This past August, the Business Roundtable, a group of CEO’s of nearly 200 major U.S. corporations, issued a statement declaring a new definition of the “purpose of a corporation”.
The old definition focused on maximizing shareholder value.
“Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy.”
The new definition calls for companies to consider effects on all of its stakeholders, not just those of shareholders.
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
- Delivering value to our customers.
- Investing in our employees.
- Dealing fairly and ethically with our suppliers.
- Supporting the communities in which we work.
- Generating long-term value for shareholders.
What is a shareholder?
A shareholder is any person, company, or institution that owns at least a single share of a company. Shareholders have a financial interest in a company’s profitability.
What is a stakeholder?
- Owners and shareholders of a company
- Holders of company issued debt
- Suppliers and vendors whom may rely on the company to function
- A company’s surrounding community
A stakeholder has an interest in the performance of a company outside of just its stock performance. Employees may have an interest in a company’s stock performance, they also care about the long term prospects of a company because that means they will have a job in the future.
Shareholders are always stakeholders, but stakeholders are not necessarily shareholders.
One key difference between shareholders and stakeholders is their time horizons. Shareholders can sell their stock and buy stock in another company; they do not have a long term need for the company. A stakeholder, such as a vendor in a company’s supply chain, might suffer if a company is struggling and no longer requires its services to the same degree. Thus, stakeholders tend to be in it for the long haul and care more about a company’s long term viability versus short term financial performance.
More reading on the Business RoundTable’s letter and shareholder/stakeholder issues:
- People Before Profits: A New American Credo? – Stanford Graduate School of Business
- Companies should concentrate on maximising their profits – Financial Times Opinion
- It’s good for shareholders when boards consider public interest – Financial Times Opinion
- 181 Top CEOs Have Realized Companies Need a Purpose Beyond Profit – Harvard Business Review
All of this relates to Corporate Social Responsibility (CSR) a self-regulating business model that helps a company be socially accountable. You can read more about CSR here.