What is the Purpose for the Corporation?

Business world seeks a new purpose for the corporation because the answer to the question “How well does the capitalism serve society?” seems to be pretty embarrassing.

In 1997, the Business Roundtable, an association of the chief executive officers of nearly 200 of America’s largest companies, created the philosophy in a statement of corporate purpose. “The paramount duty of management and of boards of directors is to the corporation’s shareholders,” the group declared. “The interests of other stakeholders are relevant as a derivative of the duty to shareholders.”

22 years after the aforementioned statement, on 19 August 2019, the Business Roundtable announced the release of a new statement on the Purpose of a Corporation signed by 181 CEOs in the U.S. who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.

In accordance with the surprising announcement, the leaders of these largest companies redefined a corporation’s purpose as not solely providing profit for shareholders. The released statement asserts that corporations should be committed to the needs and well-being of all of their stakeholders — including employees, customers, their local community and suppliers — as opposed to just their shareholders. This change marks a departure from the commonly accepted business philosophy that the sole obligation of business is to increase profits in order to maximize value for shareholders. 

How did other stakeholders become the priority for corporations while their interests were used to be treated as a derivative of the duty to shareholders? 

When reviewed the new statement, I have recognized that the word “shareholders” were only used twice towards the end of the statements. However, the Business Roundtable strongly referred to creating “value for customers,” “investing in employees,” fostering “diversity and inclusion,” “dealing fairly and ethically with suppliers,” “supporting the communities in which we work,” and “protecting the environment” in the statement. The way the statement is written clearly shows the weights of new elements in defining the purpose of corporation.

The aforementioned change in the purpose of business is not a new concept in the business ethics and corporate social responsibility space. In my opinion, the decision made by the Business Roundtable came rather late. The concepts used in the statement have been heavily discussed in the business and academic world because the businesses all over the world focused too much on the benefits of the shareholders rather than understanding their stakeholders and responding their needs and requirements. This shareholder-centric approach has already started to threaten the sustainability of corporations. Sustainability problems, financial problems and corporate scandals have been making businesspeople think the root cause of these problems. Most of the time, the answer is simple: Business Ethics and Corporate Social Responsibility.   

Although the reaction of the business leaders is late, better late than never. I just cannot predict how this change of philosophy will affect the way organizations conduct business, but it is for sure that this will expand the focus of companies from the goal of only focusing on profits to more endurable values. This approach sooner or later will have a positive impact on the culture of organizations and has the potential to reduce corporate misconducts.

The signatures of business leaders on this new statement of purpose for corporations is a tangible message to business world and it is an excellent example of setting a tone at the top. Simply, business leaders say that “there are more important things than profits”.

Overall, I believe that this statement will be fundamental in promoting ethical culture in organizations and will be welcome by all stakeholders at large.