Stakeholder Capitalism: Intention is the First Step toward Accountability

This article was written by CASE Faculty Director Cathy Clark and originally posted on LinkedIn.

Antoine Beyeler Royalty-free stock photo ID: 5593762

My inbox and twitter feed have been flooded since Monday. That is the date the Business Roundtable, a lobbying group composed of the nation’s leading CEOs, released a new Statement on the Purpose of a Corporation signed by 181 CEOs.

The group’s website says the release outlines a modern standard for corporate responsibility that supersedes all previous statements of corporate governance. This is a big deal – governance sets the fundamental rules of the game under which all businesses must operate. What do America’s CEOs want to change about those rules? Key ideas in the release include (items in italics are my additions):

1) The purpose of a corporation in the US is to promote an economy that serves all Americans;

2) US CEOs should move away from the notion that the sole purpose of business is to maximize profits for shareholders, (called “Shareholder Capitalism” by some or just plain “Fiduciary Duty” by many more); and

3) Businesses share a fundamental commitment to serve all of their stakeholders, including customers, employees, suppliers, communities and shareholders (which some call “Stakeholder Capitalism.”)

So why the big reaction? I’ve seen interpretations on two opposite poles:

The Air Traffic Control group. Some see asserting a broader purpose of business as heretical. And coming from the CEOs, it’s like the pilots of 181 airplanes telling air traffic control to change their routes in midflight. They may be leaders of these engines today, but they are temporary stewards and have been engaged within a larger system to do a specific job. To many, their insistence that purpose must change seems at best idealistic, and at worst, illegal since fiduciary duty is generally interpreted as requiring maximization of returns to shareholders. Still, others believe the idea is simply flawed. How can you be beholden to more than one kind of stakeholder and still succeed? These CEOs might just not be able to land their planes, especially if they are redrawing the map in midflight to include multiple destinations.

The Show Us the Money group. On the other side, there are growing sets of people, businesses, and institutions who have been experimenting with stakeholder capitalism for several decades. And the alternative seems morally wrong to them because maximizing self-interest of the few may not leave us with a society most people want to live in. These groups are happy to see their view voiced by some of the largest companies in the US, but they know that there are many ways for these CEOs to follow their bold intention with even bolder and more real actions and the release didn’t include many. So to many of them, the words alone make them skeptical. They want to know where the actions are that make this real. Otherwise, this is a distraction from the work already underway to build great stakeholder-driven companies. And this is the group usually asking academics like us for more data, more studies, and more evidence to know when corporate responsibility to stakeholders might actually increase financial value.

For me, accountability has three steps: intention, action, and metrics. Accountability always starts with a clear intention, and these 181 CEOs have expressed a very clear intention. And if they want to be taken seriously by others, they need to take clear actions that align with these intentions. I think they know that, and I think they’ve given themselves a strong platform in which the best action steps will now be directly sent to them about what they can do next. They launched the idea, and they are now crowdsourcing actions.

And what actions are being proposed? Here’s a brief guide to some of what I’ve seen in the past few days:

1.    This post, by the co-founders at B Lab, outlines 3 things that can be done by the corporation, by capital markets and through public policy to make this real.

2.    This post, by the CEO of REDF, on what companies can do to serve employees better.

3.    This post, by a colleague at Georgetown, on what the companies can do to up their stakeholder behavior on many levels.

4.    This post, by a Washington Post reporter, on what actions we should look for, including changing CEO pay based on achievement of stakeholder goals.

5.    This set of tweets, by Obama’s National Economic Advisor, on what can be done to change fiduciary duty, specifically in Delaware, to make the new purpose of business definition legally possible.

This is just the beginning, coming in less than a week. And I’m sure I’ve missed many more. What I love about these is that the actions are both for companies and for the other institutions that surround them. Everyone sees this is a system- either worth defending or worth challenging. It’s about the rules of the game, not just adding a few new planes.

So, what happens if these companies DO take the actions to make their intentions real? And if other institutions start to collaborate to make stakeholder capitalism easier? The truth is we won’t know unless they start measuring and reporting on the impact they are having on other stakeholders. Would a company ever claim to have created value for a shareholder without reporting on how much it earned? No, it wouldn’t. We have developed standards for measuring and reporting on financial performance, though organizations and systems like GAAP and FASB, and we need to do the same with stakeholder impact performance metrics.

This is why I believe this week’s invitation is just another step in the long wave of change around the purpose and performance of large US companies. Maybe someday soon, we will be able to know how well a company treats its employees or contributes to climate change, as part of its regular filings. With more actions, we’ll get more data and start to understand which actions lead to better financial performance, and which might not, but will be viewed as worth doing by Americans and the company’s shareholders anyway. Because they build trust, or just because they leave more people better off, creating more wealth for those that need it instead of siphoning it off to the few at the top.

Either way, we need more fuel for these experiments. We’ve been developing the tools for over 20 years and we have some very significant progress, such as those put forth by the Impact Management Project, B Corporations, and SASB. But in my personal opinion, these successes been too small and too slow compared to the problems corporations and people face. For now, I’m optimistic that this announcement by significant corporate leaders might promote faster iteration by a larger group of actors with big engines to drive experimentation.

In the meantime, this list of CEOs has given us a platform to share, to voice dissent when things are not working, and even, I suppose, a sort of a shopping list if you believe in corporate responsibility. Which of your favorite brands are on the list and which are not? And what will you do about that?