To all the purpose-driven businesses: We will remember you

Many businesses have become more stakeholder oriented, and in line with the Business Roundtable's view that creating value for stakeholders is the real purpose of great companies

Published: May 13, 2020 10:07:10 AM IST
Updated: May 13, 2020 10:15:35 AM IST

stakeholderImage: Shutterstock

 

At this writing, 264,422 people have died in the COVID-19 pandemic. 26.5 million Americans are now jobless.

At times like these—and thankfully, there are not many times like these—it is tempting to be self-protective. And it is tempting to place blame. Self-protectiveness on a household level is what is flattening the curve. Self-protectiveness in business, however, deserves at least partial credit for the mass layoffs, dividends paid to investors while workers are furloughed, and the garish rent-seeking behavior of some corporations.

Blame has done its share of damage, too—business did not cause COVID-19. Calls for punitive regulation and central coordination of business, and for serious consideration of socialism, ignore the fact that business leaders are, unbidden, managing the largest redeployment of labor ever attempted in the history of humanity and that, business, without compulsion, will likely find the cure for COVID-19.

Consider the feat Amazon has undertaken in hiring 100,000 workers to meet the demands of the crisis, with plans to hire more tech workers in the weeks to come. General Motors has redeployed 1,000 autoworkers, their own factory floors, and their entire supply chain to assist Ventec Life Systems in increasing production of life-saving ventilators by an order of magnitude. Gap, Brooks Brothers, and Carhartt, among many others, are making hospital gowns, white medical coats, and face masks instead of fashion. Johnson and Johnson’s public-private partnership has invested $1 billion to bring 1 billion COVID-19 vaccines to market by year’s end on a not-for-profit basis.  And, Medtronic has made its patents and its manufacturing processes on ventilators available for others to use.

When the time for recriminations does come, we will remember stories like these, and we will remember the immense good that business can do when it is motivated by purpose.

Purpose, like most virtues, is slippery. It requires dedication and commitment, because attractive alternatives exist. Some have clearly prioritized shareholders over employees, or paid dividends instead of protecting operations. However, many businesses have become more stakeholder oriented, and in line with the Business Roundtable’s view that creating value for stakeholders is the real purpose of great companies.

Creating value for all stakeholders is easy to say but hard to do.  Yes, pundits aside, business is hard. Stakeholder interests often are in conflict and it is not easy to make them go in the same direction.  When keeping faith with one set of stakeholders looks like breaking trust with another, it is tempting to seek an easier way. And there is, of course, a very easy way. It is taught in the best business schools and encouraged by financial analysts: just ignore all your stakeholders except your shareholders, and business is easy. Shareholder value makes your burden light. It excuses you from having a purpose beyond making money.

The fallacy in this solution is the assumption that business is zero sum, and that the way forward has to be murky. However, business is a human institution. For example, humans don’t think that taking care of one child means breaking the trust of another. They know their purpose is to care for both—with resources, sure, but also with persuasion, well-timed, commensurate, responsible rewards, trust, and high expectations. Likewise, purpose clarifies how to treat stakeholders’ divergent interests as business engages in the hard, human work of finding ways to keep faith with their stakeholders, and to take care of all of them, customers, employees, suppliers, communities, and shareholders alike.  Great businesses harmonize the interests of these groups, and we repeat: this is hard. And, it is better for all stakeholders, even shareholders. According to Just Capital’s index of ethical business, during the pandemic, stakeholder-oriented companies have financially outperformed shareholder-oriented companies by over 4.6 percent. And that’s just on financial returns. We would bet that on the human predictors of long-run business viability—innovation, research pipelines, worker productivity, worker satisfaction, supplier trust—stakeholder-oriented companies perform better still.

During the pandemic, communicating with stakeholders transparently about the very difficult choices managers are making is an opportunity to demonstrate the importance of business in a healthy community. Right now, as in any crisis, this won’t always mean that businesses can keep all their staff employed; this won’t always mean they have resources to pay for time people aren’t working; this won’t mean they can take delivery from suppliers on things they can’t use. But the fact that those choices are hard means that what businesses have built in their communities and in the world had consequences—with their stakeholders, they created lasting, impactful bonds with one another, which is why the crisis hurts so bad. Sharing both the decisions and the difficulty with stakeholder networks helps them empathize as managers empathize with them; and it helps them see the importance of what businesses have created. And it is likely to make stakeholders—including shareholders—trust business more when we are able to get back to work. Stakeholder theory is not averse to saying, “No,” including to shareholders. Sometimes what stakeholders, including shareholders, value just isn’t possible. But hearing all stakeholders out, and trying to find a way anyway, is the hard work business owes them. And it is the hard work purpose-driven businesses are doing right now.

Click here to see Forbes India's comprehensive coverage on the Covid-19 situation and its impact on life, business and the economy​

[This article has been reproduced with permission from University Of Virginia's Darden School Of Business. This piece originally appeared on Darden Ideas to Action.]

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