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Archive for March 18th, 2020

In August 2019 the Business Roundtable (BR), an association of CEOs of American major corporations, issued a wholly revised “Statement on the Purpose of a Corporation” (also see in ‘Our Commitment’). It is a complete change in approach of BR for the first time since its statement of 1997 that espoused the concept of ‘shareholder primacy’. In the past six months since then numerous articles and blog posts were published in reaction to the new statement that calls for fuller consideration of interests of different groups of stakeholders; the reactions range from congratulation and appreciation, through doubt and skepticism, to acrimonious criticism and condemnation. This post takes a humble look at the statement from a marketing perspective.

The statement, signed by 181 member-CEOs of BR,  gives a node of agreement to the contribution of businesses to the economy: “Business plays a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services”. But the leading CEOs make a salient declaration in addition: “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders” (italics added); they subsequently list their commitments to each of the following groups of stakeholders in this order: Customers; Employees; Suppliers; Communities; and Shareholders.

The new stand breaks away from the view that was held in principle by CEOs of BR since 1997 and which regarded the principal purpose of corporations to serve shareholders — hence the concept of ‘shareholder primacy’. The approach taken by BR from 1997 to 2019 contended that: “The paramount duty of management and of boards of directors is to the corporation’s stockholders. The interests of other stakeholders are relevant as a derivative of the duty to stockholders”. That is, the needs and expectations of customers and other stakeholders were made subordinate to those of shareholders (i.e., satisfying the former only if they fit with or do not violate shareholders’ expectations and interests). That view was heavily influenced by the teachings of Milton Friedman.

The commitment made specifically with regard to customers states:

Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.

The headlines of the other commitments include:  “Investing in our employees”; “Dealing fairly and ethically with our suppliers”; “Supporting the communities in which we work”;  and “Generating long-term value for shareholders”. The theme of the new statement, particularly with respect to customers, may be seen as a replacement of the attitude “generating value for shareholders while delivering value to customers” with the reformed attitude “delivering value to customers while generating value for shareholders” — many would admit that these days the latter sounds more reasonable.

Perhaps the CEOs overstepped themselves in putting ‘shareholders’ in the last place — it does not sound very believable and even a bit apologetic. After all, profitability is like fuel for the business, without it executives and investors lack the motivation or ability to keep the company going for long. Yet from a marketing perspective, and furthermore justified in accordance with a customer-centric approach, customers are fundamental to the purpose of a company — for whom is a company making its products and delivering its services if not for the customers. As an old adage says: with no customers there is no business. Acting for the benefit of customers, employees and their communities can be expected to indirectly generate rewards and long-term value for the company and its shareholders. But if managers and investors are still not convinced, consumers, especially younger ones, become more likely to expect and even require companies to act in a socially-responsible way, giving preference to the goods and services of companies who do so over those which do not.

Nevertheless, the attempt to try and set priorities between the groups of stakeholders may be futile. A company cannot provide for its customers, for instance, without its employees — human capital is vital, and can remain so also with the aid and contribution made by artificial intelligence and robots. Instead of listing the stakeholders in any particular order, it could be more sensible to arrange them on a circle line, maybe in the form of a wagon wheel with the company in the centre and arms leading outwards to each group of stakeholders on the circumference, so as to denote the relationships of a company with its different stakeholders. However, the statement remains vague on how a company should balance between conflicting interests of different groups. The statement concludes by saying: “Each of our stakeholders is essential. We commit to deliver value to all of them for the future success of our companies, and our communities and our country” — leaving the challenge to executives in every company how to reconcile and negotiate between interests of different stakeholders.

The updated statement on purpose does not come a moment too early. The recognition of different types of stakeholders, whose needs and interests managers should account for, is at least thirty years old. In a textbook on Marketing Management and Strategy from 2002, Peter Doyle, professor of marketing who taught at Warwick University (UK), named some of these groups, including: shareholders, managers, customers, employees, and creditors. He also argued about the importance of holding more than a single objective for the business, suggesting objectives of profitability, growth, shareholder value, and customer satisfaction.

