The Business Round table, a non-profit association of the CEOs of America’s largest corporations, has, since 1978, issued an annual Statement on the Purpose of a Corporation. In Previous years, the statement put forward that the first and overarching responsibility of a corporation is the creation of wealth for its shareholders. But in 2019, the Business Round table broke with tradition and put forward a statement that mentions shareholder value only fifth after customers, employees, suppliers, and communities.Statement on the Purpose of a Corporation Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide healthcare; generate and deliver energy; and offer financial, communications and other services that under pin economic growth.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 tothe 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 andprotect 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 share holders.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.This change in focus reflects a growing understanding that business exists within a broader social context and that, for any given business to be successful, it must adapt to changes in that social context. The ESG (Environmental, Social, Governance) framework has been put forward as anew way for organizations to conceptualize their activities in the marketplace.Environmental – There is growing concern, particularly among corporate leaders, that environmental change poses a risk to the world economy. Business activity uses energy and natural resources, discharges pollutants into the air and water, and depends on employees and customers whose physical well-being depends on a healthy environment. And so, a focus on an organization’s relationship to the environment is of fundamental importance.Social – Business exists within a broader social context including workers, customers, suppliers,and other stakeholders. The successful organization recognizes that its own well-being depends on that of its workers, the solidity of its supply chain, and the health of the communities both in which it operates and serves.Governance – Finally, business success depends on a solid internal governance model. Firms must have in place a formalized decision-making process that is compliant with the legal and regulatory environment and considers the long-term impact on shareholders and other relevant stakeholders. As this diagram demonstrates, adherence to an ESG framework is positively correlated withoverall financial performance. It’s difficult to determine whether attention to ESG concerns directly contributed to the superior performance. But a November 2019 McKinsey report posits five ways in which an ESG framework can create value for an organization.Top-line Growth – Attention to ESG concerns improves the relationship between the organization and its customers, regulators, and community resulting in increased sales revenue.Cost Reduction – Reduced energy use and attention to decreasing resource intensity reduce operating cost and operating risk and so improve operating margin.Reduced Regulatory Costs – Pro-active attention to regulatory concerns reduces fines and litigation expenses as well as improves relationships with local, state, and federal governments.Productivity Improvement – Improved job satisfaction and more successful hiring increase labor productivity and worker retention.Investment Optimization – Attention to ESG directs firm investment activity toward more sustainable investments reducing stranded costs later on. Attention to the broad impact of a firm’s activities on all relevant stakeholders is consistent withour value creation paradigm. Profit and social benefit are both by products of business efficiency. But ESG appears to go further by treating the pursuit of “social benefits” as equal tothe business with that of profit seeking. But this equality of treatment may simply reflect the realization that the sustainability of profit requires a healthy environment and society for business to operate within.
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