The main narrative we have about business is deeply flawed.
R. Edward Freeman is University Professor at the Darden School of Business, University of Virginia, and academic director of the Business Roundtable Institute for Corporate Ethics, which is housed at the Darden School. He is the co-author of Bridging the Values Gap: How Authentic Organizations Bring Values to Life (Berrett-Koehler Publishers, 2015), Stakeholder Theory: The State of the Art (Cambridge University Press, 2010), Managing for Stakeholders (Yale University Press, 2007), and the award-winning book, Strategic Management: A Stakeholder Approach, originally published in 1984, in which he traced the origins of the stakeholder idea and suggested that businesses build their strategy around their relationships with key stakeholders.
— J. Kristie
As the debate rages about the appropriate form of capitalism, I have become increasingly skeptical about one of the underlying assumptions that never gets challenged. It is the distinction between “short-term” and “long-term.” We are told that the ills of capitalism are due to its short-term orientation, and that this leaves a big gap between Wall Street and Main Street. Directors are urged to take a long-term view of their companies, and executives are to manage for the long term.
This distinction can easily become an excuse. For many years I have been told, “Well, all these ideas of yours about stakeholders and ethics and such will work in the long term, but in the short term business is about profits and shareholders.” The big problem with this line of reasoning is that it is always the short term. We live in the “now,” not the future. If these ideas eventually pay off, there must come a time where they are paying off in the short term, or else they never pay off.
The real problem has nothing to do with the “short term” vs. “long term” distinction. The real problem is that the main narrative we have about business is deeply flawed. That narrative says that business is about making money for shareholders and that everyone involved in a business transaction is a short-term maximizer of their individual self-interest.
There is now a robust body of knowledge that these assumptions are no longer useful. There are countless research studies that show that people are quite complicated, and there are many businesses that defy the idea that shareholder value is all that counts.
Most businesses have a purpose, a raison d’etre, an answer to “why they exist” that goes well beyond making money for shareholders. Of course, making money for shareholders is important, but so too is purpose, ethics, and creating value for stakeholders. If we can enact a new narrative of business that focuses additionally on these ideas, we have a way out of the endless debate about the appropriate form of capitalism.
Purpose doesn’t just matter in the long term; it matters every day. It is about the meaning of our lives and how we are enacting that meaning. You don’t tell your children to have a purpose, but don’t live it in the short term. The same goes for ethics. It’s about the quality of our relationships with others, each and every day. Enron is a glaring case of putting ethics off till the future, as the board gave an exception to the ethics policy to the CFO. The only way you can build a great company is by making purpose and ethics a priority every day. The distinction between short term and long term is irrelevant.
What about stakeholders? Remember that key stakeholders are customers, employees, suppliers, communities, and financiers. Businesses have to create value for these stakeholders each and every day. Yes, we have to anticipate what those stakeholders will need in the future, but that is based on what a company is doing to create value for them today. Increasingly in today’s global world, these stakeholders are interdependent. Building a great company is about getting them all going in the same direction. You can’t build a great company by satisfying customers, and then saying that in some distant future you will take care of your communities.
The bottom line here can be seen through the lens of executive compensation. There are endless debates, laws, expressions of outrage over both executive pay and the proposed laws to regulate it. It is often said that executive pay is too short-term oriented toward stock price, or earnings, or some other quarterly measure. This “short termism” is often diagnosed as the real problem with capitalism as it exists today.
The problem is not short termism. The problem is that we measure and compensate the wrong things. My proposal is that companies consider compensating people based on “stake options” not “stock options.” A stake option has five measurements, each of which could include multiple variables:
1. Consumer satisfaction
2. Supplier satisfaction
3. Employee engagement
4. Community support
5. Financial success
The measures could be normalized and a market could exist so that I might short a stake option because of employee engagement. If companies really do create (and sometimes destroy) value for stakeholders, then let’s make that the main way that we compensate executives.
For CEOs and board members, we might also add a measure of how well they are driven by the company’s purpose and their commitment to the company’s ethics. Such a perceptual measure from employees would hold everyone’s feet to the fire.
I can’t see any other way out of the endless debate about capitalism, other than changing the underlying story, getting rid of the short term vs. long term distinction, and beginning to build systems, like stake options, to revitalize the best system of business that we have ever created. ■
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