Want purpose-driven businesses? Rethink ownership.

Purpose
Purpose
Sep 5 · 4 min read
Photo by Daria Shevtsova on Unsplash.

The Business Roundtable’s (BRT) departure from the gospel of shareholder-value in favor of a commitment to all stakeholders has sparked strong reactions. It serves as an ideological litmus test for the questions: What’s the purpose of business? And does our current economic system need changing? While some hailed the announcement as the beginning of a new era of inclusive stakeholder capitalism, others, including investors and The Economist, have warned that capitalism and our prosperity are in danger. Many have demanded that actions now follow words, with leaders proposing concrete changes and measures for moving away from shareholder primacy.

To achieve the aspirations of BRT’s announcement, we need more than purpose-statements. Meaningful change requires us to address the fundamental structural deficiencies of our system, by rethinking the goals and incentives that guide decision-making in companies. We need to ask ourselves: who holds power and what is motivating their decisions? To create new solutions that harness the potential of capitalism (entrepreneurship, innovation, competition, a decentralized economy) and move beyond its failures (greed, consolidation, inequality), we must challenge one of the fundamental paradigms of capitalism: the understanding and definition of corporate ownership.

Let’s talk about corporate ownership

Corporate ownership is the cultural technology that determines who governs and holds the power within a company. In conventional businesses, shareholders hold the power as owners of the business. As owners, they can buy, sell, or dismantle a company as they please.

Over the last two centuries, there have been two main mechanisms allocating corporate ownership: (1) buying/selling a business and (2) family succession/inheritance. The former sells the “steering wheel” of the company to the highest bidder, the latter passes it to heirs. These have been the two primary mechanisms of capital and ownership-allocation: the principles of (1) money and (2) blood. The corresponding motivational mechanisms have been profit-maximization and wealth building. In this paradigm, a company is something you own and your objective is to profit from it.

During the last century and especially during the last decade, a new ownership paradigm has emerged in Europe and the United States. This new paradigm replaces blood and money as the leading allocation principles with stewardship. In this new model, ownership is understood as a responsibility; companies are held in trust and stewarded by people who cannot extract profits for their own personal benefit.

Often structured as trusts, foundations, or employee-owned businesses, all of these companies have fundamentally redefined ownership by committing to two common principles: self-governance and profit serves purpose. We call these principles of steward-ownership, ​because they (1) establish stewardship as an alternative to conventional control allocation; and (2) replace shareholder value-maximization with the company’s purpose as its main driver. For stewards, ownership is no longer a source of profit-extraction/wealth generation, but a responsibility towards the company and its community. In steward-ownership, companies are not commodities, but social-organisms, groups of people working together with a common purpose.

Steward-ownership: A viable alternative

This may sound idealistic, but industrial giants in Northern Europe such as Novo Nordisk, BOSCH, and Zeiss as well as Mozilla, OpenAI, Newman’s Own in the US and dozens of mid-sized businesses and start-ups are proving steward-ownership as a viable, successful third way of ownership. Steward-ownership can be accomplished through a variety of legal forms, all of which ensure that control cannot be bought or inherited. Because economic and voting rights are clearly separated, no individual owners, employees or external stakeholders have a right to profit at the cost of the success of the business. This structure empowers leaders to take a long-term perspective on strategy without pressure from quarterly earnings reports or public stock valuations.

In Denmark, the combined market capitalization of steward-owned corporations represents 60% of the entire value of the Danish stock market index. Studies from Copenhagen University and Yale University with data from Danish foundation-owned (=steward-owned) companies show that foundation-owned companies have a higher survival probability than conventionally-owned companies. While other conventionally-owned companies have survival probability 10% after 40 years, foundation-owned companies have a 60% survival probability over the same period. In addition, foundation-owned companies have a higher employee retention rate and pay higher wages, while at the same time being similarly profitable as non-foundation-owned companies. Foundation-owned companies also have a strong reputation among consumers. According to a recent representative poll by the Allensbach Institute in Germany, 71% of Germans think that foundation-owned companies are more long-term oriented and 55% think that they serve the common good, while only 18% think the same of conventionally-owned companies.

Steward-ownership not only enables companies to better internalize externalities, it also helps combat the growing wealth gap and inequality caused by inherited wealth accumulation. Because steward-owned companies cannot be inherited, they help prevent dynastic wealth accumulation. What’s more, they prevent owners from siphoning rent off of businesses. Instead, steward-owned companies are “self-owned.” These businesses belong to the commons, serving their purpose and all stakeholders who contribute to their successes and helping to create a more equitable, regenerative economy. Capital is in this sense democratized.

A new generation of entrepreneurship

Today, there’s a growing international community of founders and business leaders who are choosing this path, including Organically Grown Company, Sharetribe, and Ecosia. These businesses are pioneering a redefinition of corporate ownership through steward-ownership. For them, these structures represent a legally binding commitment to the company’s purpose, the needs of all stakeholders, and the freedom to act in the best interests of the company’s long-term goals, independent from the pressure of corporate shareholders.

If we want to create more sociable businesses, it will require more than announcements. We need to address the underlying incentives and powers that drive corporate decision-making. Redefining corporate ownership from wealth-ownership to steward-ownership is a concrete solution to realizing this change.

Purpose

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Purpose

Purpose serves a global community of entrepreneurs, investors, and citizens who believe companies should remain independent and purpose-driven.

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