Furthermore, the attitude of past CEOs at the BR itself had been different before ‘shareholder primacy’ was enshrined in the statement of 1997. As Kristin Bresnahan (Columbia Law School) tells us, the Statement on Corporate Responsibility of BR from 1981 declared that “the long term viability of the business sector is linked to its responsibility to the society of which it is part”.  The statement referred to stakeholders as ‘constituencies’ — it recognised the responsibility of a company to constituencies other than shareholders. Bresnahan suggests seven questions that contemporary executives and directors should contemplate about their responsibilities. So there was a different view in the 1980s prior to the statement of 1997 to which we may now actually return (Directors & Boards, Issue Q3/2019; Bresnahan is Executive Director of the Center for Global Markets and Corporate Ownership).

  • In the context of the 1981 statement, it is interesting to note a comment that Ginni Rometty, CEO of IBM, made in an interview with Alan Murray of Fortune following the 2019 statement: “Society gives each of us a license to operate. It’s a question of whether society trusts you or not. We need society to accept what it is that we do.” Murray documents in his cover story the change in attitudes in recent years among CEOs of leading American corporations [“A New Purpose for the Corporation”, September 2019, Alan Murray, Fortune (Europe Edition), pp. 42-48.]

We can relate to two levels that concern consumers: 

At the customer level, consumers may expect first and above all that companies treat them in fairness. That may include, for example, careful and sensitive consideration when and how much to raise prices (e.g., not taking advantage of states of distress or crisis), or flexibility and tolerance in receiving product returns and giving refunds or compensation for damages. More generally, companies are expected to make it easier, not complicated, for consumers to purchase, obtain and use the products and services offered to accomplish their goals and tasks in life. Employees can have an important role in fulfilling the purpose of a company towards its customers — “when employees are presented with customer understanding that enables a deep sense of empathy, they are more apt to act on behalf of the customer and become a proxy for the corporate mission” (Camille Nicita, Forbes [Council Post], 17 October 2019). A success in enacting this attitude depends on culture and values embedded in the working environment of employees, and authority delegated to them to make decisions in favour of customers without asking for permission. This may also exemplify how a better employee experience can be linked to improved customer experience.

At the community level, wherever a company has a presence it may support, for instance, community social centres and cultural projects; more broadly, a company may contribute to protecting the environment (e.g., clean energy, green spaces). Importantly, in local community areas where a company maintains a large store, offices (e.g., managerial HQ, development centre), or a factory, employees in those facilities who are resident in the community would feel greater pride and motivation to do their best for the company and its customers. This can work for the benefit of the company, the employees, and consumers in the community and beyond.

In real life, ideals and expectations do not necessarily materialise. Consumers have difficulty at times in believing a corporate or brand purpose. Without practising it pro-actively, there is concern that the purpose statement, including one as collective as BR’s , is no more than lip service. A brand purpose should be positioned at the ‘right altitude’, suggests Ali Demos (The Drum [Opinion], 3 February 2020), that is in a way that will keep it authentic (e.g., consistent with brand history, personality), believable and trustworthy. An ‘altitude’ that fits the brand may be chosen from the functional level to emotional or social level, close to the ground or more aspirational.  Andrew Winston (Harvard Business Review Online, 30 August 2019) congratulates the initiative of the leading CEOs in issuing the revised purpose statement, but he also raises some doubts. Winston notes that shareholder primacy as a guiding principle cannot solve problems of business and society encountered in America, and it has always had its skeptics; yet, shareholder primacy may not be the real problem but only one of its symptoms. Subsequently, he poses the question: What it will really mean for those major companies to follow the new principles of BR? Winston culminates that the new commitment will be no more than empty rhetoric if we do not “hold these companies to their words”, thereby caring about all their stakeholders.

The CEOs of major American companies could be somewhat late in updating the statement of the Business Roundtable on purpose; but now that it is made public it should be praised, to be used as an example to many companies in the US and worldwide. Notwithstanding, the public should follow-up on these leading corporations, that their CEOs apply their own teachings, with the support of their executive suites and boards of directors. Companies are not asked to be altruistic and deliberately sacrifice value at the expense of their shareholders; the companies (and shareholders) are asked to be willing to give up on some value at present if they can help out in achieving goals of the other groups of stakeholders. In the long term, and if ideals have any validity, then there may be no sacrifice of value but really an enhancement of future value.

Ron Ventura, Ph.D. (Marketing)

Feel Well, Keep Good Health

 

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