An Easy Way To Fix The Business Roundtable’s Toothless Purpose Statement
Shareholder Primacy Is Dead. Long Live Shareholder Primacy!
The highly influential US-based Business Roundtable recently announced an update to its “Statement on the Purpose of a Corporation.” Much has been written about it. Those in favour say, “It’s about time!” whereas the hardliners now wonder what happened to Uncle Milt Friedman’s normal way of doing business. (At least since 1970.)
The short version is that a corporation, according to the Business Roundtable, should no longer operate with maximizing shareholder return—buybacks, dividends and the like—as its sole purpose. (In many circles it’s known as “shareholder primacy,” a concept pushed by Uncle Milt and adopted by President Reagan–a part of Reagonomics–only to take over pretty much all of publicly traded corporate America by the early 1990s.)
The Business Roundtable has announced corporations ought to serve all stakeholders.
Hell Hath Frozen Over
But it’s not nearly enough. Hell is still happily on fire.
First, we should indeed thank the 181 CEOs who signed the updated proclamation. It includes chief executives from the likes of Apple, JPMorgan Chase & Co., Pfizer, United Airlines, Salesforce, SAP, BlackRock, Honeywell, and ConocoPhillips just to name a few. To put your name behind the switch from maximizing shareholder return to improving the lives of all stakeholders as the purpose of a corporation is a massive step forward in the right direction.
While we may thank them in this newfound semi-chilly hell for the better-late-than-never nod to serving all stakeholders, the new definition is devoid of actually being useful. That’s why hell is still on fire.
It’s a bit like saying you’re going to lose 30 pounds but you keep eating Dunkin’ Donuts for dinner. (No, sadly, Dunkin’ is not a Business Roundtable member.)
The Business Roundtable is wise to redefine the “Purpose of the Corporation” to serve all stakeholders, but it must come with a playbook for change if it wants to be useful. It cannot simply be a definition, for behaviour never changes by definition only. If we state that a company can no longer solely be operating by maximizing shareholder return, yet we don’t provide a way to stop eating donuts, those 30 pounds are never going to be shed.
First, let’s look at how the Business Roundtable defines its stakeholders:
- Delivering value to customers.
- Investing in employees.
- Dealing fairly and ethically with suppliers.
- Supporting the communities in which we work.
- Generating long-term value for shareholders.
In my second book, The Purpose Effect: Building Meaning in Yourself, Your Role and Your Organization (2016), I suggested essentially the same thing.
If the company is putting its customers first, it does so through its team members (who are ideally engaged, treated fairly and being paid a decent, livable wage) who then collectively aim to assist the community in which they live and the society they inhabit.
Additionally, the organization will provide a fair return to owners and/or shareholders as a result of its aligned strategy, one that addresses the needs of other stakeholder groups before shareholders. I defined an organization’s stakeholders as follows:
- Team Members
What’s missing from the Business Roundtable’s definition is a corresponding behaviour change. For executives to get off the donut diet of maximizing shareholder return they require a stakeholder scorecard.
Instead of being measured solely on financial metrics that only serve the analysts—whose job is to stare into the crystal ball of quarterly or annual forecasts to predict a stock price—and Wall Street traders, how about a behaviour change that forces executives to manage to all stakeholders?
I don’t think we can ever get off of the executive compensation diet of restricted stock units or RSUs. Yes, I know executive compensation is out of whack when compared to the average employee, but I don’t see it changing in the foreseeable future. Nor do I see the compensation model changing any time soon.
Introducing the Stakeholder Scorecard
To combat this hard truth, the Stakeholder Scorecard that I propose continues to use stock as the primary compensation incentive yet it’s aligned not to maximizing shareholder return rather to certain targets set against each of the stakeholder categories.
In my rough example below, I use the five stakeholders (customers, team members, community, society, owners/shareholders) and allocate several targets within each category. Each stakeholder category has a corresponding weight. (The Board could even sign off on all metrics and sub-targets.)
If the target is hit, that’s good news for the executive. If it’s not, there are consequences. Specifically they would receive a lower percentage mapped against the weighting of that particular item.
Customers and Team Members
Under Customers, I use reliability, relationship and relatedness as metrics against customer satisfaction. (See Dr. Mark Colgate’s work.) Customers are surveyed quarterly and the result is applied against the scorecard.
With team members I envision items such as employee engagement, diversity in roles, addressing compensation gaps, and learning and development spend as potential markers. These could be annual goals.
Community and Society
At the community level, how about targets in terms of volunteer hours, community investment (as an expression in dollars) and in-kind donations? Each of these points pay homage to Marc Benioff’s Pledge 1% initiative.
When it comes to society, a few easy ones that I included are GHG CO2 (measured in tonnes), H20 consumption (measured in litres) and energy usage (measured in kWh). If the company fails to live up to its targets, the result is a less than stellar percentage.
Finally, any for-profit company has financial targets to hit. The easiest metrics are revenue and profit or EBITDA, but there could be many more. In this example, I stick to revenue and profit for simplicity sake.
The Final Results
The key is that each of the five stakeholders is assigned a weight. Again, for simplicity purposes, I chose a 20% weighting for each of the five stakeholder categories. In this model, the executive must manage all five stakeholders rather than simply shareholders.
Once the results are tabulated, the final scores are added up across all five of the categories to arrive at a final percentage summary. The Board will have pre-approved an allotment of potential RSUs at the beginning of the fiscal year. In my example, 100,000 RSUs were conditionally allotted at the beginning of the year and this particular executive—due to hitting most of the stakeholder targets—was allotted 103,600 stock units. It could be devised differently of course. (For example, every percentage mark could be equal to 1,000 shares, etc.)
I applaud the Business Roundtable for agreeing to change the true purpose of a corporation. Indeed, it is to serve all stakeholders. It’s a fabulous first step.
The necessary next step is behaviour change. One of the ways in which to change behaviour is to hold executives accountable to a new stakeholder scorecard.
I urge the Business Roundtable not only to consider my proposal but to at least help change the behaviour. Maybe one of you will even adopt the Stakeholder Scorecard. (You can download it here in its entirety for free.)
Unfortunately, hell is still, well, hot as hell.
And those donuts still taste really good.
- Corporate Social Responsibility Is Not Your Organization’s Purpose
- Facebook And Apple CEOs Ask Us To Serve Humanity. Will We?
- Evolution of the Chief Learning Officer
- The Untapped Potential Of The Middle Manager
- A Lesson On Balancing Purpose With Profit
- Perhaps the Purpose of an Organization?
- The Graphic That Started My Journey Researching Purpose Three Years Ago
- Win A Signed Copy Of “THE PURPOSE EFFECT”