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Susan McPherson wasn’t necessarily trying to rethink the theory that a corporation’s paramount purpose was to maximize profits for shareholders, period. But in 2005, she volunteered for a nonprofit that took her to war-torn Afghanistan.
“It was the first time I saw businesses actually being a force for good, and coming together as ... professionals who could help women become business owners in that country,” she says. “That really kind of supercharged me into doing a deep dive into the definition of capitalism.”
Now, as head of a communications firm in New York, she’s part of a movement of people – including a generation that came of age in a time of financial crisis – who are pressing corporations to embrace a sense of purpose beyond quarterly profit reports. Some finance experts say this movement helps explain the recent pivot by CEOs at the Business Roundtable to acknowledge wider duties that corporations have.
“Increasingly, companies are feeling the pressure from all of these different stakeholders to be more responsive, or people are going to start walking away from the company as employees, … as consumers, ... as investors,” says management professor Sarah Kaplan at the University of Toronto.
When Susan McPherson first came to New York in 2003, she never dreamed she’d be at the vanguard of a movement to reshape the core principles of American capitalism.
In her “nine lives” as a communications executive in various fields, she says, she’d always valued the importance of “giving back” to her community over the years. Her mother worked in public broadcasting and her father was a professor of history at a women’s college, and she says both had instilled in her the value of a career with a wider social purpose.
“But when I moved to New York City, I didn’t know anyone, so as I was throwing myself into working full time, I also looked into nonprofits just to meet people,” says Ms. McPherson, now the CEO of her own communications consultancy in Manhattan, where she advises businesses how to be both sustainable and a “force for good.”
She wasn’t necessarily trying to rethink the powerful and elegant economic theories that for decades explained that the paramount purpose of a corporation was to maximize profits for shareholders, period. But in 2005, she volunteered for the Business Council for Peace, which took her to war-torn Afghanistan just a few years after 9/11. It reset the course of her life, she says.
“It was the first time I saw businesses actually being a force for good, and coming together as networks of professionals who could help women become business owners in that country,” she says. “The idea was, the more jobs that were created in that country, the more it could be less violent and stable.”
“And that really kind of supercharged me into doing a deep dive into the definition of capitalism, and to start to understand how this quote-unquote ‘social impact’ idea and the purpose of a business could dovetail together.”
The idea of capitalism has been buffeted from all sides over the past decade. On both the political left and populist right, supporters of President Donald Trump and those of Sen. Bernie Sanders (I-Vt.), Sen. Elizabeth Warren (D-Mass.), and others have decried the current state of global free markets, believing big corporations reap record profits while sending jobs overseas, even as wages remain in a perpetual state of stagnation. Even ideas wrapped in the name of socialism now have a widening following in mainstream American politics.
At the same time, too, millennials have generally brought a different ethos into the corporate workplace. Shaped by concerns about climate change and the economic crisis in 2008, many of the best and brightest have sought to work for companies that reflected their values, as they seek meaning and purpose in their jobs.
In many ways, Ms. McPherson was in the middle of this wide-ranging social movement as it began to evolve from below. Cadres of highly skilled and digitally connected employees, organizations of socially conscious shareholders, and even new-thinking CEOs like her began to challenge titans of global business and the long-held idea that maximized profits and shareholder returns are the be-all and end-all of a corporation.
“Right now it’s become a wave that is building into a tsunami,” says Andrew Behar, the CEO of As You Sow, a company that strives to build coalitions of investors who demand socially responsible business practices from the companies they invest in, rather than maximized returns alone.
Duties beyond earning profits
Instead of a singular duty to shareholders, this growing movement emphasizes a corporate duty to “stakeholders” – not only the well-being of a company’s employees and customers, but also those in global supply chains or any community affected by a company’s business practices.
Now, a group of nearly 200 of the nation’s top business executives, including those of Apple, JPMorgan Chase, and Walmart, has responded to these social pressures and announced a change in corporate orthodoxy, saying through the Business Roundtable last month that they were “modernizing” the principles on the role of a corporation.
In years past, American executives had acknowledged the importance of a range of stakeholders in the decisions they made, but the “paramount duty” of a corporation, they said in 1997, is to the corporation’s stockholders. “The interests of other stakeholders are relevant as a derivative of the duty to stockholders.”
In their updated understanding of the purpose of a corporation issued in August, however, they acknowledged their many critics and appeared to elevate the importance of broad stakeholder well-being up to that of shareholder profits.
“It has become clear that this [prior] language on corporate purpose does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable,” the executives said.
