Note: This post originally appeared on September 24, 2019, and was updated with new information on May 19, 2021.
Most business executives, including service executives, spend most of their time dealing with tactical issues. Here are a few examples for CEOs and Service Leaders:
CEO’s
- Visit customers and suppliers
- Make income statement and P&L decisions with their CFO
- Lobby governments
- Attend industry functions
- Participate in M&A negotiations
Service executives
- Visit and communicate with customers
- Interact frequently with their technical and field teams
- Evaluate the software they are considering implementing
- Review KPI’s
- Lead or participate in problem-solving sessions
Most of both groups’ strategic decisions come in the lead-up to the annual budget exercise. But this year, things are different, even if the current situation comes in the budget run-up for most U.S. businesses. This year a topic to be discussed is August 19, 2019, version of the Business Roundtable Statement on the Purpose of a Corporation.
How is the new Purpose of a Corporation different from the older version?
Since the 1997 Principles of Corporate Governance was released, each version endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders. The new document changes the focus from shareholders to stakeholders and, for many companies, adopting the new Principal will cause a significant change in the way they do business.
However, this notion was articulated in 1943 in the Johnson & Johnson Credo. Robert Wood Johnson describes his company’s responsibilities in this order: patients/doctors/nurses, customers, business partners, employees, communities, the environment, and natural resources, and then, after all that, “stockholders should realize a fair return.”
And in 1981, the Business Roundtable declared that companies needed to balance shareholders’ interests with “the legitimate concerns of other constituencies.” Once again, what goes around comes around!
From the press release for the new Statement:
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
- Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
- Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
- Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to other companies, large and small, that help us meet our missions.
- Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
- Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.
Which commitment comes first?
When 181 CEOs and Board Chair sign a document with a list, it is reasonable to think that unless the list is in alphabetical order, as this list is NOT, then the order is significant. In this case, the “tactical” objective of the business is to deliver value to the customers. To achieve this objective, the company must take good care of its employees, suppliers, communities, and the environment. If we do these four things successfully, we achieve the long-term objective of delivering value to the shareholders.
Impact of the new Purpose of a Corporation statement
For many companies, this Statement will make little or no impact because these companies have been behaving this way for years. This is especially true of start-ups and companies with a mission to improve the planet. But for others, this will be a big deal.
When planning to implement a change of this magnitude, the first step is ensuring the shareholders agree. Well, 58% of the Statement signers were either the Chair of the Board or Chair plus CEO, etc. It is reasonable to think that the Boards of these companies agree, but it may surprise individual shareholders (including investment companies.) For the other 42%, it is highly likely that the CEO brought this proposal to the Board and received their full support, but one never knows…
But for now, let’s assume that the Board of Directors (which represents the shareholders) is in complete agreement.
What does the new Purpose of a Corporation statement for the service group?
Companies focusing on growing shareholder value usually means pumping up the share price. CEO’s like nothing better than to boost about X number of consecutive quarters with year-over-year growth. Think back to the hay days of GE. And when this trend stops, bad things can happen to the CEO and internal department leaders.
I can’t remember how often my department’s workload grew, yet I had to lay off a few people. Or I was told to increase prices (typically on spare parts) with no corresponding increase in value for our customers. And hasn’t at least one of your automation projects been held up until the next fiscal year to conserve cash and make the balance sheet look better? All in the name of creating more value for the shareholders.
Under the new Statement, we will be more likely to be asked to increase our capital and operating investments if they create significant value for our customers, increasing both the service or product sales and profits. We can expect to be challenged on how our business helps or hinders our carbon-neutral efforts and what else we can do to improve our environment.
We can also expect HR to finally start pushing us to encourage our employees to take courses and improve their eating habits while on the road. And don’t be surprised if people are encouraged to meditate when stressed.
All these changes will take a while to filter through the businesses. Along the way, many people will need lots of mentoring to get on board. However, in the long run, each of us, individually and collectively, and our customers will be much better off than we are today.
May 19, 2021 Update based on a presentation titled “The Illusory Promise of Stakeholder Governance” by Lucian Bebchuk and Roberto Tallarita Forthcoming, Cornell Law Review, December 2020
Here is the key slide from the PowerPoint presentation:
The attorney’s main point is that because the signers generally did not seek board approval, they believed the Statement, as published, would be good PR and not make any difference to how they do business.
Only time will tell which story will turn out to be non-fiction and which will be fiction.
About Middlesex Consulting
Middlesex Consulting is an experienced team of professionals with the primary goal of helping capital equipment companies create more value for their clients and stakeholders. Middlesex Consulting continues to provide superior solutions to meet the needs of its clients by focusing on our strengths in Services, Manufacturing, Customer Experience, and Engineering. If you want to learn more about how we can help your organization align with the new Purpose of a Corporation statement, please get in touch with us or check out some of our free articles and white papers here. Also, here is another post on this topic.
This article originally appeared on Field Service Insights.