Redefining the purpose of a corporation

The traditional purpose of a corporation has been, first and foremost, to maximize profits to increase shareholder value. While such a purpose has, in many ways, served companies and their investors well over many years, such a purpose can have some detrimental effects.

On the positive side, it protects the shareholders who invest their financial resources in the firm. By seeking to maximize profits, the corporation’s leadership (e.g., the CEO) ensures shareholders receive appropriate returns.

However, a singular focus on maximizing profit has the potential to negatively affect the corporation and many of its stakeholders. For instance, striving solely for profit can lead firms to a short-term focus. Such a focus could drive the firm to reduce costs by forgoing important investments in long-term viability and success, such as research and development and employee training.

A short-term outlook also can lead firms to cut costs on customer service, employee wages and purchases from suppliers, all of which are likely to impact long-term success.

In the face of these downside risks, there was good news this past Monday: the Business Roundtable, a group of 181 CEOs from major U.S. companies, redefined the purpose of the corporation.

In this statement, signed by all 181 executives, commitments were made to all the important stakeholders of a corporation: customers, employees, suppliers, communities and shareholders.

In their statement, the CEOs espoused their belief in the free-market system as “the best means of generating good jobs, a strong and sustainable economy...and economic opportunity for all.” However, what changed in the new definition is that businesses also need to act in the best interest of all stakeholders, not just its shareholders, in the following ways:

• Delivering value to customers; meeting or exceeding customer expectations

• Investing in employees; including fair compensation and important benefits, developing them through education and training, fostering diversity, inclusion, dignity and respect

• Dealing fairly and ethically with suppliers; being good partners

• Supporting communities; respecting people and protecting the environment through sustainable practices

• Generating long-term value for shareholders and engaging them with transparency

While the best U.S. companies are mostly already committed to these tenets, this new definition augurs well for American business and society as a whole. The U.S. economy and standard of living will thrive and grow as companies adhere to the betterment of the wider constituencies.

In addition, acting in the best interest of all stakeholders builds symbiotic relationships. For instance, when a firm acts in the best interest of its employees, those employees are more motivated to treat the firm’s customers better, and customer service improves. Similarly, as a firm invests in employee education and training, the employees are better able to serve customers, improving customer satisfaction.

As I have mentioned in previous installments of this column, Chick-fil-A is a great example of how treating and developing employees translates into a great customer experience.

A similar result comes from treating suppliers as collaborators. When firms focus solely on extracting the lowest price from suppliers, there is little incentive for suppliers to be supportive in return. When firms treats suppliers as partners, they tend to work together to produce a high-quality product at a good price in a timely manner. That benefits consumers as well as the companies.

Finally, when firms are supportive of their communities, both the company and the community end up with great results, as more community members want to work for and patronize the firm. While many firms in Augusta support our community, I highlight ADP as one that stands out for its civic support, particularly for our military, veterans and local nonprofits.

While the Business Roundtable's definition of the corporation has changed, the reality of business success has not. The most successful firms of the 21st century are those committed to the betterment of their customers, employees, suppliers and communities. Profit maximization is not the end goal, but rather the by-product of doing what is best for all stakeholders.

This is what we have been teaching in business schools for years, and I am excited America’s business leaders are delivering this message for all to see.

The writer is dean of the Hull College of Business at Augusta University.