Redefining the purpose of a corporation

In August, the Business Roundtable (“BR”), an association of chief executive officers of the leading US companies, made a...

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“The way to get started is to quit talking and begin doing.”

Walt Disney

In August, the Business Roundtable (“BR”), an association of chief executive officers of the leading US companies, made a significant change to their definition of the purpose of a corporation – the fundamental idea of what their businesses should strive to achieve.

The old principle stated that “the social responsibility of business is to increase its profits”, but the organisation has now moved to the pledge that business managers should “lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders”.

This announcement made the news headlines, suggesting this is a significant change in the tone of corporates – the updated statement moves away from shareholder primacy and instead requires commitment to all stakeholders. While news editors have showcased the change taking place as front-page news, those of us who have followed the Business Roundtable know that past statements and principles already pointed at the importance of considering all stakeholders as part of doing business.

To remind ourselves, an excerpt from the BR’s 2002 governance principles states the following:

“The Business Roundtable believes that stockholder value is enhanced when a corporation treats its employees well, serves its customers well, maintains good relationships with suppliers, and has a reputation for civic responsibility and legal compliance.”

Even further back, the 1997 BR Statement on Corporate Governance statement asserted:

“It is in the long-term interests of stockholders for a corporation to treat its employees well, to serve its customers well, to encourage its suppliers to continue to supply it, to honour its debts, and to have a reputation for civic responsibility. Thus, to manage the corporation in the long-term interests of the stockholders, management and the board of directors must take into account the interests of the corporation’s other stakeholders.”

Looking right back to the 1970s, the decade when the BR was founded, we find our favourite, not because it is nostalgic but because it is spot-on in linking why ESG factors matter to maintaining and expanding the ‘social license’ of a business to operate in the interest of long-term shareholder value creation:

“Moreover, the share owners and directors alike have an interest in assuring that entities with which they are identified behave ethically and as good citizens. It is the board’s duty to consider the overall impact of the activities of the corporation on (1) the society of which it is a part, and on (2) the interest and views of groups other than those immediately identified with the corporations. This obligation arises out of the responsibility to act primarily in the interest of the share owners – particularly their long-range interest.”

Our knowledge of the above statement as well as the evolution of the BR’s principles and guidance means that we were not as seemingly surprised as the financial media by the most recent reframing of the fundamental function of a corporation. Furthermore, nor are we in any way concerned that this new principle could have any adverse effect on shareholder value creation, as it has been a constant theme underpinning the BR since its founding. The new wording merely brings to the fore the importance of all stakeholders, something we actively advocate.

At the same time, it is also inevitable that there will always be actions of the few that will ruin it for the many, which is often sensationalised. Yet, we are optimistic about the direction of travel of the corporate world in general, albeit a little impatient.

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

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