What is the purpose of a corporation? To many, corporations exist only to make a profit for their shareholders, no matter the cost. This belief, popularized in American culture, has been supported over the last several decades by numerous instances of executive greed and misconduct, as well as environmental degradation and callousness towards individuals and communities. The notion that corporations chase profits at the expense of everything else is so pervasive in our society that an increasing number of people question the validity and desirability of free-market capitalism as an economic system.

Several weeks ago, 181 Chief Executive Officers of America’s largest and most recognized corporations came to an agreement about the role corporations should play in society. Through the auspices of The Business Roundtable – an industry association comprised of CEOs from America’s leading companies - the CEOs released the “ Statement on the Purpose of a Corporation.” In that statement, the CEOs agreed that corporations have duties related to all corporate stakeholders, not just shareholders. This means corporations have obligations with respect to customers, employees, suppliers, and communities, as well as shareholders.

This new statement represents an “about face” for The Business Roundtable. Since 1997, the BRT has maintained steadfastly that corporations exist principally to serve corporate shareholders – a concept known as “shareholder primacy.” The idea of shareholder primacy upon which the BRT previously subscribed surfaced around fifty years ago as an economic concept of a small minority of economists. However, during the 1980s and 1990s, the idea blossomed and eventually grew into a tidal wave that washed over the academic and corporate worlds. Ultimately, it transformed into corporate dogma and challenging the concept became taboo.

The real question is “why?” After all, the existence of corporations as a form of business pre-dates the concept of shareholder primacy by at least 100 years. Why did the doctrine of shareholder primacy become the default position for how a corporation should act? The answer lies in our cognitive preference for simplicity. The concept of shareholder primacy plays to that cognitive preference. Shareholder primacy attempts to distill the complex, interdependent, and multi-faceted corporate entity into a singularly-focused, easily measurable tool for profit. The measure of success of a corporation is winnowed down to a mere examination of corporate earnings per share of issued stock. The attractiveness of the theory’s simplicity was just too much to overcome – economists, business school professors, corporate executives, judges, and media outlets all succumbed to this siren’s song.

NATO Meeting_June2014
A view of an informal meeting of the North Atlantic Council and the Political and Security Committee of the European Union on Ukraine in June 2014. nato.int

In the last few decades, however, many corporate-thought leaders – including academics and executives – have recognized that, despite its simplicity, the shareholder primacy concept is largely insufficient in recognizing the real role and impact that the corporate form of business has on today’s society. These leaders have long advocated that corporations are not only afforded rights in our society, but they also have corresponding societal duties that go beyond returning profits to shareholders. And, while a number of corporations have espoused duties to stakeholders other than corporate shareholders over the years, we now have the most powerful grouping of CEOs ever assembled renouncing shareholder primacy and acknowledging that corporations have a greater responsibility to society.

Has the fallacy of the shareholder primacy economic experiment been sufficiently exposed to render it obsolete and condemn it to a footnote in the annals of corporate history? That, in large part, depends on those same CEOs of The Business Roundtable.

The Business Roundtable’s recently revised Statement on the Purpose of a Corporation is a fine first step, but it is just that – a first step. The BRT must take immediate follow up steps. It must quickly and carefully review its research, reports, and policy positions and revise them to ensure that they closely align with not just the letter, but also the spirit, of its newly-issued statement.

Moreover, The Business Roundtable, as well as the companies that its member CEOs represent, must take concerted, tangible action designed to drive a stake in the heart of the shareholder primacy doctrine once and for all. First and foremost, they must champion and adopt executive compensation practices that are closely tied to the social performance of the corporation.

Second, they must develop and implement corporate governance practices that put other stakeholders on par with corporate shareholders. To that end, the BRT and its members must advocate before the Securities and Exchange Commission for the modification of existing rules that give corporate shareholders an inordinate say in corporate affairs, and to adopt new rules that support the stakeholder model. In addition, corporations must establish advisory boards for which various stakeholder perspectives can be considered. Moreover, corporations must establish tangible and meaningful performance goals related to their newly-acknowledged duties to society, and report auditable progress towards those goals on a periodic basis.

Third, corporations must immediately adopt financial practices that support the BRT’s statement. Corporations should refuse to issue short-term (quarterly) earnings reports, eschewing them in favor of long-term (annual) reports that are focused on financial reporting that is supportive of longer term strategies of the corporation. Also, corporations should decline to use share repurchases as a method of inflating their stock share prices. Finally, the BRT and the companies its members represent must ensure that their lobbying practices are transparent and do not undercut the acknowledged duties that corporations owe others and society as a whole.

Actions speak louder than words. As a society, we must acknowledge that the type of change required to remedy the effects of the shareholder primacy doctrine will take significant time and effort. And it is unfair to expect perfection from others, including corporations and their executives. However, the tangible actions of The Business Roundtable, its member CEOs, and the companies those CEOs represent, will ultimately be the chief determiner of whether or not the BRT’s Statement on the Purpose of a Corporation represents a seismic shift in how corporations operate and are ultimately viewed, or whether it is merely a platitude devoid of real meaning.

(Professor Robert Föehl is executive in residence of business law and ethics in the College of Business at Ohio University)