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The purpose of a corporation: sustainability

Originally written for

A month ago, 181 US companies announced that shareholder interests would no longer be the primary driving force behind all corporate decisions. Those who signed the statement included large companies such as JPMorgan Chase, General Motors and Apple.

Five new priorities were outlined: delivering value to customers, investing in employees, dealing fairly and ethically with suppliers, supporting communities and generating long-term value for shareholders.

Given the challenge that the liberal economic system is facing with the rise of anti-capitalism, it is perhaps not surprising that the largest corporations are responding.

Conscious that most people do not go into second or third order thinking (for more on this, I recommend Ray Dalio) about who “shareholders” really are and why focusing on them does actually translate into benefits for all, this new approach makes those benefits explicit. It expands upon and actually simplifies the idea of “shareholder value” to show that it doesn’t just mean monetary value.

The sustainability of a corporation #

Sustainability has always been part of the corporate purpose. Without profits, companies eventually go out of business. They must create a sustainable business that can continue for the long term. The challenge that the new priorities are intending to address is that the means of achieving this has often been at odds with certain long term goals.

As Jeremy Caradonna puts it:

Sustainability involves more than “the environment”; it is equally interested in social sustainability (often summarized as well-being, equality, democracy, and justice) and sensible economics but, above all, in the interconnectedness of these domains

Caradonna, Jeremy L, Sustainability

It is the interconnectedness that has often been missing from the discourse around the profit motive. That is, profit was assumed to be at the expense of everything else because the idea of pure “shareholder” value was too ambiguous.

Governments have been pushing corporations to consider sustainability as a specific, board level concern for some time. The UK has required reporting for all quoted companies since 2013 and the Greenhouse Gas reporting standards are already used by 9 out of 10 Fortune 500 companies.

Whilst the word “sustainability” is not being used, the reverse definition of the new corporate priorities outlined by The Business Roundtable announcement is: sustainability.

The second step isn’t as easy as the first #

The easiest change large corporations can make is about how decisions are made in the future. Internal policy changes drive decisions and so making changes to things like vendor requirements for purchasing and procurement are a good way to exert pressure on the market.

Corporate investment into startups is another way large cash resources can be put to work. $49bn has been invested in cleantech since 2006 and there are a number of new funds starting up. Breakthrough Energy Ventures is a $1bn fund leading the way, backed by Jeff Bezos, Bill Gates, Richard Branson and many others. Corporate investors like National Grid, Shell and BP are also actively investing in (and acquiring) startups.

Corporates have a few areas of low hanging fruit they can start with, but the next step involves making potentially costly changes to existing systems and infrastructure. Startups have an advantage because they can consider sustainability from the beginning but this has to be a board level issue for large businesses as well as small.

With the old approach of a singular focus on “maximizing shareholder value”, it could be difficult to argue for adopting more sustainable practices. But now there are four other corporate priorities, executives should find it easier to build the case for taking real action.

“How sustainable is this?” #

Redefining the purpose of a corporation means reconsidering how decisions are made. A standard part of business decision making includes considering financial costs. That now has to extend to sustainability costs as a key part of how decisions are made. This could even come down to questioning whether “growth” itself is sustainable.

Growth is relevant for startups but is it really the right goal for large corporates?

As Herman Daly put it in his 1977 Steady-State Economics, “The verb ‘to grow’ has become so overladen with positive value connotations that we have forgotten its first literal dictionary denotation, namely, ‘to spring up and develop to maturity.’ Thus the very notion of growth includes some concept of maturity or sufficiency, beyond which point physical accumulation gives way to physical maintenance.” Even Adam Smith and Keynes had suggested that a society could, in theory, reach a level of wealth at which point growth would take a back seat to human happiness. Yet to question the benefits of growth in the 1960s was tantamount to telling a sixteenth-century pope that the Earth orbited the sun.

Caradonna, Jeremy L, Sustainability

Reconsidering the fundamental driver of corporate valuations is perhaps too much to expect in the short term, but it is a useful way to frame the question of how sustainability can be built into decision-making.

This will likely start with investigating the economic benefits of considering the environment. Renewable energy is already cheaper than fossil fuels so switching suppliers and investigating building energy usage will already have an immediate cost saving impact.

Over the longer term, we will see executive teams include sustainability considerations when deciding broader corporate strategy. Whether that is choosing a cloud provider for their IT, selecting a new office location vs remote working or adjusting HR policies to include better conditions for workers, sustainability is now an implicit part of the purpose of a corporation.