A New Purpose for Corporations?
On August 19, 2019, the Business Round Table, a gathering of 200 of the largest businesses in the US, decided to change the purpose of a corporation. No longer is a corporation’s sole responsibility to its shareholders. Now a corporation will also be responsible for improving conditions for its customers, employees, suppliers, retailers, communities, and environment. And I live close enough to the University of Chicago to hear Milton Friedman’s ghost sputtering in the halls.
Friedman popularized the idea of a corporation having responsibility only to its shareholders in a 1970 article in the New York Times titled, “The Social Responsibility of Business is to Increase its Profits.” He concluded the article with a quote from his book Capitalism and Freedom, “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
Friedman’s position had legal precedence. In Dodge v Ford (1919), the Michigan Supreme Court decided that Henry Ford had to pay a dividend to his shareholders rather than using his profits only to increase wages, cut costs and invest in new plants. The Michigan Supreme Court ruled:
“A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.”
Friedman’s writings and his “Chicago School” of economists popularized this notion of the corporation having only one responsibility. In 1997 the Business Roundtable, in its Statement on Corporate Governance, echoed Friedman when it wrote “… the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders. The notion that the board must somehow balance the interests of stockholders against the interests of other stakeholders fundamentally misconstrues the role of directors.”
What Hath Shareholder Primacy Wrought?
What has been the result of America’s largest corporations serving their shareholders as their primary duty? Profits of corporations have skyrocketed, while wages as a proportion of GDP have declined.
Making inequality rise to levels we haven’t seen since before the stock market crash of 1929.
Why the Sudden Change?
So why have the business elite decided to change their position now? Based on my discussions with one of the signatories of the recent BRT statement, CEOs have a real concern about an economy that is concentrating wealth at the top, which leads to a growing polarization of our politics and decreasing confidence in our economic system. They see the writing on the wall with the surging candidacies of Bernie Sanders and Elizabeth Warren. Business leaders know that new administrations may seriously curtail the way corporations can operate unless they show themselves to be positive contributors to society.
Can They Do This?
If the BRT CEOs carry out the intentions of their statement, they will have legal precedent behind them. While the Dodge v Ford case gets quoted often by shareholder groups, more recent rulings in Delaware (where most of these companies are incorporated) have more sway. In the case of Revlon vs. MacAndrews and Forbes Holding (1985) the Delaware court decided that “A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.” The US Supreme Court summarized this view in the case of Burwell v Hobby Lobby Stores (2014) in this way: “… modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.”
Will They Do This?
The bigger question is whether these companies will actually carry out these high-sounding objectives, or whether this statement becomes window dressing to help them through a difficult political moment. My guess would be that major corporations will make some changes, such as increasing wages and making their products a little more sustainable. I don’t think it will lead to major changes in corporate behavior unless the businesses in the Round Table enact the following three measures:
Fortune Magazine quotes Anand Giridharadas, author of the book Winners Take All: The Elite Charade of Changing the World, “What I see are well-meaning activities that are virtuous side hustles while key activities of their business are relatively undisturbed … Many of the companies are focused on doing more good but less attentive to doing less harm.”
The first sign of a corporation’s serious intent to follow the BRT resolution will be this: Does it do a thorough inventory of its effects on customers, employees, suppliers, communities and the environment to see where it is doing harm? And then, does it take steps to stop doing harm?
Corporations produce reams of data on their financial performance, but very little on their social performance. Among corporations there is no generally accepted set of indicators to measure social performance, which makes it very hard to compare the performance of one company with another.
If the corporations in the BRT are serious about this resolution, they will designate senior staff to work with stakeholder groups to come up with appropriate measures of performance. Then they will set targets for each of these indicators and publish their results in each category.
Corporations have quarterly earning calls where their shareholders compare their performance against projections. If they want to achieve social goals, then they will also need to hold meetings with representatives of different stakeholder groups to present their performance as compared to their projections and receive the opinion of their stakeholders on the results.
What Would Danone Do?
In other words, the corporations in the BRT should follow the example of the Danone Corporation. Over the last decade, Danone has begun to examine more carefully its own purpose as a corporation. Examining its own products, which include dairy and plant-based essential foods (including yogurt), early life nutrition, medical nutrition, and water, it decided that its main purpose was to protect and nourish the health of people and the planet. Creating values for shareholders was one of the means that they used to achieve that purpose, but not a purpose in itself. (Hear the CEO of Danone, Emmanuel Faber, describe the purpose of a class of business school students.)
Danone set company goals that aligned with the Sustainable Development Goals of the United Nations. It also sought out ways to be accountable for its commitments to its employees, suppliers, communities, and environment. It helped establish, with Mars, Unilever and Nestle, the Sustainable Food Policy Alliance to develop tools for measuring the sustainability of its supply chain. It also decided that all of the companies within Danone should become Certified B Corporations.
“Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose,” according to the Certified B website. B Corps commit to a regular certification program that measures a company’s entire social and environmental performance. The B Impact Assessment evaluates how a company’s operations and business model impacts its workers, community, environment, and customers.
Danone wants to have all of its operations covered by B Corp certifications by 2030. Already, 12 of its subsidiaries, representing 30% of its sales, have been certified. This includes Danone North America, which is the largest B Corp in the world.
How Can We Tell They’re Sincere?
So how will we know that those who signed the Business Roundtable Statement are serious about following through with their commitments? When we hear Jamie Dimon (president of the Roundtable) and other signers tell us that they are submitting their companies to a B Corp assessment.