CHAPTER TWO

The Question of Business Purpose

RULE #2
Businesses Serve Many Objectives beyond Shareholder Value

Profits sustain us, but they don’t define us.
—MARJORIE SCARDINO, FORMER CEO, PEARSON

KAREN BRENNER teaches Law and Business at New York University. She takes her students through a simple exercise each semester: filing to obtain a license to open a business. It costs $60 and requires you to fill out a form that asks the purpose of the enterprise. It’s a teachable moment: Purpose is the starting point.

Sadly, the advice typically given by your accountant, should you consult one, is to say that the purpose is whatever the law deems permissible. But the lesson from Karen’s classroom still stands. Because you are the principal of the business, it’s up to you. You decide the ends to which you will deploy the license to operate.

It may feel like parsing words, but the purpose of business is not the same as the purpose of the corporation. The purpose of a corporation is a legal construct. The purpose of a business goes deeper; it is given meaning by the people who lead and who are employed there, past and present. While the leader’s intentions may be defining, they are not static; the business is continually influenced by systems and forces that embrace and shape both the intentions and the execution.

The importance of understanding both the legal framework and what truly animates the business—its purpose—first became clear to me in a conversation with an executive about a decision he made a decade earlier. In 1997, toward the end of my tenure at the Ford Foundation, I spent an hour with Roy Vagelos, who as CEO of the pharmaceutical company Merck gave the go-ahead to produce a drug with no commercial value—but whose properties had incalculable human benefit.

The drug is Mectizan, also known by its generic name, ivermectin. Mectizan is still produced by Merck today as a money-losing but effective prevention and treatment for river blindness, a disease spread by infected blackflies in breeding grounds near fast-moving rivers and streams in remote regions throughout sub-Saharan Africa. It is also found in discrete locations in Latin America and Yemen.

A Harvard Business School case chronicles the decision that Vagelos faced: whether the company should engage in public health activities when the costs of success have no bounds, and the benefits to the company are, at best, intangible. River blindness is a devastating but curable condition. What is the right thing to do when you learn that your intellectual property could bring renewed life and hope to the victims but no revenues to support its production?

When appeals by Vagelos to everyone from the UN to the White House failed to identify a public entity willing to take the patent off his hands and produce and administer the drug, he decided that Merck would forge ahead.

The company’s investment in 1988, backed by Vagelos’s commitment to produce the drug “free of cost for as long as needed, as much as needed, and wherever needed” is indeed a great case for the classroom; it’s a leadership story and ethical dilemma. But it’s more than that. The Merck case became a compelling example of long-term thinking—and a window into what makes a company tick.

For Merck to succeed in this venture required complex partnerships that connected the science, drug production, and remote villages in infected areas. A network of public health agents and protocols was needed to turn drug delivery into sustained practice. The gambit is paying off on the ground, as onchocerciasis—river blindness—is gradually being eradicated in areas where these practices have been effective.

Decades after Vagelos made his move, Jim Yong Kim, president of the World Bank Group, declared Merck’s steadfast decision to produce and distribute the drug until the disease was eradicated a “game-changing intervention.” It also produced meaningful benefits for Merck that are difficult to capture on the balance sheet.

The CEO’s decision was ultimately viewed as a public relations coup and a defining moment for a company dedicated to human health, but Vagelos first had to overcome resistance within his own ranks. His executive team rightly feared the slippery slope of engagement in a campaign with no end in sight. Yes, they could create some goodwill, but it would be offset by an extended liability.

In my interview with Vagelos, he spoke about the MBA classes that he had visited for years after the case was produced—and how even with the gift of hindsight, students would question his course of action and recommend against it. Vagelos spoke about other moments in Merck’s history that he had learned from and that had set the stage for his decision. After the end of World War II, during the transition of occupied Japan to self-governance, Merck helped Japan develop its own capability for drug manufacturing. Similar investments in a developing China had positioned the company as a valued development and trade partner.

Yet, what had truly unlocked the Mectizan decision for Vagelos?

“We are nothing,” he said, “without the scientists who are the creative force behind drug discovery. What message would it send to our employees if we decided against manufacturing a drug that cures a disease as devastating as river blindness?”

