In mid-August, the think tank Business Roundtable (BRT) issued a 307-word statement that has the power to radically transform how American corporations do business. This group — comprised of nearly 200 CEOs from the largest and most influential companies in the United States — has long supported the notion that optimizing shareholder returns above all else is both mandatory and critical to market survival. In fact, BRT was one of the first organizations to codify this previously-tacit agreement by writing a statement of purpose that insisted that “the paramount duty of management and of boards of directors is to the corporation’s shareholders.”
On August 19, 2019, it did an about-face.
In BRT’s “Statement on the Purpose of a Corporation,” these CEOs listed their four top priorities as delivering value to customers, investing in employees, dealing fairly and ethically with suppliers, and supporting communities. In essence, they said they were abandoning shareholder primacy to focus on value for all stakeholders. Shareholders snuck onto the list, too, but at the very end and with some refreshing context: BRT’s members committed to “generating long-term value for shareholders, who provide the capital thatallows companies to invest, grow, and innovate.”
It was truly gratifying to see the words “long-term” included.
We founded Bionic six years ago on the then-radical belief that the pressure to leverage business efficiencies to boost profits for the benefit of shareholders has led to the optimization of short-term core business growth at the expense of new businesses and models. Leaders who want to drive sustainable long-term growth must “re-found” their companies and return to their entrepreneurial DNA.
What caused this almost singular focus on business efficiency at the expense of new business innovation? In the 1970s, economists began to publicly bemoan the plight of the shareholder, claiming that any corporation that focused on serving customer needs was ignoring the importance of generating shareholder returns. By the 1980s, this philosophy had become so entrenched that CEOs saw “maximizing shareholder value” as their ultimate responsibility. Executives became convinced that they answered to and worked for their shareholders. Corporate boards took on the task of getting managerial and shareholder interests into alignment, often by rewarding executives with stock-based incentives as motivators.
These incentives permanently disrupted the corporation’s obligations to the customer and stakeholders. Any activity that failed to nudge stock prices ever upward was deprioritized or abandoned. Shareholders, once an afterthought, were now a vocal and powerful economic force.
New pressures spawned new tactics, including some unfortunate ones. Leadership teams had spent decades relying on efficiency-focused ratios like RONA (return on net assets), ROCE (return on capital employed), and IRR (internal rate of return) to measure success. But with this new focus on short-term “quick wins” that would boost stock prices in the next quarter — and the added motivator of stock-based compensation for CEOs — corporations found inventive ways to influence those ratios. Since RONA, ROCE, and IRR are fractions, they can be tweaked by making changes to either the numerator or the denominator. Generating more income adds to the numerator, but new growth is harder and takes longer than cutting costs, so naturally, more executives turned to cost-cutting to further improve earnings. Cutting costs also reduces the amount of capital required to operate the business, which amplifies the ratio improvement. Companies didn’t have to grow real-world profits in order to satisfy shareholders’ collective hunger for returns. They just had to reduce expenditures.
Efficiency and cost-cutting became the new cults of business. To be clear, the fact that it was possible to cut out so much cost was an indication of just how inefficient and bloated many corporations had become by the late 1970s. But CEOs over-corrected, and by the 1980s, with quarterly results constantly looming, all innovative energies were directed toward making existing systems more efficient and more profitable. After all, why invest cash in investigating a new market when you can just wring profits from your existing market?
While the dot-com boom (and bust) of the 90s had some disastrous economic repercussions, it also laid important groundwork for a critical shift in the approach to innovation. Over the next ten to fifteen years, entrepreneurs learned how to build and scale businesses quickly and to take ideas from whiteboard to market faster than their predecessors ever dreamed possible. Entrepreneurship became a management approach focused on identifying a customer need or friction point and devising a service or product that solved the problem in a radically new way. They deprioritized short-term shareholder returns in favor of reinvesting cash into growth, supported by venture capitalists who were prepared to take a long-term view. Tech and online startups changed the game. And for the most part, they changed it for the better. Venture capital and entrepreneurship together offered a form of management to discover and build new businesses.
And yet many legacy enterprises have struggled to adapt. This is why we built Bionic. Corporate leaders want to catalyze new growth and create long-term success, but they’re no longer sure how to do it while also meeting short-term shareholder expectations. We help them shift their focus from endless optimization around existing offerings, to exploring opportunities to leverage their companies’ assets to build new offerings, move into new markets, and create next-generation solutions. We encourage them to consider all of the players involved in their enterprises, from employees to end-users, suppliers to summer interns. Profits are important, as is shareholder support, of course. But both will disappear fast if the company itself stagnates.
If you’re not convinced that this approach can work, just look back a few decades. Before the shareholder shakeup of the 1970s, corporations built their businesses in ways that supported communities. Well into the 1950s and ’60s, these companies invested in real innovation that churned out new and life-changing products, paid billions in taxes, and enthusiastically worked to fortify the American economy. They cared for employees, customers, and shareholders in almost equal measure, while their leaders took the long view instead of boosting profits by excessively cutting costs.
Consider, also, that 181 leaders of America’s largest corporations told the world in their August statement that the era of serving shareholders above all other stakeholders is officially over.
We at Bionic agree that the corporate world needs to rebalance its priorities. We built our business around the belief that the next generation of leaders must be growth leaders who have the ability to both operate their existing businesses and create new ones that address real consumer problems and needs. The ambidexterity to balance the financial management tools of the previous era with the stakeholder-focused purpose of the next will offer a new model of leadership that will drive lasting impact and prosperity for generations.