The esteemed economist Milton Friedman once stated, “The only corporate responsibility a company has is to maximize its profits.”
For more than a generation, that paradigm largely defined corporate America. Businesses were guided in near exclusivity by a singular purpose—to maximize shareholder profits. Fidelity to earnings became the ultimate metric of success, a principle heralded from classrooms to boardroom and romanticized even in pop culture. Who can forget Gordon Gekko’s infamous line: “Greed, for lack of a better word, is good.”
From a dollars and cents perspective, that model functioned well, and its accountability to shareholders, in theory at least, provided some governance against corporate abuse. But frequently it ignored other constituents—consumers, employees and communities. As columnist Aaron Ross Sorkin opined in the New York Times, this concept of “shareholder democracy,” in reality, yielded an “era of shareholder primacy.”
It is unfair to dismiss the traditional shareholder-driven model as universally evil, as some pundits have. After all, the basic function of a business is to deliver goods or services in exchange for the economic benefit of stakeholders. But it’s difficult, too, to deny the public distrust that model bred, at least in part.
Opinion polls have consistently found low confidence in corporations to act in the public interest over the past quarter century, and those number have declined in recent years. Americans’ trust in big business to “do what’s right” has not exceeded 25 percent since 2001, according to Gallup, and four in ten Americans embrace some form of socialism. An annual Edelman poll last year found trust in corporations fell 10 points from the year prior, and in 2017, the same Edelman poll showed that nearly two-thirds of respondents don’t believe CEOs to be credible.
“In absolute terms the results are troubling for business,” Matthew Harrington wrote in the Harvard Business Review. “Will business leaders continue to focus solely on their companies’ financial performance, believing that to be their primary responsibility, or will they look to engage externally in order to strengthen their permission to operate?”
Increasingly, it seems the answer may be the latter.
This month, the members of the Business Roundtable—a group of 193 major U.S. companies including Amazon (the most valuable public company), American Airlines (the largest airline in the world) and JP Morgan Chase (the largest American bank)—signed a “statement of corporate purpose,” which states that corporations have a responsibility to create economic benefit for all, not just investors.
“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders,” the statement reads. It then specifically commits to delivering value for customers, investing in employees, dealing fairly with suppliers and supporting communities—only lastly mentioning creating value for stakeholders.
The Roundtable’s rally behind social welfare marks a groundswell shift in the corporate framework, one that puts a heighten priority on the public good versus profits for some. In that sense, it reflects a growing populism and discontent with income inequality—which, perhaps more than ever, has become a central theme in the current presidential election cycle.
What impact the statement will make in actuality is hard to say, and one might argue that rather than a departure from the old corporate model, the move is actually a manifestation of it. Modern companies have demonstrated that social accountability can be good for business, and many have developed their business model around doing good.
Eighty-seven percent of consumers said they would purchase a product because a company engaged on an issue they care about, according to a 2017 Cone Communications study. Eighty-eight percent will be more loyal to a company that supports a social or environmental cause. Conversely, 76 percent will refuse to patronize a company if it’s not aligned with their views on an issue.
Viewed through that lens, it’s conceivable that the Business Roundtable’s statement is less a move away from the old shareholder model, as much as an expression of it. If supporting the public good also serves investors, then doing good actually achieves a business’ obligation as Friedman and others see it.
Still others see the Roundtable’s new modus operandi as a potentially costly step. “Serving the long-term interests of shareholders necessarily requires executives to attract and retain a talented workforce, to provide good value for consumers, to deal fairly with suppliers, and to respect the laws and customs wherever a business operates,” columnist James Freeman wrote in the Wall Street Journal. “Our future prosperity depends on companies devoted to generating returns for investors by competing to serve customers, not a failed political agenda.
Whatever the case, whether self-serving or public-serving, it is impossible to ignore corporate America’s embrace of raising the social welfare tide. From food to fashion, sustainability has emerged a driving commercial force, and many businesses have won consumer loyalty by espousing issues unaddressed elsewhere.
More than a passing fad, this newfound emphasis on social accountability reflects the behaviors of a new generation of consumers. This isn’t your grandma’s economy, and that presents both challenges and opportunities for companies. More and more, customers not only want, they expect, a memorable experience from businesses.
“As consumer spending shifts from things to experiences,” Ryan Estis advises business leaders, “it pays to consider the customer experience question beyond your category. Today, customers are much more inclined to compare their experience with U2, The Dallas Cowboys, Starbucks, Uber and Amazon to the experience YOU deliver.”
Whether corporate America is in the midst of a sea change transformation or simply experiencing the natural progression of traditional economics is yet to be seen. What’s evident is that modern consumers have created a climate in which social accountability can be good for margins—and that may just serve shareholders and public interests alike.