The pledge by 181 CEO members of the Business Roundtable that their companies will now serve all stakeholders, not just shareholders, has ignited fierce debate. But, in my humble opinion, it is largely a false debate.
At first glance, the development seems revolutionary. After all, it reverses the long-held Milton Friedman coined axiom that a company’s primary purpose is to maximize shareholder value. Since the announcement, more than a few pundits have been handwringing about the implications of distracting corporate leaders from their fiduciary duty. Some going so far as to raise the specter of losing investors, shareholder led revolts, voting out boards and firing executives.
To manage the complexities of the real world, company leaders must navigate multiple — and often competing — demands from all sides. They do not have the luxury of considering only one set of stakeholders — to do so would be like wearing blinders.
A recent example ripped from the headlines. In the wake of a horrific mass shooting at one of its stores, Walmart took a public stand on gun control policy, ceased retailing certain ammunition and requested customers not to bring guns into its stores. If we try to imagine the discussions that led to this decision, almost certainly the impacts to the company’s financial results were considered. But it is also clear from the outcome that Walmart management considered public safety, employee safety, brand reputation, perhaps even a dash of morality and some good old common sense.
Clearly, this decision required many perspectives — from shareholders, and yes, other stakeholders. This is what good corporate managers must do every day, and what their stockholders expect them to do: Make the best decisions for their company… full stop. And the best decisions take into account the interests of stakeholders beyond the immediate financial interests of shareholders (the obvious reality of this statement makes typing these words seem superfluous).
There are many similar examples. After a career in corporate responsibility, I have first-hand experience with several cases, including Intel’s leadership on eradicating conflict in their minerals supply chain and Apple’s work to improve labor conditions in their outsourced manufacturing. These are just two of the more high-profile cases in very long list of successful companies taking a stand to improve social and environmental conditions in their value chains.
Contrary to the notion of being a distraction, I would argue that these programs added demonstrable business benefits. Interestingly, one of the loudest voices for more attention to social and environmental issues comes from investors. Once relegated to the niche of ‘activist investors,’ this sentiment has entered the mainstream. Larry Fink, the leader of the $6 trillion investment firm BlackRock, has penned several letters on the purpose of a company.
From his 2019 letter to CEOs:
“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.
Profits are in no way inconsistent with purpose — in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time — not only shareholders, but also employees, customers, and communities.”
Look, companies are not NGOs. They will always act out of self-interest. Yet it is encouraging to see leaders, such as Larry Fink, publicly supporting the idea that corporate (and investor) interests are served when companies consider, and meet, the needs of all stakeholders. Again, this seems obvious!
As the leader of the Global Reporting Initiative (GRI), I am regularly asked about how much companies should disclose about their impacts on social and environmental issues. Recently, I was drawn into a debate about whether companies should only disclose those issues that are financially material to themselves or whether they should report on a broader set of issues that are material to their stakeholders. Predictably, for the reasons above, I took the broader stakeholder view. But as I reflected on this experience, I am increasingly worried.
The movement to limit corporate disclosure on environmental, social and governance (ESG) issues to financially material topics (already legally required for public companies), has gained some momentum. If it catches on, it could roll back decades of progress. Even more troubling is that the advocates of this position brand themselves as working for environmental and social causes. Could this be a clever Trojan Horse to put the brakes on corporate responsibility?
Clearly a disclosure system that only works for the companies making the disclosures does not inspire trust. Nor does it provide the information that stakeholders — including mainstream investors — demand from companies. While financial materiality is an important perspective, it is a subset of the larger, and equally important, perspective of stakeholders beyond company shareholders.
The pledge by 181 CEOs and the definition of corporate purpose from Blackrock puts this argument in sharp focus. These CEOs are codifying what has frankly been reality for many years now — that companies must consider the interests of all stakeholders. And this reality, to see the bigger picture, is essential for good management and better investment returns. In this complex and connected world, managing a company with only the perspective of shareholders is like driving a car wearing blinders — dangerous!
These leaders, and all good corporate leaders, have already taken the blinders off — and this is a good thing for their shareholders as well as the rest of us. It’s obvious.