock buybacks instead of investing profits into future growth.

This statement returns to a more Deming-like view that there are other people that matter besides shareholders and that the company focus should be on long term growth and not short-term gyrations in stock price or sales. In principle, in turn, this should reduce interest is mergers — most of which do nothing for long term growth — and may reduce layoffs as well. It all depends on how many companies take this new direction to heart.

Finally, and helpful to US companies, it may encourage firms to focus on product and service quality and less on ad spend. The long term focus has underpinned the growth of the Japanese car industry at the expense of US makers. When you’re focus is on profit, you’re buying the cheapest parts to do the job rather than the best parts, and cheap doesn’t last. When you focus on long term growth, you want customer loyalty and word-of-mouth endorsements, and that means you have to provide quality products. Think of Dodge (pretty cars that break) versus Toyota (rugged cars that last).

The Roundtable statement could be a long-overdue stride in the right direction. I certainly hope so!

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