U.S. Corporations Redefine the ''Purpose of a Corporation''

Nicholas J Price
The purpose of a corporate that has acted as a guiding maxim for corporate America has long been to serve shareholders by maximizing profits. This has been evidenced by the hyper-focus on quarterly earnings, yet this approach is facing some challenges in the digital age. As irrelevance looms overhead for every company, the focus of today's corporations must be to create disruption, longevity and sustainability. Recently, a group of leading U.S. company CEOs got together to revisit their priorities.

The Business Roundtable, a group of 181 CEOs of major U.S. corporations issued a new statement on the purpose of a corporation that represents a fundamental expansion of the corporate American mission statement.

Business Leaders Modernize their Definition of the Purpose of a Corporation

The Business Roundtable, which was organized in 1972, says that the new definition reconceptualizes the corporation's deep-rooted function first and foremost to serve the shareholders and maximize profits.

The new definition favors the following:
  • Investing in employees
  • Delivering value to customers
  • Dealing fairly and ethically with suppliers
  • Supporting the communities in which they work
  • Generating long-term value for shareholders that includes transparency and effective engagement
  • Considering each individual stakeholder as essential and delivering value to them
In part, the statement acknowledges that the CEOs recognize that each individual company serves its own corporate purpose, but at the foundation, they share a commitment to deliver value to all of them. They expect the impact of this new effort to extend value to the success of companies, communities, and ultimately, the whole country.

CEOs who signed the statement include corporate greats like Jamie Dimon, chairman and CEO of J.P. Morgan Chase, Amazon's Jeff Bezos, Apple's Tim Cook, Bank of America's Brian Moynihan, Dennis A. Muilenburg of Boeing, GM's Mary Barra, and Blackrock's Larry Fink. The group believes that these are modernized principles that reflect the business community's stealth promise to strive for an economy that can be successful over the long-term and that serves all Americans in the best way possible.

Media attention and recent research may have prompted the leaders to produce this groundbreaking statement. As Wall Street works to rebound from the financial crisis, the 2020 election and the media are placing a lens over issues like economic equality and fair business practices.

Also, research affirms the positive connection between governance and profitability. According to a meta-analysis on academic research that was published between 2006-2016 by Deloitte in 2016 in the white paper 'Good Governance Driving Corporate Performance,' five issues stood out as being positive variables in overall corporate performance. They are as follows:
  1. Board independence-higher numbers of independent board directors improved objectivity and brought forth multiple points of view.
  2. Board diversity-the greater the diversity, the more positive was the impact on the company's performance.
  3. Remuneration-by aligning interests between shareholders and managers, a powerful CEO had a positive impact on corporate performance.
  4. Oversight-active oversight by owners and board directors had a positive impact on their company's performance, especially as it pertained to joint ventures.
  5. Ownership structure-institutional investor ownership bettered the quality of strategic decisions that the board made. They're actively engaging and adding an outside perspective.
A May 2019 report by the Diligent Institute called 'The High Cost of Governance Deficits: A Case for Modern Governance' states that companies with strong governance outpaced the S&P 500 index and outperformed their low-ranking peers by 17 points (15%) over two years. The study measured strength in governance using 14 criteria across the categories of board composition and independence, shareholder rights, and corporate compensation.

The New Definition of Corporate Purpose Aligns with the Vision for Modern Governance

The statement by the Business Roundtable states that their new definition of the purpose of corporations supersedes past statements and outlines a 'modern standard for corporate responsibility,' which aligns perfectly with the vision for modern governance.

Modern governance is the practice of empowering leaders with the technology, insights and processes required to fuel good governance. Research concurs with the sentiments described in the new statement by the major U.S. business leaders. There's no longer any doubt that good governance gives corporations a competitive advantage in today's complex, digital world. The weaknesses in governance in today's corporate systems are creating a governance deficit. Business leaders aren't getting the right information and they're not getting it in time to ask the right questions. Boards lack visibility into the company, across the industry, and into the future. Channels for communication and collaboration are often disparate and not secure, leading to a lack of efficiency and enhanced exposures to cybersecurity risks.

Corporate leaders that address these issues forthrightly embolden effective decision-making, enhance transparency, and open up insights that drive growth and long-term success in the current digital age. That's exactly what modern governance is'the practice of empowering leaders with the proper technology, insights, and processes to fuel good governance. As research, and now our greatest industry leaders are stating, when companies adhere to the principles of good governance, long-term value will follow.

How Boards Can Drive Success in the Age of a New Purpose for Corporations

Successful boards will be forward-thinking and embrace the new definition of the purpose of corporations and the vision for modern governance. Diligent Corporation plays an instrumental role in equipping board directors with digital solutions that support modern governance. Diligent's tools ensure that the boardroom has the necessary diverse perspectives to represent all stakeholders and that allow for good decision-making. Diligent provides an electronic platform that addresses reputation monitoring, committee-level data, predictive analytics on shareholder actions, board director recruiting, secure communications and document-sharing, entity management, and more. All the products are fully integrated under a highly secure online platform. The right corporate culture begins in the boardroom and it channels its way throughout the rest of the organization.

Be inspired to re-examine the governance structure you've inherited and ask yourself the hard questions. Does the current structure drive the board to ask for the right information? Does the current structure line up with the current statement that describes the new definition for the purpose of corporations? Does our company have the proper tools to support our vision of modern governance? As an innovator and industry leader in governance, Diligent provides the tools that enable companies to power modern governance with the core issues of visibility, security, and speed and that's what will fuel long-term success for your company.
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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.