Sustainability Requires a Shift from Shareholder to Stakeholder Primacy

Setting the strategy for the corporation obviously requires consensus on the purpose of the firm, the goals and objectives of the firm’s activities and the parties who are to be the primary beneficiaries of the firm’s performance.? While primacy of shareholder interests has been the dominant theme of corporate governance, at least in the US, for decades, there is no doubt that one of the most dynamic and important debates in the corporate governance arena, as well as in other areas of society, is the proper future purpose of the corporation.?

Economist Milton Friedman’s writings have served as a primary source for the theory of shareholder primacy, the idea that corporations have no higher purpose than maximizing profits for their shareholders, and it has often seemed that shareholder primacy is treated as something more than just a theory but rather a natural law of the marketplace.? However, other members of the academic community, as well as regulators, politicians, activists and even some of the investors that had grown wealthy during the stock market turbulence that started in the 1980s, have questioned the primacy of shareholder value and called for rethinking the role of the corporation in society and its duties to their owners and other parties impacted by their operational activities and strategic decisions.? Among other things, this meant challenging the long-accepted assumption that the principal participants in the corporate governance framework were the shareholders, management, and board of directors.? For example, Sir Adrian Cadbury, Chair of the UK Commission on Corporate Governance, famously offered the following description of corporate governance and the governance framework in the Commission’s 1992 Report on the Financial Aspects of Corporate Governance:

“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.”

Cadbury’s formulation of corporate governance brought an array of other participants, referred to as “stakeholders”, into the conversation: employees, suppliers, partners, customers, creditors, auditors, government agencies, the press, and the general community.? The principles of corporate governance of the Organisation for Economic Cooperation and Development clearly state that the corporate governance framework should recognize the rights of stakeholders (i.e., employees, customers, partners and the local community) as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.?

The Business Roundtable ,?a nonprofit association based in Washington, D.C. whose members are chief executive officers (“CEOs”) of major U.S. companies has periodically issued Principles of Corporate Governance since 1978.? On August 19, 2019, the Business Roundtable announced the release of an updated Statement on the Purpose of a Corporation signed by 181 CEOs that redefined the purpose of a corporation as stated in previous principles to move away from shareholder primacy (i.e., that corporations exist principally to serve shareholders, a concept that had been championed in the principles since 1997) to promotion of an economy that serves all Americans and included commitments to operate companies for the benefit of all stakeholders: customers, employees, suppliers, communities and shareholders.?

Several of the CEOs explained that the changes were necessary to reflect the way that companies can and should operate and the essential role that companies must be willing to play in improving society through job creation, innovation and delivery of crucial goods and services.? The updated principles also explicitly recognized that CEOs needed to look beyond generating profits and returning value only to shareholders to building long-term value for all stakeholders.

The Statement on the Purpose of a Corporation reads as follows:

“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

• 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.”

Articulating a purpose, a meaningful and enduring reason to exist that aligns with long-term financial performance, is an essential foundation for creating a sustainable business and provides a clear context for daily decision making and unified and motivates relevant stakeholders.? However, satisfying multiple stakeholders involves a difficult balancing process and a corporation’s purpose needs to continuously revisited and reexamined as circumstances change.? Throughout the lifecycle of the corporation, governance mechanisms and procedures need to be in place to ensure that the corporation, through the day-to-day actions of its managers and employees, remains faithful to its purpose and accepts accountability and an obligation to report transparently on its progress.? Development and implementation of these mechanisms and procedures will require new skills and innovative approaches to dealing with traditional topics such as corporate governance, investors’ relations, raising capital, organizational culture, compensation, and incentives and measuring and reporting on performance.?

For addition discussion of the debate regarding the purpose of the corporation, see my chapter On the Purpose of the Corporation .