American Capitalism Just Made a Major Change for the Better
Corporate America Says It Will Now Consider the Community in its Actions (What Took Them So Long?)
A group of some of the largest companies in the country recently declared for the first time that they will consider the effects of their decisions on workers, customers, suppliers, and communities, in addition to shareholders. This announcement by the Business Roundtable could be considered a major turning point in American capitalism.
Historically, and legally, the purpose of a corporation (and other business types such as LLCs) is to maximize profits to the shareholders (owners and investors of the company) above all other concerns. This is known as “shareholder primacy.” In fact, major shareholders can sue their own corporation if they feel that the CEO and other corporate leaders are making decisions that fail to maximize profits.
For example, a company may want to spend more money to improve worker satisfaction, or to prevent harm to customers, or donate to non profits. If these actions do not clearly result in more money into shareholder pockets, but simply end up benefiting these other “stakeholders,” the shareholders could sue to stop the company from doing these things.
If it sounds selfish, it is. But some people are proudly committed to this selfishness as engine of capitalism. They say that these stakeholders should be taken care of by other means, such as the government, and that corporations have no “business” getting involved in these considerations.
Others believe that capitalism does not have to be so harsh, and in fact that this hard line stance actually weakens the system overall and companies in particular in the long term. If companies lay off thousands of workers, this could hurt the economy and reduce the amount of customers who have money to pay for the company’s products.
The social enterprise movement is based on the idea that capitalism can and should be a force for good, or at least minimize harm. “B corporations” and “Benefit corporations” (NOT the same thing!) are a newer way to operate a business while considering the community and environment without the concerns of being sued by shareholders. See our Guide to Social Enterprise for more on this.
This shift in thinking about capitalism reflects a culture change, particularly among younger people, who want their spending to reflect their values. As a result, more companies are becoming B corporations and/or Benefit corporations, seeing it as a benefit to their bottom line while also doing good.
Yet the vast majority of corporate America has not got on board with the social enterprise movement thus far. If they do not change their operating structures, it remains to be seen whether these major companies can truly implement their new perspective, or whether they may get too much push back from their investors.
One way or another, the corporate world must focus on the long-term. It’s good for them. It’s good for us.