4 min read.Updated: 26 Aug 2019, 10:43 PM ISTAjit Ranade
Top US CEOs have stated that the purpose of business must go beyond just shareholder value
The Business Roundtable, an association of CEOs of America’s top companies, recently issued a statement that redefines the purpose of a corporation. Signed by nearly 200 top CEOs, including those of J.P. Morgan, Apple, Walmart and Amazon, it essentially says that America should move from shareholder to stakeholder capitalism. That is, corporations should not just focus on maximizing shareholder value, but also include the well-being of employees, environment, suppliers and communities at large. While share-value maximization is a clearly defined metric, the statement does not clarify what metrics will be used for maximizing the welfare of other stakeholders. This statement is dramatically different from one made by the Roundtable just two decades ago, when it had articulated a doctrine that the duty of a company’s management and board was only towards its shareholders. Indeed, this has been the underlying principle of all reforms in corporate governance laws, both in America and abroad, including in India. To now say that the board and management are accountable to employees, suppliers and others as well, is a major shift. It also contradicts the philosophy articulated by Milton Friedman 50 years ago, who pithily said, “The social responsibility of business is to increase its profits." It had weight and logic which explains its longevity. Many people still believe in it. For, if companies focus on obeying laws and maximizing profits, then governments can collect healthy tax revenues from which generous social spending and provision of public goods can be done. Friedman’s exhortation was to refrain from distracting a profit-maximizing company.