It could have turned out differently.

Vagelos was the CEO but he was first and foremost a scientist. He was crystal clear about what makes Merck tick. He understood the foundation of the company’s long-term success, that access to scientific talent is the scarce resource that distinguishes the brand—and that enables the company to fulfill its mission to “discover, develop and provide innovative products and services that save and improve lives around the world.”

The hour I spent with him—his demeanor, his clarity about the importance of science and drug discovery, his humanness—is still with me over two decades later. The values he lived by and his keen understanding of the company he inherited are what enabled him to become a great leader.

Fast-forward to today’s culture of shareholder value. What is the purpose of Valeant?

In 2015, Valeant was a hot stock. Like Merck, Valeant was considered a drug company, but it did not engage in drug discovery or create its own IP. The company’s revenues came from buying other drug companies, stripping out costs, and aggressively pricing the products on the shelves, even pushing product through pharmacies that the company controlled. The organizing principle was sharholder value maximization. Aggressive stock targets were embedded in the compensation plan.

Where does the patient fit into this business model? Who is drawn to work at this company? Access to medicines for those in need does not appear to enter into the equation. In fact, it’s impossible to classify the company and how it made money as within the bounds of productive activity, in an economic sense.

By the close of 2015, Valeant’s operating model was falling apart, and the stock price had imploded. The organizing principle of shareholder value, or share price maximization, had reached its natural limit.

Sometimes, writing the company’s purpose is merely a PR exercise. It’s easy to be cynical when companies coin statements lofty enough to serve as fodder for late-night comedians. Casper, the mattress company, became the butt of jokes for this slogan: “Awakening the potential of a well-rested world.” Adam Neumann, cofounder of WeWork, I believe actually thought he was in business to “elevate the world’s consciousness.” His quest will be remembered as a red flag more than an inspiration to either workers or customers.

WeWork may have been poorly managed, but the company provides a useful service to individuals, entrepreneurs, and even large corporations that are seeking more flexible ways to house employees. Clarity of purpose, anchored into the business model, could have been a useful foundation for decision-making—an organizing principle for how to allocate both investment capital and talent.

The true purpose of the enterprise is more than words on a page. It signals intentions and understanding of the context of the business. But here’s the bottom line: in all companies, purpose is also revealed.

Valeant lived by profit maximization, while the CEO of Merck lived by his keen understanding of science and the importance of the scientist as the doorway to drug discovery and delivering value to patients.

As mentioned in chapter 1, BlackRock CEO Larry Fink writes annual letters to the CEOs of public companies. With its $7 trillion under management, BlackRock is the single largest investor in most stocks. In 2018, Fink called for each CEO to consider his or her company’s purpose. He asked the executive to take a fresh look at why the public offers the business a license to operate with its specific protections and benefits.

Larry wrote, “Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being—what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them.”

PURPOSE REVEALED

The process of drug discovery is a long and complicated one and requires a commitment to science, a high degree of professional standards and protocols, flawless execution against operating goals, and a keen sense of the public license to operate. If you become CEO of Merck, you inherit a legacy with roots in Germany and US operations that date back to 1891. Merck is an example of what Jim Collins wrote about in the best-selling book Built to Last: Successful Habits of Visionary Companies. It’s Merck’s clarity about its social purpose, Larry Fink argues, that enables the company to achieve its full potential.

For companies that raise capital in the public markets, a clear understanding about what matters most helps them withstand short-term demands for higher returns that come at the expense of long-term focus.

A colleague, friend, and adviser, David Langstaff, founded the company Veridian in 1997 and built it into a premier provider of technology solutions and security services to the defense industry. The origins of the company go back much further, to a company with close ties to the space program that David had joined a decade earlier and ultimately managed from a business and operating perspective. I first met David in 1998 as I was transitioning from the Ford Foundation to start the Business and Society Program at the Aspen Institute. We met at a seminar called “The 21st Century Corporation,” which explored tensions inherent in the age of globalization, from increasingly complex supply chains to the challenge of attaining higher labor standards and protecting human rights in nation-states with fragile governments and little adherence to the rule of law.

