A core tenet of American capitalism has long been that a public company’s foremost duty is to generate profits for its shareholders. The logic behind this belief is powerful: shareholders own the company and have wagered hard-earned capital on its success, so the corporation owes them nothing less than the greatest possible return. It turns out, however, that it also owes them quite a bit more.
Last month, the Business Roundtable, an influential trade group that represents 200 of America’s largest companies, changed its statement on “the purpose of a corporation” to reflect that corporations should not just meet the needs of shareholders but also those of its stakeholders such as employees, consumers, and society. The 181 CEOs who signed this statement are joining a widespread movement against shareholder primacy that includes not only a surprisingly diverse set of business leaders but also politicians from both parties. For instance, while Senators Marco Rubio and Elizabeth Warren don’t agree on much, they do agree that shareholder primacy is the cancer that’s killing American competitiveness, American communities, and American workers. It is exciting to see the Business Roundtable also begin to recognize this issue, although many commentators have noted their statement is short on specifics of how companies will factor broader sets of stakeholders into their decision making. Unless they outline a more detailed plan, they run the risk of just being another example of business leaders giving lip service to making the world a better place while continuing to operate in the same old way.
Fortunately, over the last decade, a grassroots movement led by US nonprofit B Lab has created a set of innovations that allow companies to meet the challenge of not only delivering profit but also focusing on a broader purpose. This movement has created a new kind of company that has a triple bottom line — people, planet, and profits — woven into its DNA. At the center of this work is a rigorous assessment whereby companies certify their environmental, social, and governance performance and become B Corporations. This assessment — the B Impact Assessment (BIA) — has no other parallel in the world. Although other certifications do exist (e.g. Fair Trade, Organic, and others), the BIA is the first assessment that encompasses all aspects of corporate performance. Well-known multinational companies have already signed onto this movement, including business units of Danone, Unilever, Campbell’s Soup, Procter & Gamble, Nestlé, and Gap; established independent firms such as Patagonia, Eileen Fisher, and New Belgium Brewing, and more recent start-ups such as Allbirds, Kickstarter, and Casper. Currently, there are close to 3,000 Certified B Corporations across the globe, more than 50 percent of which are outside the USA. Aside from those that have been Certified, tens of thousands of companies around the world have used the BIA to measure and manage their social, governance, and environmental impacts.
The CEOs from the Business Roundtable can take two inspirations from the B Corp movement in order to move their initiative from the domain of talk to the domain of action.
1. Stakeholder Governance Mechanisms
These companies must develop mechanisms to align their governance structures to create stakeholder value. Without such alignment it is hard to believe that such lofty talk will ever be implemented. The most rigorous way would be to become a registered benefit corporation — a new type of corporation that places social benefits and the rights of workers, the community, and the environment on equal footing with financial shareholders. This corporate form, developed by B Lab, is being adopted globally. Over the last decade, 35 American states, plus Italy and Colombia, have passed benefit corporation legislation, and more than 10,000 US companies have incorporated using the benefit corporation form. Political figures across party aisles have supported the passage of benefit corporation legislation in their states, including then-Governors Deval Patrick (D-MA), Mike Pence (R-IN) and Nikki Haley (R-SC). This new corporate form also inspired many of the ideas in Senator Elizabeth Warren’s (D-MA) Accountable Capitalism Act. For companies with dispersed shareholders it may be difficult to change their corporate form in the short run. But certainly, they can align performance standards inside the firm with stakeholder-oriented objectives, and most importantly, begin discussing these objectives with investors and government leaders. For widescale change to occur, it is essential to convince the capital markets and policymakers of the importance of stakeholder aligned governance structures.
2. Accountability, Transparency, and Performance Standards
Unless businesses measure and report on their environmental, social, and governance activities there is no way to judge their actions. The Council of Institutional Investors critique of the Business Roundtable statement was that, “accountability to everyone means accountability to no one.” Stakeholder governance would be hollow without some form of accountability and performance standards. Such standards are what separates true stakeholder governance like exists in B Corporations from CSR. While becoming a B Corporation may initially be a stretch for many of the Business Roundtable companies, there are a number of steps they can take in the short run. Like many of their peers, for instance, they could use the BIA as a stakeholder performance management tool. This would allow them to assess parts of their business and/or suppliers which would then also provide a roadmap for key areas of improvement. Moving forward, these companies could commit to year-on-year improvements on the key stakeholder metrics of their choosing.
Today, many corporations have become more powerful and have accumulated more wealth than some of the world’s largest nations. For decades, under the banner of serving shareholders first, they have compartmentalized different aspects of their business and the rest of society and as a result, there has been unnecessary and extensive damage to the environment, communities, working conditions and, in some extreme cases, human rights. It is wonderful members of the Business Roundtable are beginning to recognize the important role they play in creating a more equitable and sustainable world. The accountability and governance tools developed by the B Corp movement provide some easy first steps for them to take their principles to the next level. I challenge the CEOs of Business Roundtable to utilize the innovative tools and advancements made by the B Corp movement in order to find new ways integrate stakeholder principles into their daily operations, and place real actions behind their decisions.
Christopher Marquis is the SC Johnson Professor in Sustainable Global Enterprise at Cornell University and the author of the tentatively titled “Better Business: How the B Corp Movement is Remaking Capitalism One Company at a Time” to be published in 2020 by Yale University Press.