Time to End the False Dichotomy

On August 19th last year - a year ago yesterday - a massive amount of media coverage flowed from the announcement, “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’”. That was the title of the organisation’s own announcement.

Marking the anniversary, a group calling itself a left-right coalition, published an open letter to the Business Round table, “after a year of empty promises”. And they proposed “a framework for substantive action.”

The proposals are very specific and in my view not very helpful for that reason. We first need to resolve an outstanding issue.

The Business Round statement was taken to be a “win” by those who have long advocated, rather than existing to maximise value for shareholders the purpose of business must be creating value for all shareholders. This very polarised shareholder v stakeholder debate is, in my view, an entirely false dichotomy, as I explained in a recent article.

In my view Arie de Geus, a senior executive at Royal Dutch / Shell for 38years, was correct to say a “company exists primarily for its own survival and improvement: to fulfil its potential and to become as great as it can be. It does not exist solely to provide customers with goods, or to return investment to shareholders”, or for the benefit of any other stakeholder group.

If the focus of the company is to “become as great as it can be”, that will benefit both shareholders and stakeholders, including society. The only people that may loose are market speculators who have no interest in the long-term success of the firm and are of much less value to society.

In other articles I have expressed the view that there is only one purpose of a business, and that is to create value in ways that ensure society is willing to grant it a license to operate and earn profits, because doing so benefits society. These principles are at the heat of the idea of the Social Contract.

Once we have moved beyond the false debate, and it is agreed that everyone benefits from the long-term success of the business, I think it is time to get specific. And being specific means making the implicit social contract explicit, by asking companies to define how they intend to fulfil their obligations. This can be done. The Johnson and Johnson “credo” represents an early prototype, and when the company has abided by it has served all interests. But it has made mistakes such as its faults in relation to the opioid crisis.

To ensure companies avoid such mistakes, I suggest that the explicit social contract of a firm is based on a clearly defined scheme for creating value, as a return on investment for all individuals or groups with a vested interest in the long term success of the business, and upon whom the business depends to achieve that long-term success. The Value Scheme ought to be specific to the firm, and its performance and future prospects out to be understood based on full consideration of the scheme.

All that I have said so far represents the thinking, and actions, that I believe any enlightened enterprise would accept. And they would happily be accountable for the contribution they make to the sustainable widely shared prosperity of society, measured in terms of human flourishing and wellbeing – because business can only thrive in a sustainable way within a thriving society.

I will conclude with final remarks from Arie de Geus that I think all business leaders would do well to consider, including the leaders of the businesses that are members of the Business Roundtable.

De Geus said, “If the real purpose of a living company is to survive and thrive in the long run, then the priorities in managing such a company are different from the values set forth in most of the modern academic business literature”. And, perhaps most importantly, he recognised, “Such a purpose also contradicts the views held by many managers and shareholders”, but, sooner or later, they “find that their companies do not have the right habits to accomplish what they hope to achieve.”

He also said, “If we look at them in the light of their potential, most commercial corporations are dramatic failures — or, at best, underachieve. They exist at a primitive stage of evolution; they develop and exploit only a fraction of their capability”. I believe that to be true, and that it will remain the case, until a more enlightened enterprise approach is understood and adopted. And it is for this reason I recently announced the soft launch of the Enlightened Enterprise Academy