The seminar helped me begin to connect the dots between my work at the Ford Foundation and the values of business leaders able to embrace complexity and to question their place in society. David, it turned out, was attending to learn the discipline of the Aspen seminar as he prepared to join the corps of expert moderators. He was, in my book, already enlightened—but still curious. We stayed in touch, and when it came time to build an advisory board, David agreed to become the chair.

David thinks in terms of inputs and outputs. He believes that the purpose and vision and strategy are the key inputs. As with Roy Vagelos of Merck, for David and the business he was building, a people-centered strategy rooted in values was the key to success and helped him attract the best talent in a competitive industry—and one in which trust was the foundation of business relationships. Seventy-five percent of Veridian’s employees had security clearances. The outputs are the goods and services rendered, profits, and other forms of measurable value. Purpose is an input. Profits are an output.

A sign of David’s success as a business builder who was deeply comfortable talking about the values of his company came soon after he took Veridian public in 2002. David barely found his legs as the CEO of a public company before the company was in play. The services Veridian provided were a compelling fit for major defense contractors. The offer that finally tipped the balance came from General Dynamics, a $15 billion defense giant. They sought the suite of capabilities—and talent—that Veridian represented in technology-based defense solutions and made an attractive offer for the stock of the company.

Left to his own devices, David would have resisted the tender, but the advisory firms that knocked on his door were quick to insist on the need to prioritize what was best for the shareholders. The purchase price offered by General Dynamics was the highest ever seen by a company like Veridian. It would put a lot of money in the pockets of investors in the company’s stock. Cash out today, or continue to build for the future, with the potential of greater returns over time? David sought alternatives. Was financial return the only measure of success, and how could you capture in a spreadsheet the unique capabilities of a company as important to national security as Veridian? What would become of the signature values he wove into decision-making and commitment to his customers—and the team he had built over the course of a decade?

How do you capture the real value in a single number? Or, as the Harvard Business School case written about the decision that David faced at Veridian put it, how do you put a value on values?

The business ultimately was purchased by General Dynamics at a 75 percent premium; 80 percent of the shareholders agreed to the sale, and the company was absorbed into two large divisions of General Dynamics. The law on the fiduciary duty of boards during change of control—aka the Revlon rule—continues to be debated, but today it is no longer assumed that the cash value to shareholders is the only, or the most important, factor in a tender offer. Under Delaware law, the de facto standard for corporate governance law, the board has the freedom to exercise judgment about what is in the long-term interest of the company—to accept the offer or pass, accordingly. And while the story of Veridian and David’s emphasis on values as the glue in attracting the best talent and commercial success is compelling as the ultimate source of value creation, his vision was never fully tested as a public company. Within a short period of time, David and the core of talented individuals he had built into a highly competitive team had moved on.

In David Langstaff s experience, it’s when profits get confused with purpose that the problems begin. If purpose is only a statement in the corporate social responsibility (CSR) report, it’s only a matter of time before the real purpose of the enterprise is revealed.

In September 2016, the chief executive of Wells Fargo, John Stumpf, appeared before a congressional committee and apologized for the high-pressure sales tactics that led to phony fees and accounts and the eventual firing of more than 5,000 employees. It’s a matter of debate whether the fired employees were culpable, but what is clear is that the real purpose of the enterprise—profit and stock price—was made apparent through management protocols and incentive systems. Facebook’s business model of selling customer data (earning the catch phrase, “If you aren’t paying for the product, you are the product”) may be more complex to unwind, but it strikes a similar chord.

The employees of the enterprise don’t need to be taught the purpose. They live it.

WHAT IS THE PURPOSE OF BOEING?

What is the purpose of Boeing? The company’s muddled mission statement might have foretold the company’s crisis that Fortune called “a scandal of its own making.”

At this writing, the Boeing 737 Max, the company’s newest jetliner, is still grounded. The order from the FAA came in early 2019 after 346 people died in two separate crashes, each linked to problems with the plane’s software. The scrutiny from the press, regulators, and Congress was unforgiving and exposed deep-seated problems in the corporate culture, including pressure to ignore warning signs from employees in a race to market.

