In August 2019, CEOs from 181 of the world’s largest companies — tasked with advocating for policy solutions that foster economic growth and competitiveness as part of The Business Roundtable (BRT) — publicly declared that the purpose of a corporation is to create value for all stakeholders, including employees, communities, and suppliers.
This declaration deliberately renounced shareholder primacy, the BRT’s official position since 1997, which advocates that a corporation’s primary purpose is to serve its shareholders. In fact, shareholder primacy has been the core operating principle of public companies for nearly 50 years, when economist Milton Friedman famously declared “the social responsibility of business is to increase its profits.”
To be sure, not all CEOs ascribed to the shareholder primacy model. Robert Wood Johnson, Johnson & Johnson’s former chairman from 1932 to 1963, published J&J’s “Credo” in 1943, in which he clearly described his organization’s hierarchy: Obligations to patients, doctors, nurses and families came first, followed by business partners, employees, and local and global communities. The final obligation was to stockholders, providing them with “a fair return.”
But, while Johnson’s ahead-of-his-time Credo has almost certainly contributed to J&J’s longstanding success, most modern organizations adopted shareholder primacy as the economic model of choice. And, for decades, it served them well.
The Rise of Corporate Social Responsibility
In recent years, corporate social responsibility (CSR) has continued to gain traction as customers, employees, and investors pressured companies to consider their overarching purpose and impact on society. A 2019 Deloitte survey revealed that 93% of business leaders believed they were “stewards of society,” and 95% were planning to devote substantial resources to socially responsible initiatives in 2020. More than half of respondents were already devoting between 1-5% of their revenues to programs with a purpose, and two-thirds planned to increase their budgets for these programs in 2020 and 2021.
There are many contributing factors here, including evolving social norms and the pervasive threat of global challenges like climate change, rampant inequality, and sweeping technological advancement. Confronting these increasingly pressing problems demands a shift from a short-term focus on shareholder profits to considering the long-term impacts on all stakeholders.
Yet these initiatives are not entirely altruistic. In a capitalistic society, they probably couldn’t be. Employers are also investing in their workers and communities because they understand it’s good for business — it’s likely the only way to remain successful long-term. Good corporate citizenship impacts everything from marketing and sales to employer brand and retention, and both consumers and employers are holding organizations accountable.
CSR is No Longer Optional
In 2020, economic, social, and political upheaval fully thrust organizations into the driver’s seat of social change. Faced with the realities of economic uncertainty and undeniable racial injustice, consumers and employees are no longer satisfied with platitudes; they want action, they want progress, and they’re holding companies liable when their stated values and actions don’t align. We know that CSR is a valuable recruitment strategy, and that job loyalty rises as businesses address internal social issues like DE&I and reskilling. Walkouts and leaked employee letters at some of the world’s biggest corporations proved that many employees feel comfortable — if not obligated — to publicly support or criticize their employers’ actions when it comes to controversial social issues. And while 90% of consumers would purchase a product because the company supported an issue they cared about, 75% would refuse to buy products from organizations that went against their core values.
This means that conscious capitalism and CSR — guided by a higher purpose, stakeholder orientation, conscious leadership, and conscious culture — are no longer optional. Looking forward, organizations will also need to evolve the scope of their initiatives; for example, rather than organizing single-day volunteer events to build houses or serve meals, leaders should be investing in long-term programs designed to address the underlying systemic issues like generational poverty, affordable housing, and hunger.
To succeed at this lofty level, organizations will need to honestly evaluate how they currently interact with society and embed social-impact agendas into their corporate identity and mission. As we’ve learned over and over this year, business and society are intricately linked. While the prospect of confronting controversial and complicated issues like climate change, racism, and political activism is daunting, businesses must play a leading role if meaningful change is to occur.
Just as organizations’ responses to the Great Recession impacted their employer brand for years, people will remember the companies who stepped up to lead progress in 2020.