CEOs promise people before profits in new statement on 'Purpose of a Corporation'

CEOs promise people before profits in new statement on 'Purpose of a Corporation'

Stock market digital graph chart on LED display concept. Via Shutterstock
Stock market digital graph chart on LED display concept. Via Shutterstock

.- A new commitment by business leaders to move past pure profit, and commit to employees, communities, and the environment, echoes what the Church has been teaching about business for years, a Catholic scholar has said.

On Monday, chief executives on the Business Roundtable—181 CEOs of corporations like Apple, Amazon, Wal Mart, banks and other businesses from various industries—issued a new joint Statement on the “Purpose of a Corporation.”

The updated statement alters more than 20 years of policy that previously held that the primary duty of a company is to provide profit for its shareholders. The Business Roundtable has issued regular statements on corporate governance since 1978, and in 1997 stated that “the principal objective of a business enterprise is to generate economic returns to its owners.”

Now, the roundtable lists several other commitments of business leaders in addition to shareholder profit, including investing in employees through training programs, dealing ethically and fairly with suppliers, and caring for the environment and for local communities.

“I think it’s a really good move,” Professor Andrew Abela, Dean of the Busch School of Business at the Catholic University of America, told CNA.

“Church teaching has been, I think, some of the most sensible teaching on the role of a business anywhere,” he said, to “make a profit as well as to serve society.”

The statement reflects those principles, Abela said.

“It’s something that the Church has been saying for decades,” Abela said, noting that the new announcement is not an “about-face” on the priorities of corporations, but is rather “an expansion of the understanding of the purpose of the firm.”

The statement will need to be put into action to be effective, but it gives “cover” to any business owner who claims that a company has duties to employees and local communities along with shareholders, Abela said.

“It is significant, in terms of language. I think a question is, will it also be significant in terms of a change to policies?” Martijn Cremers, dean of the University of Notre Dame’s Mendoza College of Business, told CNA. He added that such a statement provides a means of holding the executives “accountable.”

A Vatican document from May of 2018 explained the role of shareholders in ethical business dealings. The Congregation for the Doctrine of the Faith issued its “Considerations for an ethical discernment regarding some aspects of the present economic-financial system,” saying that a business operates as “a true intermediate social body” within a “social fabric.”

When a business pursues profit at all costs, the document said, “every ethical claim is really perceived as irrelevant.”

This mindset leads to the promotion of “greedy and unscrupulous” executives, the document states. Furthermore, primacy is then given to shareholder profit and not to the well-being of employees, consumers and stakeholders, producing “a profoundly amoral culture—in which one often does not hesitate to commit a crime when the foreseen benefits exceed the expected penalty.”

What the Church teaches is not a set of rules for business but “a way of life,” Abela said.  “Running a corporation well” involves various duties both “effective” and “ethical,” he said, including “taking care of your employees, taking care of your customers, taking care of the communities in which the corporation works.”

This reflects a “cooperative” mindset that Pope Benedict talked about in his 2009 encyclical Caritas in Veritate, emphasizing the need for businesses to consider the needs not only of shareholders but all stakeholders--communities, customers, employees, society as a whole, and the environment.

More corporations are moving towards this more “inclusive” business model that operates for the long-term, Cremers said, with an increase in technology and “intangible assets” underlining the need for relationships and “long-term investments.”

“And that is also why I think the statement now is timely,” he said, pointing to a 2018 letter to CEOs from Larry Fink, the CEO of the financial planning and investment management firm BlackRock; Fink stated that “a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth.” 

The Business Roundtable statement expands upon that, Cremers said, explicitly stating the goal of “generating long-term value for shareholders” and not just short-term profits.

Shareholders “are the owners of the corporation” and have property rights, Abela said, but other duties must be looked to as well. “And if you don’t do that, you’re not going to be long-term successful as a corporation, as a business.”

The Church teaches private property rights in conjunction with the “universal destination of goods,” Abela said, “the idea that the goods of this world are for the good of all.”

“What that means is if you own property, you ought to use that property to serve others,” he said.

A New York Times article on the statement noted that it did not address the pay of executives being tens or even hundreds of times greater than lower-level employees.

“It’s a controversial issue,” Abela acknowledged, saying that unjust pay is wrong and that executives should not be paid exorbitant salaries if a company is performing poorly.

However, he said, “if a firm is doing well and paying its employees fairly, and making tons of money for its investors, then I don’t think anyone should put any limits on how much the CEO is being paid. It’s a rare skill to run a large corporation, a large complex corporation, especially in this litigious age.”

Tags: Catholic University of America, Businesss ethics, Amazon