Roundtable wagers that good relations mean good profits

The Business Roundtable is an organization made up of the CEOs of our country’s leading corporations. It has been around since 1972, but its action earlier this week represents a major course change for the principal engines of our private sector economy.

Nearly 200 of the member CEOs have signed on to a new “statement on the purpose of a corporation” that knocks “increasing shareholder value” off its perch as the primary goal of their business organizations.

Shareholder value hasn’t disappeared but is now running fifth and last in the listing of corporate commitments. Those commitments are:

• Delivering value to our customers

• Investing in our employees

• Dealing fairly and ethically with our suppliers

• Supporting the communities in which we work

• Generating long term value for shareholders

It is not clear what the motivation for this change was, but initially analysts believe that it is a response to bad press and the public’s souring attitude toward big business. Political reactions to this change in public attitudes have included proposing punitive actions against big businesses and even replacement of our free market system with socialism.

Discussions and disagreements over corporate purposes mirror one in 1950s and 1960s that divided economists. Eventually Nobel laureate economist Milton Friedman’s argument won out. He said that corporations were inept at non-profit activities and should stick to what they were good at: making profits.

Whether the Roundtable’s action is a game changer or not remains to be seen. It could be that, although very possibly not in the way that shareholders are concerned about.

The effect of the change on shareholders isn’t clear yet. They would naturally be worried about their interests being displaced but the course change may turn out to work in their favor. The Roundtable’s action may be an example of Adam Smith’s “Invisible Hand” at work. It could well be that the motives of the Roundtable’s members do not matter; its actions will turn out to be efficient and beneficial.

Pete Bowen, a Southern California-based consultant on high performance leadership sums up the possibilities this way: “Business success is all about relationships. When you have great relationships with your customers, they give you more business. Great relationships with your people mean increased productivity. Combine great relationships with your customers and your people and you beat the pants off the competition.”

There is ample economic evidence that he is correct, especially in the area of the workers on your team. This area has received the most attention from business analysts, management experts, and economists because it is the easiest to measure and the easiest to do something about. We need only to look at hard data on productivity and labor turnover costs to see that companies that genuinely care about and for their workers are more profitable than their competitors. It’s a case of nice guys finish first.

Relationships with customers lends itself to indirect measurement through sales and retention data. And, to a lesser degree, customer feedback can be useful to estimate the general health of the relationship.

Real problems in measurement and execution will come up, though, in the achieving the goals of, in the Roundtable’s words, “dealing fairly and ethically with our suppliers,” and “supporting the communities in which we work.”

Suppliers can be interviewed, and data can be compiled to provide a look at whether suppliers are ardent suitors of your business or prefer to find excuses to decline your “cost and availability” requests.

Often, the biggest obstacle in establishing a relationship with the community is government. Some governments have a very negative attitude toward businesses of any sort, and they present a formidable barrier to even “getting along,” let alone a good relationship.

They are responsive to voters, though, and in some cases, then, business may find that the best strategy for a business may be an indirect one — building relationships with non-government organizations whose attitudes and views influence people. Religious groups and charitable organizations of all sorts are likely to welcome the effort, especially if the corporations already have workers who are volunteers or members.

The difficulty of measuring progress should provide a caution light to CEOs in the community relations area and many companies may find it necessary to start small. CEOs tend to be action-oriented, impatient individuals, though, and we will undoubtedly be reading some news stories about ill-starred programs that don’t work well or even backfire. Good relationships often require time and patience, and they flourish under good management.

The Roundtable’s big corporations are entering what will be, for them, unexplored economic territory. And whether they learn the lesson the easy way or the hard way, they will have to obey a fundamental economic management rule: you can’t outsource sincerity – or leadership.