On August 19, 2019, the Business Roundtable, an association of some of the largest companies in the United States, made headlines with the news that it had revised its  Statement on Corporate Purpose . The initiative represents a significant shift in the understanding of business activity: “Each and every one of our  stakeholders  is essential. We are committed to creating value for all, for the future success of our businesses, our communities, and our country.”

The Business Roundtable is a non-profit organization founded in 1972, bringing together nearly 200 presidents and CEOs of major American companies—the elite of the business world. It periodically issues a statement outlining how its members envision their companies’ purpose.  For decades, these statements have centered around the idea that executives should work for their shareholders, maximizing profit.

This wasn’t a manifestation of selfishness, but rather a reflection of a deeply ingrained thesis among economists: under certain conditions, if companies maximize their profits, the result will be socially optimal in terms of income generation, job creation, growth, innovation, and prosperity for all. The problem is that these conditions are rarely met:  competition in markets is incomplete, as is information; there are negative externalities, such as pollution; there are public goods that markets don’t provide…

The news has been widely discussed in the media, especially in economic and business publications. I particularly enjoyed  Professor Argandoña ‘s analysis of this news in an Aceprensa  article  . I’ve included a few paragraphs below because of its relevance. You can read the full article  here .

Creating value for all

So the Business Roundtable began to reflect. Society, they told themselves, is changing rapidly; there is a lot of precarious employment, and workers don’t always get what they expect from their jobs; the needs of the local communities where companies operate are frequently neglected by the authorities; suppliers, often small and based in emerging countries, are not always treated well; customers don’t feel loyalty to the company…

So  those senior executives decided they needed to change their approach.  It’s good to ensure shareholders receive adequate compensation for the risk of their businesses, but—they told themselves—we must do more: we must  “create value for our customers, invest in our employees, treat our suppliers fairly, support our communities, and generate long-term value for our shareholders.”

This is what caught the media’s attention: the shift in how companies understand their purpose or objective. It’s no longer just about profit, but also the well-being of stakeholders  (  those who share our interests). And effective management requires putting resources to work not only for shareholders, but for all those stakeholders. Are we witnessing a revolution? I don’t think so, but in a way, we are.

It’s not a revolution, because companies have long  been conceived as communities of people, which must be managed for everyone involved: shareholders, managers, employees, customers, suppliers…  Should they make money? Yes, of course: if companies lose money, we’re on the verge of a very serious crisis. Profit is necessary, but it’s not the purpose of a company. That was the Roundtable’s mistake for many years: believing that a necessary condition for the company’s survival and growth was its objective.

A common task

Many people are involved in the company’s activities, providing capital, labor, management, raw materials, services, and more. Each person does so because they expect something in return. Employees, for example, want a good salary, but also to learn new things, have career opportunities, enjoy a pleasant work environment, feel useful, and make friends.  Shareholders seek profitability, but also other things, such as being able to be proud of the company they have invested their money in.

The purpose of a company is not profit;  this is one of the owners’ objectives, but it’s not even the only one.  The purpose is about people coming together to do something they believe in.  They want to achieve that long list of things I just mentioned because it will allow them to meet their own needs while also meeting the needs of those outside the company—customers, suppliers, investors, and the local community.  The Business Roundtable is right when it talks about the duties of a company toward all these stakeholders.