The Economic and Moral Foundations of the Business Roundtable’s New Statement on the Purpose of a Corporation
By Atrey Bhargava
Abstract: The Business Roundtable‘s (BR) new statement on the purpose of a corporation marks the formal acknowledgement by the corporate[1] sector of the need to re-evaluate corporate purpose. The BR has acknowledged the need to value other stakeholders important to corporations and tone down on their hitherto defined purpose of corporations that solely gave primacy to shareholder value. This paper is novel in the regard that it argues that not only is the change in the statement of purpose of corporations desirable, but it is also required to maintain the long-term relevance of the corporate sector. The first section defines and critically analyzes the rationale and the subsequent implications of maintaining shareholder primacy as the principal purpose of corporations. The second section elaborates the ‘new purposes’ outlined by the BR. The purposes defined are noteworthy yet insufficient for they should also include an effort to increase minority representation across corporate governance structures. The third section mentions the actionable steps immediately being taken up by corporations and financial intermediaries to act on the new statement of purpose. This list is not exhaustive but serves only to argue that structural changes can happen in the realm of finance and corporations. The last section of the paper makes explicit the moral underpinnings of purpose in the corporate sector. The explanation borrows from the stated mission of Seven Pillars Institute that seeks to understand the purpose of finance as not one of serving money but one of helping people and society.
Section 1 Corporations, Profit and Shareholders: A Brief History
This section outlines the rationale behind how profits and correspondingly shareholder primacy came to be the dominant purpose of corporations since the 1980s. While profitability had always been one of the objectives of corporations, Milton Friedman’s seminal article titled ‘The Social Responsibility of Business is to Increase its Profits’ in the New York Times Magazine gave profit maximization a predominant position in public discourse and monetary theory.
[1] Through the course of the paper, the business and corporate community, as well as the financial sector, will be used interchangeably to imply a similar meaning.