Boeing lays out its intentions on its website in a series of statements grouped under “Our Vision.” It starts with a statement of purpose and mission in which the word Innovation figures repeatedly, as if to be innovative is an end in itself. Likewise, we have the company’s Aspiration: to be the “best in aerospace and enduring global industrial champion.”

What does it mean to be “the best”—and by what measure does it constitute a worthy purpose?

When we get to the part about Boeing’s strategy for achieving its goals, the prescription for the disaster that has befallen the company is laid out in full. There are three main bullet points, including this one: “Sharpen and Accelerate to Win,” which, according to press reports, management took seriously—while skipping basic steps in the design process in a race to market against its chief competitor, Airbus.

In a searing exposé, reporters for the New York Times made a strong case that the problems at the company go much deeper than bad design for the 737 Max.¹ Boeing, a market leader in the airplane industry and the crown jewel of US manufacturing, failed on two critical steps: first, setting a clear direction that reflects a real understanding of the public license to operate, and second, building the protocols for driving the purpose through the company’s core operations and feedback loops.

The idea of linking purpose to the public interest isn’t a new idea— or as lofty as it often sounds. The Engineers’ Creed, adopted by the National Society of Professional Engineers in 1954, sets this out as one of four promises made: “To place service before profit, the honor and standing of the profession before personal advantage, and the public welfare above all other considerations.”

If the professional creed of engineers is not sufficient, Boeing would have been well served to revisit the bible of manufacturing, Total Quality Management (TQM), or its more modern cousin, Lean Six Sigma, which took American manufacturing by storm after its adoption by GE and Motorola in the 1980s. TQM is defined by Investopedia as “the continual process of detecting and reducing or eliminating errors.” It may not be the reference point for managers that it once was, but it stands the test of time with its focus on product quality and customer satisfaction, supported by training, management protocols, and metrics. The underlying tenet of continuous improvement helps assure that performance matches intentions.

PURPOSE IS REVEALED

Business purpose begins with intentions but is revealed through the actions and rewards that shape the culture and the decisions for which the company is known—what the company becomes. What was Boeing’s true purpose? Simply stated, at a critical point in time, it was to Beat Airbus. While conflating profits and purpose, the company lost its way and squandered the trust of the public—and perhaps, even more important, the trust of pilots, who need to be persuaded again to fly the Boeing aircraft, the 737 Max.

By 2020, the CEO had stepped down, and Boeing’s future was uncertain.

It reminds me of a New Yorker cartoon framed in the hallway of my office: A rag-tag group of children and an elder are huddled around a flickering campfire. They sit in a scorched-earth terrain; the dim light of the campfire gives way to darkness. The characters are disheveled; the mood is dystopian.

“Yes, the planet was destroyed,” their guardian explains, “but for a beautiful moment in time, we created a lot of shareholder value.” Short-termism is one by-product of share price maximization and is evident in the decision rules and regulations that govern corporations and capital markets. To fix the system means rethinking the metrics and incentives that make it more attractive to buy back shares of stock rather than invest in worker training. When a company unlocks its real purpose, it clarifies why it exists and how it will measure success. David Langstaff at Veridian found that clarity of purpose makes it easier to cultivate the kind of investors who will support the decisions and trade-offs required to stay on course.

Yet, the pressure in public markets to place profits ahead of long-term value creation is unrelenting.

The idea that companies must serve a clear purpose—more than making money for the shareholders—may still be challenged by some, but it’s hardly a new idea. It’s what I like to think former General Motors CEO Charles Wilson meant in 1953 when he told the US Senate that if he was confirmed as secretary of defense, the interests of the nation would come first—but also that he did not truly perceive the potential for conflict: “Because for years I thought what was good for the country was good for General Motors and vice versa.”*

The last decades have injected more than a note of irony in this statement, but Wilson was hardly the last executive to feel this way. Many corporations offer evidence that the public interest is still a critical organizing principle for business.

Successful public companies from the Container Store to Herman Miller to JetBlue to Microsoft to Panera Bread and many more are clear about their public purpose. But what sets the successful ones apart isn’t the purpose statement itself, it’s the follow-through.

