Economy & Business

The Importance of Stakeholders to Profitability

(Igor Kutyaev/Getty Images)
The Business Roundtable shows that maximizing shareholder value is good for shareholders and stakeholders alike.

August 19 marked the second anniversary of the Business Roundtable’s Statement on the Purpose of a Corporation, which stated that corporate management’s primary responsibility was no longer to their shareholders but rather to a group of “stakeholders” — including “customers, employees, suppliers, communities and,” last but perhaps not least, “shareholders.”

In a Wall Street Journal opinion piece denoting that anniversary, the director and associate director of Harvard Law School’s Program on Corporate Governance offered evidence that the 181 CEOs who signed the statement “didn’t intend to make any significant changes to how they do business.” Rather, companies were, for example, still aligning director compensation with the company’s stock price, sending “a clear signal that shareholder value is the objective directors are expected to pursue.”

Well, of course it is. The Business Roundtable’s statement did nothing to change that. But that doesn’t mean that a business’s sole responsibility is to its shareholders. Business have always owed responsibilities to other stakeholders including customers, employees, suppliers, and communities as an integral part of their primary responsibility — to make a profit. In fact, the statement confirms that corporate management will continue to do the things that lead to profitability and — God forbid — shareholder value.

Obviously, every business has a responsibility to its customers. How can you make a profit if you fail to meet the needs of your customers? It’s rather silly to say you have a responsibility to your customers like it’s a revelation. Of course you do, and if you fail to do a better job than your competitors at meeting that responsibility, you will go out of business. Which, if you think about it, really doesn’t benefit any stakeholders.

With respect to employees, every manager knows a loyal workforce is essential for success. Your employees are your most valuable asset. If you fail to treat your employees fairly, they will quit and work for your competitors. In a free-market economy where employees can move from job to job, there is no legitimate business model where having an unhappy labor force enhances profitability.

With respect to your suppliers, of course you have to keep them happy, or they’ll give the best deals to your competition or stop supplying you altogether. Obviously, that will hurt your bottom line. Our current high-demand/low-supply economy highlights the importance of maintaining good supplier relations. The fact is that without a functioning supply chain, your business’s life span will be very short.

Finally, businesses clearly have responsibilities to their communities, and they know it. American corporations donated $21 billion to charities in 2019. Every business wants the people in its community to view it as a good neighbor. It isn’t just the right thing to do; it’s good for business.

Businesses that fail to meet their obligations to stakeholders will fail to meet their obligation to their shareholders — which is to enhance profits. None of this should come as a shock. The Business Roundtable’s statement was little more than an acknowledgement of this reality.

So, it’s not surprising that these Harvard professors found that 100 of the statement’s signatory companies failed to add language to their corporate-governance guidelines “that elevates the status of stakeholders, and most of them reaffirmed governance principles supporting shareholder primacy.”

I’ll go a step further and bet that, following the statement’s issuance, all 181 signatories continued reporting to their shareholders, boards, and the investment community that they had either increased profits or had a plan for doing so going forward. I’ll even go a step beyond that and bet that none of these CEOs, at least none that still have their jobs, reported that profits declined because they were focused on the needs of stakeholders other than their investors. Something like, “Profits are down and your stock price will decline but, hey, we’re really good guys.”

The professors believe the statement’s signatories may have intended it as something of a ruse. They could be right. CEOs are not above virtue signaling in an attempt to make themselves more acceptable to progressives.

What the professors miss is that making a company profitable — adding to its value for its shareholders and its stakeholders — is by itself highly virtuous. It’s by far the most noble and important role businesses play in a free and prosperous country. Policies that reduce profits also reduce job opportunities, wealth to help the disadvantaged, and support for government functions; in addition, shareholders’ returns fund the endowments and other investments that pay the salaries of professors at noble institutions such as Harvard Law School.

Investors place their wealth at risk because they expect superior returns and, if our economic system is to continue generating prosperity and abundance, we need them to keep investing. People donate to charities to do good works for others. They invest in businesses to make a profit.

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