NEXT: Purpose-Driven Capitalism
On August 19, the Business Roundtable—that club of 200 CEOs from large and influential American companies—announced a redefinition of the purpose of a corporation. The updated “Statement of Purpose of a Corporation” announces that a company should seek to benefit many stakeholders, not simply maximize the profits of shareholders. This means:
- Delivering value to customers
- Investing in employees
- Dealing fairly and ethically with suppliers
- Supporting the communities in which corporations work
“Each of our stakeholders is essential,” the statement concludes. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
This new statement reflects a fundamental shift by the Business Roundtable. It might seem that the purpose of corporate capitalism has always been the maximizing shareholder value, but the idea was born with Milton Freidman in the 1960s. By the 1980s, it had become orthodoxy at business schools, and thereafter became the modus operandi for most businesses. Compare the new Statement with the one the Business Roundtable made in 1997:
In The Business Roundtable’s view, 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.
If history is any guide, then one of its lessons is that capitalism is not monolithic: it has been practiced in many different ways. Thus it is possible that the idea of “maximizing shareholder value” may be fading as the driving force of capitalism. The shift in emphasis expressed by the Business Roundtable may well be purely savvy PR with little real conviction behind it. Or, it could be evidence of a newly-emerging form of corporate capitalist practice. Will this new form come to define capitalism in the future?
Jean-Dominique Senard, the CEO of the French company Michelin, says that European companies are currently squeezed between two competing forms of capitalism: U.S.-style capitalism based on the idea of maximizing shareholder value, and a Chinese-style of state-sponsored capitalism.
Senard favors a style he calls “responsible capitalism,” where companies consider financial performance, as they do now. “But their purpose must also take into consideration the social and environmental impact of their activities.” The French government has recently enacted laws based on Senard’s ideas.
In this country, “responsible capitalism” is going by the name “conscious capitalism.” Conscious Capitalism, Inc. articulates four principles of conscious capitalism: conscious leadership, a stakeholder orientation, a values-based culture, and higher purpose (beyond money making). I note that there is a chapter of Conscious Capitalism here in Columbus (full disclosure: I am a member of its education committee). The growing number of participants in our meetings signals a widespread interest in the values of purpose-driven capitalism.
One reason for this shift toward conscious capitalism may be because Millennials are starting to enter positions of leadership. Many of those Millennials who have started companies began with the idea of addressing some societal problem. Profit (if it comes at all) comes later. Another cause might be a reaction to the excesses of certain businesses after the Great Recession, especially ever-expanding executive compensation and ever-widening income inequality.
Senator Elizabeth Warren has sponsored the “Accountable Capitalism Act,” which would require companies “to create a general public benefit as articulated in its charter,” and require company directors “to balance the pecuniary interests of shareholders with the interests of persons materially affected by the entity,” among other things.
The bill is still being debated in committee, so I cannot say whether the act will become law. But I do note that so-called “benefit corporations”—corporations that must adhere to a social purpose and not simply profit-making— are increasing in number, and that we might soon see accountable, benefit corporations as the rule, not the exception, in capitalist practice.
If economic ideas drove capitalism toward maximizing shareholder value, then who are the idea-generators that might cause a shift toward responsible, conscious, accountable capitalism? Will there be a new big consulting firm—on the order of McKinsey or Booz Allan or Bain—for purpose-driven capitalism? Will business schools curricula adopt responsible capitalism?
It is far from certain that purpose-driven capitalism will become the dominant model. But we may nevertheless be witnessing the early tremors of a seismic shift in capitalist practice.