What Is The Purpose Of A Company?

The purpose of a company

This statement from 181 CEO’s redefining the purpose of a company captured the news.  If you haven’t heard, the ‘Business Roundtable’ has redefined the purpose of a company to benefit all stakeholders.  This includes customers, employees, suppliers, communities and shareholders.  It used to state companies existed to serve their shareholders.  And these CEO’s committed to do this.

Why all the fuss?

When I first heard this, I was surprised by all the attention.  What happens if a company serves its customers, employees, suppliers and communities well?  Research shows it is more likely generate high profits.  And high profits serve the shareholders very well!  Most successful companies already know this, so is this really big news?  Wasn’t this the original goal?

My initial reaction was no.  These CEO’s are stating the obvious.  But then another question came to mind.  Are the CEO’s saying a company’s role is no longer to maximize the return to shareholders?  It is possible to pay employees more.  To share more value with suppliers.  To invest in our communities.  Will these actions increase or decrease returns to shareholders?  In the short-term, there may be a reduction.  If we consider the long term, the picture is much different.  When employees, suppliers and their communities all pull on the same end of the rope, profits will increase for everyone including shareholders.

The pie analogy

This reminds me of a simple analogy.  Imagine we have a pie and five stakeholders are arguing over the size of their piece of the pie.  If instead, they focused their collective energy on figuring out how to increase the size of the next pie, they would all be better off.

I’ve concluded these CEO’s are stating nothing new.  It is great they are stating it in black and white, but nothing has changed.  When a company serves its customers, employees, suppliers and communities, it will maximize its shareholder returns.  The more important thing is making this a reality.  Actions speak louder than words, this is harder than is appears.  And I know it is possible because many of my clients and other companies are doing this.