Business must act on a new corporate purpose

FT, August 20, 2019

An important shift may be under way in corporate America. The largest US business group has replaced the long-held view that maximising shareholder value is the defining corporate goal with a more inclusive vision that takes account of other stakeholders. Explicitly elevating broader interests such as those of employees, the environment and customers is intended to set a new standard for companies across the US. This welcome, wider approach to corporate purpose should create a more sustainable and inclusive form of capitalism. Business must now show it is ready to put the change into practice.

The update of corporate purpose from the Business Roundtable on Monday encapsulates a major change in thinking. The principle of shareholder primacy has dominated US capitalism for two generations and has, for more than 20 years, been at the heart of the BRT’s governance principles. Since the BRT includes some of the largest US companies representing $7tn in annual revenues, its shift has at least the potential to trigger broader changes in corporate behaviour.

Pressure has been building for some time. Maximising shareholder returns has come at the expense of other stakeholders and created incentives to pay less tax. Investors and politicians such as Democratic presidential hopefuls Elizabeth Warren and Bernie Sanders have voiced concerns over rising disparities between profits and wages, leading to scepticism that business may simply be trying to propose cosmetic changes before more substantial reform is imposed. Jamie Dimon, the JPMorgan CEO and Business Roundtable chairman, has been a leading voice in promoting change. In his annual letter to shareholders in April, Mr Dimon set out a list of issues that needed to be addressed — including education, immigration, and tax reform, and promised JPMorgan would “take advocacy to the next level”.

Scepticism about such lofty declarations is in order. Corporate America must now prove this is not just a symbolic shift. One task is to align management interests with the broader stakeholder view. Over-reliance on share price performance, long an integral part of management incentives, and often with a time horizon of just a year or two, must change. Tying executive pay to broader financial and non-financial performance measures would ensure priorities are better aligned.

Companies should be encouraged to articulate a purpose beyond merely maximising profits. The BRT’s move tacitly acknowledges that if businesses ignore their responsibilities towards society, they risk losing their licence to operate.

Promoting longer-term interests will undoubtedly run into conflict with quarterly reporting requirements. Offering better deals for employees and suppliers, or investing in local communities, may enhance overall performance in the longer term, but hold back profits in the near-term. Short-term investors, or activists looking for an immediate return, may dig in their heels. Firm and clear statements of long-term purposes may help persuade the doubters.

One final way companies can prove their commitment to a stakeholder approach is to ensure it is not used as a way to avoid paying tax. Incentives tied to operating profits are one way around this. Promoting a culture of investment, rather than share buybacks, would also help. Fifty years of shareholder primacy has fostered short-termism and created an environment of popular distrust of big business. A new corporate purpose has the chance to generate wealth more sustainably and to share prosperity more evenly.