What's the Purpose of a Corporation?
What's the Purpose of a Corporation?
The Business Roundtable, steward ownership, and stakeholders versus shareholders
Background: Over the weekend, I listened to an Oxford-style debate between Harvard’s A. Lucian Bebchuk and Oxford’s Colin Mayer.
The question at hand: Should business be governed and run for shareholder or stakeholder interests?
The conversation came in the wake of a 2019 announcement by The Business Roundtable, a lobbying group made up of large CEOs of large companies. In that announcement, they redefined the purpose of a corporation.
Why it Matters: For decades, The Roundtable adhered to economist Milton Friedman’s position that the sole legitimate purpose of a corporation is to maximize shareholder value. TBR’s announcement, a real departure from economic orthodoxy, came as a shock.
But Bebchuk and other critics argued that this was mostly PR.
The Rise of Steward Ownership: At the same time the Roundtable was reconsidering the purpose of a company, a movement was growing in Europe in support steward ownership. In a post, the nonprofit Purpose Foundation argued:
We need to ask ourselves: who holds power and what is motivating their decisions? To create new solutions that harness the potential of capitalism (entrepreneurship, innovation, competition, a decentralized economy) and move beyond its failures (greed, consolidation, inequality), we must challenge one of the fundamental paradigms of capitalism: the understanding and definition of corporate ownership.
Toward the end of the Oxford debate, Bebchuk argued something similar: we can’t blindly trust business leaders to make decisions on behalf of stakeholders. If stakeholder benefit is what we are after, we need a different kind of corporate governance.
Where do things stand? Today marks five years since the Rountable’s announcement, which the commemorated last week in a blog post. And their Purpose of a Corporation document is still linked from the About Us section of their homepage.
But the most exciting developments of the last five years have not come from the CEOs of major companies or regulation, but from the small group of companies that have taken up Bebchuk’s call to rethink corporate governance in pursuit of purpose.
Watch the debate here: