The Coming Crisis Over Corporate Purpose

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The World Economic Forum (“WEF”) is gearing up for its annual confab in the Swiss Alps by publishing a “Davos Manifesto” about company purpose. It smacks of dishonesty and desperation.

I caught the full-page ads in the Financial Times and New York Times which, interestingly, had different headlines: The FT called it “The Universal Purpose of a Company in the Fourth Industrial Revolution” while the NYT headline just read “A Company’s Purpose…”

Anyway, the manifesto builds on an original version published shortly after the WEF was founded in the early 1970s, which opened with this declaration:

The purpose of professional management is to serve clients, shareholders, workers and employees, as well as, societies, and to harmonize the different interests of the stakeholders.

The original then went on with a few graphs about the importance of society and future generations, but ended with a stark, common-sense closer:

The management can achieve the above objectives through the economic enterprise for which it is responsible. For this reason, it is important to ensure the long-term existence of the enterprise. The long-term existence cannot be ensured without sufficient profitability. Thus, profitability is the necessary means to enable the management to serve its clients, shareholders, employees and society.

The new manifesto is longer and filled with lots of references to fairness, well-being, respect, sustainability (of course), and the occasional vague term like “regenerative economy” and “material universe.”

But there’s no closer about making money anymore; instead, the new one ends with this:

A company that has a multinational scope of activities not only serves all those stakeholders who are directly engaged, but acts itself as a stakeholder — together with governments and civil society — of our global future. Corporate global citizenship requires a company to harness its core competencies, its entrepreneurship, skills and relevant resources in collaborative efforts with other companies and stakeholders to improve the state of the world.


So, first to the dishonesty part…

The WCF’s corporate execs, intellectuals, and government types are the global elite who’ve given the global elite a bad name: their Devil’s Bargain over almost a half century has yielded incredible improvements in health and economic well-being for many of us in exchange for enriching themselves beyond all imagination while destroying the planet.

Their botched job at effecting and communicating the merits of globalism have in large part helped give rise to the nativism that is blowing up trade agreements, hardening borders, and encouraging racial and ethnic hatred.

In a blog post promoting the new manifesto, the WCF’s founder says that shareholder capitalism’s focus on short-term results disconnects it from the real economy (whatever that is) and promises that the Big Four accounting firms will come up with new ways to “link environmental and societal benefits to financial returns.” Videos from celebrity activists are included to support his point, so I’d bet money that one or more of them shows up at a Davos party next month.

In other words, the new manifesto’s punchline is trust us.

This is dishonest gibberish, created by committee based on demographic research from marketers and filtered through the presentations of management consultants.

The idea that the world’s most powerful entities would get together and make chummy agreements about how to run things has not only proved a failure, but it would have been even scarier had it been effective. Inventing arbitrary or absolute measures for performance that WCF members will use is actually scary, too, because it suggests the potential for more obfuscation and confusion over what’s really happening.

The truth is that the purpose of business hasn’t changed, nor should it. Companies need to make money in order to exist, so those old-fashioned metrics of the marketplace — product pricing, margin, profit and loss, etc. — are the only truly objective metrics available to us. We need better visibility into them.

Transparency should be the call to action, and it should have three components:

First, turn externalities into reportables, so emissions, employment diversity, community impact, and other impacts of business behavior are revealed. This doesn’t mean making up nonsense about innovation or engagement, but adding to a company’s disclosure the impacts it has on the world. Skip the make-believe measures and don’t bother interpreting them as costs or benefits; just state them, and let every company can choose to reveal different impacts, or details thereabout, which is the way it should be, since stakeholders can then judge them accordingly.

Second, get some third-party authentication. Even if companies skip trying to spin those reportables, the last few years of propaganda on sustainability and social causes has made them less credible, and the premise that the Big Four accounting firms can be trustworthy is almost as laughable as the reliability of the big credit rating agencies. The WCF should look beyond its bench of supporters and perhaps lead the creation and support of truly independent bodies that could add necessary color commentary that’s not necessarily glowing.

Third, get out of the business of promotion and start informing stakeholders. The transformative functions of business require trade offs, by default: no activity is a win-win for everybody and everything everywhere, but it’s far easier to talk about good works and intentions instead of taking responsibility for delivering difficult, complex, and nuanced information in compelling ways. Transparency isn’t a reporting activity as much as a communications effort, and it can’t be run like marketing by marketers. Let communicators do it.

The result? Businesses won’t have to invent new ways to “listen” to their stakeholders since they’ll “hear” what they think in market pricing of products and equities. Don’t tell them what’s good or bad. Let them vote with their wallets.

Now to the desperation part…

What is the purpose of a company, actually?

Corporations were conceived as royal grants of monopoly rights over specific trades and/or markets, with the original stakeholder being the monarch who’d collect revenue from those activities. They evolved to include limited numbers of shareholders which expanded a company’s purpose to enriching them, too. Everything else was an “externality, which meant that companies could do just about anything to realize its profits (the East India Company raised its own army and provided government services).

Although anybody can invest in stocks and governments in liberal democracies try to limit corporate monopoly status instead of granting it (the US’s approach to digital giants notwithstanding), this “shareholder capitalism” model has remained pretty much unchanged.

Now, the model is changing irrespective of how WCF hopes to relabel it, in at least three fundamental ways:

First, the nature of work is shifting from direct, full-time employment to freelance or “gig” relationships. It’s just far more efficient to manage a workforce the way Uber utilizes its drivers. The emerging model of a company is that of an entity that coalesces, or comes together to perform certain tasks, whether once or ongoing, in some ways like those early merchants formed companies to hire ships for specific trade adventures. The premise that businesses are static, co-equal institutions that rule the world alongside governments might not be valid anymore.

Second, the ways companies invest capital and maintain assets are also changing, as more functions are being outsourced to contractors. The Boeing approach to using third-parties to build the 787 is one example of this emergent model: why spend CapEx on machines when you can “rent” them much the same way you can rent people? Ditto goes for major components, like renting engines and paying for their use instead of buying or building them outright? The nascent Age of 3-D Printing will make this more common, as manufacturers will rely on third-parties to maintain expensive fabricators. Is it possible that companies in the future might not own any assets?

Third, financing is changing, as more investors are turning to private markets and crowdsourced direct investment (i.e. Indiegogo, etc.), which challenges traditional conceptions of the role of companies in assuming and managing financial responsibility and risk. It also begs the question of how much money does a business have to have on its balance sheet in order to function?

So, if companies one day don’t hire people, own equipment, or raise/have cash, what is their purpose? Add the fact that robots will replace many or most of the people involved in producing and delivering things, and the question becomes all but unanswerable.

These are fascinating questions that beg wildly innovative ideas about corporate structure and conduct, but the Davos Manifesto doesn’t even ask them, let alone offer any answers; instead, it avoids them and in trying to assign some higher purpose to our present-day conception of a “company” it avoids the ugly future challenges to the presumption that there’s even a purpose to be had.

There’s a crisis coming over corporate purpose. It would be great if we talked about it, perhaps at the party with Sir David in the Alps next month. 

Read the original post by Jonathan Salem Baskin here.