In 2019, The Business Roundtable issued a "Statement on the Purpose of the Corporation”. The new statement reads, “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders”.
This represent a radical departure from a decades-long practice that regarded “maximizing shareholder value” as the sole purpose of companies. This practice first took hold in the 1970s, evangelized by Milton Friedman and the Chicago School of Economics, and has been adhered to ever since.
According to The New York Times, under the new ideals, “companies pledge to compensate employees fairly, and to provide 'important benefits', as well as training and education…. and to 'foster diversity and inclusion, dignity and respect.'”
As I reflect on my three-decade career, I would argue that no stakeholder group has been more adversely affected by the focus on shareholder value than employees. My hypothesis is borne out not only by what I have observed personally, but also by what we have all observed in terms of income inequality, the destruction of unions, and the substantive shifts that have been observed in employee tenure rates.
Going forward, corporate leaders must disproportionately focus on employees if they want to course-correct from the approach of the past 40 years. This will not only benefit employees: it will also be good business. Creating better, more satisfying places to work can only lead to enhanced value for shareholders too. For example, think of the substantial costs incurred in dealing with employee churn: training, loss of intellectual capital, and workplace disruption.
To stay true to the spirit of what the Roundtable suggests, we need to start by rethinking what we require of leaders and what we mean by “leadership” today. After all, it is leaders who are key to employee value both now and in the future.
First and foremost, we should evaluate and reward leaders for the kind of workplaces they create, not just according to what they produce, how much profit they make, or how efficiently they do it. Without this, nothing can shift from the current paradigm.
This leads to the key question: what criteria should be used to evaluate leaders going forward?
1. Leaders should be judged on how they lead.
I would argue that a natural by-product of Friedman’s thinking is that leaders tend to lead without paying great attention to those things that enhance employees’ work experiences: feeling heard, being empowered, being encouraged to take risks, or being dealt with empathetically.
Leaders are prone to think that if they practice related behaviors, they will lose control, be viewed as “soft”, invite too much risk, or commit to things that would cost too much.
Leaders in successful companies might be even less likely to exhibit these behaviors. Success can be paralyzing, creating fear that deviation from the existing way of doing things might actually put the company’s success at risk.
The fact of the matter is that leading with these behaviors can arguably breed even greater success.
2. Leaders should be rewarded for “managing down” as opposed to “managing up”.
When leaders focus exclusively on shareholder value as their mission, they are inherently disposed to manage up versus managing down. CEO to board. President to CEO. And so it goes. After all, if you’re meant only to care about shareholder value, impressing those above you with the ability to create greater efficiency and improved profitability takes precedence over pretty much anything else. It is how leadership is rewarded.
But this approach results in leaders who are not focussed on nurturing or retaining talent, or inspiring greatness. And that causes employee dissatisfaction, lack of employee loyalty, and failure to get the best out of people.
3. Leaders should demonstrate an ability to engage employees in their own problem-solving.
No one knows better than the people on the ground and in the trenches what solutions are necessary to create better operational efficiency or better, more gratifying ways of working. Oftentimes, leaders encourage employees simply to do their jobs and not to think more broadly about the organization and how it could be better. What could be more beneficial to employee morale and shareholder value than to invite employees to take an active part in making their companies well tuned organizationally?
Today’s leaders need to encourage employees to participate in articulating their own, bottom-up solutions. These solutions will be more organic, more actionable, and most likely more successful.
Undeniably, leadership that focuses on employees and creating a better place to work is required if companies are to maximize value for all stakeholders. Doing so should not be considered as being at odds with maximizing shareholder value, but rather as a catalyst in achieving it. Likewise, employee-focused leadership should not be viewed as mutually exclusive to leadership that is pragmatic, clear, and demanding.
Companies whose mission emphasizes employee value and who reward their leaders for also doing so will be the undeniable winners going forward.
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