Geographies | August 20, 2019

Stakeholder primacy: CEOs redefine the role of business in society

Dennis Price
ImpactAlpha Editor

Dennis Price

ImpactAlpha, Aug. 20 – The statement from nearly 200 CEOs redefining ‘corporate purpose’ to include customers, workers, communities and suppliers, along with shareholders, catches them up with other business leaders, not to mention impact investors. Put another way, the Business Roundtable is a lagging, not leading, indicator. Smart CEOs have long known long-term value creation means satisfying multiple stakeholders.

The pledge from CEOs of Apple, IBM, Johnson & Johnson, JP Morgan and other companies does reset default assumptions away from “shareholder primacy,” the dominant corporate ethos of the last few decades. Now they must back it up with real progress for those stakeholders.

“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders,” the CEO members of the Business Roundtable said in a new ‘statement on the purpose of a corporation.’ Among non-signatories of the pledge: Roy Harvey at Alcoa, Stephen Schwarzman of Blackstone and Larry Culp of General Electric.

  • Why it matters. The pledge to “stakeholders” is a pivotal moment, says Beeck Center’s Sheila Herrling, who wrote earlier this summer that use of the term “represents an intentional shift from a shareholder primacy approach that maximizes short-term profit and returns” to a structure accountable and “responsive to a broader group of those who can affect or be affected by the achievement of the company’s objectives.”
  • Impact alpha. Purpose drives value. One in four U.S. assets ($12 trillion) already take into account environmental, social or governance, or ESG, factors, either when selecting investments or through shareholder resolutions. In May, Harvard’s George Serafeim presented evidence to the Roundtable that “firms with strong purpose and strategic clarity about that purpose and firms with strong material ESG performance create more value.” Thousands of Benefit Corporations and Certified B Corps. have integrated mission into their business practices. 
  • From resistance to revival. The move from the CEOs arrives as public sentiment shifts about the role of corporations in an increasingly unequal U.S. economy. Multiples studies show dissatisfaction with capitalism as practiced is growing among young people – and even Republicans. More interesting may be the dominant preference for making business a part of the solution. Nearly three-quarters of 1,026 adults polled in July by Fortune/New Paradigm Strategy agree that public companies should be “mission driven” as well as focused on shareholders and customers.
  • Follow the talent. In the end, it may be the competition for next-generation talent driving the rethink from CEOs. Talent wants impact. Four out of five adults ages 25 to 34 in the Fortune/New Paradigm poll say they want to work for “engaged” companies.
  • Executive watch. The onus is now on the Business Roundtable CEOs to turn pledges into action, says As You Sow’s Andrew Behar. In recent years, the business association has spearheaded efforts to deny shareholders the right to raise the very concepts that the Roundtable has now adopted, says Behar. “If the Roundtable’s new statement is to be taken seriously, we expect to see it withdraw its ongoing attempts to eliminate shareholders’ voices and welcome the engagements designed to implement these new practices.”