It’s Fine For CEOs To Signal They “Get It” But Business Still Has To Be Mainly About Serving Customers
A new article announces that a statement signed by 200 CEOs of the Business Roundtable signals an important shift in corporate purpose from “creating shareholder value” to a more humanistic and holistic-sounding one that includes taking care of employees, providing fair value to customers, dealing ethically with suppliers and being responsive to the community.
Before anyone gets too excited about this seemingly groundbreaking change in the way companies will do business, let’s look at what they’re said to be departing from.
Origins of the shareholder value concept
Now that it’s supposedly being downplayed — at least semi-officially, anyway — it might be useful to take a look at where this concept got its start.
The term itself is said to date back to 1986 and is credited to Alfred Rappaport, a professor at Northwestern, and explained in his popular books of that era. But apparently Jack Welch was talking about it at GE even earlier. The idea was to make sure top management knew their main job was to serve as agents for the people who owned the company and that their effectiveness should be measured by their impact on the value of their companies’ stock rather than other things like sales or earnings.
In that sense, it probably served as a tap on the shoulder to some high-flying execs who had become preoccupied with growth for its own sake. But from the start it had the potential to be misused as it became overused. Big companies have always had a number of important stakeholders and the new term was never meant to take leaders’ focus off their obligations to customers, employees, suppliers and the community,
I think where it started to go wrong was when people began to refer to it as THE PURPOSE of a company — when the attitude evolved that if the shareholders are happy, it’s all good, no matter what else is happening or who else is feeling slighted.
What these business leaders are really saying with this new statement
“We Hear You. We Really Do.” It’s understandable that these CEOS would want to be responsive to the ever-louder cries of employees, suppliers and the communities they serve. That’s where the big noise (lawsuits and complaints) has been coming from in recent years. These kinds of pressures weigh every bit as heavily as the threat of shareholder derivative suits.
“We’re Spiritually Connected Too, Ya Know.” The word “purpose” has evolved to signify a “higher-calling,” owing in large part to books like The Purpose-Driven Life: What On Earth Am I Here For? by Pastor Rick Warren. It’s not surprising that CEOs would want to demonstrate that they “get it” and are not clones of the old money-grubbing stereotype of the corporate titans of yesteryear.
There’s nothing new about big company CEOs joining together to sign letters and “taking the pledge” to do things better and to show they’re in tune with the prevailing cultural zeitgeist. And, if by making these pronouncements, their companies end up being better places to work and have better relationships with suppliers and people in the community, hey, that’s good, right?
But a desire to focus more attention on the needs of previously neglected stakeholders, as these CEOs are intending to do, should not require a change in the fundamental purpose for being in business.
Let’s be clear: Implicit even in the now apparently-dimmed term of “creating shareholder value” was the proposition that a business existed primarily to serve customers and to do it profitably. That’s still true, despite any statements that purport to change or broaden the focus of its leaders..
The “reason for being” of any business — big or small, incorporated or not — whether you call it purpose, mission, vision or whatever term happens to be cool at the moment — is and will continue to be as it always has been: To serve customers. If it does everything else right but cannot do that successfully, it will cease to exist. Period.