Among the hardest decisions business leaders must make is how to balance the conflicting interests of their companies’ stakeholders.
For example, it may be in shareholders’ interests to radically reduce the workforce, but this would not be in the interests of the community or the employees. Alternatively, employees may demand higher wages and shorter hours, but this could be detrimental to customers.
So how can leaders balance conflicting stakeholder interests? In understanding stakeholder conflict, there are four dimensions of stakeholder responsibility to consider:
- A business responsibility to serve customers and provide them with value;
- A leadership responsibility to support employees in their service of customers;
- An ethical responsibility to reward shareholders; and
- A societal responsibility to improve the communities in which they operate.
These four responsibilities to stakeholders do not rank equally. Overarching a company’s responsibilities to its stakeholders’ interests is its responsibility to faithfully execute on its purpose, the reason for which it exists.
The Purpose of an Organization
In a 1970 New York Times magazine article, economist Milton Friedman argues that a corporate executive is the agent of the individuals who own the corporation, and as such, his primary responsibility is to them. He proceeds to famously comment that unlike individuals who may have wider ethical obligations, corporations are legal entities set up to generate profit for shareholders in a way that is consistent with the law and within the norms of societal ethics. This is their sole purpose. They have no further ethical obligations.
In 1987, I founded Lapin International on the basis that business has a higher purpose than providing profits to shareholders. I was not referring to philanthropy, corporate social responsibility, or sustainability. I was referring to making a positive impact on society through the products and services that businesses design, build, and deliver to their customers. A business’s purpose is to serve and provide value to its customers in ways others cannot.
Fifteen years later, in 2011, Roger Martin, former Dean of the Rotman School of Management at the University of Toronto and Director of the Martin Prosperity Group, wrote, “Our theories of shareholder value maximization and stock-based compensation have the ability to destroy our economy and rot out the core of American capitalism”. His argument was a strategic one, not just an ethical one.
Last Monday, The Business Roundtable, a group of 200 CEOs leading American corporations, redefined a corporation’s purpose as “investing in employees, delivering value to customers, dealing ethically with suppliers, and supporting outside communities.”
Saying that the purpose of a corporation is to serve the interests of all stakeholders is Pollyannaish because not only are stakeholder interests not always aligned, but they also often conflict with one another. A company’s purpose is the unique tangible and intangible value it adds to its customers. Hence, supporting employees in the service of its customers is how a company fulfills its purpose and is the starting point of its ethical responsibility to all stakeholders. If done effectively, shareholders and communities will benefit.
The story of a regular Southwest Airlines customer who was constantly disappointed with every aspect of the company’s service is well documented. Customer service bumped her last letter up to CEO Herb Kelleher with a note, “This one’s yours.”
Intuitively using the four dimensions of stakeholder responsibility and focusing on the purpose for which he created Southwest, Kelleher almost instantly came to a decision. He believed his product was adding value to his customer (which was why she continued to fly Southwest despite her dissatisfaction); and he would not add further value to her by continuing to respond to her complaints. In this instance, his job was to support his employees and reward his shareholders by cutting unproductive time spent on a single customer. Kelleher wrote back, “Dear Mrs. Crabapple, We will miss you. Love, Herb.”
The famous Johnson & Johnson case is another example of supporting a company’s purpose even at the expense of some stakeholders. In the space of a few days in September 1982, seven people in the Chicago area died after taking cyanide-laced Tylenol capsules.
James Burke, then Chairman of Johnson & Johnson, owners of the Tylenol Brand, realized that he could not serve customers in any way other than by recalling 31 million bottles of Tylenol capsules from store shelves and replacing them with the safer tablet form free of charge. Marketers predicted that the Tylenol brand, which accounted for 17 percent of the company’s net income in 1981, would never recover from the incident.
Burke argued that if the company failed its customers, Johnson & Johnson would compromise its higher purpose, which is to save lives. The other stakeholder interests had to be subservient to the company’s purpose. Even though employees might have lost jobs, shareholders might have experienced big losses, and communities might have suffered from unemployment, Burke made the right call. And in the end, it turned out to be a masterpiece of a strategy. In its 2002 article, the New York Times highlighted, “If you had invested $1,000 in Johnson & Johnson shares on September 28, 1982, just before the first Tylenol episode, you would have $22,062 today.”
A business’s first ethical responsibility is to provide risk-adjusted returns to the people who took a risk by investing in it, but this is not its only responsibility. Executives and managers have significant responsibilities to all their stakeholders. Fulfilling all these responsibilities, as important as they are, should not be confused with a company’s purpose.
The purpose of a company is not “investing in employees, delivering value to customers, dealing ethically with suppliers, and supporting outside communities,” as the Roundtable has declared. A company must find its own unique purpose—the reason for its existence—and determine how it can serve its chosen customers in ways others cannot. It must establish what it believes in and live by that even if at times doing so does not serve all stakeholders. In the long run, when a company steadfastly holds to its beliefs and pursues its purpose, all stakeholders—shareholders, customers, employees, and communities—will prosper.