Lars Sørensen of Novo Nordisk was named best-performing CEO by Harvard Business Review in 2015 and again in 2016. Sørensen describes the juggernaut of the company’s success in this way: a premium on values, consensus, and teamwork—and, importantly, a governance structure that offers some protection from the unrelenting pressure of capital markets. In an interview with HBR’s editor, Sørensen states:

Our philosophy is that corporate social responsibility is nothing but maximizing the value of your company over a long period of time, because in the long term, social and environmental issues become financial issues. There is really no hocus-pocus about this. And Novo Nordisk is part-owned by a Danish foundation that obliges us to maximize the value of the company for the long term.²

When Sørensen claims that CSR “is nothing but maximizing the value of your company over a long period of time,” he elevates time frame as the fulcrum for setting intentions. He also raises the question of ownership and whether public companies have the freedom to succeed over the long haul.

BACK TO THE BASICS

Why do we offer any company the license to operate, the protection of limited liability, and even constitutional rights, such as the freedom to speak in the public square, if the fundamental purpose is more about private inurement than the public good—if the purpose of the firm does not speak clearly to its social utility or fully reward the contributors to the company’s success?

Bill Budinger founded Rodel, Inc., with his brother Don. The company that the brothers built together and ultimately sold is still a global leader in high-precision materials and technology for the electronics industry.

Bill has been involved in the Aspen Institute for decades. His interests are wide-ranging, from philosophy and the humanities to energy policy, politics to corporate governance. He is a humble guy; when you share a meal with him, you would never know that he holds more than three dozen patents, including one or more for technology that was instrumental in bringing semiconductor manufacturing back to the United States in the 1990s.

Bill’s keen interest in politics grew out of his direct experience in shaping US patent law. The Rodel Fellowship that he envisioned and brought to fruition at the Aspen Institute is an oasis for politicians motivated to work across party lines in a world beset by partisan warfare. I made it my business to get to know Bill based on comments he made at an Aspen Board of Trustees meeting. He is an articulate and impassioned spokesperson on the consequences of shareholder primacy—and for building a business foundation that honors the public license to operate.

For Bill, like Roy Vagelos at Merck and David Langstaff at Veridian, the animating force behind his company’s success was about attracting and retaining talent.

Bill has a wry sense of humor. He speaks plainly from his experience as an entrepreneur. A favorite of Bill’s many aphorisms is the following: “Profits are a lot like oxygen—clearly necessary. But to breathe is not what gets anyone out of bed in the morning.” For Rodel, the investment in talent was key to the culture of innovation that drove the company’s success.

Today, it seems that everyone from SEC commissioners to politicians to CEOs rails about short-termism, even as supportive protocols—from the tenor of quarterly conference calls to pay practices—reinforce short-term thinking in practice. Where is the lever for change? And can public companies rise to the challenges of social upheaval and environmental risk—or does that require a protective ownership structure like the one that Novo Nordisk enjoys?

Business executives in public companies operate under remarkable pressure to maximize profits for short-term gain. The New Yorker cartoon in my office hallway perfectly captures the choices facing executives now: “Yes, the planet was destroyed, but for a beautiful moment in time, we created a lot of shareholder value.” The leverage point for systemic change is where theory and practice meet—the mindsets of leaders on the front lines. What we need is a pronounced shift away from shareholder-centric thinking.

When the Business Roundtable (BRT) renounced shareholder value as the organizing principle of public companies in a statement released in 2019, it was like the shot heard round the world.³ The announcement came in the sultry days of late August, but my in-box exploded like fireworks on the Fourth of July. Game over, I thought. The change in mindset had been unfolding for years, under the mantle of extraordinary leadership in remarkable companies and the insight of scores of thought leaders, activists, and scholars, but now, with the right voices and a large microphone—190 executives of our largest companies—it resounded with éclat.

It was a new day.

The theory-turned-ideology that puts shareholders at the center of the business, which was advanced by scholars in the mid-1980s but quickly took over classrooms, boardrooms, and markets, had begun to shred. A new rule has emerged and will continue to be informed by the practices of great companies.

THE END OF SHAREHOLDER PRIMACY

In 2017, two years before the Business Roundtable’s statement emerged, the Harvard Business Review published “The Error at the Heart of Corporate Leadership,” by two long-time professors at Harvard Business School, Lynn Sharp Paine and Joseph Bower. The article nicely foreshadowed the Business Roundtable’s announcement.

