Somewhere, Milton Friedman must be spinning. Whatever they thought they were doing, the 181 CEOs who signed the Business Roundtable’s breakthrough statement on the purpose of corporations embraced a much wider interpretation of corporate responsibility—signalling the beginning of the end for the shareholder primacy cult. The pressure on business leaders to declare and deliver against a wider social purpose can only grow.
But, as the Washington Post notes, the statement is, in many respects, “a return to the past”. In 1981, the Business Roundtable declared that companies needed to balance shareholders’ interests with “the legitimate concerns of other constituencies.” That concern for “other constituencies” went missing in action in 1997 when the Roundtable endorsed the doctrine of “shareholder primacy”: the belief that the sole purpose of a corporation is to maximize the value delivered to shareholders. The new statement is therefore a reversion to the common-sense interpretation of corporate purpose that prevailed up until Friedman’s thinking became unassailable in the 1980s and 1990s.
Even so, we warmly welcome the Business Roundtable’s initiative, overdue though it is. For 181 of America’s leading CEOs to publicly break rank is hugely significant. But, as several commentators note, what really matters is what they do next. There is a narrow window of opportunity within which to prove that stakeholder capitalism is more than self-serving PR.
So what actions should the 181 CEOs and their boards consider taking to prove that they do mean business? We suggest that they show decisive leadership in, at minimum, one of the following six areas:
- Pay and incentives
One key source of discontent with capitalism has been the escalating ratio between what CEOs earn relative to their employees. For many firms, the ratio between the CEO’s pay and that of their median worker is now well in excess of 200:1. Taking action to narrow the gap – whether that involves curbing executive pay or increasing average wages (or both) – is a critical first step companies should consider. Another would be to follow the advice of Judy Samuelson of the Aspen Institute, who has called on companies to “dampen down the intense focus on stock price in CEO pay.”
- Ownership and governance
Another way to better align shareholder interests with those of employees is to make employees themselves shareholders. Creating employee stock ownership plans (ESOPs) – or, where they already exist, expanding them – is therefore a key opportunity. To give real teeth to your commitment to serve all stakeholders, ensure that different stakeholder groups are properly represented in your governance structures. Appointing worker representatives to the Board is one tried-and-tested approach; creating independent advisory boards is another