181 leading business leaders realized that businesses needed a goal beyond profit

summary

August 19th^thIn 2019, the Business Roundtable (BR) published a note titled "Statement on the Purpose of a Company". The Business Roundtable, one of the largest business lobbies in the United States, includes 192 senior US corporate executives, from Apple to Walmart. . A one-page statement ended: "Each of our partners is essential." We are committed to bringing value to each and every one of them for the future success of our businesses, our communities and our country. The main criticism of this type of capitalism is that any objective other than shareholder profits leads to a lack of concentration and corruption. If they had the opportunity, these interested leaders would divert resources to their own enrichment under the pretense of "purpose". Larry Fink, CEO of Blackrock, in his 2019 letter to CEOs disagreed with this assumption, stating in bold: "The Goal It's not the exclusive pursuit of profits, but the strength that drives them to achieve them … Profits are by no means inconsistent with purpose – in fact, the benefits and purpose are inextricably linked. "This debate – whether the purpose and benefits work together or are fundamentally in conflict with one another – can be illuminated by empirical research. This is the goal of our ongoing research initiative on business goals. Our findings support the views of Larry Fink and the Business Roundtable: goal and profit go hand in hand.

On August 19, the Business Roundtable published an open letter titled "Statement on the Purpose of a Company". One of the most prominent lobby groups in the United States, the Business Roundtable (BR) brings together CEOs of major US companies ranging from Apple to Walmart. Between the reserve title and the 181 signatures was a one-page statement that ended as follows: "Each of our stakeholders is essential. We are committed to bringing value to each and every one of them for the future success of our businesses, our communities and our country. "

In itself, this phrase is indistinguishable from the trivial commentary that fills in the annual reports of many members of the business roundtable. For those who are actively following this topic, however, this is a very public reprimand of Milton Friedman's worldview that guides business decisions behind closed doors. Friedman, a renowned economics professor at the University of Chicago, wrote a famous New York Times essay from 1970 titled "Corporate Social Responsibility, It's Increasing Its Profits" Which helped launch half a century of "shareholder capitalism". In this world view, the company's main goal is to maximize the profits of this company.

The new Business Roundtable statement explicitly contradicts this view. According to the statement, companies are accountable to five constituent groups, whose shareholders are only one (customers, employees, suppliers and communities). In this sense, it is a classic articulation of "stakeholder capitalism" that prevails in Europe today and in the United States after the war. Thus, although the statement itself is not remarkable, it has the support of CEOs accounting for almost 30% of the total market capitalization of the United States.

The main criticism of stakeholder capitalism is that any objective other than shareholder profits leads to a lack of focus and, ultimately, corruption. This criticism stems logically from the point of view that CEOs can be autonomous arbiters of social value and, if given the opportunity, divert resources to their own enrichment under the pretense of "purpose". In his 2019 letter to the CEOs, Larry Fink, the CEO of BlackRock, disagrees with this assumption, said in bold: "The goal is not the only search for profits, but the strength that drives them for achieve. The benefits are by no means inconsistent with the purpose – in fact, the benefits and purpose are inextricably linked. "

This debate – whether purpose and profits work together or fundamentally opposed – can be informed by empirical research. And the findings of our ongoing research initiative on corporate goals reinforce Larry Fink's views and, now, the Business Roundtable: Goal and Profit go hand in hand. Using over 1.5 million employee-level observations on thousands of companies, we quantified the goal as the overall sense and impact felt by employees of a company. business. Our research shows that if the company has a strong goal, its employees will feel more meaningful and have more impact in their work. This viewpoint reflects the opening statement of the BR report: "Americans deserve an economy that allows each person to succeed through hard work and creativity, as well as through lead a life of meaning and dignity "(we are emphasizing).

In our data, we find that companies with the highest goals outperform the market by 5% to 7% per year, on par with companies with the best governance and innovation capabilities. They are also growing faster and have higher profitability. However, the link between goal and profitability is only present if senior management has been able to spread this sense of purpose more deeply into the organization, particularly in middle management, and to provide strategic clarity to the organization. whole organization on how to achieve this goal.

Our work could also help to explain the barriers businesses face in moving away from such an exclusively shareholder perspective. The introductory status of a company and its investor base is one of these obstacles. We find lower targets in listed companies, compared to private companies. Importantly, this trend is generated by public companies with concentrated or activist shareholders. We may think that we find the opposite effect, namely that activist shareholders choose poorly performing companies that also have a lower objective, but this is not what happens in our data. Instead, activist shareholders acquire large holdings in publicly traded companies, and then decline to medium and long-term employees. For us, this shows the importance of companies strategically managing their shareholders and aligning their long-term strategies with the types of investors that can support them.

Incentives are another factor. We find that this goal decreases when the gap between CEO and median pay and performance-based pay for middle and lower level workers is greater. Both can stem from employee sentiment that value creation is unfairly attributed to the company.

Leadership is yet another. We find that companies in which CEOs have been promoted internally have greater determination. The rise in ranks seems to be an important variable to preserve the purpose of the organization. Finally, strategic choices, such as mergers and acquisitions, are also an important factor. We note that mergers and acquisitions tend to reduce the meaning of objectives, which is consistent with the notion that most M & A activities do not include sufficient due diligence as to how they will affect employees. and the culture of the company.

All of these models are important for the discussion of the role of finality in business and society. We live in a time when production is increasingly concentrated among large corporations and large capital providers. With this greater market power, we expect a greater social role, whether it is the choice of CEOs or not.

It is difficult to know what the impact of this letter from the business roundtable will be. On the one hand, it could be a cynical response to the political speeches and proposals of the election year that worried the member companies of this powerful lobby group. On the other hand, this may reflect a deeper response from national leaders to the decline in social mobility, the polarization of toxic substances and the loss of confidence in the traditional institutions we are struggling with today. ; hui. Social changes rarely happen suddenly. They are often manifested by the gradual erosion of support for one worldview and the rise of another. And with this letter, we can see progressive steps in this direction.

The authors wish to thank their partnership with the Great Places to Work Institute for this research initiative, and more specifically the support of Ed Frauenheim and Marcus Erb at the Institute.