New Business Roundtable statement a welcome change for managerial ethics professor

In 1919, in ruling on a dispute between Henry Ford and his shareholders, the Michigan Supreme Court noted “There should be no confusion… a business corporation is organized and carried on primarily for the profit of the stockholders.” This case has long been pointed to as the root of something called the “shareholder primacy” view — that is, companies should act solely in the best interests of their shareholders. While this view has been dominant in the United States for the past 50 years, a recent meeting of nearly 200 top CEOs at the Business Roundtable called this view into question. The group released a statement suggesting the purpose of the corporation should expand to include other stakeholders.

The overall reception of the statement has been mixed, with people on both sides taking shots at the business leaders. On one side, the Council of Institutional Investors slammed the Business Roundtable for “placing shareholders last,” and insisting that “accountability to everyone means accountability to no one.” On the other side, several Democrat presidential hopefuls have claimed the statement does not have any teeth and that policy still needs to lead the way on pressing issues like inequality and the environment.

Don Lange, Lincoln Professor of Management Ethics, studies corporate social responsibility, organizational reputation, and managerial ethics. He weighs in with his view of the statement and helps contextualize it within several other trending business concepts.

Question: What does this new Business Roundtable statement mean?

Answer: For decades, since Milton Friedman wrote his famous article dictating that the only social responsibility of a business is to increase its profits, shareholder primacy has been a guiding mantra for many in the business community. The new Business Roundtable statement essentially turns that idea on its head, saying that a business should also consider the needs of employees, the environment, the community, etc. It doesn’t necessarily downgrade the shareholder, just adds more stakeholders to the table.

Q: Do you see anything changing based on this statement?

A: It is hard to say what exactly is changing, as the statement does not include detailed plans or policies. Rather, I think it’s a major shift in conversation. That shift seems kind of shocking now, but 10 years ago it would’ve been unheard of in the majority of these major companies, and it would have been impossible 20 years ago. A lot of people are criticizing the statement for lacking teeth or for its political motivations, but I think you can be suspicious of intent and still applaud the action. I don't care why the Business Roundtable released the statement. They did it. So let's keep reinforcing it. Don't make them feel bad for doing it — let us make them feel good for doing it, and hold them accountable for following through.

Q: Interesting. So does the intent matter?

A: I teach ethics in the MBA program, and we have this question about whether there's such a thing as altruism among human beings. So, if a child is floundering and drowning in a river and somebody jumps in to save them, does it matter what their intent was? Does it matter whether they wanted to be a hero, if they thought they were going to get a reward? Or they were just doing it because it was the right thing to do? Intent doesn't matter as much as what happened. And in this case, the fact that these giant firms have changed the conversation to the possibility that the purpose of the business isn't quite so narrow is positive and a big change.

Q: How does this statement relate to some other trends in business toward corporate social responsibility (CSR) or the uptick in B Corporations?

A: There are some interesting differences and overlaps between the statement and the idea of CSR. CSR is more generally about the actions firms take to promote positive outcomes in society, actions that go beyond the firm’s narrow transactional interests. Corporate philanthropy is an example of CSR. Rather than specifically joining the CSR discussion — about how firms can intentionally devote energy and resources into doing good in the world — the statement is more aimed at the debate in the business community about how a sole focus on shareholders may, in the end, be counterproductive for all involved — even shareholders. That debate is about how to run a business effectively, but — because it raises questions about how an effective business might also necessarily need to be a responsible business — it crosses over with ideas from the CSR discussion.

The B Corp movement is also part of this debate, as it rose in response to the assumption that the corporation is legally and morally responsible to the shareholders exclusively — the idea of shareholder primacy. B Corps essentially renounce shareholder primacy in their corporate charter and they make it their mission to be responsible to a range of stakeholders. Ben & Jerry’s is a famous example of a B Corp. They are selling ice cream with a dual mission in mind: profits plus doing good. So the B Corp movement is based on an admirable ideal. The danger, I think, is that by exempting themselves from the shareholder primacy notion, B Corps inadvertently reinforce the assumption that shareholder primacy applies to all other firms, when — as the Business Roundtable Statement indicates — that is possibly a faulty assumption.

All of these conversations, though, point toward an overall shift in the public eye. Efforts by businesses to show they are good corporate citizens and that they are engaging in CSR, the B Corps movement, and the Business Roundtable Statement are all indications that societal expectations are changing.

Note: For another perspective on how the Business Roundtable statement might extend to individual actions, check out this Q&A with Assistant Professor of Management and Entrepreneurship Edward Wellman.