Shareholders vs. stakeholders: Fundamental changes in an old debate
The emergence of the modern corporation in the late 19th century spawned a passionate debate that continues to the present day: What are a company’s financial and moral obligations to the civil society whose support is necessary for its license to operate?
This debate has waxed and waned at various levels of ambition during the past century, but one factor has remained constant: Whether by government edict or through voluntary initiatives, companies both public and private always have supported initiatives beyond their immediate need to maximize shareholder profitability.
This behavior also stems from their original charters that nowhere provide a legal requirement that shareholder value constitute a company’s mission. Rather, such charters empower corporate boards to balance the diverse and sometimes conflicting interests of many shareholders for the longer-term health of the company. As long as boards were free of conflicts of interest and made reasonably informed decisions, U.S. courts have not reversed their judgments on the best interests of the company.
What, then, explains the recent decision of 181 chief executive officers affiliated with the Business Roundtable to issue a new Statement on the Purpose of a Corporation? Was there an awakening of collective social consciousness, or was a more cynical ploy at work to stunt future regulatory initiatives?
CEOs differ in their approach to management strategy and leadership style, but they all highly value maximizing their degrees of freedom in running their enterprises. In deciding to update their corporate mission statement, the CEOs were responding to three major factors that threaten their executive freedoms and responsibilities.
First, stakeholder perspectives have acquired greater scope and intensity during the past two decades. This development has fractured previous societal consensus for free trade agreements and investor capitalism while yielding greater public support for a broader social agenda that CEOs are expected to address as leaders of major institutions, including inequality, gun control, advancing LGBTQ rights and other diversity issues, and climate change controls.
From a CEO standpoint (in which huddling with your peers is preferable to standing alone), an updated mission statement represents a logical starting point to engage in a debate about a corporation’s social license to operate. It also embodies a tactical desire to buy some time before having to advance more detailed proposals.
Second, the nature of business risks is changing. Many of these risks are long-term in their evolution but increasingly short-term in their manifestation. They include the increasingly disruptive impacts of climate change that is eroding both public and private infrastructure; the growing vulnerability of global supply chains from tariffs and other protectionist measures; and greater volatility in commodity prices.
Companies have been forced to expand the definition of what is "material" to their business operations and to begin accounting for expanded risk materiality in their financial statements.
Third, current and future employees are restless. At a time of growing global competition for talent retention and recruitment, major corporations are beginning to recognize the need to adjust their policies and practices by listening to a workforce whose voice continues to expand through social media and other platforms. This factor is a major reason why CEOs have become increasingly active in advocacy related to climate change and the broader sustainable development agenda, as well as diversity and gun control issues.
In an age when the erosion of the political center and accompanying government dysfunction no longer buffers businesses from social pressures, the expanding stakeholder agenda will add both complexity and disruption to enterprise management.
What, then, should be done to preserve corporations’ future license to operate and maintain CEOs' freedom to lead their businesses?
The Business Roundtable’s updated mission statement is a starting but hardly a stopping point towards developing a new narrative to establish the legitimacy of business for 21st-century challenges and opportunities. As the most powerful global institution in the world, the multinational corporation is expected to have a perspective on issues ranging from the reduction of inequality and poverty to why Flint, Michigan, and other communities can’t obtain a decent water supply.
Corporations always have existed for multiple purposes and evaluating their performance through the primary metric of shareholder value is inconsistent with the principles embodied in their corporate charters to preserve their longevity.
Corporations also need to make major changes to their governance model to bridge the shareholder-stakeholder divide to improve their eroding social legitimacy. Initiatives should include modifying executive compensation plans to reduce the gap between senior executives and employees; altering selection criteria for board members to expand diversity in both people and skill sets; updating financial accounting practices that monetize pollution and other externalities while also quantifying the value of energy efficiency, renewable energy and other investments; and expanding the disclosures of business risks.
Finally, corporations need to develop a positive advocacy agenda that presents common-sense proposals to effectively solve issues that are of growing public concern. Typically, the business community plays defense to deflect and delay regulation, taxes or other controls upon their operations. This posture has become more transparent to shareholders, employees and other stakeholders and serves only to widen the corporate credibility gap towards attaining sensible compromises.
The movement for an expanded stakeholder voice in corporate decision making is challenging and adds complexity to already crowded executive calendars, but it is not antagonistic to shareholder value. In a world driven by changing demographics, disruptive technologies, climate change, less stable financial and political systems and market volatility, integration of both approaches is necessary for business to maintain its social license to operate.
In doing so, corporations must continue to focus on what they do best: managing the fundamentals of innovation and productivity, and the opportunities and costs of the future, to improve the quality of our lives.