One year ago today, the Business Roundtable released its Statement on the Purpose of a Corporation, signed by 181 chief executive officers. We thus republish this piece, originally featured on October 2, 2019.
It seems that a central tenet of American business nowadays is that being a profit-making enterprise is no longer enough. Instead, it’s important to harness corporate energies to larger social goals, like gender sensitivity, racial diversity, and environmental awareness. The trend culminated this past August in the Business Roundtable’s proclamation that the American corporation must no longer tend exclusively to shareholder interests, but should serve all stakeholders affected by business.
In other words, the business of business isn’t exclusively business, but must include activity that we formerly regarded as philanthropy.
New York Times columnist David Gelles recently reminded us (hat tip to Marc Gunther) that such well-meaning sector-bending has its limits.
WeWork’s chief executive officer wasn’t content to run a real-estate firm, Gelles notes, but wanted to “elevate the world’s consciousness.” The president of eBay wanted to go beyond on-line sales to “make a bigger difference around the world.” And Volkswagen’s CEO, “speaking of climate change, said ‘We owe it to our children to find the right answers.’” Yet recently, all three CEOs were either out or on the way there, because for all their high-minded concern about stakeholders, their agendas had lost favor with shareholders.
New York University marketing professor Scott Galloway puts it this way: “People’s radar for yoga babble is on high alert right now.” He cites the example of Peloton, maker of “internet-connected exercise bike and other gear.” It proclaims itself “an innovation company transforming the lives of people around the world.” Yet when it started trading on September 27, its stock price immediately fell 11%—perhaps because during the past year, it had lost $196 million. “Peloton is talking about delivering happiness and connecting people,” Galloway remarks. “No: You sell exercise equipment.” (Just not enough?)[caption id="attachment_69590" align="alignnone" width="248"] Peloton bike at company’s headquarters in New York City (Wikimedia Commons)[/caption]
If business seems more philanthropy-minded nowadays, philanthropy has long been enamored of business-mindedness. Phil Buchanan’s recent guide to charitable giving, Giving Done Right: Effective Philanthropy and Making Every Dollar Count, splendidly critiques this trend, arguing that it’s entirely out of place in a sector where cooperation, rather than competition, should be the dominant ethos.
But business-minded charitableness also underlies our sector’s longstanding fascination with “social entrepreneurs.” As J. Gregory Dees and Beth Anderson argued 16 years ago in “Sector-Bending: Blurring Lines Between Nonprofit and For-Profit,” we “should focus on social entrepreneurs who carry out innovations that blend methods from the worlds of business and philanthropy to create social value.” The Schwab Foundation suggests that social entrepreneurship “captures a unique approach to economic and social problems, an approach that cuts across sectors and disciplines.”
Yet like exercise-equipment makers turned life-transformers, the results don’t always live up to the hype. Beginning in the late ’90s, the Nature Conservancy launched an ambitious, lavishly funded effort to build an environmentally conscious commercial venture on Virginia’s Eastern Shore, a “triple-bottom-line” venture meeting economic, social, and environmental ends all at once. Washington Post reporters David Ottaway and Joe Stephens were finalists for the investigative-journalism Pulitzer Prize in 2004 for the series they did on the ensuing financial debacle.
The Virginia Eastern Shore Corporation included dozens of business start-ups, an “eco-friendly” waterfront development, and a 12-room inn built around an historic lighthouse specially barged in at the cost of $3 million. The project went belly up in 1999, leading an analyst at the Ford Foundation—one of the investors—to conclude, “The fact is that very little is known about how to create enterprises that meet a triple bottom line.” Or, as Conservancy president Steven J. McCormick said to The Post, “We’re a nonprofit organization. We don’t tend to think like a business. ... That’s okay, probably even appropriate, but it means we’re very inexperienced in running a business.”
More recently, in 2010, Chicago’s famous and thoroughly politically wired ShoreBank declared insolvency, as well. It was a serious blow to the sector-benders, according to David Greising of The New York Times, because “for years the bank [had] drawn the attention of those who saw in its success a way to meld a social mission with a profit-making purpose.”
To be sure, the recession of 2008 played a role in its demise, with ShoreBank carrying a troubled asset ratio of 300%, compared to the national average of 15%. But Greising understood this as a sign of a more fundamental problem. “An ill-timed, overly aggressive expansion at the height of the credit bubble, a headlong push into risky markets on Chicago’s West Side and to the inner city of Detroit, and an unwillingness to foreclose on troubled loans,” according to Greising, “combined to weaken the bank to the point that regulators … ordered a major recapitalization.”
Critics noted that it should have followed the sound banking practice of foreclosing on those loans, but failed to do so. One bank analyst asked, “Was this bank managed as well as it could have been? Or were they too much into the social-welfare thing?” As one former board adviser put it, ShoreBank “suffered from an overly zealous commitment to its original mission.”
The Times’ Gelles points out that businesses can pose as charities as long as economic times are good and shareholder expectations are met. But when economic indicators begin to flag, shareholders will insist that the otherwise “woke” CEO return to market basics, or hit the streets. As online-marketplace Etsy’s former CEO puts it, “It’s not Milton Friedman’s 1970s shareholder value world anymore. Except when it is.”[caption id="attachment_69591" align="alignnone" width="268"] Milton Friedman (Wikimedia Commons)[/caption]
Similarly, for-profit ventures launched by philanthropies may do well in good times. But when hard times come, difficult, business-like decisions must be made—decisions for which, as the Nature Conservancy’s McCormick suggested, nonprofits are ill-equipped. If, like ShoreBank, the decision is to remain zealously committed to its original mission, to remain “in the social-welfare thing,” then the venture will probably fail.
At any rate, some of the bloom may be off the rose of sector-bending. Anand Giridharadas’ powerful and entertaining Winners Take All: The Elite Charade of Changing the World makes it almost impossible now to take seriously the notion that corporate elites really want to “change the world.” For Giridharadas, the problem isn’t so much yoga-babble as it is the underhanded substitution of market-friendly reformism for genuine, market-shattering, social-justice transformation.
As for the marketization of nonprofits, more nonprofits leaders like Cynthia Gibson, Ruth McCambridge, Linsey McGoey, and Phil Buchanan, have been pushing back against this trend, as did the late Rick Cohen. They point out that nonprofits serve a higher good than the efficient delivery of services. They are, in fact, the essential instruments of genuine, democratic self-governance, prone to the sorts of inefficiencies that widespread deliberation and participation are likely to introduce.
Sector-bending has always been a symptom of a larger intellectual problem: utopianism. We too readily assume that we can ignore the reality-shaping power of our deeply entrenched social and political institutions—which, like all human contrivances, inevitably deliver both weal and woe. We casually and carelessly believe that we can pluck the virtues of one sector and marry them to the virtues of another, without conveying their respective vices, as well. We’re confident that we can merge the substantial resources of the market sector with the compassion of the nonprofit sector, when our compound is just as likely to result in the resources of the nonprofit sector plus the compassion of the market sector.
If the moral of Gelles’ piece is that the business of business should be business and its pursuit of profit, then perhaps the moral of the Nature Conservancy and ShoreBank is that the business of nonprofits should remain charity and other forms of civic engagement.