Purpose of a Corporation : What every American needs to know

One of the most exciting things for business over the 2019 summer was when the Business Roundtable put out a Statement on the “Purpose of the Corporation.” Signed by 181 American CEO’s all of whose brands are well known to consumers or businesses, the statement reflects the changing times. Here is the  Roundtable Statement and check out the 181 signatures from many CEO’s of companies you are already familiar with.

American politicians have been telling us what we know to be true – the “American Dream” eludes most folks today due to rapid changes in globalization and technology. Thankfully, leaders of American businesses have taken notice and have decided to move their focus from the “next quarter” to “long term shareholder value” on the shareholder element and have included all stakeholders in the “Purpose of the Corporation”. The times have truly changed in the last decade with all stakeholders having a voice on social media and the old dictum of “just focus on shareholder (short-term) value”  can no longer work.  See Eric Posner’s article “Milton Friedman was wrong” in the Atlantic.

This blog assumes that the Round Table CEO’s have positive intent and they really do want to switch from a next quarter approach to long term value for shareholders. So why have CEO’s collectively become so pious? That question deserves an entire post but three quick thoughts. (1) As Warren Buffet has been saying investors should think long term and Americans are listening with increasing appetite for index funds. It makes sense for CEO’s to align with the changing investor.(2) Politicians worldwide realize that only citizens in their country can vote and if unhappy then the election results can’t be good. The politicians of all persuasions are pressurizing companies  to look out for their voters (3) There was no social media when Milton Friedman suggested that if companies focussed on dividends then individual investors would have the freedom to choose what charity they would like to support. Although more efficient if companies directly engaged in charity through Corporate Social Responsibility (CSR)  – Friedman thought that the individual investor would be disenfranchised in not being able to decide on which stakeholder causes she/he would like to support. Today all stakeholders can speak out easily and do so with speed and vehemence, unimaginable even ten years ago. The CEO’s are forced to address stakeholder’s problems – after the fact -with a lot of collateral damage to their reputations (eg. big brands caught up in the opiate crisis ). The times are changing too rapidly to stay only with short term shareholder value….

In any case,  assuming that the CEO’s have positive intent here is how Americans in private life and in their roles as employees, consumers and as public  need to think about each element in the Corporate Purpose statement.

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