Ira Millstein, nonagenarian and esteemed adviser to boards during his long tenure at the New York law firm of Weil, Gotshal & Manges, called to say the article had him “dancing a jig.” Henry Schacht, who had served as CEO of two public companies, Cummins Engine and Lucent Technologies, had the article in his hand when he greeted me several days later in his midtown office. “This is the most important article HBR published,” he said. “HBR blew it by not making it the cover story.”

I sent it to everyone I knew.

What makes the Bower-Paine article powerful? It is a well-reasoned critique of shareholder primacy by renowned scholars of business, published in an influential management journal. The authors give executives and boards a fresh way to think about their role—one that appeals to common sense about how businesspeople want to spend their time—building businesses. Put simply, Bower and Paine assert that the duty of directors is to the health of the enterprise itself—not to shareholders, who are widely considered to “own the company” and receive both privileges and protections, yet in no way, legally or practically, do they own anything more than shares of stock with specific rights.

Bower and Paine give appropriate credit to law professor Lynn Stout, whose many scholarly articles and books, especially The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public, helped bring the debate about corporate purpose out of the shadowy domain of corporate governance and onto the main stage.

Professor Stout’s great gift was her willingness to challenge the academy on ideology so ingrained that it was no longer truly viewed as theory—without losing the plotline for her real audience: business executives, investor relations professionals, directors of mutual funds, and the rest of us trying to make sense of the constant refrain that “the law makes me do it.”

Stout, who tragically died in 2019 of an aggressive cancer, wrote,

United States corporate law does not, and never has, required directors of public corporations to maximize shareholder wealth. To the contrary, as long as boards do not use their powers to enrich themselves, the law gives them a wide range of discretion to run public corporations with other goals in mind, including growing the firm, creating quality products, protecting employees, and serving the public interest. Chasing shareholder value is a managerial choice— not a legal requirement.⁴

When the BRT’s announcement came out, had she been alive to hear it, she would likely have made a huffy remark, something along the lines of “It’s about time,” but more biting and memorable, and then returned to her real passion, deconstructing the scaffolding of beliefs and protocols that keep shareholder primacy in place, and coaching scholars and teachers and advocates who had taken up her cause. As a member of our Advisory Board, she always had time for me, but she was never shy about insisting that I could do more, move faster, take on a bolder idea or challenge, right up to the last days of her illness.

The last time I saw Lynn was one week before she died. We were attending the annual meeting of an organization that promotes long-term thinking, called Focusing Capital on the Long Term. She rose to her feet, with the help of a cane, to challenge a respected investor on the stage who hadn’t gotten the memo on the purpose of the corporation and had slipped lazily into the mantra about shareholder value as the goal of the enterprise.

Lynn cogently made mincemeat of his words and sat down again. Her insight about fiduciary duty—that the board’s allegiance is to the company itself, rather than to the sea of shareholders with conflicting time horizons and competing goals—firmly links corporate law with common sense.

Shareholders come in many flavors, with diverse interests and investment horizons. The influence of some shareholders over boards is undeniable, but as we will explore in chapter 5, capital is no longer a scarce resource, and the needs of shareholders are not, nor should they be, the primary interest of companies with a long-term view. As Marjorie Kelly wrote in 2001 in her first book, The Divine Right of Capital: Dethroning the Corporate Aristocracy, the company got their money at the IPO. Shareholder primacy is a theory with a stranglehold on finance classrooms, but it is not the law.

US law supports the decision that Roy Vagelos made at the helm of Merck. It ties together David Langstaff’s belief that values-based leadership builds real value and Herb Kelleher’s management ethic at Southwest Airlines, and that of Unilever’s Paul Polman.

The job of public company directors is a lot like the duties of the co-op board where my husband and I own shares. We get to vote in the election of the board, and our shares entitle us to control our premises and to sell to another occupant, but we don’t own the building itself—the East End Avenue Corporation does. The co-op’s directors like to make their shareholders happy, but their duty is to the long-term preservation of value for the co-op.

