When my business school professor told the class, “The purpose of business is to maximize profit for shareholders,” I had little reason to doubt his expertise.
As it turns out, he was wrong.
After three decades of focusing on driving shareholder return, a coalition of America’s most powerful CEOs is taking a longer view. And they’re getting attention.
First, the backstory: The Washington Post writes, the “concept — often known as “shareholder primacy,” or a corporation’s duty to maximize shareholder value — grew to prominence in the mid-1980s and has since become a widely accepted governance norm, one that critics say has driven a fixation on short-term results and helped balloon the size of CEO pay packages, fueled by outsized stock awards.”
As someone who studies the connection between the business model and the business results, I’ve observed the inherent problems with a shareholder primacy model. Maximizing return rarely drives innovation because the organizational energy is devoted to hitting quarterly targets.
It’s also not surprising, during the decades shareholder primacy rose, employee engagement tanked. Shareholder primacy creates a transactional relationship with employees and customers who (correctly) discern numbers matter more than they do.
Now, The Business Roundtable, a group of America’s most prominent CEOs, have signaled, they’re making a shift. The Washington Post reports, “A group representing the nation’s most powerful chief executives on Monday abandoned the idea that companies must maximize profits for shareholders above all else, a long-held belief that advocates said boosted the returns of capitalism but detractors blamed for rising inequality and other social ills.
In a statement about the purpose of the corporation, the Business Roundtable, which represents the chief executives of 192 large companies, said business leaders should commit to balancing the needs of shareholders with customers, employees, suppliers and local communities.”
My firm’s research, along with countless other studies, illustrate, why focusing on adding value to customers activates a more powerful organization, than a drive for quarterly earnings.
Tricia Griffith, president and CEO of Progressive Corp. says, “CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value.”
The best CEOs point their team towards customers because that’s where the business is, and who should drive future innovation.
The research is clear, when a customer-focused purpose is the rallying cry:
The Washington Post piece states, “The new statement puts an official stamp on a more stakeholder-driven approach to governance that some CEOs have individually advocated for in recent years.”
This shift will be transformational, particularly for publicly held firms. The challenge for leaders is to operationalize this aspiration. It requires a different mindset and different metrics. If employees and communities want CEOs to take a longer more holistic view, boards and shareholders need to do so as well.
At the end of the day, the central question is, does a business exist simply to make money? My B school professor only had half the equation. Making money is important. Making a difference to your customer and employees is the path to get there.