The profit maximizing corporate model must evolve

Given how much has changed it now seems like a blip from a distant era, but it was just a year ago this week when the Business Roundtable issued a much-ballyhooed statement that declared that corporations “share a fundamental commitment to all our stakeholders,” including their workers and the communities where they do business.

The statement was news because of its sharp rhetorical contrast to Milton Friedman’s famous 1970 dictum that the only social responsibility of business is to “increase its profits,” an ethos that corporations zealously and unapologetically embraced through the “greed is good” 1980s and into the 2010s gap between a roaring Wall Street and a dangerously precarious Main Street.

Now, amid the twin health and economic crises brought by COVID-19, it is fair to ask whether such a statement is adequate to the moment, and whether business has lived up to the rhetoric. 

It doesn’t and it hasn’t.

It’s not that the principle of businesses being obliged to a broad group of stakeholders is wrong. In fact, this shift in ideals is one of the most promising developments in the business world in decades. One place where that ideal has become reality is in the rise of the benefit corporation, many of which are formally registered as “B Corps” with a nonprofit certifying agency. These are businesses that govern themselves on a triple bottom line embodied in formal commitments to give social and environmental benefits equal standing with profit goals. National brands as diverse as Ben & Jerry’s, Amalgamated Bank and King Arthur Baking are all certified B Corporations with social missions woven into the core of their governance.

Mission-driven, triple-bottom-line companies must become the norm rather than the exception. That’s what evolution of corporate purpose means: creating truly next-generation enterprises. To make this evolution the new norm, two things must happen.

First, we need bold action to stop an evisceration of the small business sector that is conferring more wealth and power to large corporations and making them more impervious to change for the common good. In July, 23 percent of respondents to a survey by the National Federation of Independent Business reported that they would have to shutter their businesses within the next six months if the economy didn’t improve, and another 22 percent doubted they could last another year. The result of this carnage would be an “Amazon economy” in which a few giants, disconnected from and unaccountable to local economies, monopolize retail spending and use their power to further suppress worker wages, pit communities against each other to extract tax breaks, suffocate new market entrants and display “public benefit” mostly in slick 30-second commercials.

One solution proposed by our organization, The Democracy Collaborative, is to create local economy preservation funds. These are holding companies that would invest equity in small and medium business enterprises, either supporting existing local owners or purchasing companies outright and transitioning them in a recovery to broad-based local ownership. These funds could prioritize ownership by workers, Black people and other people of color. They could require businesses to make commitments to local hiring and living wages. This model was proven at the federal level with the Depression-era Reconstruction Finance Corporation (RFC), which held equity stakes in banks in thousands of businesses with conditions such as limits on CEO pay. New RFC-style holding companies at either the federal or state and local levels can ensure that a revitalized small business sector is also a reparative one, conferring wealth-generating opportunity to people who have been systematically excluded.

Any talk of corporations being responsive to a broad spectrum of stakeholders is just that — talk — as long as stakeholders don’t have power, and power means ownership. It also means a truly new purpose. A start is legislation like the Accountable Capitalism Act by Sen. Elizabeth Warren (D-Mass.), which would require every corporation with more than $1 billion in revenue to adopt a new, stakeholder-oriented charter and would give workers the power to select 40 percent of corporate board seats. Broad-based ownership combined with a true purpose of stakeholder service —  that is the real shape of change needed. 

A study by The Democracy Collaborative’s Fifty by Fifty project, which is working toward a vision of 50 million employee-owners by 2050, shows that corporations that are both mission-driven and employee-owned are more successful at achieving social and environmental objectives than their peers. A key reason is that the owners are not distant millionaires fixated on stock prices and quarterly returns; they are employees closest to the work and closest to the communities the businesses serve.

The crisis of corporate capitalism goes deeper than a statement like the Business Roundtable’s. The blunt truth is that the profit-maximizing, capital-controlled corporate model must become a thing of the past. Its structure and mores are not suited to an age of existential challenges of ecological fragility, extreme wealth inequality and the continuing impact of structural racism. The corporation needs to be re-envisioned as a living system in symbiosis with the larger living system of the earth. Workers should be regarded as a living community and stewards of this symbiosis, not resources for wealth extraction. 

We also can’t allow large corporations to be the only enterprises left standing when the COVID-19 crisis abates. Smaller businesses are critical engines of community wealth building, creativity and vitality, especially when led by employees, people of color and other local owners under cooperative and other democratic ownership models. A healthy economic ecosystem needs enterprises of all sizes enriching the lives of all their stakeholders.

It’s time to move beyond corporations making rhetorical promises to workers and communities. We need a new paradigm of companies, workers and communities working as one to make those promises real. 

Marjorie Kelly is executive vice president of The Democracy Collaborative, co-founder of the organization’s Fifty by Fifty employee ownership project and co-author of the book, “The Making of a Democratic Economy.”