The writings of Lynn Stout, Lynn Paine, and Joe Bower describe the legal theory that supports the practices of well-run companies. Their common-sense approach reinforces managers who are keen to focus on what matters most to the long-term health of the enterprise.

The Bower-Paine article also illustrates how business scholars ply their trade—making observations and posing questions rooted in data about the performance of business and markets, which in turn stimulates new lines of inquiry by the next generation of academics, and so on. This is the system of thought leadership at work, from which the business academy derives its influence and the authority to shape the thinking of hundreds of thousands of future businesspeople each year.

From the work of many, a new narrative about the purpose of the corporation and a more useful formulation of the fiduciary duty of boards are taking root.

When the Business Roundtable weighed in on the debate about corporate purpose, it was as if the one wood block that had been keeping the Jenga tower of shareholder-first thinking aloft was finally dislodged. The tower of misplaced trust and entrenched ideology came tumbling down with a crash.

The Business Roundtable soundly and firmly retracted the emphasis on the shareholder as the key to value creation, returning to more of a so-called stakeholder view that embraces multiple interests that are critical to business success.

The statement is powerful. It not only retracts shareholder primacy; it raises the bar on business leaders. We are invited to view the CEO signatories as responsible and capable parties with choices to make—choices that have profound impacts on the workplace, on the communities where they work, and well beyond.

Jamie Dimon, CEO of JPMorgan Chase, in his role as chairman of the BRT (who a year earlier said that releasing quarterly earnings forecasts “forces people inside the company to bullshit up the chain”), and Alex Gorsky of Johnson & Johnson, who chaired the BRT Corporate Governance Committee, raised the bar further with these words in the public release:

Too often hard work is not rewarded, and not enough is being done for workers to adjust to the rapid pace of change in the economy. If companies fail to recognize that the success of our system is dependent on inclusive long-term growth, many will raise legitimate questions about the role of large employers in our society.

The BRT made sure that the statement would be read widely—even in late August, when the denizens of Wall Street take a deep breath and decamp for the beach or the countryside.

The release went viral. From my own perch on an island 10 miles off the coast of New Hampshire, I sat in amazement as messages and headlines flooded my in-box. The first one came in at 6 a.m. from a business school classmate: “Have you seen this????” The headlines focused on the resounding change in what felt like an entrenched idea. Was business really changing its tune about putting shareholders first?

Amid a wave of positive reaction, criticism of the Business Roundtable’s bold move was swift and sharp—and came from both the capitalists and the critics of business. Who would hold the companies accountable, if not their shareholders? And how were companies to make decisions among competing demands?

But then also, why should we believe that anything would change?

Distrust in business has been building for decades, from Occupy Wall Street to the techlash to critique on the campaign trail. It is fueled by spectacular examples of business failure, from the implosion of Enron in the early 2000s up to the tale of woe at Boeing almost two decades later. Behaviors like earnings management, underinvestment in infrastructure, tax avoidance, and outsized CEO pay packages, plus the stew of stagnant wages, self-dealing in Washington, and environmental disasters, have produced a resounding chorus of discontent and demand for a new governing ethic.

CREATING REAL VALUE

A few weeks after the release of the Business Roundtable’s restatement of corporate purpose, a Bloomberg reporter called for comment on a story he was crafting. When he and I spoke, his colleagues had already interviewed 21 of the 181 executives who initially signed on to the BRT’s statement at the time it was first released. The Bloomberg team would continue to probe, but the pattern was already clear. Those interviewed agreed that nothing would really need to change. Signing on was easy to do—they already were doing it. They were attending to the needs of all of their stakeholders.

Pat Gross, a seasoned director and member of our Advisory Board, shared that 75 percent of the directors at a forum he attended had agreed that the new BRT articulation reflected the status quo, that their companies already took a long-term perspective.

What might this mean? What are the steps that can turn a bold move and call to action by the Business Roundtable into a moment of real reflection in boardrooms and executive offices?

How do we leverage this moment?

First, we need to unpack the word stakeholder. Roy Vagelos didn’t think of the scientists and engineers he hired as stakeholders. Good science was the foundation of long-term success—the organizing principle for the operating model. To make the best decision for the firm, he had to walk in the shoes of the scientists who were critical to the company’s growth.

