Redefining the Corporate Goal Amidst Changing Social Views
Written by Harold Burson
Some of us believe the conduct of modern business in the Western world, especially the United States, has been positively influenced by an unwritten “social contract” that set forth public expectations from business in return for access to the public franchise that permits most kinds of business transactions. This informal understanding evolved over a century and a half that started a few decades before the Civil War and ended during the latter days of the 20th century. It had a strong influence on how the public viewed and regarded reputations of corporations and business in general.
In the US, the modern corporation got going only a couple of decades before the Civil War. Since then, there have been few extended honeymoon periods in the relationship between business and the Federal government. Scandals during the Grant administration followed by the chicanery in the construction and consolidation of railroads and the panic of 1887 led to the trust-busting of Presidents Theodore Roosevelt and William Howard Taft and the dissolution of such mammoth enterprises as Standard Oil and US Steel early in the 20th century.
The decades immediately following World War I and World War II, from a Washington standpoint, were generally favorable to business, especially the 1920s. Grateful for the contribution of Big Business in winning the war, and with a well-liked Republican president, Dwight Eisenhower, firmly ensconced in The White House, public and government pressures on business abated during most of the 1950s—although Eisenhower is well-remembered for his admonition on the stealth of the “military-industrial complex.”
The corporate world was then fortunate indeed to have the caliber leadership embodied in such chief executives as John De Butts (AT&T), Frank Carey (IBM), Reginald Jones (General Electric) and Irving Shapiro (DuPont). This quartet, solo and together, spoke out for business to the extent that President Jimmy Carter was once quoted as saying “they spent as much time in the Oval Office as any cabinet member.”
These executives recognized corporations as social entities whose ability to serve their public obligations depended on making a fair profit. The general understanding was that the role of the corporation was 1) to market goods and services at a fair price and deliver on its promises; 2) provide steady employment and an adequate retirement for its employees; 3) participate in the “uplift” activities in communities where it did business; and 4) deliver a fair return on investment to stockholders.
The most important words in that menu of corporate obligations are “fair return” to investors. This seemed to work for all parties well into the 1970s, but the model began to change with the introduction of the concept of “maximizing” return on shareowners’ investment. This resulted in such actions as stripping corporate assets, wholesale elimination of jobs, moving from defined retirement benefits to IRAs, squeezing suppliers for better prices, reducing the content in many packaged goods without public notice, and holding workman wages at a level, adjusted for inflation, at about the same level as in the mid-1970s.
Further implied commitments to shareowners were that earnings would increase quarter after quarter after quarter, the business cycle or general economy notwithstanding, and that income and market share would parallel earnings growth. CEOs were rated on how well they delivered quarterly earnings measured against “the Street consensus.”
Managing for ever-growing maximum profits has made the CEO’s job extremely difficult. The average tenure of a Fortune 500 CEO is said to be in the five-year range, resulting in immeasurable damage to a company’s future, since nowadays few initiatives are undertaken if lacking a rapid payout. That puts the nation’s competitive position in world markets at risk. Even more frightening, it puts the capitalistic market system itself at risk from overly stringent regulatory and legislation oversight.
No responsible individual believes business should replace the government in dealing with social issues. Corporations simply are not the best vehicle for dealing with societal problems. But business, in its daily decisions, can impact the solution of social problems enormously. It’s purely a matter of setting priorities to do what’s right in its dealings with the many constituencies ranging from customers to employees to share owners. The problem facing today’s CEOs is that they are often impeded in making the right decisions when maximizing quarterly profits is a principal focus.
The business environment over the past quarter century has changed markedly. Having a good reputation may no longer be the proper ultimate goal of most corporations. Were I a mathematician seeking to develop a 21st century equation describing today’s goal, it would take this form:
Accountability + Reputation = Sustainability
Business, in many instances, has evolved into a struggle to survive; since “making the numbers” quarterly is the principal objective, failure to do so brings about severe punishment. This is a big change from years past when the equation describing the ultimate corporate goal would look more like this:
Accountability + Sustainability = Reputation
Looking forward, I fear the business outlook is bleak if allowed to follow its present course. The reason is, simply, that today’s expectation of maximized profits is not sustainable. When just about every other cost-saving action has been undertaken, we are now observers to a rash of companies abandoning the US in favor of countries whose corporate taxes are substantially lower. They have determined they are no longer “sustainable” domiciled in the United States. What statement does this kind of behavior make to the rest of the world? Or, yet a better question, what statement does it make to the “average” citizen who pays his or her taxes down to the penny?
As one who has worked with senior corporate managements for more than six decades, I am astounded that no one in business today is making the case loudly, or even behind closed doors, that this is a problem that needs to be addressed—that the successful 21st century corporation is indeed a social entity with a greater purpose than producing ever-increasing earnings for investors at the expense of other stakeholders critical to making the system work. None of us wants merely to survive. We must continue to innovate and invent and expand the variety of goods and services that contribute to our shared pursuit of happiness.
This state of affairs has a profound effect on corporate reputations. At no time since polls began to measure public attitudes toward business has the approval rating toward big business been so low—almost at the single-digit level of the public’s favorability rating for the US Congress. Of course, there are some companies that have overcome these unfavorable ratings, but they are the exception. It’s not ineffective communication that’s responsible for the problem, it’s unacceptable behavior that’s being forced on CEOs whose greatest concern is maximum profits for the shareowner.
What we need is a new, unwritten “social contract” that clarifies the role of the corporation as a social entity. This should be a high-priority undertaking of the corporate world. The most disheartening result would be for the government to start anew with restrictive regulation and legislation à la the New Deal, albeit with much higher stakes than in the 1930s Depression. This is a problem that cries out for business involvement to develop a governance covenant acceptable to all parties.
The unknown—and it’s a big one—is how the “market” would value shares in corporations no longer seeking maximization of shareowner return on investment that risks sustainability against a lower-earning stock that has longer-term predictability. It’s an imponderable question that has serious consequences.
Until that time when there is a change in the role of the corporation in society, the reputation of business will be at risk, continually subject to unwanted and often misdirected regulatory corrective interventions that are usually as likely as not to fail in their purpose. The ultimate solution is for all sectors of business to come together to determine what best serves the common interest—the needs of the public, the needs of business, the need to perpetuate an ever-growing economy that provides opportunity and subsistence for the populace at all socio-economic levels.
The greatest need is leadership in business sectors and at the legislative and regulatory levels to agree to a set of unwritten principles that will set the behavioral course for business and society for generations to come. It’s time for the heroes to step forward; otherwise, sustainability, rather than reputation, will be the metric most important to the individual corporation.
This article is based on personal observation, reflecting only the views of the author and not necessarily those of the firm that bears his name.