The New Old Corporate Objectives

Recently, the Business Roundtable made news by supposedly redefining the purpose of a corporation. Their "new" definition emphasizes these main points:

• Delivering value to our customers.
• Investing in our employees.
• Dealing fairly and ethically with our suppliers.
• Supporting the communities in which we work.
• Generating long-term value for shareholders.

I shortened these points, so feel free to follow the link above to read the full text.

This statement apparently is in reaction to the tendency of corporations to have a singular focus on shareholder value and perhaps little else. I strongly agree that only focusing on shareholder value can drive the wrong behavior. These concepts are not new as visionary corporate leaders have been applying them for decades.

The triangle model shown to the left is a useful tool for thinking about this. It is a simple model -- all models are wrong, some are useful-- and focuses on the Big Three Stakeholders: Shareholders, Customers and Employees. It puts Shareholders at the top because, in my experience, they will take priority over the other two. After all, they do own the company. However, the key is to find the right balance between serving all three stakeholder groups. It turns out that if you piss off and lose your customers, it is difficult to keep the shareholders happy. Similarly, if your employees abandon ship, it is difficult to keep the ship afloat. So it's all about finding the right balance. In other words, keeping the shareholders happy requires the corporation to consider the needs of employees and customers.

There is a time horizon associated with this model. In tough economic times, the shareholder interest may temporarily swamp out the interests of the other two. For example, employee salaries may get frozen for a period of time to improve financial results. Or prices to customers may get bumped up for the same reason. This approach can work for a while but it may not be a sustainable long-term strategy.

Other Stakeholders

The Business Roundtable expands on the triangle model by including two other stakeholders: Suppliers and Community.

The Business Roundtable statement about Suppliers seems a bit odd to me. Certainly Suppliers (I might have said Partners) are important to business success. However, the words used emphasize being fair and ethical with them. Of course, you want to be fair and ethical...with everyone. I can think of a few large companies that seem to think it is a good strategy to abuse their Suppliers. Not a sustainable strategy, in my opinion. When it comes to acting with integrity, that concept should apply to everyone, not just suppliers.

The (local) Community is a stakeholder that should be supported. It seems like the prudent thing to do, but what is the business case for this? Certainly, projecting a positive company image can help the employees feel good about working there. Customers may also take note of it and feel better about doing business with the company. (However, in a global marketplace, I question whether a customer in Singapore really cares about what a US company does to support their local community.) Shareholders may also respond positively and feel good about their investment. I think the tangible business value is really through the Employees. Having Employees see their employer contributing to the outside world (and being part of it) is a powerful force, one that builds community inside the organization.

Back to the Future

The Business Roundtable statement reminds me of the early days of Hewlett and Packard. The HP Corporate Objectives when Bill and Dave ran the company (1966), are captured here. (Just for the record, I was still in elementary school at the time.) These objectives are broad and comprehensive: Profit, Customers, Field of Interest, Growth, Employees, Organization and Citizenship.

One thing worth noting is that Profit is listed as #1, with this comment:

1. Profit, To recognize that profit is the best single measure of our contribution to society and the ultimate source of our corporate strength. We should attempt to achieve the maximum possible profit consistent with our other objectives.

This is well stated. Profit is the single best measure of contribution and it is the key enabler for achieving other objectives. When the profit disappears, everything else goes with it.