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Why do profit and purpose seem to have such a hard time coexisting?

The Business Roundtable, a group of CEOs that represent America's largest corporations (with over 20 million employees), has been an authoritative voice of business for almost a half century. 

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Twenty five years ago, the BRT asserted that the “principal objective of the business enterprise is to generate economic returns for its owners.” 

In 2019, however, the BRT shifted gears, noting that “while each of our companies serves its own corporate purpose, we share a fundamental commitment to our stakeholders.” 

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The BRT explicitly named customers, employees, suppliers, and communities ahead of any mention of shareholders.

So why do businesses still put their shareholders first? And what does this have to do with climate change?

Why does the BRT statement matter?

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According to The New York Times, the BRT statement was “an explicit rebuke of the notion that the role of the corporation is to maximize profits at all costs — the philosophy that has held sway on Wall Street and in the boardroom for 50 years.

The idea of "shareholder primacy" has dominated business since the 1970s, when University of Chicago economist Milton Friedman stated that "the social responsibility of the business is to increase profits."

The BRT's public rejection of shareholder primacy was hailed as a hopeful harbinger that businesses will do more to address society's social and environmental challenges.

Are businesses actually changing?

Flaticon Icon According to a recent study by two Harvard Law School professors, little has changed since the BRT statement. According to the study, almost none of the BRT signatories have changed their governance guidelines to reflect a stakeholder focus. 

In addition, the authors looked at the forty shareholder proposals aimed at implementing the BRT statement. Zero received support from the management of those companies, notwithstanding their non-binding public promises to serve all stakeholders.

What about businesses that lead with purpose?

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"Ah, but look at purpose-driven companies such as Patagonia!" you say. Fair point.

Patagonia’s purpose is “to save our home planet.” The company paid its store employees during the COVID lockdowns, makes all of its cotton products using organic cotton, and donates 1% of revenues to fund environmental causes.  It's also fast-growing and profitable with sales exceeding $1 billion.

It's also too often used as the sole paragon of a successful purpose-led company.  Unlike most large corporations, Patagonia is privately owned by a husband and wife. 

Its founder, Yvon Chouinard, is the author of a book entitled Let My People Go Surfing: The Education of a Reluctant Businessman. His model is hard to emulate.

Why are shareholders still the priority?

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Public companies report their financial results to shareholders every ninety days. Few companies report quarterly on progress against "purpose" or standard environmental or social metrics. 

While some investments deliver both financial returns and planetary welfare (for example converting to LED lights), most purpose-driven investments have long payback periods and opaque, hard-to-measure benefits.  As a result, they're often deprioritized.  

As an example, the BRT recently lobbied against the US government's "Build Back Better" bill.  Though the BRT applauded the bill’s spending to address climate change, it still opposed the legislation because it involved higher corporate taxes to pay for it.  

It seems that purpose (saving the planet) once again took a back seat to profit.

What would a CEO do?

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Consider the following scenario:

  • You're the CEO of a public company that has a factory in the Midwest.

  • All of your products are sold overseas. 

  • Your factory pays workers wages and benefits equal to an average of $50 per hour. 

  • You learn there's a similarly equipped factory in Asia that has spare capacity and pays its workers $8 per hour. 

What do you do?

A purpose-driven CEO who is attuned to the needs of the company’s various stakeholders would have to consider the needs of its factory workers.

At the same time, if the company were to choose to continue to pay its workforce six times the amount that it might pay workers in Asia, it's likely that its pricing would become increasingly uncompetitive and it would lose market share and profits.

Quiz

What is a CEO likely to do in this situation?

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This Byte has been authored by

KP

Ken Pucker

Senior Lecturer, Fletcher School at Tufts