Mere ‘virtue signaling,’ or more?
Even so, as critics or cynics point out, this statement could simply be a public relations move in a politically and economically volatile era, since corporate boards and managers in most cases still have a legal “fiduciary duty” to operate on behalf of shareholders and their profits.
Some say the Business Roundtable is simply “virtue signaling” to its many liberal critics, while in reality changing nothing about the calculus of business success.
“Typically, a corporation’s sustained reputation for producing quality goods at competitive prices and for providing returns to those who risk their capital by investing in it tends to correlate with its acting in compliance with the laws and ethical standards of a given community or country,” says Juscelino Colares, professor of business law at Case Western Reserve University’s School of Law in Cleveland.
“Because that is the case, the Business Roundtable statement rings hollow,” Professor Colares continues via email. “CEOs routinely decide between ‘investing in our workers’ or dealing ‘fairly with our suppliers’ and being competitive and profitable so they can remain in business, for instance,” he says. “Merely stating that other stakeholders matter – they obviously do – without openly acknowledging the core of their decisions, is an exercise in virtue signaling.”
Still, such pressures from below have been coming at corporate leadership from all sides, says Sarah Kaplan, professor of strategic management at the University of Toronto’s Rotman School of Management. Corporate executives have no choice but to respond, she says, and recalculate the best interests of their companies.
“It’s very interesting, and I feel like we are at this kind of super turning point moment right now, where these conversations about stakeholders are now being taken seriously,” says Professor Kaplan, whose new book, “The 360 Corporation: From Stakeholder Trade-offs to Transformation,” traces the evolution of this social movement.
“That means that, increasingly, companies are feeling the pressure from all of these different stakeholders to be more responsive, or people are going to start walking away from the company as employees, they’re going to start walking away from the company as consumers, and they’re going to start walking away from the company as investors,” she says.
As it happened, in 2005, the same year that Ms. McPherson traveled to Afghanistan with the Business Council for Peace, investors coined the acronym “ESG” for the growing movement of socially conscious investors who were demanding information about a company’s environmental, social, and governance policies.
New voices shaped by a crisis
Then social media began changing the ways workers can communicate and organize. Shaped in part by observing corporate bailouts during the economic crisis of 2008 and investors who more or less were taking risks with “house money,” younger workers began to lose faith in the hierarchies of corporate leadership and the “invisible hand” of efficient markets.
“Social media has greatly amplified the voices of workers, and not just workers in their companies themselves, but those throughout the supply chain,” says Professor Kaplan. “I think especially we attribute this to millennials, who don’t want to work for companies that don’t have good workplace policies, that don’t look out for their social impact, that ignore the increasing impact on the environment.”
And since then, a wave of ESG-based investment principles and other forms of stakeholder-centric investment strategies have indeed become a tsunami, scholars say. In 2010, there was about $3.07 trillion in socially responsible assets under management in the U.S., according to US SIF, a nonprofit forum in Washington D.C. This has rocketed to $12 trillion in the U.S. in 2018, the forum reported.
Worldwide, nearly $20 trillion is invested only in companies deemed socially responsible, economists estimate.
“What we’re seeing is that people want to know what they’re investing in – and particularly the younger generation wants to know – and they’re saying, I do not want to profit from owning assault weapons, I do not want to profit from burning down the rainforest, I do not want to profit from companies that don’t emphasize gender equality,” says Mr. Behar at As You Sow.
One motive: building long-term value
But many economists say that political and moral values are not the only drivers of this social movement beginning to transform the idea of capitalism, even if this era’s zeitgeist is marked by a suspicion of global elites and institutions.
“This isn’t some far-left wing or collectivist movement, this is capitalism,” says C.B. Bhattacharya, director of The Center for Sustainable Business at the University of Pittsburgh’s Katz Graduate School of Business. “Maybe it’s a different brand of capitalism that’s in tune with our times, but this is very much enlightened self-interest, or whatever you want to call it.”
“Ultimately, in the long run ... you’re bound to make more money if you are sustainable in your business practices,” continues Professor Bhattacharya, who traces the economic value of stakeholder-centric business practices in his new book “Small Actions, Big Difference: Leveraging Corporate Sustainability to Drive Firm and Societal Value.”
He points to the business risks for corporations that fail to adapt. “Frankly the cost of inaction is higher than the cost of action today. So maybe the CEOs at the Business Roundtable thought at least that part through, saying that if we don’t do something now, then we really will perish in the years to come.”