Second, the signatories who say that nothing needs to change confuse important activities and good works with the underlying decision rules and values that determine how to allocate capital and shape attitudes and behaviors. They conflate inputs and outputs. They are failing to look carefully at the design of the business model itself—of the business system. What key assumptions and nonnegotiables exist in the competitive environment? What is core and what is expendable?

Stakeholders is a grab-bag term that requires deeper thinking to create real value over time. Otherwise, “stakeholder engagement” will continue to be the sole provenance of managers in the social impact office or company foundation. What is needed is to engage these strategists with the business heads to help connect purpose, strategy, and capital allocation.

Yes, of course companies invest in the institutions and communities where they work, and yes, they care about their employees and try to connect with the attitudes and preferences of millennials and the like. But to reverse decades of mistrust, to ensure that we are on a different path, requires a level of authenticity that must be the rule, not the exception.

The list of leaders managing with a new mandate is growing.

On his first day on the job in 2009, Paul Polman, CEO of Unilever, dropped the practice of “guiding” the market of stock pickers and called on his CEO peer group to follow suit. Unilever’s long-term orientation and plan to grow the business for the benefit of all who contribute drew committed investors and scores of job applicants, and created sufficient goodwill to withstand an unfriendly bid for the company in 2017. He was supremely popular with the CSR set for his Sustainable Living Plan, but he also enriched the shareholders that were along for the ride.

Polman joined a growing cadre of CEOs who have new answers to timeless questions: How does the company measure success—and over what time frame? What constitutes a high-quality decision that stands the test of time? Who is “downstream” from the business and needs to be consulted in order to assess—and mitigate—risk and eliminate negative externalities?

From Herb Kelleher’s phenomenal legacy at Southwest Airlines to Marc Benioffs provocative leadership style and provocative questions about equity at Salesforce, Satya Nadella’s turnaround of the fortunes of Microsoft and commitment to carbon recapture, Tom Wilson of Allstate’s declaration on workers and jobs, and Indra Nooyi’s innovative pursuit of a healthier product mix at Pepsi—these and many fresh faces in the C-suite are opening the door to new questions and expectations about business and its role in society.

The tension between profits today and real value creation over time persists, but the narrative about the purpose of the corporation— taught in MBA classrooms and accepted as the first principle in boardrooms—has clearly changed. The strong reactions to the BRT statement demonstrate just how big a shift in attitudes and mindset is already underway.

Jeff Weiner, the inquisitive and thoughtful leader of LinkedIn, spoke to a group of Aspen Institute Fellows in fall 2019, shortly before announcing that he would leave the company in 2020. Jeff was CEO for over a decade of rapid growth and through its acquisition by Microsoft in 2016. He talked about the pursuit of talent, technology, and trust. “What are we trying to accomplish, and how are we going to accomplish it?” Simple questions, but complex in execution. Authenticity, he said, is about keeping your promises; it is about actions, not words.

The BRT’s decision to walk back into the public square and remind us of corporate America’s intention to honor its license to operate was important because of the dialogue it enabled. But to restore trust requires us to revisit the fundamentals.

To create and sustain real value begins with clarity of purpose but then requires a closer look at the decision rules and protocols—the scaffolding that keeps shareholder-centric thinking in place. Both scholars and executives are called to illuminate and then activate a more robust, socially useful conception of the firm.

The change is underway and is irreversible. The pressure to think differently, to embrace a new set of rules, emerges from changes in a society hungry for leadership from the private sector and from changes within the ranks of employees on a mission to connect their jobs to what they hold dear.

As the next chapter illustrates, the new rules are often dictated by agents who operate from far outside the gates of the business itself, whose work to reverse the decline of endangered species or tackle the roots of climate change focuses their attention on global corporations—their buying power and contract relationships, complexity, and capacity.

They seek out business executives who are sending out new signals, who can articulate what is expected of them now and what needs to be true to honor the promises made.

*It is worth noting that Charles Wilson is often misquoted as having said, “What’s good for General Motors is good for America.”

 OLD RULE 
Corporate responsibility is defined by host communities and fence-line neighbors.

A corporation has a social responsibility to create jobs, support local services and civic institutions, and contain pollution.