"Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country." This is a statement taken from the Business Roundtable’s August 19, 2019, open letter titled "Statement on the Purpose of a Corporation."
This statement reflects a public transition by the members of the Business Roundtable, representing a large portion of the American business community, away from the historical view that the sole responsibility of a business is to increase and maximize its profits and shareholder returns and towards what is now coined "stakeholder capitalism."
In this view, "stakeholders include customers, employees, suppliers, communities and shareholders. Critics of stakeholder capitalism believe that a shift away from profits results in a lack of focus and in corruption. However, advocates such as BlackRock CEO Larry Fink believe that profits and purpose are "inextricably linked."
Purpose and profit tend to go together in three meaningful ways:
- First, if a company has a strong and well-articulated purpose, employees will feel their jobs are more meaningful and impactful.
- Second, companies with a strong purpose have been shown to outperform the market by up to 7% per year.
- Third, companies with high levels of purpose tend to grow faster and have higher profitability.
However, companies focusing on the promotion of a strong purpose are also faced with several obstacles:
Creation of Incentives
Perceptions of a company’s purpose may suffer when there is a large gap between the pay of high-level employees and middle- and lower-level employees. Ensuring proportionate pay and fair distribution in wages tends to help all employees feel valued within a company.
Companies with CEOs who were promoted internally may tend to exhibit higher levels of purpose. The reward that comes from hard-working, dedicated employees can help unite a company’s purpose across all levels of management.
Finally, making decisions that are well thought out and adequately discussed among employees of all levels can help maintain a company’s purpose. Far too often companies make decisions, such as private equity investments, mergers and acquisitions, without considering long-term effects on firm culture and employees’ sense of purpose.
The conclusion reached by the Business Roundtable is that articulating and maintaining a strong purpose, guided by a commitment to all of the stakeholders of the business, unites the stakeholders in the interests of the enterprise, benefits the entire community, and increases the profit potential of the business.