181 Top CEOs Have Realized Companies Need A Purpose Beyond Profit

181 Top CEOs Have Realized
Companies Need a Purpose

Beyond Profit
On August 19 the Business Roundtable issued an open letter

titled “Statement on the Purpose of a Corporation.” One of the
preeminent business lobbies in the United States, the Business Roundtable
(BR) includes the CEOs of leading U.S. companies from Apple to Walmart.
Sandwiched between the spare title and 181 signatures was a one-page
declaration that ended as follows: “Each of our stakeholders is essential.
We commit to deliver value to all of them, for the future success of our
companies, our communities and our country.”
On its own, this sentence is indistinguishable from the anodyne

commentary that fills the annual reports of many Business Roundtable
members. For those actively following this topic, however, it represents a
very public rebuke of the Milton Friedman worldview that guides business
decisions behind closed doors. Friedman, the renowned University of
Chicago economics professor, penned a famous 1970 New York Times
essay, “The Social Responsibility Of Business Is to Increase Its Profits,” that
helped launch a half century of “shareholder capitalism.” In this
worldview, the business of business is business, and the sole focus of the
CEO is to maximize the profits of that business.
The new statement by the Business Roundtable explicitly counters this

view. Corporations are, according to the statement, accountable to five
constituencies, of which shareholders are only one (customers,
employees, suppliers, and communities are the others). In that sense it is a
classic articulation of “stakeholder capitalism,” prevalent in Europe today
and in the U.S. during the immediate postwar period. So while the
statement itself is not notable, that it has the backing of CEOs representing
nearly 30% of total U.S. market capitalization is.
The primary criticism of stakeholder capitalism is that any purpose other

than shareholder profits results in a lack of focus and, ultimately,
corruption. This critique logically follows from the view that CEOs can be
self-serving arbiters of social value and would, if given the opportunity,
divert resources to their own enrichment under the guise of “purpose.” In
his 2019 letter to CEOs, Larry Fink, the CEO of BlackRock, disagreed with
this assumption, stating in bold lettering: “Purpose is not the sole pursuit of
profits but the animating force for achieving them. Profits are in no way
inconsistent with purpose — in fact, profits and purpose are inextricably
linked.”
This debate — whether purpose and profits work together or are
fundamentally at odds with each other — can be informed by empirical
research. And the findings of our ongoing research initiative on corporate
purpose support the views of Larry Fink and now of the Business
Roundtable: Purpose and profit tend to go together. Using more than 1.5
million employee-level observations across thousands of companies, we
quantified purpose as the aggregate sense of meaning and impact felt
by employees of a corporation. If the company has a strong corporate
purpose, our research shows, its employees will feel greater meaning and
impact in their jobs. This view reflects the opening sentence in the BR
report: “Americans deserve an economy that allows each person to
succeed through hard work and creativity and to lead a life of
meaning and dignity” (emphasis ours).
In our data we find that companies with high levels of purpose outperform
the market by 5%–7% per year, on par with companies with best-in-class
governance and innovative capabilities. They also grow faster and have
higher profitability. However, the link between purpose and profitability is
present only if senior management has been successful in diffusing that
sense of purpose further down in the organization, especially in middle
management, and in providing strategic clarity throughout the
organization on how to achieve that purpose.
Our work also could help explain the obstacles companies face in moving
away from such an exclusively shareholder-focused perspective. A
company’s listing status and investor base is one such hurdle. We find
lower levels of purpose in publicly listed companies, relative to private
firms. Importantly, this pattern is driven by public companies with
concentrated or activist shareholders. One may think we are picking up
on a reverse effect, that activist shareholders choose underperforming
companies that also have lower purpose, but this is not what is going on
in our data. Instead, activist shareholders acquire large stakes of public
companies, and then purpose subsequently declines among hourly and
middle-ranked employees. To us this indicates the importance of firms’
strategically managing their shareholder bases and aligning their long-
term strategies with the types of investors that would be supportive of it.
Incentives are another factor. We find that purpose declines when there
is a larger gap between the pay of CEOs and median workers and
between the performance-based pay of middle- and lower-level workers.
Both can result from employees’ feeling that value creation is allocated
unfairly within the firm.
Leadership is yet another one. We find that firms where the CEOs were
promoted internally have a higher sense of purpose. Rising through the
ranks seems to be an important variable when considering preserving the
purpose of the organization. Finally, strategic choices, such as mergers
and acquisitions, are also an important factor. We find that M&A tends to
cause a decrease in sense of purpose, consistent with the idea that most
M&A activity does not include enough due diligence on how it will affect
employees and firm culture.
All these patterns are important to the discussion of the role of purpose in
corporations and society. We live in an age where production is
increasingly concentrated among large companies and large capital
providers. With this greater market power comes expectations of a larger
social role, whether that role is the choice of the CEOs or not.
What the impact of this one letter from the Business Roundtable will be is
hard to know. On the one hand, it might be a cynical response to election-
year rhetoric and policy proposals that worry the member companies of
this powerful lobbying group. On the other hand, it may reflect a deeper
response of national leaders to the falling social mobility, toxic
polarization, and reduced trust in traditional institutions that we are
grappling with today. Societal shifts seldom come suddenly. They often
manifest as the gradual erosion of support for one worldview and the rise
in support of another. And with this letter, we may be seeing incremental
steps in that direction.

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181 Top CEOs Have Realized

Companies Need a Purpose

On August 19 the Business Roundtable issued an open letter

On its own, this sentence is indistinguishable from the anodyne

The new statement by the Business Roundtable explicitly counters this

The primary criticism of stakeholder capitalism is that any purpose other

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