“It’s almost astonishing… (BRT are) in effect coming right out and saying, ‘We’ve been wrong for the last 20 years…some folks in the BRT are recognizing there’s something unsustainable about an economy that’s all about shareholder primacy. … it’s probably good politics on their part in addition to good economics.” Robert Hockett, Professor at Cornell Law School
In the first two posts in this series (1, 2), we made it clear that the Maturity Institute (MI) believes it is crucial for the Business Roundtable (BRT) signatories to understand the full implications, and ramifications, of their ‘Statement on the Purpose of the Corporation’. MI wants to help them make the most of the huge opportunity they have opened up for themselves, other companies and all the world’s stakeholders; including shareholders.
The ‘statement’ itself is not an explicit pronouncement that capitalism, as we have come to know it, is over but, be in no doubt, it is. Nor does it propose an alternative to the Friedman ‘profit motive’ that they have consigned to history. So, in order to fill the vacuum they have created, MI offers its paradigm for mature, responsible, sustainable capitalism; where the only corporate purpose is measuring improvements in Total Stakeholder Value (TSV).
The primary components of our TSV model are simple, practical and already practised by OMINDEX exemplars (like Spanish supermarket Mercadona). So how can BRT members start their own transition away from measuring profit and towards measuring their TSV contribution to the whole system? They must first adopt a universal definition of value that is intrinsically moral, responsible and sustainable.
If we had to pinpoint the single, root cause that led BRT to make its ‘statement’, it would have to be its long-standing misinterpretation of Friedman’s dictum that afforded ‘profit’ primacy over all other business considerations. Profit is a very narrow measure of the difference between revenue and costs. Profit is a necessary condition for corporate survival but all CEOs have to realise it is not sufficient. More importantly, it should never have been taken as a proxy for the much more important, and sufficient, condition – the creation of societal value. As long as a corporation keeps creating value it will survive and society will be able to thrive. How might Friedman have changed if he were alive today?
Imagine he was reincarnated as a practising manager rather than an academic: say, as the CEO of a large hotel. If he read one of his own books it might lead him to believe that he only has to maximise the profits of his establishment. He might also believe this is a simple matter of reducing costs and/or raising revenue. He could reduce costs by diluting the drinks in the bar, buying inferior ingredients for the restaurant and cutting corners on cleaning the rooms. Friedman was never that short-sighted though: even if his dictum was. He offered a false legitimacy to executives who put profit first and, in effect, sanctioned any excessive remuneration that followed.
MI’s philosophy of never-ending improvement (following the methods of the Toyota Way) places value above profit but, counterintuitively, leads to more profit (go check Toyota’s performance over the last 50 years). As it forms the essential component for the whole system (i.e. the whole world), every improvement, however small, benefits everyone. With TSV as corporate purpose society shifts to a new capitalist paradigm where it can divide the increased wealth more equitably. TSV is the antithesis of the zero-sum game designed by Friedman and played by BRT CEOs for so many years.
At MI we define value (Figure 1.) as a balanced, composite measure of Output (e.g. hotel room occupancy, meals served), Cost (better cost control, less waste), Revenue (the premium the customer is prepared to pay for the enhanced value they receive) and, most important of all, Quality (the quality of the rooms, the service levels and the quality reputation of the whole organization itself). This is the totality of the combined, intrinsic value of the organization and the sum of its core capabilities.
We frame this definition of value within another condition: all economic activity must aim to remove harm, both human and environmental. Friedman’s profit motive predates the acute awareness we now have of climate change and corporate misgovernance. MI’s paradigm of responsible capitalism does not allow for any single country, or specific group of stakeholders, to come ‘first’ at the expense of all other stakeholders or neighbours. This is a more natural system; encouraging, allowing and enabling all people to make their best value contribution, because they see that it is in their own best interests, regardless of any current disadvantages they might perceive.
Unscrupulous CEOs gamed Friedman’s system, which is why our Organizational Maturity Index (OMINDEX) is designed to be game-proof; you cannot cheat the searching questions it contains. We use OMRs (Organizational Maturity Ratings) to assess and rate all organizations; measuring their progress along the Total Stakeholder Value scale for the long-term. We never attach much weight to short-sighted, short-term measures of profitability because they are poor predictors of future performance and sustainability; especially in the face of changing societal attitudes.
There are many, many implications and ramifications that will automatically flow from CEOs having to recognise and acknowledge that the world has already been changed by the BRT’s statement: –
- Governments are going to have to re-draft company law with Total Stakeholder Value as the primary responsibility of corporations.
- Government departments, both national and local, will have to rebuild their preferred supplier and procurement lists to only include providers with high maturity ratings (minimum BBB+)
- Corporate lawyers and general counsels are going to find it increasingly difficult to protect their clients if they try to revert to Friedmanism.
- Accountants and auditors have to build the MI definition of value into their financial reports and organizational audits, and use whole human system diagnostics, such as our OM30 as part of their work. They are already attempting to do so under the auspices of the International Integrated Reporting Council.
- Investment analysts are already having to look at OMINDEX ratings to see which companies are more likely to mature and create long term TSV. They will need to increasingly divest from companies with distressed, environmentally unfriendly, assets.
- Investors will be drawn more and more to companies that declare the never-ending pursuit of maximising TSV to be their ultimate goal because that is where the best, long-term financial returns will be found.
- Business schools are already re-designing their curricula to move away from Friedman and the outmoded economic and business management theory currently taught on MBA programmes
- Employees will know whether their salaries are being paid out of Total Stakeholder Value rather than short-term profits
- Regulators and ordinary citizens will have a common standard by which to judge the behaviour of all companies
Is your organization ready for the transition? The full exposition of how all societal stakeholders can adapt and transition to a true Total Stakeholder Value based economy can be found in our core text: The Mature Corporation – a Model of Responsible Capitalism.